Report and Recommendation of the President to the Board of Directors

Project Number: 40610 September 2007

Proposed Loan and Technical Assistance Grant Republic of Armenia: Rural Road Sector Project

CURRENCY EQUIVALENTS (as of 24 August 2007)

Currency Unit – dram (AMD)

AMD1.00 = $0.0030 $1.00 = AMD337.75

ABBREVIATIONS

ADB – Asian Development Bank ARD – Armenian Roads Directorate Non-Commercial State Organization ASIF – Armenia Social Investment Fund EA – executing agency EARF – environmental assessment and review framework EIRR – economic internal rate of return EMP – environmental management plan GDP – gross domestic product HDM4 – Highway Development and Management Model 4 IA – implementing agency ICB – international competitive bidding IDPR – internally displaced persons and refugees IDPRDF – internally displaced persons and refugees development framework IDPRDP – internally displaced persons and refugees development plan IEE – initial environmental examination iRAP – international Road Assessment Programme IRI – international roughness index JBIC – Japan Bank for International Cooperation JICA – Japan International Cooperation Agency LRNP – Lifeline Road Network Program MCC – Millennium Challenge Corporation MOTC – Ministry of Transport and Communications NCB – national competitive bidding NPV – net present value PAM – project administration memorandum PBC – performance-based contract PGC – project governing council PMU – project management unit PPMS – project performance monitoring system PRSP – Poverty Reduction Strategy Paper RF – resettlement framework RP – resettlement plan SIEE – summary initial environmental examination TA – technical assistance UNESCAP – United Nations Economic and Social Commission for Asia and the Pacific UNAIDS – Joint United Nations Programme on HIV/AIDS UNDP – United Nations Development Programme USAID – United States Agency for International Development

NOTES

(i) The fiscal year (FY) of the Government of Armenia and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.

Vice President L. Jin, Operations Group 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director S. O’Sullivan, Infrastructure Division, CWRD

Team leader H. Koide, Principal Infrastructure Finance Specialist, CWRD Team members B. Konysbayev, Counsel, Office of the General Counsel L. B. Lahm, Senior Advisor, Office of the Vice President (Operations 2) P. Lizot, Head, Project Administration Unit, CWRD O. Nazmieva, Financial Control Specialist, Controllers Department S. Tu, Environmental Specialist, CWRD L. P. Alejandro, Assistant Project Analyst, CWRD A. L. Silverio, Administrative Assistant, CWRD

CONTENTS Page

LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2

III. THE PROPOSED PROJECT 6 A. Impact and Outcome 6 B. Outputs 6 C. Special Features 7 D. Project Investment Plan 7 E. Financing Plan 8 F. Implementation Arrangements 8

IV. TECHNICAL ASSISTANCE 12

V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Economic Benefits 13 B. Project Sustainability 14 C. Environmental Impacts 14 D. Social and Poverty Impacts 14 E. Indigenous People 14 F. Internally Displaced Persons and Refugees 15 G. Land Acquisition and Resettlement 15 H. Risks 16

VI. ASSURANCES AND CONDITIONS 16 A. Implementation Arrangements 16 B. Conditions for Disbursement 19

VII. RECOMMENDATION 20

APPENDIXES 1. Design and Monitoring Framework 21 2. Road Subsector Analysis 23 3. External Assistance to the Road Subsector 29 4. Selection Criteria and Approval Process for Subprojects 30 5. List of Subprojects Identified for the Project 32 6. Detailed Cost Estimates and Financing Plan 34 7. Project Organization and Implementation Arrangements 36 8. Indicative Implementation Schedule 37 9. Procurement Plan 38 10. Economic Analysis 42 11. Summary Poverty Reduction and Social Strategy 47

SUPPLEMENTARY APPENDIXES (available on request) A. Outline Terms of Reference for Subproject Preparation and Project Supervision B. Financial Management Assessment C. Outline Terms of Reference for Transport Sector Development Strategy D. Summary Initial Environmental Examination E. Internally Displaced Persons and Refugees Development Framework F. Resettlement Framework

LOAN AND PROJECT SUMMARY

Borrower Republic of Armenia

Classification Targeting classification: Targeted intervention (geographic poverty) Sector: Transport and communications Subsector: Roads and highways Themes: Sustainable economic growth, capacity development Subthemes: Fostering physical infrastructure development, institutional development

Environment Category B. An initial environmental examination (IEE) has been Assessment undertaken, and a summary initial environmental examination (SIEE) is in Supplementary Appendix D.

Project Description The proposed Rural Road Sector Project (the Project) will (i) enhance the economic integration of selected rural communities, which make up about 10% of the total rural population, through improvement of high priority rural feeder roads totaling about 220 kilometers (km) connected to the national road network; and (ii) strengthen the transport sector management capability.

To maximize the benefits and reach out to the majority of the rural population in the country, the Project has been designed by actively maintaining operational partnerships with the Japan Bank for International Cooperation (JBIC), Japan International Cooperation Agency (JICA), US Millennium Challenge Corporation (MCC), Armenian Social Investment Fund (ASIF), international Road Assessment Programme (iRAP), Joint United Nations Programme on HIV/AIDS (UNAIDS), United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), United Nations Development Programme (UNDP), and United States Agency for International Development (USAID).

Rationale Facing ongoing globalization, Armenia has progressively made efforts to strengthen the interlinkage between its economy and other economies. The transport sector, particularly the road subsector, has played an increasingly important role in this process. As the predominant transport mode, road transport is important for the national economy and population and serves 98% of passenger traffic and 66% of freight traffic.

The majority of the road network traverses mountainous terrain, and altitudes frequently exceed 1,500 meters (m) above sea level. Steep gradients, deep cuttings, and high embankments are common in mountainous areas, and landslides occur frequently. Severe winter weather requires extensive efforts to maintain access. In many areas of the road network, high intensity rainfall and poor road drainage cause traffic problems and road infrastructure damage. The extreme climate also causes a negative impact on the behavior of road pavements, particularly because of freezing and thawing in the spring. In Armenia, 1.2 million people (about 38% of the total population) live ii

in rural areas, of which more than 45% is poor. Poverty has been reduced from 50.0% in 2000 to 29.8% in 2005 but poverty reduction has been slower in rural areas. This is mainly because of constrained economic activities—primarily attributable to mountainous topography and poor transport infrastructure—imposing high direct and indirect transport costs on the rural population, and limiting income opportunities and expansion of rural industries. High transport costs and constrained road access have also negatively affected non- income aspects of poverty in rural areas because of limited access to social service delivery institutions.

To respond to challenges created by road infrastructure deficiency, the Government’s main road subsector policy until 2015 focuses on the rehabilitation and maintenance of existing roads in line with the Poverty Reduction Strategy Paper (PRSP). The Government adopted three strategic goals for its road infrastructure development for the period 2006–2015: (i) maintenance and improvement of the main road network to enhance the country’s business competitiveness and support the economy, (ii) improvement of the socioeconomic condition of the rural population through rehabilitation of rural roads in support of the PRSP, and (iii) improvement of traffic safety. The Government plans to (i) complete the rehabilitation of old bridges and other ancillary facilities along the main highways by 2010, (ii) complete the rehabilitation of secondary roads and bridges by 2015, (iii) meet rural road transport demands in a cost-effective manner, and (iv) ensure road safety throughout all road categories.

To address inefficient infrastructure as one of the main causes of poverty, the Government has set rural infrastructure development as the cornerstone of the PRSP and has prepared rural infrastructure investment programs to reduce rural poverty. In the road sector, the Government developed a Lifeline Road Network Program (LRNP) in 2004, with assistance from the World Bank. The LRNP will improve the access of rural communities to the national highway system in an optimal manner throughout the country. It targets 784 high priority rural feeder roads (secondary and local roads) totaling about 2,700 km.

Under the small-scale technical assistance for preparing the Project, the overall cost of the LRNP has been preliminarily updated to an estimated $300 million. MCC has committed to provide $67 million for the rehabilitation of rural roads (totaling about 940 km), while the Government is expected to budget nearly $50 million equivalent for the improvement of rural roads (totaling 532 km). The Government has requested the Asian Development Bank (ADB) to provide $30.6 million to upgrade rural roads (totaling about 220 km). These interventions will complete the improvement of about 60% of the LRNP by 2011. In response to ADB’s resource mobilization consultations, JBIC is preparing a loan of about $50 million equivalent in parallel with the Project by using the sector lending approach developed by ADB for the Project. With JBIC financing, more than iii

75% of the LRNP roads would be improved by 2011.

Impact and Outcome The Project will have an additional, positive, long-term impact on the four project regions and the income and non-income dimensions of poverty in rural areas—serving about 10% of the country’s total rural population. The outcome will be increased mobility and improved accessibility to basic social service delivery institutions, employment opportunities, and domestic and international markets for communities and enterprises in rural and urban areas of the four regions. The feeder roads improved under the Project will lead to (i) higher and more frequent quality transport services available for road users; (ii) increased business opportunities for private sector in general, particularly agriculture (including agro-processing), industrial, and service sectors; and (iii) more synergetic benefits from close partnerships in the road and other sectors relevant to the Project. Furthermore, the Project will improve transport sector management through the TA that will be attached to the Project.

Project Investment The total cost of the Project is estimated at $41.4 million, including Plan taxes and duties of $5.8 million equivalent.

Item Cost ($ million) A. Base Cost 1. Road Connectivity Improvement Component 29.2 2. Road Infrastructure Management Component 2.5 3. Taxes and Duties 5.8 Subtotal (A) 37.5 B. Contingencies 3.4 C. Interest and other Charges 0.5 Total 41.4 Source: Asian Development Bank estimates.

Financing Plan Lifeline Road Network Program

Source Amount % ($ million) Millennium Challenge Corporation 67.0 22.3 Asian Development Bank 30.6 10.2 Government of Armenia 50.0 16.7 Othersa 152.4 50.8 Total 300.0 100.0 a Includes financing from the Japan Bank for International Cooperation in the amount of $50 million equivalent in parallel with the Project. JBIC Loan processing is underway. Source: Asian Development Bank estimates.

Financing Plan

Source Amount % ($ million) Asian Development Bank 30.6 73.9 Government of Armenia 10.8 26.1 Total 41.4 100.0 Source: Asian Development Bank estimates.

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Loan Amount and It is proposed that ADB will provide a loan in various currencies Terms equivalent to Special Drawing Rights 20.1 million ($30.6 million equivalent) from ADB’s Special Funds resources. The loan will have a term of 32 years with a grace period of 8 years. There will be an interest charge of 1.0% per annum during the grace period and 1.5% per annum thereafter.

Period of Utilization Until 30 June 2011

Estimated Project 31 December 2010 Completion Date

Executing Agency The Executing Agency will be the Ministry of Transport and Communications (MOTC). Responsibility for planning, implementation, and supervision of the Project will be delegated to the Armenian Roads Directorate Non-Commercial State Organization (ARD) responsible for planning and management of road construction and maintenance work for the road assets under MOTC’s purview.

Implementation ARD will be responsible for (i) recruiting consultants for subproject Arrangements preparation and construction supervision, and auditing, (ii) preparing bidding documents, (iii) monitoring and evaluation, and (iv) awarding of civil works contracts. Within ARD, a project management unit (PMU)will be established to manage day-to-day coordination, implementation, and administration of the Project.

Procurement Procurement under the Project will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Civil works contracts will be carried out by using international competitive bidding (ICB) procedures and the post-qualification method, as described in the procurement plan for the Project (Appendix 9). The procurement plan will be reviewed regularly and amended at least annually covering the next 18 months of procurement activity during project implementation. The minimum amount of a civil works contract procured through ICB is initially set at more than $1 million and will be reviewed during implementation. Procurement through national competitive bidding (NCB) will be conducted under the Borrower’s legislation on procurement, subject to modification and clarifications set forth in the Loan Agreement. The NCB thresholds are presently set at less than or equivalent to $1 million for civil works and less than or equivalent to $500,000 for

goods. International shopping will be carried out for goods less than or equivalent to $100,000.

ADB has approved advance contracting and retroactive financing for the consulting services for subproject preparation and project supervision, monitoring, and evaluation. Up to 20% of the loan amount may be used to finance eligible expenditures retroactively for consulting services that have been engaged in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to v

time), and incurred prior to loan effectiveness but not earlier than 12 months prior to loan signing.

Advance Contracting About 30 person-months of international consultants and 162 person- and Retroactive months of national consultants will be required to work with the PMU Financing Consulting for subproject preparation (including detailed design; and technical, Services environmental, economic, and social/resettlement due diligence); and project supervision, monitoring, and evaluation (including technical, environmental, economic, social/resettlement monitoring, and evaluation). ARD will engage one consulting firm for the services. The consultants will be recruited through the quality and cost-based selection method, using the full technical proposal procedures in accordance with ADB’s Guidelines on the Use of Consultants. The Government requested ADB to carry out the selection of the consultants, as it is not familiar with ADB procedures. Once selected by ADB, the Government will negotiate with the selected consultants to finalize the consulting contracts and will retain the responsibility to supervise the consultants.

Project Benefits and The immediate main benefits of the Project include (i) long-term Beneficiaries sustainable savings in vehicle operating costs and travel time stemming from the physical improvements, and (ii) the development of improved transport and road management systems. The overall project economic internal rate of return (EIRR) is estimated at 43.2%.

The Project will also improve the income and non-income dimensions of poverty in rural areas. About 32% of road users within the project areas are poor and 6% are classified very poor. Project benefits will accrue to about 40,500 poor beneficiaries, of whom roughly 7,000 are very poor. Total net benefits accruing to the poor in the project areas are estimated at about $24 million, of which the very poor will receive around $4 million. In addition, improved road infrastructure will provide rural communities with enhanced access to social service delivery institutions including hospitals, clinics, and schools. This will support the improvement of non-income aspects of poverty.

Risks and The major risks arise from possible project preparation delays, Assumptions implementation delays, and low quality of works. To minimize these risks, the Government and ADB have agreed on a feasible schedule that will be reviewed regularly, and systematic procedures for subproject submissions to ADB and project implementation that are detailed in the project administration memorandum (PAM). Consultant support will (i) ensure high quality due diligence for subproject selection and preparation, and (ii) help ARD anticipate major factors in the critical paths of project implementation. Furthermore, advance contracting of the consultancy services for subproject preparation and construction supervision has further minimized risks of implementation delays. To ensure high quality of works under the Project, consultant support has been designed to include provisions for project supervision, monitoring, and evaluation by including qualified

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international and national road engineers and pavement specialists, road safety experts, transport economists, social/resettlement specialists, and environment specialists. A further risk is cost overrun, which has been reduced through (i) surveys of sample subprojects to estimate more accurate costs, (ii) sufficient price and physical contingencies, and (iii) provision of consultants for subproject preparation and project supervision.

Technical Assistance In conjunction with the Project, technical assistance (TA) is proposed to support the development of a new transport sector strategy, and enhancement of the institutional capacity of MOTC and ARD. The total cost is estimated at $800,000. ADB will finance $600,000 equivalent on a grant basis through ADB’s TA funding program. A consulting firm will be recruited through the quality and cost-based selection method, using simplified technical proposal procedures in accordance with ADB’s Guidelines on the Use of the Consultants.

I. THE PROPOSAL

1. I submit, for your approval, the following report and recommendation on a proposed loan to the Republic of Armenia for the Rural Road Sector Project (the Project).1 The report also describes proposed technical assistance (TA) for transport sector development support, and if the Board of Directors of the Asian Development Bank (ADB) approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve the TA.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. Facing ongoing globalization, Armenia has progressively made efforts to strengthen the interlinkage between its economy and other economies. The Government has accelerated strengthening of the business environment to promote investment and exports. The Armenian Trade and Transport Facilitation Committee was established in 2002 and has played an active role in (i) facilitating coordination between the Government, industry, private sector, and civil society; (ii) eliminating barriers to international and regional trade; (iii) bringing Armenian trade and transport procedures in line with international standards; and (iv) promoting harmonization of trade and transport procedures in the South Caucasus. The committee has been working with similar committees in neighboring countries. Internally, issues related to customs procedures were streamlined and other reforms have been implemented to develop private sector freight transporters. Armenia has signed all major international trade and transport protocols and conventions.

3. The transport sector, particularly the road subsector, has played an increasingly important role in this process. Road transport is the predominant transportation mode, supporting the national economy and population by serving 98% of passenger traffic and 66% of freight traffic. Growing demands for road transport have been supported by the Armenian road network infrastructure totaling about 7,500 kilometers (km), 2 comprising (i) main highways including international road transport corridors 3 (roughly 1,560 km); (ii) secondary roads connecting communities to the main highways (nearly 1,830 km); and (iii) local roads serving rural communities (around 4,100 km). The Ministry of Transport and Communications (MOTC) is responsible for the main highways and secondary roads. Responsibility for planning and management of road construction and maintenance work for the road assets under MOTC’s purview is delegated to the Armenian Roads Directorate Non-Commercial State Organization (ARD). Regional governments are responsible for local roads. An estimated 90% of main highways and secondary roads are in fair or good condition, while more than 60% of rural roads are in very poor or poor condition. About 84% of the rural road network is not passable during winter.

4. The majority of the road network traverses mountainous terrain and altitudes frequently exceed 1,500 meters (m) above sea level. Steep gradients, deep cuttings, and high embankments are common in mountainous areas, and landslides occur frequently. The severe winter weather requires extensive efforts to maintain access. In many areas of the road network, high intensity rainfall and poor road drainage cause traffic problems and road infrastructure damage. The extreme climate also causes a negative impact on the behavior of road pavements, particularly because of freezing and thawing in the spring.

1 The design and monitoring framework is in Appendix 1. 2 Consisting of paved roads (78%), gravel roads (19%), and earth roads (3%). 3 Armenia has three Asian highway routes adding up to 958 km. The major part of the northern sections of the international road transport corridors have been improved with financial assistance from the World Bank and Lincy Foundation, while the southern part of the road transport corridor has been partially improved under World Bank assistance. 2

5. In Armenia, 1.2 million people (about 38% of the total population) live in rural areas, of which more than 45% are poor. Poverty has been reduced from 50.0% in 2000 to 29.8% in 2005 but poverty reduction has been slower in rural areas. This is mainly because of constrained economic activities—primarily attributable to mountainous topography and poor transport infrastructure—imposing high direct and indirect transport costs on rural population, and limiting income opportunities and the expansion of rural industries. High transport costs and constrained road access have also negatively affected non-income aspects of poverty in rural areas because of limited access to social service delivery institutions.

6. To respond to the challenges created by the road infrastructure deficiency, the Government’s main road subsector policy until 2015 mainly focuses on the rehabilitation and maintenance of the existing roads in line with the Poverty Reduction Strategy Paper (PRSP). The Government adopted three strategic goals for its road infrastructure development for the period 2006–2015: (i) maintenance and improvement of the main road network to enhance the country’s business competitiveness and support the economy, (ii) improvement of the socioeconomic condition of the rural population through rehabilitation of rural roads in support of the PRSP, and (iii) improvement of traffic safety. The Government plans to (i) complete the rehabilitation of old bridges and other ancillary facilities along the main highways by 2010, (ii) complete the rehabilitation of secondary roads and bridges by 2015, (iii) meet rural road transport demands in a cost-effective manner, and (iv) ensure road safety throughout all road categories.

7. The Government has been firmly committed to improving its road safety in conjunction with its road infrastructure improvement programs in response to rapid motorization. 4 It established the National Road Safety Council in 2001 and has developed a road safety program that identifies accident black spots. However, the situation is serious and deteriorating. Road accidents have increased from 1,021 in 2001 to 1,312 in 2005. In 2005, fatalities (310 persons) were 20% higher than in 2004. The death rate per 10,000 vehicles is eight times as high as in the safest European countries. Of particular concern is the large number of pedestrian fatalities.

8. Rapid motorization has also caused air pollution through vehicular emissions. Throughout the country, many trucks, buses, utility vehicles, and passenger cars use liquefied natural gas as fuel, emitting cleaner exhaust gas than that of vehicles using gasoline or diesel. Many liquefied natural gas stations serve these vehicles. However, the numbers of gasoline or diesel vehicles are increasing and many old vehicles using such fuels still exist. Because of the mountainous topography, many cities and towns are located at the bottom of basins where vehicular emission does not diffuse easily. Although air pollution caused by vehicular emissions has not yet become a serious health hazard in the country, an increasing need for proactive actions is considered necessary, especially in the major cities. An analysis of the road subsector is in Appendix 2.

B. Analysis of Key Problems and Opportunities 1. Constraints

9. Despite the Government’s effort to improve and restore the road network in line with its 10-year road subsector strategy for 2006–2015, the road subsector has not been able to contribute significantly to economic development and poverty reduction in the country. This is because of the inadequacy of transport infrastructure and transport services between rural communities and centers of economic and social activities. Inadequate transport services in rural areas are caused by (i) mountainous, hilly, and rolling terrain; (ii) poor condition of existing roads; and (iii) high transport costs on such roads in poor condition. 5 A cost-effective road asset

4 During the last 5 years, vehicle fleets have increased by 30%. Road freight traffic grew by 38% and passenger traffic increased by 61% during the same period, according to the National Statistics Agency. 5 Poor road infrastructure also leads to economic losses and limited access to basic services. According to World Bank. 2004. Rural Infrastructure in Armenia: Addressing Gaps in Service Delivery. Washington, DC, about 3 management has to be developed to improve road connectivity for rural communities in the optimal routes, connecting such communities to the main road network or the nearest centers of economic and social activities. Additional financing, besides central government budgets, needs to be mobilized to reap the maximum economic and social development potential in rural areas through the improvement of road transport connectivity.

10. In the road subsector, the Government has progressively pursued cost recovery and reduction measures, systematic project prioritization, and subsector monitoring activities. To strengthen the overall road subsector monitoring functions, road infrastructure management can be enhanced by improving the current management system used by ARD, which is responsible for planning and management of road construction and maintenance work for the road assets under MOTC’s purview. Although the Highway Development and Management Model 4 (HDM4) was introduced for the road asset management system, traffic data were generally a few years old and only very brief economic and social assessments were conducted. In 2005, to overcome the traffic data deficiency problem, ARD introduced automatic traffic counters at 10 locations along the six main highways, which feed traffic information to the current road management system. A more comprehensive road project selection and monitoring system needs to be developed to reduce the cost of maintaining road assets by the systematic use of economic analysis as a basis for selecting the most appropriate time and type of road maintenance, the use of improved road technology, and timely maintenance interventions commensurate to the available resources. Such a system needs to include specific monitoring functions with respect to traffic counts and periodic road condition surveys over the road network, safety measures to minimize accidents, and social and environmental measures to minimize risks associated with road improvements.

11. In 2007, the Government has allocated AMD16.16 billion, which is 0.6% of the gross domestic product (GDP), for road maintenance. The Government’s Medium-Term Expenditure Framework for 2007–2009 envisages increasing allocations to operation and maintenance. Provision for domestic funding has been made through legislation requiring 10% of fuel tax revenue to be applied to routine maintenance. While the Government has made efforts to achieve cost recovery measures for road network asset management, further cost reduction measures need to be introduced by competitive bidding procedures for periodic maintenance, such as the use of performance-based contracts (PBCs).

2. Opportunities

12. Inefficient transport infrastructure increases transaction costs, constrains the economy from realizing its full potential, and limits people from improving income and non-income dimensions of poverty. To address this issue, the Government has set rural infrastructure development as the cornerstone of its PRSP and has prepared rural infrastructure investment programs to reduce rural poverty. In the road subsector, the Government developed a Lifeline Road Network Program (LRNP) in 2004, with assistance from the World Bank. The LRNP will improve the access of rural communities to the national highway system in an optimal manner. It targets 784 high priority rural feeder roads (secondary and local roads) totaling about 2,700 km.

40% of total survey participants replied that significant volumes of agriculture produce are lost during transportation; 18% of respondents put the figure at 40%, and 24% of respondents considered that 30% is lost during transportation. Poor road conditions in rural areas have constrained timely access to health and other social services, and access to schools (including the time spent in education). Bus services and/or road freight services have been reduced or stopped in some rural areas, as operators try to avoid damage to their vehicles or perceive high vehicle operating costs of driving on poor/very poor condition roads. On the other hand, after the Lincy Foundation improved road access of the Noyemberyan area in the Tavush region located in the northeastern part of Armenia, the Noyemberyan area’s agricultural potential has been developed, and export of agriculture produce and processed agriculture products is taking place from this area to the Russian Federation and Georgia.

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Under the small-scale technical assistance for preparing the Project, 6 the overall cost of the LRNP was preliminarily updated to an estimated $300 million at currently prevailing market prices.

13. In 2005, MOTC introduced PBCs for routine and winter road maintenance covering all roads under MOTC’s responsibility (totaling 3,393 km) for 3 years. Local authorities have carried out PBCs for routine and winter road maintenance along local roads. In conjunction with its rural road rehabilitation project, the Millennium Challenge Corporation (MCC) will review PBC performance in 2007. Through a regular project coordination mechanism, MCC will share the findings of the PBC review with ADB and the project management unit (PMU) to be established for the Project. ARD has also introduced a standard provision in civil works contracts to ensure incorporation of environmental management plans (EMPs) in construction works. The standard provision requires all contractors to provide financial resources ranging from 1.5% to 10.0% of the contract amounts for EMPs.

14. In 2006, MCC committed to provide $67 million for the rehabilitation of rural feeder roads (totaling around 940 km). The Government is expected to finance nearly $50 million for improvement of rural roads (totaling 532 km) for the next 5 years and has requested ADB to provide $30.6 million to upgrade rural roads (adding up to nearly 220 km). In response to ADB’s resource mobilization consultations, the Japan Bank for International Cooperation (JBIC) is considering financing (about $50 million equivalent) in parallel with the Project by using the sector lending approach developed by ADB for the Project.

3. Policy Dialogue

15. During project processing, MOTC/ARD and ADB have maintained policy dialogue in relation to the transport sector, particularly in relation to (i) road sector reforms and restructuring matters, (ii) cost-effective road interventions, (iii) road safety, and (iv) pollution and vehicle emissions. The Government and ADB have agreed to continue active policy dialogue during project implementation. In particular, the development of a competitive construction industry and logistics industry will be needed to enjoy the full benefits of the investment in road improvements and to support the competitiveness of the national economy. MOTC/ARD and ADB will continue to have regular policy dialogue on these issues. ADB will review and assist the Government’s efforts in key policy areas that emerge from the dialogue, and through the TA that will be attached to the Project in support of the development of the transport sector.

4. ADB Strategy and Partnerships

16. ADB’s interim operational strategy for Armenia7 is to focus ADB interventions on (i) rural development, (ii) private sector development, and (iii) regional cooperation. The Project has been formulated in line with this strategy.

17. In developing its support to the road subsector, ADB has actively pursued partnership opportunities with external funding agencies active in the country. The Lincy Foundation, MCC of the United States and the World Bank are the major external financing sources for the road subsector—providing the road subsector with a total of nearly $216 million since 1995. During 1995–2004, the World Bank financed two loans for road improvement, including institutional strengthening of ARD, a road safety program, and institutional support to MOTC. It commissioned a transport sector review 8 in 1997 and is actively supporting a road safety program in Armenia. The Lincy Foundation, established by the Armenian diaspora in the US, has

6 The small-scale technical assistance was financed on a grant basis by ADB’s TA funding program. ADB. 2006. Technical Assistance to Armenia for Preparing the Rural Roads Rehabilitation Project I. Manila [TA 4895–ARM]. 7 ADB. 2006. Armenia: Country Economic Report and Interim Operational Strategy (2006–2009). Manila. 8 World Bank. 1997. Republic of Armenia Transport Sector Review. Washington, DC. 5 provided two grants for road improvement of selected main and secondary highways and road upgrading in the capital city, totaling $86.9 million during 2001–2003. The Government of Japan has provided Armenia with a technical cooperation project and study totaling about $3 million equivalent to finance a landslide survey, and a grant (about $5.0 million equivalent) to finance road construction equipment for the capital city, through the Japan International Cooperation Agency (JICA). JBIC is preparing a loan of $50 million equivalent for the LRNP in parallel with the Project by using the same subproject selection criteria developed by ADB. The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) is conducting a pre-feasibility study on the southernmost part of the international transport corridor between Goris and Kapan (totaling about 60 km) with the potential total project cost ranging from $15 million to $30 million. ADB has maintained coordination with the international Road Assessment Programme (iRAP), which has started developing a road safety assessment program for the international road corridors in Armenia.9 External assistance to the road subsector is in Appendix 3.

18. The Government and ADB have carefully identified the subprojects to be financed under the Project by avoiding duplication and by systematically planning road subprojects to achieve maximum synergy among the rural roads rehabilitation project financed by MCC, the Government, and the Project. Furthermore, to maximize the benefits of the Project—and serve additional traffic generated from projects in the agriculture, small and medium-sized industry, and social sectors effectively—the Government and ADB have identified the subprojects for the Project, taking into consideration all major relevant projects financed by external assistance. This includes the MCC-financed irrigated agriculture project ($146 million). The Project, together with the two MCC-financed projects (road and agriculture), will benefit more than 73% of the rural population in Armenia. The Armenia Social Investment Fund (ASIF), with assistance from the World Bank, is implementing community-driven development in Armenia to reduce non-income poverty in rural areas. The World Bank has so far completed ASIF I and II to finance 619 microprojects, and approved ASIF III in September 2006. Road improvement under the Project will improve rural communities’ access to major economic activities in the capital city and regional centers, as well as local social service delivery institutions supported by the Government and ASIF initiatives. The Armenian Small- and Medium-sized Enterprise Market Development Project financed by the United States Agency for International Development (USAID) has mainly supported the development of small and medium-sized agro-processing industries, which require good rural roads to gather agricultural produce and other inputs and deliver products to international and domestic markets efficiently. The Government is progressively implementing the National Program on the Response to the HIV Epidemic (2007–2011) with assistance from the Joint United Nations Programme on HIV/AIDS (UNAIDS). The United Nations Development Programme (UNDP) is actively implementing its programs on anti-human trafficking in response to the recently increasing mobility of people, particularly international movements.

5. Need for ADB Support for the LRNP

19. The LRNP will require additional funding of about $180 million (estimated at current prices, net of MCC and government commitments totaling about $117 million). The majority of the rural population in Armenia depends heavily on road transport for their daily lives and access to jobs, markets, and basic social services. Failure to implement the LRNP would prolong rural remoteness and poverty in rural communities, and exacerbate the outward migration of labor. Thus, the Government has requested financial support from ADB to meet part of its resource gap for the LRNP.

9 Possibly to Georgia as well. The main component will be an international Road Assessment Programme (iRAP) road assessment of the international road transport corridors and follow-up activities to improve road safety in Armenia, in conjunction with World Bank support to road safety.

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III. THE PROPOSED PROJECT A. Impact and Outcome 20. The Project will have an additional, positive, long-term impact on the four project regions and income and non-income dimensions of poverty in rural areas, serving about 10% of the total rural population in the country. The outcome will be increased mobility and improved accessibility to basic social service delivery institutions, employment opportunities, and to domestic and international markets for the communities and enterprises in rural and urban areas of the four regions. The feeder roads improved under the Project will lead to (i) higher and more frequent quality transport services available for road users; (ii) increased business opportunities for private sectors in general, particularly agriculture (including agro-processing), industrial, and service sectors; and (iii) more synergetic benefits from close partnerships in the road and other sectors relevant to the Project. The Project will improve transport sector management through TA that will be attached to the Project.

B. Outputs 21. The main outputs of the Project will be (i) about 220 km of improved rural roads;10 (ii) development of an improved transport sector management system, including a new transport sector strategy to strengthen the capability of MOTC; and (iii) establishment of an improved road asset management system to enhance the institutional capacity of ARD.

22. The physical improvements envisaged under the Project will increase the percentage of roads in good condition from 12% to 15% at the national level. 11 Road roughness will be significantly improved from the average international roughness index of 10.9 m/km (poor) to a range of 3.0–4.0 m/km (fair/good). Road transport costs and travel time will be reduced by more than 40%.

1. Road Connectivity Improvement Component 23. This component focuses on rehabilitation of high priority rural roads totaling about 220 km. The subprojects for the Project have been selected and prioritized by using the HDM4; and taking technical, economic, environmental, and social concerns into consideration. Special attention has been given to the integrity of the overall road rehabilitation activities supported by MCC, the Government, and the Project. The selection criteria and approval process of subprojects are in Appendix 4. The list of prioritized subprojects identified for the Project is in Appendix 5.

2. Road Infrastructure Management Component

24. The component consists of (i) overall project management by ARD’s PMU, and (ii) subproject preparation and construction supervision support to the PMU. The main objectives of this component are to ensure (i) high quality of preconstruction work, including all necessary due diligence and detailed design for the subprojects; (ii) timely and high quality implementation of the subprojects; (iii) monitoring and evaluation of the subprojects (covering technical, road safety, economic, environmental, and social aspects); and (iv) annual auditing of project expenditures. On-the-job training by international consultants will also be conducted to improve ARD’s skills in road rehabilitation.

10 Includes two road subprojects totaling 24.9 km along the main highways. These subprojects were included to maximize the benefits of rural road improvement in the Vardanis district of Gegharkunik region. 11 The Project, together with MCC and the Government, will improve the share of good road condition from 12% to 29% in 2011. With JBIC financing, the overall share of good roads will be further increased to about 35% during the same period. 7

C. Special Features 25. The major value added of the Project includes (i) flexible financing and enhanced resource mobilization for the LRNP using ADB’s sector lending modality and (ii) maximized impacts on rural poverty reduction through strong partnerships.

26. Sector Lending Modality. The Project has been conceptualized to help the Government achieve its poverty reduction and economic development goals by financing part of the LRNP, which targets 784 high priority rural feeder roads (secondary and local roads) totaling about 2,700 km. The Government has a well-developed overall road sector plan (2006–2015) to meet the priority development needs of the road subsector and the Government’s PRSP. ARD has sufficient institutional capacity, developed through the implementation of two World Bank- financed projects, to implement the LRNP in selecting and implementing subprojects. The Government’s road subsector policies, developed with World Bank assistance, are appropriate. Thus, ADB’s sector lending modality is best suited to meet the financing need. In addition, ADB’s sector lending modality, the subproject criteria, and the environmental and social frameworks will allow the Government to mobilize additional financing from JBIC and others for the LRNP.

27. Enhanced Partnerships. The Project has been designed to maximize benefits by actively maintaining operational partnerships with ASIF, JBIC, JICA, iRAP, Lincy Foundation, MCC, UNAIDS, UNDP, UNESCAP, USAID, and World Bank. The aim has been to achieve maximum synergy to impact rural poverty. Although HIV/AIDS and human trafficking incidence is relatively low in Armenia at this moment, the PMU and ADB will continue to have proactive partnerships with UNAIDS and UNDP in these fields during project implementation. Further, the PMU and ADB will continue to pursue regular coordination with the World Bank and iRAP, regarding road safety.

D. Project Investment Plan

28. The project cost is estimated at $41.4 million, including taxes and duties of $5.8 million, and interest and other charges on the loans from ADB during construction (Table 1). Detailed cost estimates by expenditure category and financier are in Appendix 6.

Table 1: Project Investment Plan ($ million) Item Amounts A. Base Costa 1. Road Connectivity Improvement Componentb 29.2 2. Road Infrastructure Management Componentc 2.5 3. Taxes and Dutiesd 5.8 Subtotal (A) 37.5

B. Contingenciese 3.4

C. Financing Charges During Implementationf 0.5

Total (A+B+C) 41.4 a May 2007 prices. b Includes $0.4 million–$2.9 million for environmental management plans required by the standard contracts. c Includes consulting services for (i) design, subproject preparation, and project supervision; and (ii) auditing. d Twenty percent value-added tax on civil works. e Physical contingencies computed at 10% for civil works and consulting services. Price contingencies computed at 0.8% on foreign exchange costs (2007–2011), 4% for local currency costs (2007–2008), and 3% for local currency costs (2009–2011). f Interest during construction. Source: Asian Development Bank estimates.

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E. Financing Plan 29. The Government has requested a loan of $30.6 million equivalent from ADB’s Special Funds resources to help finance the Project, while the Government will provide $10.8 million equivalent in counterpart funds (Table 2). The loan will have a 32-year term, including a grace period of 8 years, an interest charge of 1.0% per annum during the grace period, and 1.5% per annum thereafter. Table 2: Financing Plan ($ million) Source Total Percentage Asian Development Bank 30.6 73.9 Government 10.8 26.1 Total 41.4 100.0 Source: Asian Development Bank estimates.

30. The Government, MCC, and ADB will be able to finance about half of the total investment requirements for the LRNP (Table 3), serving nearly 44% of the total rural population in Armenia.

Table 3: Overall Financing Plan for the Lifeline Road Network Program ($ million) Source Total Percentage Millennium Challenge Corporation 67.0 22.3 Asian Development Bank 30.6 10.2 Government 50.0 16.7 Othersa 152.4 50.8 Total 300.0 100.0 a Includes financing from the Japan Bank for International Cooperation (JBIC) in the amount of about $50 million equivalent in parallel with the Project. JBIC’s loan processing is underway. Source: Asian Development Bank estimates.

F. Implementation Arrangements

1. Project Management

31. MOTC will be the Executing Agency (EA). Responsibility for planning, implementation, and supervision of the Project will be delegated to ARD, a noncommercial state organization responsible for planning and management of road construction and maintenance work for the road assets under MOTC’s purview. ARD will be responsible for recruiting consultants for subproject preparation and construction supervision, and auditing; preparation of bidding documents; and monitoring, evaluation, and awarding of contracts. Within ARD, a PMU12 will be established to manage day-to-day coordination, implementation, and administration of the Project, while PMU’s team responsible for civil works contract management at the regional level will supervise day-to-day civil works contracts. ADB and PMU will maintain close coordination with JBIC, while they will also maintain partnership with other partners related to the Project. Project organization and implementation arrangements are in Appendix 7.

32. In accordance with the Government’s requirements for externally funded projects, 13 a project governing council (PGC), comprising representatives from key stakeholders within and external to MOTC, will provide overall oversight and supervision for the Project. The PGC will

12 It is estimated that 15 staff members are required for the PMU. ARD has so far identified 9 members comprising (i) head (deputy director general level), (ii) a procurement officer, (iii) an environmental officer, (iv) a financial officer, (v) a construction officer, (vi) two construction specialists, (vii) an administrative assistant/interpreter/translator, and (viii) a driver. Some of them have operational experience with the World Bank road projects. 13 Republic of Armenia. 1999. On the Activities of Project Implementation with the Proceeds of Loans and Grants Provided to the Republic of Armenia by Foreign States and International Lending Organizations. Yerevan. (Resolution No. 765, dated 22 December 1999). 9 comprise 11 members: (i) minister of MOTC, (ii) first deputy minister of MOTC, (iii) first deputy minister of finance and economy, (iv) first deputy minister of justice, (v) deputy minister of territorial administration, (v) five representatives from civil society, and (vi) head of the PMU. The PGC meetings will be held at least quarterly, and the PMU will report and seek guidance from the PGC on major procurement issues and policy decisions. The PGC will also provide a forum for coordinating activities among project beneficiaries.

2. Implementation Period

33. The Project will be implemented over 3 years, taking the construction season (May– November) in Armenia into consideration. Necessary preparatory work has been programmed for completion before the construction season. Twenty-four road links preliminarily identified for ADB financing will be improved through five international competitive bidding (ICB) packages, which will be completed in 2008 and 2009, by commissioning them simultaneously. Advance action on the engagement of consultants for subproject preparation and project supervision is ongoing. Surveys and detailed designs are expected to be completed by the end of 2007 and subsequent bid documentation will start in parallel with the detailed design preparation. Bidding and award of civil works contracts has been scheduled for completion by April 2008. The Project will be completed when the contractors’ liability for the repair of defects and maintenance ends in 2010. An indicative implementation schedule is in Appendix 8.

3. Procurement

34. Procurement under the Project will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Civil works contracts will be carried out by using ICB procedures with post-qualification and as described in the procurement plan for the Project (Appendix 9). The procurement plan may be reviewed regularly and amended at least annually covering the next 18 months of procurement activity during project implementation. The minimum amount of a civil works contract procured through ICB is initially set at more than $1 million and will be reviewed during implementation. Procurement through national competitive bidding (NCB) will be conducted under the Borrower’s legislation on procurement, subject to modification and clarifications set forth in the Loan Agreement. The NCB thresholds are presently set at less than or equivalent to $1 million for civil works and less than or equivalent to $500,000 for goods. International shopping will be carried out for goods less than or equivalent to $100,000.

35. The country presently imports bitumen required for road improvement from non-ADB member countries. Restricting bitumen procurement to ADB member countries may preclude civil works contractors under the Project from obtaining the best economic terms, and may seriously erode economic efficiency. It is proposed that civil work contractors under the Project be allowed to procure bitumen for road improvement from all countries, including from countries that are not ADB members.

4. Consulting Services

36. About 30 person-months of international consultants and about 162 person-months of national consultants will be required to work with the PMU for subproject preparation (including detailed design and technical, environmental, economic, social/resettlement due diligence); preparation of contracts; and project supervision, monitoring, and evaluation (including technical, environmental, economic, social/resettlement monitoring, and evaluation). ARD will engage one consulting firm for the services. The consultants will be recruited through the quality and cost- based selection method, using full technical proposal procedures in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). Outline terms of reference for the consulting services are in Supplementary Appendix A. The Government

10 requested ADB to carry out the selection of the consultants, as it is not familiar with ADB procedures. Once selected by ADB, the Government will negotiate with the selected consultants to finalize the consulting contracts and will retain the responsibility to supervise the consultants.

5. Advance Contracting and Retroactive Financing

37. ADB has approved advance contracting and retroactive financing for the consulting services for subproject preparation and project supervision, monitoring, and evaluation. Up to 20% of the loan amount may be used to finance eligible expenditures retroactively for consulting services that have been engaged in accordance with ADB’s Guidelines on the Use of Consultants and incurred prior to the loan effectiveness but not earlier than 12 months prior to loan signing.

6. Anticorruption Measures

38. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government including the EA and the Implementing Agency (IA). Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the Loan Agreement and bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the IA and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

39. ADB’s Procurement Guidelines requires the Borrower to publish within 2 weeks of receiving ADB’s “no objection” in an English language newspaper or well-known and freely accessible website the results identifying the bid and lot numbers, and the following information: (i) name of each bidder who submitted a bid; (ii) bid prices as read out at bid opening; (iii) name and evaluated prices of each bid that was evaluated; (iv) name of bidders whose bids were rejected and the reasons for their rejection; and (v) name of the winning bidder, and the price it offered, as well as the duration and summary scope of the contract awarded. For contracts subject to post-review, the Borrower shall publish the results no later than the date of contract award.

7. Financial Management

40. ARD—the IA responsible for the flow of funds, accounting, reporting, and auditing—will handle the financial management functions of the Project. An assessment of the financial arrangements for the Project was undertaken in May 2007. Based on the financial management assessment, it was established that ARD has acceptable financial management arrangements: (i) accounting and reporting is performed with the use of appropriate software, which was assessed to be a reliable and flexible system to record and report with the required details and formats; (ii) the bookkeeping system allows the storing of all supporting financial documentation relating to the Project in a systematic manner; (iii) the internal control system is adequate; and (iv) ARD accounting staff have extensive experience with World Bank procedures for disbursement and financial management under the two road project financed by the World Bank, including financial management reports. According to the World Bank, financial management supervisions and annual audits conducted in conjunction with the World Bank-financed road projects, implemented by ARD, confirmed the satisfactory financial management arrangement. In addition, ARD accounting staff was given training sessions on ADB’s loan disbursement procedures during the financial management assessment (Supplementary Appendix B).

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8. Disbursement Arrangements 41. The ADB loan proceeds for the Project will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). To facilitate project implementation and reduce cash flow difficulties in pre-financing project expenditures, advance disbursement through the imprest fund procedure is requested by MOTC, the EA. An imprest account will be set up at a bank acceptable to ADB upon loan effectiveness and will be exclusively used to finance ADB’s share of eligible expenditures. The imprest account will be managed by ARD, the IA. The total advances to be financed through the imprest account will not exceed either 6 months of estimated expenditures or 10% of the loan amount, whichever is lower. For large civil works contracts under the Project, direct payment procedures will apply. If the Government initially funds eligible expenditures from its own resources, reimbursement procedures will be used. To expedite funds flow and simplify the documentation process, the statement of expenditures procedure will be used for liquidation and replenishment of the imprest account and reimbursement of eligible expenditures not exceeding $100,000 per individual contract. Payments in excess of the statement of expenditures ceiling will be reimbursed, liquidated, or replenished, based on the full supporting documentation process.

9. Accounting, Auditing, and Reporting

42. ARD, through MOTC, will submit quarterly and annual progress reports to ADB, indicating progress made and problems encountered during the review periods, steps taken to remedy the problems or proposed countermeasures, the proposed activities, and expected progress during the following periods. Within 3 months of physical completion of the Project, the EA will submit to ADB a project completion report providing details about implementation, costs, benefits, and other information that ADB may request.

43. ARD will maintain separate accounts and financial statements for the Project, which will be audited annually by international independent auditors acceptable to ADB. Auditors will be selected and engaged by quality and cost-based selection or the consultants’ qualifications selection method, in accordance with ADB’s Guidelines on the Use of Consultants. Annual audit reports will include an opinion on the use of the loan proceeds and compliance with the financial covenants included in the loan agreements, if any, including the use of imprest accounts and statement of expenditures procedures. ARD will provide ADB with audit reports in English, together with audited accounts and financial statements, no later than 6 months after the end of each fiscal year.

44. The Government was informed of ADB’s policy on submission of audited accounts, which covers failure to submit audited accounts and financial statements by due dates. If submission of a financial statement is delayed more than 6 months (i) no commitment letter will be issued, if applicable; and (ii) ADB might not approve new contact awards. If the delay is more than 12 months, loan disbursements may be suspended or the loans may be canceled.

10. Project Performance Monitoring and Evaluation

45. The PMU, assisted by the consultants for subproject preparation and construction supervision, will establish a systematic project performance monitoring system (PPMS) to monitor and evaluate the impacts, outcomes, outputs, and activities in relation to the targets and benchmarks set for each subproject and the Project.

46. During the preparation of a group of subprojects for implementation, ARD and ADB will agree on a set of baseline values of economic, social, environmental, and poverty reduction impact indicators for each subproject. With the assistance of the subproject preparation and project supervision consultants, ARD will conduct participatory consultations and necessary surveys, and collect and assess data at intervals agreed with ADB. Findings of the assessments,

12 together with ARD’s views, will be submitted as part of quarterly reports of ARD to ADB. A complete analysis of impacts and outcomes will be performed at project completion and 3 years after.

11. Stakeholder Participation and Consultations

47. ARD will ensure that the Project is implemented with the active participation of relevant stakeholders, using participatory practices. As part of the project preparation, more than 16 consultations covering both environmental and social issues were held with stakeholders, including directly affected people, representatives of local governments, and the Council of Elderly (key persons in the communities). Issues and activities related to project implementation were discussed and concerns expressed (especially road safety and increased exposure to communicable diseases and human trafficking) have been integrated in the project design. Stakeholder consultation and participation will continue throughout project implementation. Regular PGC meetings will systematically give opportunities to stakeholders to express their views and participate in the decision-making process during project implementation.

12. Project Reviews 48. In addition to regular reviews by ADB, a midterm review of the project implementation will be carried out during the first quarter of 2009. Representatives of ADB and the Government will take part in the review, which will focus on impacts—particularly those relating to institutional, administrative, organizational, technical, environmental, and social aspects—and poverty reduction. Other parameters that might negatively affect the economic viability and other relevant aspects will be assessed during the review, which will allow for any necessary midcourse adjustments.

IV. TECHNICAL ASSISTANCE 49. The Government’s transport sector strategy was prepared in 1997 with assistance from the World Bank.14 In the last decade, international economic integration has increasingly gained speed. New technologies and expertise have emerged, and there has been growing concern over risks associated with mobility improvement. Considering these, the Government finds a great need for the development of a new strategy in order to respond to transport demands effectively and address both positive and negative aspects of transport improvement— particularly the road subsector, which is the predominant transport mode in Armenia. Since the road subsector has strong interlinkage with other transport modes, the development of a new overall transport sector strategy will support the road subsector effectively. The Project will be ADB’s first intervention in the transport sector in Armenia, so such a transport sector strategy will assist ADB in developing its partnership with the Government to implement necessary reforms, prioritize investment, and strengthen much needed capacity for the transport sector, including institutional capacity development of the Project’s EA and IA.

50. TA will be provided to improve transport sector performance so that it can make a sustainable contribution to economic development and poverty reduction in Armenia, which is facing ongoing globalization, technological advancement, and risks associated with increasing mobility. The main purposes of the TA are to support both the development of a new transport sector strategy and enhancement of the institutional capacity of MOTC and ARD. The TA will assess in detail all modes of transport, and identify strategic uses of resources for priority areas for sector development and operational needs for a 10-year horizon. The TA will equip MOTC with a new transport sector strategy comprising a new vision and road map, which will be the Government’s key document guiding policies and investments in the transport sector, including transport facilitation for 2009–2019. Specifically, the TA will (i) develop a reform action plan,

14 World Bank. 1997. Republic of Armenia Transport Sector Review. Washington, DC. 13

(ii) develop a management information system for MOTC and ARD, (iii) define a long-term transport sector investment plan, (iv) support international transport facilitation and logistics sector development, (v) provide a capacity building development plan in all aspects of the transport sector, and (vi) support systematic resource mobilization for transport sector investments. The total TA amount is estimated at $800,000. ADB will finance $600,000 while the Government will finance $200,000. The TA will be financed on a grant basis by ADB’s TA funding program. The consultants will be recruited through the quality and cost-based selection method, using simplified technical proposal procedures in accordance with ADB’s Guidelines on the Use of the Consultants. Outline terms of reference are in Supplementary Appendix C.

V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 51. The main immediate benefits of the Project include long-term sustainable savings in vehicle operating costs and travel time, stemming from physical improvements including the development of an improved road management system. The overall investments will increase mobility and accessibility to basic social service delivery institutions, employment opportunities, and domestic and international markets for communities and enterprises in rural and urban areas of the four regions. Indirect benefits expected from the Project include (i) increased local contractors’ capability, (ii) enhanced transport sector management capability of MOTC, (iii) improved road infrastructure management capability of ARD, (iv) reduced road accidents, (v) improved awareness of risks associated with increased mobility and countermeasures, and (vi) increased awareness of vehicular air pollution and countermeasures.

A. Economic Benefits 52. Economic assessment of each of the subprojects included in the Project has been performed based on the expected benefits from the physical improvement. The benefits considered are (i) vehicle operating cost savings for passenger and freight traffic resulting from the improvements to riding quality, (ii) generated traffic from the irrigated agriculture project financed by MCC,15 (iii) induced traffic, and (iv) time savings.

53. The overall project economic internal rate of return (EIRR) is estimated at 43.2%, while net present value (NPV) is $83.0 million. The impact of a cost increase of 20%, a benefits decrease of 20%, and a combined cost increase and benefit decrease of 20% on the EIRR and the NPV are shown in Table 4. The economics of the Project are highly robust, as illustrated by the switching values which would reduce NPV to zero (an EIRR of 12%): an increase of 332% in economic cost, a decrease of 77% in project benefits, or a simultaneous increase/decrease of 62%. Economic analysis is detailed in Appendix 10.

Table 4: Sensitivity Analysis and Switching Values Item EIRR NPV (%) ($ million) Base Case 43.2 83.0 Cost +20% 37.3 78.0 Benefits –20% 36.2 61.4 Cost/Benefits +/–20% 31.2 56.4 Cost Benefits Costs/Benefits Switching Valuesa 332% -77% +/-62% EIRR = economic internal rate of return, NPV = net present value. a To reduce NPV to zero. Source: Asian Development Bank estimates.

15 The Project is located within the MCC project areas of 5 irrigation schemes (out of 21), with incremental increase in the irrigated areas totaling 12,600 hectares.

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B. Project Sustainability 54. The Government has increased road budgets and is committed to providing adequate funds to maintain the roads after the improvements, particularly the LRNP. PBCs will reduce maintenance costs. ARD’s road subsector management capabilities will be improved over time. Compliance with safeguards has been pursued throughout project processing and will continue during project implementation to ensure environmental and social sustainability of the Project. These will create a long-term sustainable environment for the road assets improved under the Project.

C. Environmental Impacts 55. Rehabilitation work under the Project will generally follow the existing carriageway width, which is about half of the right-of-way. The Project is categorized B and is expected to have insignificant environmental impacts during both construction and operation stages. The nearest distance from any of the subprojects to the protected areas (national park or state reserve) is more than 1 km. No ecological or biodiversity impacts are expected. Ten public consultations involving a total of 72 local stakeholders have been held and general feedback has been positive about the Project, with little environmental concern. The environmental assessment and review procedures included in an initial environmental examination (IEE) have covered the future subproject screening and selection process and criteria, and will be followed according to ADB’s Environment Policy 16 and Environmental Assessment Guidelines. 17 The environmental management plan (EMP) prepared under the IEE has included mitigation measures, monitoring programs, and capacity-building programs. Environmental impact will be assessed during subproject preparation, and will be monitored and evaluated during project implementation. EMPs and IEEs will be prepared for the subprojects based on the detailed design and will be included in the standard contract documents, which require 1.5–10.0% of the contract values for EMPs. This process will be supported and monitored by the consulting firm for subproject preparation and construction supervision. A summary IEE (SIEE), including the environmental assessment and review framework (EARF), is in Supplementary Appendix D.

D. Social and Poverty Impacts

56. The Project will also improve income and non-income dimensions of poverty in rural areas. The Project’s impact on poverty has been quantified by examining the share of total project net benefits that would accrue to the poor and the very poor. About 32% of road users within the project areas are poor and 6% are classified very poor. Project benefits will accrue to about 40,500 poor beneficiaries, of whom roughly 7,000 are very poor. A distribution analysis indicates that the Project will yield a poverty impact ratio of 0.28. Total net benefits accruing to the poor in the project areas are estimated to amount to about $24 million, of which the very poor will receive about $4 million. Improved road infrastructure will provide rural communities with enhanced access to social service delivery institutions including hospitals, clinics, and schools. This will support improvement of the non income-related causes of poverty. The summary poverty reduction and social strategy is in Appendix 11.

E. Indigenous People 57. An initial social assessment was carried out during project processing, covering all potential subprojects. Detailed socioeconomic evaluation of 15 communities 18 has been conducted and more than six consultation meetings were held in these communities. Extensive

16 ADB. 2002. Environment Policy of the Asian Development Bank. Manila. 17 ADB. 2003. Environmental Assessment Guidelines. Manila. 18 With a total population of about 25,820 persons (about 20% of the total people living within the project areas) along four subprojects in Gegharkunik (road link no. 2), Ararat (road link no. 17), and Kotayk (road link nos. 14 and 27). 15 research on the remaining project areas has also been conducted. The assessment has concluded that there are no indigenous people living in the project areas. Thus, there is no indigenous peoples’ issue.

F. Internally Displaced Persons and Refugees

58. A total of nearly 19,000 internally displaced persons and refugees (IDPRs) live in the project areas, which constitute about 15% of the total community population. Of 19,000 IDPRs, about 18,000 persons are refugees, while the remainder is internally displaced persons. The Project will provide the IDPRs with improved access to markets, job opportunities, and basic social services. The IDPRs do not live near the road alignments, so there will be no negative impact on the IDPRs during construction. Surveys carried out during project preparation have concluded that negative impacts on IDPRs are very limited. As ADB’s sector lending modality is adopted for the Project, the internally displaced persons and refugees development framework (IDPRDF) has been prepared for these people (Supplementary Appendix E). The consulting services for subproject preparation and project supervision will review potential negative impacts on these people, and prepare specific actions and development plans for IDPRs, if necessary.

G. Land Acquisition and Resettlement

59. Rehabilitation work under the Project will generally follow the existing carriageway widths, which are about half of the right-of-way widths. Thus, no resettlement is expected. It has been assessed during surveys and consultations that there is no encroachment to the subprojects. However, since ADB’s sector lending modality has been used for the Project, a resettlement framework (RF) was prepared to establish the policies and procedures for compensation, rehabilitation, and resettlement of people affected by the Project. The provisions of the RF will be applicable in all cases where land acquisition and/or resettlement are/is required as part of the implementation of a subproject. The RF builds on the laws of the Government of the Republic of Armenia—principally the Constitution, 1995; the Land Code, 2001; and the Civil Code, 1998— and ADB’s Involuntary Resettlement Policy.19 Since government legislation is not fully consistent with ADB policy, the provisions of the RF will take precedence over relevant decrees currently in force in Armenia wherever a gap exists between the ADB policy and Armenian laws. The RF is in Supplementary Appendix F.

H. Risks 60. The major risks arise from possible project preparation delays, implementation delays, and low quality of works. To minimize these risks, the Government and ADB have agreed on a feasible schedule that will be reviewed regularly, and systematic procedures for subproject submissions to ADB and project implementation that are detailed in the project administration memorandum (PAM). Consultant support will (i) ensure high quality due diligence for subproject selection and preparation, and (ii) help ARD anticipate major factors in the critical paths of project implementation. Furthermore, advance contracting of the consultancy services for subproject preparation and construction supervision has further minimized risks of implementation delays. To ensure high quality of works under the Project, consultant support has been designed to include provisions for project supervision, monitoring, and evaluation by including qualified international and national road engineers and pavement specialists, road safety experts, transport economists, social/resettlement specialists, and environment specialists. A further risk is cost overrun, which has been reduced through (i) surveys of sample subprojects to estimate more accurate costs, (ii) sufficient price and physical contingencies, and (iii) provision of consultants for subproject preparation and project supervision.

19 ADB. 1995. Involuntary Resettlement. Manila.

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VI. ASSURANCES AND CONDITIONS 61. In addition to the standard assurances, the Government and MOTC have given the following assurances, which are incorporated in the legal documents.

A. Implementation Arrangements

62. MOTC, shall be the EA and, as such, shall have overall responsibility for project implementation. ARD shall be the IA and, as such, shall overall responsibility for the day-to-day operations of the subprojects. Within ARD, a PMU shall be established to manage the day-to-day coordination, implementation, and administration of the Project, including, without limitation, (i) selection and assessment of candidate subprojects, (ii) maintenance of project accounts, (iii) support for the procurement of equipment and materials, (iv) monitoring and reporting on subproject implementation, (v) facilitation of environmental and social protection measures, (vi) support for the selection of consultants, (vii) detailed design supervision, and (viii) construction supervision. The PMU shall be maintained until project completion.

63. MOTC shall be assisted by a PGC. The PGC shall be an interministerial and interdepartmental body consisting of representatives from the Ministry of Finance and Economy, Ministry of Justice, MOTC, Ministry of Territorial Administration, and civil society representatives of the Project beneficiaries. The PGC shall be chaired by minister of MOTC. The PGC shall operate in accordance with the Government’s requirements20 and shall be responsible for (i) guiding the overall policy and strategic direction of the Project, (ii) reviewing and evaluating project/subproject performance, and (iii) assisting with the coordination among other donor- funded projects relating to the project roads. The PGC shall be maintained until project completion.

64. The PMU shall, on a quarterly basis or more often as required, meet with each organization,21 which it considers appropriate, to discuss and coordinate the implementation of the Project. The PMU shall further discuss all issues required to be addressed with such other entities in accordance with the terms of the PAM agreed to between the Borrower and ADB.

1. Counterpart Financing and Financial Support

65. The Borrower shall make available all counterpart funds required for the Project on a timely basis, and on an annual basis for each fiscal year, make adequate budgetary allocations as required to (i) support timely and effective project implementation; (ii) rehabilitate the project roads within three years; (iii) undertake routine operation and maintenance activities on the project roads; (iv) implement the provisions of the EARF and the mitigation measures and monitoring requirements of the IEE and EMP for each subproject; (v) adhere to the RF and implement the RP for each subproject where an RP is required; and (vi) adhere to the IDPRDF and implement the IDPRDP for each subproject where an IDPRDP is required.

2. Authority and Control over the Project Road 66. The Borrower shall ensure that MOTC has the authority and control over the project roads necessary to implement the subprojects.

20 Republic of Armenia. 1999. On the Activities of Project Implementation with the Proceeds of Loans and Grants Provided to the Republic of Armenia by Foreign States and International Lending Organizations. Yerevan. (Resolution No. 765, dated 22 December 1999). 21 Such as JBIC, MCC, Lincy Foundation, ASIF (financed by the World Bank), JICA, UNAIDS, USAID, and UNDP. 17

3. Financing of Maintenance of Road Network

67. The Borrower shall allocate and make available, on a timely basis, sufficient funds for the operation and maintenance of the project roads, and shall ensure that the project roads are adequately maintained in accordance with applicable standards and best international practices.

68. Without limiting the generality of the foregoing, in each fiscal year hereafter, the Borrower shall increase its annual road rehabilitation and maintenance budgets for the whole road network by no less than annual inflation rates from the amount allocated for the same purpose in fiscal year 2007 (AMD16.16 billion), as long as sound fiscal balance is maintained.

69. The Borrower shall ensure that actual annual expenditures for maintenance of the roads that falls under MOTC’s scope of responsibility are increased at least at the same rate as increases in the overall national budget in each year during project implementation.

70. The Borrower shall (i) ensure that details of actual road maintenance expenditures are included in every other quarterly progress report to be submitted by MOTC to ADB, (ii) have such expenditures audited annually in accordance with appropriate auditing standards by independent auditors acceptable to ADB, and (iii) furnish such audited statements of expenditures to ADB within 9 months from the end of the fiscal year.

4. Subproject Selection

71. All subprojects require the prior approval of ADB. The Borrower, through MOTC, shall annually submit for ADB’s approval a list of roads it wishes to propose for subprojects in the succeeding year. The list shall be accompanied by a feasibility study for each proposed subproject. The Borrower, through MOTC, shall ensure that the subproject feasibility studies are prepared with sufficient detail and quality for ADB to assess whether the proposed subprojects meet the agreed criteria, and are otherwise suitable and viable.

72. The Borrower, through MOTC, shall ensure that all relevant documents forming the basis for screening, selection, and processing of subprojects are made available to ADB upon request and are kept available for such purposes for a minimum period of 5 years from the date of the project completion report for the Project.

5. Road Safety

73. The Borrower shall ensure appropriate safety enforcement measures on the project roads and shall cause ARD to monitor the accident rate and traffic volume after commencement of the operation of the project roads.

74. The Borrower shall further ensure that relevant government agencies provide strict road patrol to prevent trafficking of humans, wildlife, endangered species, and illegal substances on the project roads.

6. Environmental Management

75. The Borrower, through MOTC, shall ensure that the Project is carried out in accordance with, and that all subprojects are designed, carried out, maintained, and monitored in compliance with (i) all applicable environmental laws and regulations, including the Borrower’s Law on Environmental Assessment, 1995; (ii) ADB’s Environment Policy; and (iii) the EARF and each EMP, as applicable, including the mitigation measures and monitoring requirements arising from the implementation of the environmental assessment and review procedures outlined in the relevant IEE. The Borrower shall ensure that the EMP prepared for any subproject is (i) incorporated into the design of the subproject; (ii) implemented in accordance with its terms

18 during the construction, operation, and maintenance of the subproject; and (iii) updated at such time when the detailed engineering design becomes available.

76. The Borrower, through MOTC, shall ensure that (i) civil works contractors’ specifications include requirements to comply with the environmental mitigation measures contained in each IEE and EMP, as applicable; and (ii) civil works contractors are supervised to ensure compliance with the requirements of each IEE and EMP.

7. Land Acquisition and Resettlement

77. The Borrower (i) shall ensure that all land and rights-of-way required by the subprojects are acquired or otherwise made available in a timely manner; and (ii) through MOTC, shall ensure that the Project is implemented in accordance with (a) the RF and each RP, as applicable; (b) the IDPRDF and each IDPRDP, as applicable; and (c) all applicable domestic laws and regulations and ADB’s Involuntary Resettlement Policy (1995).

78. The Borrower, through MOTC, shall ensure that (i) in the event there is any significant change in the design of subproject covered by a RP and/or IDPRDP, or any substantial changes in resettlement impacts, the relevant RP and/or IDPRDP, as the case may be, will be (a) updated based on a detailed measurement survey, (b) disclosed to the affected persons, and (c) subsequently provided to ADB for its concurrence prior to commencement of any civil works for the subprojects; and (ii) that civil works contractors’ specifications include requirements to comply with each RP and/or IDPRDP, as applicable.

79. The Borrower, through MOTC, shall ensure that no civil works contract is awarded for any subproject requiring land acquisition until such time as the land and/or right-of-way required for the execution of any civil works for the subproject has been obtained by MOTC, and subsequently provided to the contractor, in each case, free from any encumbrances and in compliance with the provisions of the RF and the IDPRDF.

80. The Borrower shall ensure that contractors are mobilized for civil works on specific subprojects only after (i) the provisions of the RF and any RP required for such subprojects and (ii) the provisions of the IDPRDF and any IDPRDP required for such subprojects, have been complied with.

8. Labor, Gender, and Health

81. The Borrower, through MOTC, shall ensure that (i) all civil works contracts require contractors employed under a subproject to incorporate applicable workplace occupational safety norms; (ii) that civil works contractors (a) comply with all applicable labor laws; (b) do not employ child labor for construction and maintenance activities; (c) do not differentiate wages between men and women for work of equal value; and (d) disseminate information to their employees on the risks of socially and sexually transmitted infections, including HIV/AIDS; and (iii) that the appropriate entities disseminate information on the risks of socially and sexually transmitted diseases to members of the local community, particularly females, living in the communities surrounding the subproject area.

9. Anticorruption

82. The Borrower shall comply with, and shall ensure MOTC complies with, ADB’s Anticorruption Policy. The Borrower, consistent with its commitment to good governance, accountability, and transparency, agrees (i) that ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project; and (ii) to cooperate fully with any such investigation and to extend all necessary assistance, including providing access to all relevant books and records, as may be necessary 19 for the satisfactory completion of any such investigation. In particular, the Borrower shall (i) conduct periodic inspections on the contractors’ activities related to fund withdrawals and settlements; (ii) ensure that all contracts financed by ADB, in connection with the Project, include provisions specifying the right of ADB to audit and examine the records and accounts of all contractors, suppliers, consultants, and other service providers as they relate to the Project; and (iii) the construction supervision consultant shall verify the contractors’ invoices in accordance with working drawings and contract specifications.

10. Project Monitoring, Review, and Reporting

83. The Borrower, through MOTC, shall, within 6 months of the loan effective date, finalize and adopt a comprehensive PPMS, acceptable to ADB, based upon the PPMS indicators agreed upon between the Borrower and ADB. The Borrower, through MOTC, shall (i) monitor the PPMS indicators on a quarterly basis to determine the efficiency and effectiveness of the Project and its impacts; and (ii) provide to ADB quarterly PPMS monitoring reports, in form and substance satisfactory to ADB, from the commencement of project implementation until project completion and on the third anniversary of project completion.

84. The Borrower, MOTC, ARD, and ADB shall, during the second year of project implementation, jointly undertake a comprehensive midterm review of the Project. The midterm review will assess the Project’s achievements and progress in implementing the Project against the PPMS indicators and the project implementation schedule in order to identify any difficulties or constraints being encountered in implementing the Project and to make adjustments, if necessary, for the remaining project implementation period. In particular, the midterm review will, among others, evaluate the project scope, costs, overall implementation progress, and status of compliance with loan covenants.

85. The Borrower shall submit to ADB project progress reports, in form and substance satisfactory to ADB, on a quarterly basis. The quarterly reports shall include, without limitation, a description of (i) the physical progress of the Project; (ii) reasons for any delays or difficulties in implementing the Project, together with recommendations for future actions, as appropriate; (iii) the progress in implementing the EMPs; (iv) the progress in implementing the RPs, if required, for subprojects (v) the progress in implementing any IDPRDP, if required, for subprojects; and (vi) a summary of the financial accounts for the Project, including the total project expenditures on a quarterly basis to the date of the relevant report. Within 3 months of project completion, the Borrower shall submit to ADB a project completion report, in form and substance satisfactory to ADB. The project completion report shall include, without limitation, (i) an assessment of the execution and operation of the Project, (ii) status of compliance with loan covenants, and (iii) the results of project outcomes and performance.

B. Conditions for Disbursement

86. Notwithstanding any other provision of the Loan Agreement, no withdrawals shall be made from the loan account for the purposes of the Project until ADB has received Borrower’s certification, in form and substance satisfactory to ADB, that:

(i) MOTC has the authority and control over the project roads necessary to implement the subprojects;

(ii) a project implementation agreement between MOTC and ARD has been duly executed and delivered on behalf of ARD and has become fully effective and binding upon the parties in accordance with its terms;

(iii) the Borrower had deposited into ARD’s bank account the required counterpart funds, in the amount of lesser of (a) estimated expenditures required for 6 months

20

of project implementation, or (b) 10% of the total estimated counterpart funding requirements for the Project; and

(iv) the PMU has been established, has been adequately staffed as agreed with ADB, and has become fully operational to implement the Project.

VII. RECOMMENDATION 87. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the loan in various currencies equivalent to Special Drawing Rights 20,075,000 to the Republic of Armenia for the Rural Road Sector Project from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board.

88. I recommend that the Board approve the proposal set forth in para. 35 of this report that bitumen procured from nonmember countries of ADB for civil works be eligible for financing under the Project. If the requisite affirmative votes of directors representing not less than two thirds of the total voting power of ADB member countries, pursuant to Article 14 (ix) of the Agreement Establishing the Asian Development Bank, is not obtained for this recommendation and the Board only approves the recommendation in para. 87, then only bitumen for civil works procured from member countries of ADB will be eligible for financing under the Project.

Linqun Jin Vice President (Operations 1)

7 September 2007

Appendix 1 21

DESIGN AND MONITORING FRAMEWORK

Design Performance Targets/Indicators Data Sources/Reporting Assumptions Summary Mechanisms and Risks Impact Assumption Poverty reduction in the Reduced average poverty level in National statistics • The Government continues project area the project area from 33.3% in 2005 to accord high priority to the to less than 20.0% after 10 years Asian Development Poverty Reduction Strategy from project completion, using a Bank’s (ADB)’s project Paper and the Lifeline Road national poverty line based on performance audit report Network Program annual household surveys prepared by the National Statistics Services

Outcome Assumptions Improved access of rural Level of motorized traffic on Direct measures of traffic • Continued political stability populations in the project improved roads increased by volume, road roughness, and economic growth in the area to jobs, markets, average of 40% from 2007 within and travel time through Republic of Armenia and the and social services, and 2 years of project completion periodic surveys region the major trunk road conducted by the • Effective implementation of networks through Reduction in travel time more than Armenian Roads the Poverty Reduction and reduction in road 40% on average for the whole Directorate Non- Strategy Paper transport costs Project after project completion Commercial State • Adequate government Organization funding for the road sector

Periodic household • Sufficient capacity of surveys in the project area domestic road construction and maintenance companies

Project progress reports Risk • Inadequate maintenance of ADB review missions the project road after completion because of ADB’s project completion insufficient funding report Outputs Assumptions

1. Improvement of high Complete rehabilitation of rural Consultant’s contract • Continued high priority given priority roads roads totaling about 220 kilometers milestones by the Government to the

(km) after project completion Project • The Government’s continued Project progress reports cooperation during project Average surface roughness for the implementation subprojects reduced from an ADB review missions • Availability of key statistics international roughness index of and information relating to ADB’s project completion 10.9 m/km in 2007 to no more than the Project 4.0 m/km after project completion report • High-quality consulting

services for subproject Reduction in vehicle operating costs preparation and construction by more than 40% on average for supervision. the whole Project after the project Risks completion • Project implementation delay

2. Improvement of Introduction of a transport sector • Poor quality of civil works transport management management program • Delay in the engagement of the TA Consultants capability of the Ministry recommended by the TA attached to of Transport and the Project Communication

3. Improvement of road Introduction of a road sector asset management management program capability of the recommended by the TA attached to Armenian Roads the Project Directorate

22 Appendix 1

Activities with Milestones Inputs

1. Consulting Services for Subproject Preparation and Project Supervision Project Target: Begin in December 2007 and complete in November 2010 • ADB: $30,600,000

2. Civil Works (including consulting services Targets: Subprojects for 2008 implementation (May 2008 and complete in November 2008) for (i) subproject preparation Subprojects for 2009 implementation (Q2 2009 and complete in November 2009) and project supervision, and 3. Consulting Services for Transport Sector Development Strategy (ii) auditing, amounting to Target: Begin in April 2008 and complete in September 2008 $1.5 million) • Government: $10,800,000

Transport Sector Development Support TA (Consulting Services) • ADB: $600,000 • Government: $200,000

Appendix 2 23

ROAD SUBSECTOR ANALYSIS

A. Road Subsector Strategy

1. The Government’s road subsector strategy was first defined in the transport strategy developed with World Bank assistance in 1997. The four major strategic pillars are (i) the introduction of cost recovery measures, (ii) the adoption of cost reduction measures, (iii) systematic project prioritization, and (iv) subsector monitoring activities. The major developments and needs are as follows:

(i) Cost recovery measures. Provision for domestic funding has been made through legislation requiring 10% of fuel tax revenue to be applied to routine maintenance.

(ii) Cost reduction measures. In 2005, the Ministry of Transport and Communications (MOTC) introduced performance-based contracts (PBCs) for routine and winter road maintenance covering all roads under MOTC’s responsibility (totaling 3,393 kilometers [km]) for 3 years, while local authorities have carried out PBCs for routine and winter road maintenance along local roads. In conjunction with its rural road rehabilitation project, the Millennium Challenge Corporation (MCC) will review PBC performance in 2007. The Government has been keenly pursuing cost-effective pavement interventions.

(iii) Systematic project prioritization. Although the Highway Development and Management Model 4 (HDM4) was introduced for the road asset management system, traffic data were generally a few years old and only very brief economic and social assessments were conducted. In 2005, to overcome the traffic data deficiency problem, the Armenian Roads Directorate Non-Commercial State Organization (ARD) introduced automatic traffic counters at 10 locations along the six main highways, which feed traffic information to the current road management system. A more comprehensive road project selection and monitoring system needs to be further developed to reduce the cost of maintaining the road assets by the systematic use of economic analysis as a basis for selecting the most appropriate time and type of road maintenance, the use of improved road technology, and timely maintenance interventions commensurate to the available resources.

(iv) Enhancement of the monitoring capacity. A new system mentioned above needs to include specific monitoring functions with respect to traffic counts and periodic road condition surveys over the road network, safety measures to minimize accidents, and social and environmental measures to minimize risks associated with road improvements.

B. Long-Term Road Subsector Policy (2006–2015)

2. To respond to the challenges created by the road infrastructure deficiency, the Government has adopted a main road subsector policy until 2015, focusing on the rehabilitation and maintenance of existing roads in line with the Poverty Reduction Strategy Paper (PRSP).

24 Appendix 2

C. Three Overall Long-Term Road Subsector Strategic Goals

3. The Government adopted three strategic goals for its road infrastructure development for the period 2006–2015: (i) maintenance and improvement of the main road network to enhance the country’s business competitiveness and support the economy through reduction in transport costs and increase in interregional transit traffic; (ii) improvement of the socioeconomic condition of the rural population through rehabilitation of rural roads in support of the PRSP; and (iii) improvement of road safety. The Government has planned to (i) complete the rehabilitation of old bridges and other ancillary facilities along the main highways by 2010, (ii) complete the rehabilitation of secondary roads and bridges by 2015, (iii) meet rural road transport demands in a cost-effective manner, and (iv) ensure road safety throughout all road categories. The strategic goals for the road subsector and the goals of ARD are in Table A2.1.

Table A2.1: Strategic Goals for the Road Subsector and the Goals of ARD

Strategic Goal ARD’s Goals Performance Indicators Maintenance and Develop an efficient Ratio (total length with improvement of the main maintenance system that will satisfactory maintenance/ road network to enhance ensure sustainable operation total road length) the country’s business and maintenance of the road competitiveness and assets support the economy Improve the road surface of IRI (m/km) through reduction in the main highways transport costs and Rehabilitate secondary roads IRI (m/km) increase in interregional transit traffic Improvement of the Improve transport activities Ratio (total number of socioeconomic condition of between regional centers communities with sufficient the rural population through and communities feeder roads to the regional rehabilitation of rural roads centers and the total in support of the PRSP number of the communities) Rehabilitate rural roads IRI (m/km) Rehabilitate ancillary Number of bridges in a facilities along rural roads good condition Improvement of road safety Identity blind spots and Total number of accidents install road signs and Ratio (total number of road markings signs against total number of road sign requirements) Ratio (total length of markings against the total length of markings required) IRI = international roughness index, km = kilometer, m = meter, PRSP = Poverty Reduction Strategy Paper. Source: Republic of Armenia. 2005. Decision on Endorsement of the 2006–2008 Three-Year Development and 2006 Rehabilitation and Maintenance Annual Work Plan of the Commonly Used State Roads of the Republic of Armenia. Yerevan. (Decision No. 2412-N).

D. Six Strategic Goals for Road Asset Management (2006–2008)

4. The goals are to do the following.

(i) Develop the overall road network, taking people’s transport needs, economic development prospects, transport demand development, and road safety into consideration. Appendix 2 25

(ii) Reduce transport costs and achieve speedy transport.

(iii) Provide rural communities with all-weather access throughout the year, while minimizing negative environmental impacts.

(iv) Improve road asset management.

(v) Improve the quality of roads through the introduction of new technologies and materials and further development of the domestic construction industry.

(vi) Create more job opportunities in the road construction industry.

5. The Road Improvement Plan for 2006–2008 includes (i) main highway rehabilitation (150 km), (ii) secondary road rehabilitation (340 km), and (iii) rural road rehabilitation (335 km).

E. Network and Traffic

6. The interstate (main) network of 1,561 km connects all regions (11 regions including Yerevan) and provides international links. The total of 1,832 km of republican (secondary) roads connects district centers, and 4,122 km of local roads provide access for the rural population. About 1,000 km of local roads are under the responsibility of regional authorities or local communities, the remainder being under state responsibility. Daily traffic volume on interstate roads ranges from 1,000 vehicles to 25,000 vehicles. Magisterial roads (M-roads) leading to Georgia in the north and Iran in the south are part of the international corridors. The axle load limit is 11.5 tons on interstate roads and 10.0 tons on all other roads.

7. After independence, expenditure on roads virtually ceased and even essential maintenance was not carried out due to the economic difficulties. The PRSP states that the main component of the road program up to 2015 should be rehabilitation and maintenance of the existing network, with particular attention to bridges in poor condition. Rehabilitation and maintenance has been largely financed through external sources. Some 1,400 km of primary roads and dozens of bridges were rehabilitated in 1995–2004; the average international roughness index on these roads fell from 7.8 to 3.5 over the period.

8. The primary road network is well developed—the interstate network (main highways) is fully paved while about 90% of republican roads (secondary roads) are paved. ARD estimates the interstate/republican surface condition to be 15% good, 75% fair, and 10% bad. Since 2005, ARD has had automatic traffic counters at 10 locations on six M-roads. Traffic volumes are in Table A2.2. For 2005–2006, they show very fast growth in truck traffic (32.0%), with more modest growth in light vehicles (7.4%) and overall growth of 12.0%. First quarter 2007 volume was below the average for 2006, but this is a result of seasonal factors.

26 Appendix 2

Table A2.2: M-Road Traffic Volume 2005–2007

Counter Location Light Trucks Truck Total Vehicles Trailers

M1 Yerevan–Gyumry–Georgia border, 20+700 km 8,316 1,351 71 9,738 M2 Yerevan–Meghri–Iran border, 9+380 km 17,032 4,963 630 22,625 M2 Yerevan–Meghri–Iran border, 200+320 km 560 185 15 760 M2 Yerevan–Meghri–Iran border, 367+250 km 340 271 59 670 M3 Margara–Vanadzor–Georgia border, 125+830 km 1,900 290 20 2,210 M3 Margara–Vanadzor–Georgia border, 135+160km 569 282 10 861 M4 Yerevan–Sevan–Ijevan–Azerbaijan border, 80+300 km 1,338 104 13 1,455 M4 Yerevan–Sevan–Ijevan–Azerbaijan border, 10+320 km 15,110 4,288 86 19,484 M5 Yerevan–Armavir–Ijevan–Turkish border, 9+400km 17,572 1,425 49 19,046 M6 Vanadzor–Alaverdi–Georgia border, 59+050km 532 141 48 721 Total 2005 63,269 13,300 1,001 77,570

M1 Yerevan–Gyumry–Georgia border, 20+700 km 8,813 1,428 82 10,323 M2 Yerevan–Meghri–Iran border, 9+380 km 17,586 5,389 624 23,599 M2 Yerevan–Meghri–Iran border, 200+320 km 726 238 38 1,002 M2 Yerevan–Meghri–Iran border, 367+250 km 400 325 79 804 M3 Margara–Vanadzor–Georgia border, 125+830 km 2,251 985 112 3,348 M3 Margara–Vanadzor–Georgia border, 135+160 km 487 877 53 1,417 M4 Yerevan–Sevan–Ijevan–Azerbaijan border, 80+300 km 2,126 144 31 2,301 M4 Yerevan–Sevan–Ijevan–Azerbaijan border, 10+320 km 17,933 4,833 111 22,877 M5 Yerevan–Armavir–Ijevan–Turkish border, 9+400 km 16,946 2,829 40 19,815 M6 Vanadzor–Alaverdi–Georgia border, 59+050 km 702 571 92 1,365 Total 2006 67,970 17,619 1,262 86,851

M1 Yerevan–Gyumry–Georgia border, 20+700 km 7,262 2,352 118 9,732 M2 Yerevan–Meghri–Iran border, 9+380 km 14,637 4,731 457 19,825 M2 Yerevan–Meghri–Iran border, 200+320 km — — — — M2 Yerevan–Meghri–Iran border, 367+250 km 412 174 93 679 M3 Margara–Vanadzor–Georgia border, 125+830 km 2,415 765 139 3,319 M3 Margara–Vanadzor–Georgia border, 135+160 km 851 281 72 1,204 M4 Yerevan–Sevan–Ijevan–Azerbaijan border, 80+300 km 661 48 2 711 M4 Yerevan–Sevan–Ijevan–Azerbaijan border, 10+320 km 15,800 4,096 148 20,044 M5 Yerevan–Armavir–Ijevan–Turkish border, 9+400km 16,955 2,399 126 19,480 M6 Vanadzor–Alaverdi–Georgia border, 59+050km 514 449 114 1,077 Total 2007 First quarter 59,507 15,295 1,269 76,071 km = kilometer, M = Magisterial Road (Main Highway). Source: Armenian Roads Directorate Non-Commercial State Organization, May 2007.

F. Road Funding

9. Much of road sector funding has been from international sources—the Lincy Foundation, World Bank, and Millennium Challenge Corporation (MCC). In 2005, for the first time, a 3-year maintenance program was adopted for 2006–2008. In 2007, AMD16.16 billion (around $50 million equivalent), which is 0.6% of the GDP, has been allocated for operation and maintenance of the road network. The Government’s Medium-Term Expenditure Framework for 2007–2009 envisages increasing allocations to operation and maintenance. Presently, provision for domestic funding has been made through legislation, requiring 10% of fuel tax revenue to be applied to routine maintenance.

Appendix 2 27

10. In 2005–2008, ARD introduced performance-based contracts (PBCs) for maintenance operations on a few main and secondary roads on a pilot basis. If successful, such contracts will be applied more widely. Under the MCC project, technical assistance (TA) in 2007 will review PBCs’ performance to date.

G. Lifeline Road Network Program

11. The 2,702 km of the Lifeline Road Network Program (LRNP) includes road lengths ranging from 1 km to 32 km, with daily traffic volumes between 50 and 2,500. One third of the length is republican road, and two thirds are local and community roads. About 60% is asphalt or bitumen surface. Proposed improvement levels were based on traffic volume. Improvement of culverts, bridges, retaining walls, and drainage is a key component.

12. Implementation of the LRNP was estimated by the World Bank in 2004 to cost $135 million (for the improvement of 2,677 km, with 25 km needing no action). Table A2.3 provides a broad estimate of the cost of completion at May 2007 prices. Total financing of about $98 million from the Asian Development Bank (ADB) and MCC is expect to cover more than 40% of the total length (about 2,700 km). 1 The Government is expected to complete the rehabilitation of roads totaling more than 532 km. The balance will be 978 km and could be completed for about $153 million, including financing from the Japan Bank for International Cooperation (JBIC) in the amount of about $50 million equivalent.

Table A2.3: Lifeline Road Network Program Cost to Completion (May 2007 Prices)

Item ADB MCC Government Balance Total Interstate (Main) (km) 25 0 0 0 0 Republican (Secondary) (km) 78 321 196 122 759 Local (km) 120 622 336 856 1,918 Total 223 943 532 978 2,677 Average Cost ($'000/km) 131 71 94 153 112 Base Cost ($ million) 29.2 67.0 50.0 146.5 300.0 ADB = Asian Development Bank, km = kilometer, MCC = Millennium Challenge Corporation. Source: Asian Development Bank.

H. Road Safety

13. Some progress has been made with the establishment of the National Road Safety Council, and the development of a road safety program that identifies accident black spots. However, the World Bank2 notes that the situation is serious and deteriorating. It defines a short-, medium-, and long-term safety strategy, together with a short-term action and investment plan.

14. Table A2.4 shows 2005 to have been an unfortunate year with fatalities about 20% higher than in 2004. The death rate per 10,000 vehicles is eight times as high as in the safest European countries. Of particular concern is the large number of pedestrian fatalities. A number of steps could improve matters—wearing seat belts, not using mobile phones while driving, and more regard for pedestrian priority. A three-stage process is required: (i) publicity campaigns to change behavior; (ii) police warning of offenders; and (iii) staged

1 According to information provided by SWECO International, a consulting firm engaged for the feasibility study and design for the roads of the MCC’s rural road rehabilitation project, the average road rehabilitation cost is estimated at $137,000/km at prices prevailing in May 2007. 2 World Bank. 2006. Republic of Armenia Road Safety Management Capacity and Investment Needs. Washington, DC.

28 Appendix 2 enforcement, with sufficient penalties to deter offence, including an eventual ban on vehicles operating without fitting of front seatbelts.

15. Within 5 years, with road network condition in general returned to a fair state, incentives should be introduced to accelerate the replacement of the oldest vehicles. This would improve fuel consumption, reduce pollution, improve safety, and increase network capacity. Old vehicles have poor acceleration and hill climbing capabilities, delaying other vehicles. Annual testing of older vehicles against increasingly strict criteria, with possibly a trade-in bonus for scrapping, would yield large economic benefits.

Table A2.4: Road Accidents 2001–2005

Item 2001 2002 2003 2004 2005

Incidence 1,021 1,002 1,025 1,164 1,312 Deaths 237 235 252 259 310 Injuries 1,258 1,213 1,294 1,492 1,774 Source: National Road Safety Council. May 2007.

I. Major Areas for Further Improvement

16. Resolving the financing issue is critical to ensure (i) appropriate road infrastructure service levels for cost-effective and safe transport, (ii) sufficient maintenance to sustain the infrastructure, (iii) pavement strengthening as required for increased traffic levels, and (iv) infrastructure improvement to meet traffic capacity needs cost-effectively. Maintenance should be given priority because of its much higher economic return, with increasing importance given to environmental and social dimensions. An enabling environment for private sector participation and state capacity to plan and contract with the private sector is particularly important. A sustainable set of road user charges, and adoption of improved technologies and strong maintenance management are also required to respond to growing demands for road transport.

17. Given immediate road subsector needs, long-term planning and database development have not been priorities. Information on traffic growth rates and vehicle fleet development is not readily available. Now is an appropriate time to develop a medium-/long- term network needs assessment, in support of economic and social development goals. This needs to be based on a range of economic growth and regional development scenarios, supported by an improved traffic flow database, particularly concerning seasonal variation and peak period traffic volumes. Appendix 3 29

EXTERNAL ASSISTANCE TO THE ROAD SUBSECTOR

1. The Lincy Foundation, Millennium Challenge Corporation (MCC) of the United States, and World Bank are the major external financing sources for the road subsector in Armenia— providing the road subsector with a total of nearly $216 million since 1995.

2. The Lincy Foundation, established by the Armenian diaspora in the US, has provided two grants totaling $86.9 million for the road subsector: (i) $73.4 million for rehabilitation of 435 kilometers (km) of main highways and secondary roads during 2001–2003, and (ii) $13.5 million for rehabilitation of 22.3 km of streets in the capital city during 2002–2003. It has planned to provide $16 million to improve 87.4 km of secondary roads during 2006–2008 and $20.9 million for rehabilitation of streets in the capital city totaling 7.5 km during 2004–2008. Total financing would total $123.8 million during 2001–2008. As part of its assistance, the Lincy Foundation improved the road access of the Noyemberyan area in the Tavush region located in northeastern Armenia. The United States Agency for International Development1 reported that the agricultural potential of the Noyemberyan area has been developed, and export of agriculture produce and processed agriculture products is taking place from this area to the Russian Federation and Georgia.

3. The US, through MCC, signed a millennium challenge compact with the Government of Armenia (the Government) in March 2006. In September 2006, the 5-year rural development program totaling $235 million on a grant basis was officially inaugurated. The program includes (i) a rural road rehabilitation project ($67 million) that will improve up to 943 km of rural roads identified for the Lifeline Road Network Program (LRNP), and (ii) an irrigated agriculture project ($146 million). The rural road rehabilitation project and the irrigated agriculture project cover all regions except the capital city (10 regions).

4. During 1995–2004, the World Bank financed two loans for road improvement, including institutional strengthening of the Armenian Roads Directorate Non-Commercial State Organization (ARD), a road safety program, and institutional support to the Ministry of Transport and Communications, totaling about $62 million to the road subsector. In 1997, the World Bank commissioned a transport sector review.2 The World Bank is actively supporting a road safety program in Armenia and is considering a loan (about $10 million) to finance the proposed traffic management and safety project, focusing on Yerevan. A traffic management study and passenger transport study will be attached to the loan.

5. The Government of Japan (Japan) has provided Armenia with a study and technical cooperation project (totaling about $3 million) to finance a landslide survey through the Japan International Cooperation Agency (JICA). In 2002, Japan provided a grant (about $5 million equivalent) in 2002 to finance road construction equipment for the capital city. Since then, the equipment has been used extensively to maintain the road network within the capital city.

6. Japan Bank for International Cooperation is preparing a loan of $50 million equivalent for the LRNP in parallel with the Project by using the same subproject selection criteria developed by the Asian Development Bank (ADB).

7. The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) is preparing a pre-feasibility study on the southernmost part of the international transport corridor between Goris and Kapan (totaling about 60 km).

1 Consultation meeting with the executive director of the Armenia Small- and Medium-sized Enterprise Market Development Project held on 15 May 2007. 2 World Bank. 1997. Republic of Armenia Transport Sector Review. Washington, DC.

30 Appendix 4

SELECTION CRITERIA AND APPROVAL PROCESS FOR SUBPROJECTS

A. Subproject Selection Criteria

1. Each subproject must meet the following criteria:

(i) the subproject falls within the scope of the Lifeline Roads Network Program (LRNP), and is considered of high priority under LRNP, or is part of the main highway system (interstate), rehabilitation of which will support the objectives of the LRNP;

(ii) the subproject connects rural communities with a total of more than 500 people per road and significant economic activities to the primary road network and/or to regional commercial centers (including those areas containing schools, hospitals, and other social service delivery institutions);

(iii) the subproject is technically feasible and demonstrates, at a worst case scenario, a minimum rate of economic return of 12%;

(iv) the subproject focuses on rehabilitation along the existing road and rehabilitation work will be conducted mainly within the current right-of-way;

(v) the subproject is not a category A project1 under ADB’s Environmental Policy and/or Involuntary Resettlement Policy;

(vi) an environmental screening has been conducted for the subproject and an initial environmental examination (IEE) and environmental management plan (EMP) have been prepared for the subproject in accordance with the Environmental Assessment and Review Framework;

(vii) a Resettlement Plan (RP), if required, has been prepared for the subproject in accordance with the Resettlement Framework;

(viii) an Internally Displaced Persons and Refugees Development Plan (IDPRDP), if required, has been prepared in accordance with the Internally Displaced Persons and Refugees Development Framework (IDPRDF);

(ix) an Initial Poverty and Social Assessment has been prepared;

(x) a road safety audit has been prepared and necessary road safety mitigation measures have been incorporated into the proposed subproject design; and

(xi) all required governmental approvals have been obtained.

1 Projects with potential for significant adverse environmental impacts. An environmental impact assessment is required to address significant impacts. Appendix 4 31

B. Project Approval Procedure

2. All subprojects must comply with Asian Development Bank (ADB) policies and guidance, and satisfy ADB’s procedures for subproject preparation, including the technical, operational, environmental, social, and resettlement dimensions. In respect to the sample subprojects reviewed under the small-scale technical assistance, these requirements were met during project preparation. For additional subprojects, the requirement will be met during project implementation.

3. Before starting procurement actions for the additional subprojects for inclusion in the second annual batch, the Armenian Roads Directorate Non-Commercial State Organization (ARD), the Implementing Agency, will submit to ADB for approval, a report providing details of compliance with the selection criteria (para. 1) of each newly proposed subproject in the batch. The approval process for each batch of additional subprojects will be as follows:

(i) with the assistance of subproject preparation and project supervision consultants, ARD prepares a consolidated report indicating the compliance of each proposed subproject with the selection criteria, including an overall IEE for all subprojects, which will focus on any environmental problems identified and mitigation required, an initial poverty and social assessment, RP (if necessary), and IDPRDP (if necessary) for each subproject;

(ii) ARD screens the subprojects included in the report and refines the report, as necessary, to meet ADB requirements; and prepares a summary checklist describing the eligibility, preparation status, and safeguard compliance of each subproject;

(iii) ARD submits the report and checklist to ADB for approval;

(iv) ADB approves the proposed subprojects, subject to any further modifications required, if ADB considers such modifications are necessary; and

(v) subject to addressing any modifications, as required, ARD proceeds with procurement for subprojects approved by ADB.

C. Monitoring During Implementation

4. ARD will adhere to ADB’s guidelines, policies, and other requirements during pre- construction through reviews of supporting documentation, and during project implementation; and monitor project impacts and contractor performance through specialists engaged to support the project management unit (PMU) and the subproject preparation and project supervision consultants.

5. Technical, economic, environmental, and social auditing will be conducted during subproject preparation and project implementation.

32 Appendix 5

LIST OF SUBPROJECTS IDENTIFIED FOR THE PROJECT Link Communities Length Roughness Cost No. No. Link Name Region District Connected (km) (IRI) ($’000) Bid Vardenis-Shatvan Vardenis–Shatvan 1 L1 Gegharkunik Vardenis 7.0 9.4 920 junction junction Vardenis–Mets Masrik– Vardenis– 2 L2 Gegharkunik Vardenis Pokr Masrik– 17.9 9.2 2,689 Ghehamakar Geghamasar M-11–Khachaghbiur– 3 L3 M-11–Geghakar Gegharkunik Vardenis 8.7 18.1 1,879 Geghakar 1 M-11–Shatjrek– 4 L6 M-11–Geghamakar Gegharkunik Vardenis 4.8 15.5 900 Geghamabak M-11–Shatvan– 5 L7 M-11–Jaghacadzor Gegharkunik Vardenis Geghamabak– 5.8 18.8 1,253 Jaghacadzor Mets Masrik–Tretuk– 6 L9 M-14–Kutakan Gegharkunik Vardenis 9.3 17.8 2,009 Kutakan M-14–Tsovagiuh- 7 L10 M-14–Semenovka Gegharkunik Vardenis 12.1 10.7 1,591 Semenovka

8 L11 M-11–Astkhadzor Gegharkunik Vardenis M-11–Astkhadzor 3.0 12.3 446 2 M-10–Tsakkar- 9 L12 M-10–Tazagiugh Gegharkunik Vardenis 5.3 14.1 947 Tazagiugh

10 L13 M-10–Vardadzor Gegharkunik Vardenis M-10–Vardadzor 2.6 20.2 562

Abovyan–Arzni – 11 L14 Abovyan–Nurnus Kotayk Kotayk 10.2 10.1 1,150 Biurehava–Nurnus Piunik–Artavaz– 12 L15 Piunik–Hankavan Kotayk Hrazdan 13.0 14.2 2,322 Hankavan

13 L16 Zoravzn–Aragiugh Kotayk Nairi Zoravzn–Aragiugh 5.3 11.6 947

14 L24 Yerevan–Yeghvard Kotayk Nairi Zovuni 8.0 11.1 1,232 3

Bujakan–Aragyugh– 15 L25 Bujakan–Saralandj Kotayk Nairi 8.0 10.7 901 Saralandj Zovuni–Kanakeravan– 16 L26 Zovuni–Mrgashen Kotayk Nairi 8.5 14.6 1,518 Mrgashen Mayakovski– Mayakovski– 17 L27 republican Kotayk Kotayk 9.1 10.6 1,196 Dzoraghbyur (secondary) road H-3 Bardzrashen–Landjazat– Bardzrashen– Abovyan–Arevshat– 18 L17 republican Ararat Artashat 12.4 11.4 1,397 Nshavan–Byuravan– (secondary) road H-8 Burastan Aygezard–interstate Aygezard–Aygepat– 19 L18 Ararat Artashat 4.2 14.8 750 (main) road M-2 Shahumyan 4 Kaghtsrashen– 20 L19 Ararat Artashat Kaghtsrashen–Vostan 8.5 10.9 958 Artashat Getazat–republican 21 L20 Ararat Artashat Getazat–Mrganush 2.9 10.4 326 (secondary) road H-9 Appendix 5 33

Link Communities Length Roughness Cost No. No Link name Region District connected (km) (IRI) ($,000) Bid Geghanist–Ghukasavan– 22 L21 Geghanist–Nizami Ararat Masis Darakert–Dashtavan– 9.2 10.6 1,037 4 Zorak–Nizami Urtsadzor–Shahap– Urtsadzor– interstate 23 L23 Ararat Ararat Lusashogh–Landjar– 26.8 17.4 5,789 5 (main) road M-2 Urtsalandj Margara–Arazap– Argavand–Tandzut– 24 L30 Margara–Armavir Armavir Armavir Aygeshat–Armavir 20.2 11.1 2,285 4 village–Haykavan– Norapat–Armavir Ararat 64.0 13.9 10,257 Armavir 20.2 11.1 2,285 Gegharkunik 76.5 13.5 13,196 Kotayk 62.1 12.0 9,266 Total 222.8 10.9 35,004 H = Highway (Secondary Road), IRI = international roughness index, km = kilometers, L = link, M = Magisterial Road (Main Highway). Source: Asian Development Bank.

34 Appendix 6

DETAILED COST ESTIMATES AND FINANCING PLAN

Table A6.1: Detailed Cost Estimates by Expenditure Categorya

% of Total Item ARM Million $ Million Base Cost A. Investment Costs 1. Civil Worksb 10,148.7 29.2 78 2. Taxes and Dutiesc 2,015.8 5.8 15 Subtotal (A) 12,164.5 35.0 93

B. Project Management and Administration 1. Project Management Unit 347.6 1.0 3 2. Consulting Services for Subprojects Preparation and Construction Supervisiond 521.3 1.5 4 Subtotal (B) 868.9 2.5 7 Total Base Cost (A) + (B) 13,033.4 37.5 100

C. Contingenciese 1,181.7 3.4 9

D. Interest During Construction 173.8 0.5 1

Total Project Cost (A)+(B)+(C)+(D) 14,388.9 41.4 110 a May 2007 prices. b Includes $0.4 million–$2.9 million for environmental management plans required by the standard contracts. c 20% value added tax on civil works. d Includes consulting services for (i) subproject preparation and project supervision (covering technical, economic, road safety, environmental, and social aspects); and (ii) auditing. e Physical contingencies computed at 10% for civil works and consulting services. Price contingencies computed at 0.8% on foreign exchange costs for 2007–2011, 4% on local currency costs for 2007–2008, and 3% on local currency costs for 2009–2011. Source: Asian Development Bank.

Appendix 6 35

Table A6.2: Detailed Cost Estimates by Financiera

ADB Government Total Item ($ million) (%) ($ million) (%) ($ million) (%) A. Investment Costs 1. Civil Worksb 25.2 86.3 4.0 13.7 29.2 100.0 2. Taxes and Dutiesc 0.0 0.0 5.8 100.0 5.8 100.0 Subtotal (A) 25.2 72.0 9.8 28.0 35.0 100.0

Project Management and B. Administration 1. Project Management Unit 0.0 0.0 1.0 100.0 1.0 100.0 Consulting Services for 2. Subprojects Preparation and Construction Supervisiond 1.5 100.0 0.0 0.0 1.5 100.0 Subtotal (B) 1.5 60.0 1.0 40.0 2.5 100.0

C. Contingenciese 3.4 100.0 0.0 0.0 3.4 100.0 D. Interest During Construction 0.5 100.0 0.0 0.0 0.5 100.0 Total Project Cost (A+B+C+D) 30.6 73.9 10.8 26.1 41.4 100.0 ADB = Asian Development Bank. a May 2007 prices. b Includes $0.4 million–$2.9 million for environmental management plans required by the standard contracts. c 20% value added tax on civil works. d Includes consulting services for (i) subproject preparation and project supervision (covering technical, economic, road safety, environmental, and social aspects); and (ii) auditing. Physical contingencies computed at 10% for civil works and consulting services. Price contingencies computed at 0.8% on foreign exchange costs for 2007–2011, 4% on local currency costs for 2007–2008, and 3% on local currency costs for e 2009–2011. Source: Asian Development Bank.

36 Appendix 7

PROJECT ORGANIZATION AND IMPLEMENTATION ARRANGEMENTS

Project Governing Council (PGC)a

Quarterly Executing Agency Asian Project Ministry of Development Partnership Transport and Communications Bank Meetings (MOTC) (ADB)

JBIC, MCA, Lincy Foundation, ASIF, USAID, UNAIDS, UNDP,USAID, etc.

Implementing Agency Subproject Preparation Armenian Roads Directorate and Non-Commercial State Organization (ARD) Project Supervision Project Management Unit (PMU) b Consultant Employer-Contractor Relation

ARD Ararat Contractors

ARD Armavir Contractors

ARD Gegharkunik Contractors Engineer-Contractor Relation

ARD Kotayk Contractors Engineer's Representative-Contractor Relation

JBIC = Japan Bank for International Cooperation, MCA = Millennium Challenge Account- Armenia of Millennium Challenge Corporation, ASIF = Armenia Social Investment Fund, USAID = United States Agency for International Development, UNAIDS = Joint United Nations Programme on HIV/AIDS, and UNDP = United Nations Development Programme (anti-human trafficking project).

a Comprises 11 members: (i) minister of MOTC, (ii) first deputy minister of MOTC, (iii) first deputy minister of finance and economy, (iv) first deputy minister of justice, (v) deputy minister of the territorial administration, (v) five representatives from the civil society, and (vi) head of the project management unit (PMU). PGC meetings will be held at least quarterly and PMU will report and seek guidance from PGC on major procurement issues and policy decisions. Furthermore, the PGC will provide a forum for coordinating activities among the project beneficiaries. b It is estimated that 15 staff members are required for the PMU. ARD has so far identified 9 members comprising (i) head (deputy director general level), (ii) a procurement officer, (iii) an environmental officer, (iv) a financial officer, (v) a construction officer, (vi) two construction specialists, (vii) an administrative assistant/interpreter/translator, and (viii) a driver. Some of them have operational experience with the World Bank road projects. Source: Asian Development Bank. Appendix 8 37

INDICATIVE IMPLEMENTATION SCHEDULE

2007 2008 2009 2010 2011 89101112123456789101112123456789101112123456789101112123 Construction Season Loan Effectivity PIA PPMS Imprest Account Midterm Review PCR Submission to ADB a

A. SSTA i

Subproject Screening er it r

Surveys (2008 Program) C P EEES Auditing S D Preliminary Design B. Consultant for Subproject Preparation and Project Supervision Recruitment (Advance Action) Services Subproject Preparation EEES Auditing Project Supervision EEES Auditing PCR C. Auditing a D Civil Works # (km) 2008 Program 2 23.0 Gegharkunik D 4 57.4 Ararat and Armavir DD B Construction Contractor's Liability Period D 526.8Ararat 107.2 # (km) 2009 Program 1 53.5 Gegharkunik D 3 62.1 Kotayk S D B Construction Contractor's Liability Period D Criteria 115.6 E. Transport Sector Development Support TA Recruitment Services F. Disbursement ($ million) 30 25 20 15 10 5

B = bidding; D = bidding document preparation; DD = detailed design; EEES Auditing = auditing of engineering, environmental, and economic aspects, and social safeguards; PD = preliminary design; PIA = project implementation agreement between MOTC and ARD to be agreed within 3 months of the effective date, but not in any event not later than the commencement of the civil work; PPMS = project performance monitoring system to be adopted within 6 months of the effective date; PCR = project completion report to be submitted to the Asian Development Bank within 3 months of the project completion; S = survey; SSTA = small-scale technical assistance; TA = technical assistance. a Four times (2009, 2010, 2011, and 2012). Source: Asian Development Bank.

38 Appendix 9

PROCUREMENT PLAN A. Project Information

Country Republic of Armenia Name of Borrower Republic of Armenia Project Name Rural Road Sector Project (the Project) Loan or TA Reference Date of Effectiveness of Procurement Plan 25 May 2007 (on approval of advance action and contacting at the management review meeting) Amount Total estimates cost of the Project is $41.4 million, of which $30.6 million is financed from the Asian Development Bank (ADB). Of Which Committed $0 Executing Agency Ministry of Transport and Communications (MOTC) Approval Date of Original Procurement Plan This is the first procurement plan Approval of Most Recent Procurement Plan Publication for Local Advertisements1 State and national newspapers Period Covered by This Plan Period up to November 2010, including the contractors’ liability for the repair of defects and maintenance. TA = technical assistance.

B. Process Thresholds, Review, and 18-Month Procurement Plan

1. Project Procurement Thresholds

1. The following process thresholds shall apply to procurement of goods and works:

Procurement of Goods and Works Procurement Method Threshold International Competitive Bidding for Works Above $1,000,000 International Competitive Bidding for Goods Above $500,000 National Competitive Bidding for Works Less than or equivalent to $1,000,000 National Competitive Bidding for Goods Less than or equivalent to $500,000 Shopping for Works Less than or equivalent to $100,000 Shopping for Goods Less than or equivalent to $100,000 Other methods of procurement approved for None envisaged use

2. ADB Prior or Post Review

2. The following prior or post review requirements apply to the various procurement and consultant recruitment methods used for the Project.

1 General procurement notice, invitations to bid, and calls for expression of interest. Appendix 9 39

Procurement of Goods and Works Procurement Method Prior or Post Comments International Competitive Bidding (ICB) Works Prior All bidding documents ICB Goods Prior All bidding documents Limited International Bidding Prior (if any) National Competitive Bidding (NCB) Works Prior All bidding documents NCB Goods Prior All bidding documents Shopping for Works Post All bidding documents Shopping for Goods Post All bidding documents Direct Contracting (if any)

Recruitment of Consulting Firms Quality and Cost-Based Selection (QCBS) Prior Quality-Based Selection Prior Based on full technical proposals for supervision and design consultancy services Other selection methods: Consultants’ Prior Qualifications Selection (CQS), Least Cost Selection (LCS), Fixed Budget Selection (FBS), and Single Source Selection (SSS) Recruitment of Individual Consultants Individual Consultants Prior Based on curriculum vitae

3. Eighteen-Month Procurement Plan

3. The following table lists goods and works contracts for which procurement activity is either ongoing or expected to commence within the next 18 months. a. Goods and Works Contracts Estimated to Cost More Than $1 million General Contract Procurement Prequalification Advertisement Comments Description Value Method Of Bidders Date ($ million) (yes or no) (quarter/year) Gegharkunik ICB No January 2009 One bid Link 1: 7.0 km 0.920 document: Link 2: 17.9 km 2.689 6 packages Link 3: 8.7 km 1.879 (Bid 1) Link 6: 4.9 km 0.900 Link 7: 5.8 km 1.253 Link 9: 9.3 km 2.009 Total: 53.5 km Total: 9.650 Gegharkunik ICB No January 2008 One bid Link 10: 12.1 km 1.591 document: Link 11: 3.0 km 0.446 4 packages Link 12: 5.3 km 0.947 (Bid 2) Link 13: 2.6 km 0.562 Total: 23.0 km Total: 3.546

40 Appendix 9

General Contract Procurement Prequalification Advertisement Comments Description Value Method Of Bidders Date ($ million) (yes or no) (quarter/year) Kotayk ICB No January 2009 One bid Link 14: 10.2 km 1.150 document: Link 15: 13.0 km 2.322 7 packages Link 16: 5.3 km 0.947 (Bid 3) Link 24: 8.0 km 1.232 Link 25: 8.0 km 0.901 Link 26: 8.5 km 1.518 Link 27: 9.1 km 1.196 Total: 62.1 km Total: 9.266 Ararat ICB No January 2008 One bid Link 17: 12.4 km 1.397 document: Link 20: 2.9 km 0.750 6 packages Link 19: 8.5 km 0.958 (Bid 4) Link 18: 4.2 km 0.326 Link 21: 9.2 km 1.037

Armavir Link 30: 20.2km 2.285 Total: 57.4 km Total: 6.753 Ararat ICB No January 2008 One bid Link 23: 26.8 km 5.789 document: 1 package (Bid 5) ICB = international competitive bidding, km = kilometer. b. Consulting Services Contracts Estimated to Cost More Than $100,000 4. The following table lists consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

General Contract Recruitment Advertisement International Comments Description Value Method1 Date or National (quarter/year) Assignment Subproject $1.4 million QCBS Q2 2007 International Surveys and Preparation detailed design and (2007 and 2008) Construction are included. Supervision ADB approved advance contracting and retroactive financing.a Auditing $100,000 QCBS or Q4 2008 International or CQS Q4 2009 national Q4 2010 Q4 2011 ADB = Asian Development Bank, CQS = consultants’ qualifications selection, Q = quarter, QCBS = quality and cost- based selection. a The Government asked ADB to carry out selection of the consultants. Once selected by ADB, the Government will negotiate with the selected consultants to finalize the consulting contracts and will retain the responsibility to supervise the consultants. Appendix 9 41

c. Goods and Works Contracts Estimated to Cost Less than $1 million and Consulting Services Contracts Less than $100,000

5. The following table lists smaller value goods, works, and consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

General Value of Number of Procurement/ Comments Description Contracts Contracts Recruitment (cumulative) Method Software and $100,000 1 Shopping, Hardware Goods

C. Indicative List of Packages Required Under the Project

6. The following table provides an indicative list of all procurement (goods, works, and consulting services) over the project implementation period.

General Estimated Estimated Procurement Domestic Comments Description Value Number of Method Preference (cumulative) Contracts Applicable Goods $100,000 1 Shopping Not Applicable Works $35.00 million 5 ICB Applicable

General Estimated Estimated Recruitment Type of Comments Description Value Number of Method Proposal (cumulative) Contracts Consulting $1.40 million 1 QCBS Full International Services and national (Subproject consultants Preparation and Construction Supervision)

Consulting $0.10 million 1 QCBS or Biodata International Services CQS and/or (Auditing) national consultants ICB = international competitive bidding, QCBS = quality and cost-based selection.

42 Appendix 10

ECONOMIC ANALYSIS

1. Economic assessment of each of subprojects included in the Project has been performed based on expected benefits from the physical improvement. The benefits considered are (i) vehicle operating cost savings for passenger and freight traffic resulting from improvements to riding quality; (ii) generated traffic from the irrigated agriculture project financed by the Millennium Challenge Corporation (MCC), as the Project is located within the impact areas of the MCC’s irrigated agriculture project; 1 (iii) induced traffic; and (iv) time savings.

A. Basic Parameters

2. The parameter values for the HDM4 analysis are in Table A10.1.

Table A10.1: Typical Vehicle Base Data Item Passenger Car Pickup/Minibus Medium Truck Economic cost ($) 5,940 14,117 17,647 Fuel ($/liter) 0.98 0.98 0.59 Oil ($/liter) 3.92 3.92 3.92 Tire replacement ($ 56 71 112 Maintenance labor ($/hour) 4.20 4.20 5.60 Crew wages ($/hour) – 1.26 2.80 No. of passengers 2 10 – Passenger working time ($/hour) 1.00 1.00 – Passenger nonworking time ($/hour) 0.30 0.30 – Work-related trips (%) 40 40 – Annual km (’000 km) 23 30 40 Vehicle life years 15 8 12 km = kilometers. Source: Asian Development Bank estimates.

3. Generated and Induced Traffic. Combined generated and induced traffic have been assumed conservatively to be 20% of normal traffic. Generated and induced benefits are typically evaluated at 50% of normal traffic benefits—equivalent to a normal traffic increase of 10%.

4. International Roughness Index. Most of the subprojects are in very poor condition, with international roughness index (IRI) ranging from 9.2 meters per kilometer (m/km) to 20.2 m/km. Road rehabilitation work envisaged under the Rural Road Sector Project (the Project) will improve the IRIs to less than 4 m/km.

5. Construction Cost. Financial construction costs estimated for each subproject range from $6.0 million to $0.3 million and are shown in Appendix 5. Unit costs have been updated to current prices by the Armenian Roads Directorate Non-Commercial State Organization (ARD), based on the Government’s monthly price list for materials and on the most recent bid data in 2007. Economic costs have been estimated by excluding the value-added tax (20%) from the financial costs.

1 The Project is located within the MCC project areas of 5 (out of 21) irrigation schemes, with incremental increase in the irrigated areas totaling 12,600 hectares. Appendix 10 43

B. Traffic Analysis

6. Base Year Traffic Volume. Traffic counts were taken in November/December 2006 (Table A10.2). Table A10.2: Traffic Counts Subproject Length Traffic Count Location (km) Car Truck Bus Total Gegharkunik 1 Vardenis–Shatvan J. 7.0 1,041 123 45 1,209 2 Vardenis–Ghehamasar 17.9 1,223 200 141 1,564 3 M11–Geghakar 8.7 177 45 27 249 6 M11–Geghamakar 4.8 214 45 27 286 7 M11–Jaghacadzor 5.8 195 36 14 245 9 M14–Kutakan 9.3 209 95 59 363 10 M14–Semenovka 12.1 391 55 18 464 11 M11–Astkhadzor 3.0 182 36 18 236 12 M10–Tazagiugh 5.3 218 41 27 286 13 M10–Vardadzor 2.6 177 50 18 245 Kotayk 14 Abovyan–Nurnus 10.2 2,041 145 109 2,295 15 Piunik–Hankavan 13.0 227 45 18 290 16 Zoravzn–Aragiugh 5.3 436 86 18 540 Ararat 17 Bardzrashen–H8 12.4 192 48 36 276 18 Aygezard–M2 4.2 300 30 30 360 19 Kaghtsrashen–Artashat 8.5 370 20 20 410 20 Getazat–H9 2.9 144 36 24 204 21 Geghanist–Nizami 9.2 1,200 80 100 1,380 23 Urtsadzor–M2 26.8 640 32 80 752 Kotayk 24 Yerevan–Yeghvard 8.0 550 125 50 725 25 Bujakan–Saralandj 8.0 480 95 20 595 26 Zovuni–Mrgashen 8.5 450 75 10 535 27 Mayakovski–H3 9.1 310 50 60 420 Armavir 30 Margara–Armavir 20.2 750 55 35 840 Total 222.8 Source: Asian Development Bank estimates.

7. Real gross domestic product (GDP) growth rates for 2008–2009 are estimated at 6%.2 Traffic growth rate is conservatively assumed to be 6% throughout the evaluation period.

2 International Monetary Fund. 2006. Republic of Armenia: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criterion. Washington, DC (Staff Report and Press Release on the Executive Board Consideration).

44 Appendix 10

C. Economic Analysis

8. Economic Internal Rate of Return and Net Present Value. The economic internal rate of return (EIRR) and the economic net present value (NPV) (at a discount rate of 12%) were calculated by comparing the with- and without-project scenarios for a 20-year period of operation. For the without-project case, a continued worsening of surface condition is calculated within the Highway Development and Management Model 4 (HDM4) down to the standard maximum IRI values by pavement type. Without the Project, the deteriorated state of the roads will result in continued high transport costs for the towns/villages and rural areas they serve, providing a disincentive to marketing of local produce, communication with other areas, and use of newer vehicles. With the Project and other associated rural road projects, the accessibility of rural areas will be transformed, providing all-weather access, much faster travel, and lower operating costs. Economic benefits accrue in the form of lower vehicle operating costs and road user time savings. Appropriate seasonal adjustments were made to the traffic counts, based on an assessment of the local situations. 9. The economic cost of the Project comprises the resource cost of physical construction and of an overlay, where required, during the analysis period. There is no land acquisition cost, as all work will be within the existing right-of-way. The total economic cost for 222.8 km is estimated at $29.2 million by excluding the value-added tax. The combined EIRR is 43.2%, while the NPV for the Project is estimated at $83.0 million. Table A10.3: Construction Cost and Economic Analysis Results Economic Length Cost 2006 Subproject Location (km) ($'000) IRI AADT EIRR Gegharkunik 1 Vardenis–Shatvan J. 7.0 767 9.4 1,511 46.3 2 Vardenis–Ghehamasar 17.9 2,241 9.2 520 22.6 3 M11–Geghakar 8.7 1,566 18.1 311 25.1 6 M11–Geghamakar 4.8 750 15.5 358 20.9 7 M11–Jaghacadzor 5.8 1,044 18.8 306 19.2 9 M14–Kutakan 9.3 1,674 17.8 454 29.3 10 M14–Semenovka 12.1 1,326 10.7 580 23.2 11 M11–Astkhadzor 3.0 372 12.3 295 14.5 12 M10–Tazagiugh 5.3 789 14.1 358 16.5 13 M10–Vardadzor 2.6 468 20.2 306 21.7 Kotayk 14 Abovyan–Nurnus 10.2 958 10.1 2,869 106.1 15 Piunik–Hankavan 13.0 1,935 14.2 363 15.9 16 Zoravzn–Aragiugh 5.3 789 11.6 675 22.5 Ararat 17 Bardzrashen–H8 12.4 1,164 11.4 345 29.9 18 Aygezard–M2 4.2 625 14.8 450 26.5 19 Kaghtsrashen–Artashat 8.5 798 10.8 513 28.7 20 Getazat–H9 2.9 272 10.4 255 19.7 21 Geghanist–Nizami 9.2 864 10.6 1,725 82.2 23 Urtsadzor–M2 26.8 4,824 17.4 940 73.2 Appendix 10 45

Economic Length Cost 2006 Subproject Location (km) ($'000) IRI AADT EIRR Kotayk 24 Yerevan–Yeghvard 8.0 1,027 11.1 906 41.9 25 Bujakan–Saralandj 8.0 751 10.7 744 38.5 26 Zovuni–Mrgashen 8.5 1,265 14.6 669 32.0 27 Mayakovski–H3 9.1 997 10.6 525 32.3 Armavir 30 Margara–Armavir 20.2 1,904 11.1 1,049 57.0 Overall Project 222.8 29,170 43.2 AADT=annual average daily traffic, H = Highway (Secondary Road), IRI = International Roughness Index, km = kilometers, L = Link, M = Magisterial Road (Main Highway). Source: Asian Development Bank estimates.

10. The cash flows of the overall Project are shown in Table A10.4.

Table A10.4: Cash Flow Analysis of the Overall Project Year Capital Cost VOC Time Net Benefits 2008 13.41 0.00 0.00 (13.94) 2009 15.75 4.10 1.27 (11.23) 2010 0.00 8.04 2.02 10.06 2011 0.00 9.50 2.41 11.92 2012 0.00 11.24 2.87 14.11 2013 0.00 12.70 3.28 15.98 2014 0.00 13.80 3.61 17.41 2015 0.00 14.86 3.92 18.78 2016 0.00 15.88 4.23 20.12 2017 0.00 16.85 4.53 21.38 2018 0.00 17.78 4.81 22.60 2019 1.33 18.71 5.10 22.49 2020 0.13 19.70 5.41 24.98 2021 3.41 20.69 5.73 22.98 2022 5.87 22.01 6.07 22.19 2023 1.41 23.69 6.44 28.71 2024 0.57 25.03 6.83 31.29 2025 1.29 26.36 7.23 32.30 2026 1.33 27.75 7.66 34.07 2027 1.29 29.52 8.14 36.32 2028 2.25 31.31 8.63 37.69 2029 2.90 16.29 3.51 16.90 Total: 50.94 385.81 103.70 437.11 ( ) = negative, VOC = vehicle operating cost. Source: Asian Development Bank estimates.

11. Sensitivity Analysis/Switching Values. The impact of a cost increase of 20%, a benefits decrease of 20%, and a combined cost increase and benefit decrease of 20% on the project EIRR and NPV are shown in Table A10.5. The economics of the Project are highly robust, as illustrated by the switching values which would reduce the NPV to zero (an EIRR of

46 Appendix 10

12%): an increase of 332% in economic cost, a decrease of 77% in project benefits, or a simultaneous increase/decrease of 62%.

Table A10.5: Sensitivity Analysis and Switching Values

Item EIRR NPV (%) ($ million) Base Case 43.2 83.0 Cost +20% 37.3 78.0 Benefits –20% 36.2 61.4 Cost/Benefits +/–20% 31.2 56.4 Cost/ Cost Benefits Benefits Switching Valuesa 332% -77% +/-62% EIRR = economic internal rate of return, NPV = net present value. a To reduce ENPV to zero. Source: Asian Development Bank.

D. Impact on Poverty

12. Poverty incidence in the project regions averaged 33.3% in 2005. Table A10.6 shows the distribution analysis of project costs and benefits. The average traffic composition on the project roads is 81.1% cars, 11.8% buses, and 7.1% trucks. Vehicle owners will be the largest beneficiary group, but passenger and freight users are expected to gain considerable benefits, given the existing poor quality of the roads and the increase in speed and avoidance of damage to cargo (especially agriculture produce) after improvement. The proportion of the poor in passengers is assumed to be the average for the regions. In rural areas, many poor owners of old vehicles will benefit and 20% are estimated to be very poor. There are also many poor farmers amongst freight users—25% are assumed to be poor, based on the results of poverty assessments conducted during project processing. The poverty impact ratio of improving all the project roads is calculated at 0.28.

Table A10.6: Poverty Impact Analysis Financial Economic Economic Passenger Freight Vehicle Item PV PV Financial Users Users Owners Economy Net Benefits Road user benefits 0.0 107.6 107.6 26.9 16.1 64.5 0.0 0.0 Cost Capital (29.5) (24.6) 4.9 4.9 0.0 NPV (29.5) 83.0 112.5 26.9 16.1 64.5 4.9 0.0 Gains and losses 26.9 16.1 64.5 (24.6) 83.0 Proportion poor (%) 34.0 25.0 20.0 10.0 Net benefit of the poor 9.1 4.0 12.9 (2.5) 23.6 Poverty impact ratio 0.28 ( ) = negative, NPV = net present value, PV = present value. Source: Asian Development Bank estimates. Appendix 11 47

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

A. Linkages to the Country Poverty Analysis

Is the sector identified as a national Yes Is the sector identified as a national Yes priority in country poverty analysis? priority in country poverty partnership No agreement? No

Contribution of the sector or subsector to reduce poverty in Armenia: In Armenia, 1.2 million people (about 38% of the total population) live in rural areas, of which more than 45% are poor. Poverty has been reduced from 50.0% in 2000 to 29.8% in 2005. However, there has been a slower pace of poverty reduction in rural areas. This is mainly because of constrained economic activities—primarily attributable to mountainous topography and poor transport infrastructure—imposing high direct and indirect transport costs on the rural population.

Rural infrastructure development is the cornerstone of the Government’s Poverty Reduction Strategy Paper (PRSP). It has prepared rural infrastructure investment programs with the main purpose of reducing rural poverty. In the road sector, it developed a Lifeline Road Network Program (LRNP) with assistance from the World Bank in 2004 that will improve the access of rural communities to the national highway system in an optimal manner. The LRNP targets 784 high priority rural roads (secondary and local roads) totaling about 2,700 kilometers (km). Under the small-scale technical assistance for preparing the Rural Road Sector Project (the Project), the overall cost of the LRNP was preliminarily estimated at $300 million.

In 2006, the Millennium Challenge Corporation (MCC) of the United States signed an agreement with the Government to finance the rehabilitation of rural roads totaling about 943 km of the LLNP, with grant financing of about $67 million, while the Government has planned to rehabilitate rural roads adding up to about 532 km. In parallel, the Government has requested the Asian Development Bank (ADB) to consider financing the rehabilitation of high priority rural roads totaling about 220 km in Ararat, Armavir, Kotayk, and Gegharkunik regions. The Project is in line with the PRSP.

B. Poverty Analysis Targeting Classification: Targeted intervention (geographic poverty)

What type of poverty analysis is needed?

The Project is located in Ararat, Armavir, Kotayk, and Gegharkunik regions with a total population of nearly 1 million. Roughly 54% of the total rural population in Armenia lives in these four regions and about 61% (about 650,000) of the total population in the four regions live in rural areas. The incidence of poverty ranges from 30.9% to 34.5%, against the national average of 29.8% in 2005.

Poor road infrastructure has also led to economic losses and limited access to basic services. According to the World Bank,a about 40% of total survey participants replied that significant volumes of agriculture produce were lost during transportation, 18% responded that 40% was lost, and 24% stated that 30% was lost.

Poor road conditions in rural areas have constrained timely access to health and other social services, and access to schools and time spent on education. Bus services and/or road freight services in some rural areas have been reduced or stopped because operators try to avoid damages to their vehicles or perceive high costs of driving on very poor/poor roads.

The Project will rehabilitate high priority rural roads totaling about 220 km in Ararat, Armavir, Kotayk, and Gegharkunik regions, serving 71 communities with a total population of 127,000 (about 10% of the total rural population). It will improve the access of these communities to (i) the capital city and regional center through the main road network; and (ii) social service delivery institutions, markets, collection points for agriculture produce and diary products, agro- processing centers, and industrial processing areas. As a result, the Project will be able to offer communities new opportunities for industrial, agricultural (including small- and medium-sized agro–processing industries), and service sectors. The Project has been developed in close partnerships with the road program and agriculture programs being

48 Appendix 11 financed by MCC, Armenian Social Investment Fund (ASIF),b Armenian Small- and Medium-sized Enterprise Market Development Project financed by the United States Agency for International Development (USAID), National Program on the Response to HIV Epidemic (2007–2011) being implemented by the Government with assistance from the Joint United Nations Programme on HIV/AIDS (UNAIDS), and UNDP’s programs on anti-human trafficking.

The Project’s impact on poverty has been quantified by examining the share of total project net benefits that would accrue to the poor and the very poor. A distribution analysis conducted during project preparation indicates that the Project will yield a poverty impact ratio of 0.28. The high poverty impact ratio reflects a high incidence of poverty among direct beneficiaries and a substantial net transfer of resources from the economy as a whole to the project areas. Total net benefits accruing to the poor amount to about $24 million, of which the very poor will receive about $4 million. Some 32% of road users within the project areas are poor and 6% are classified very poor. Project benefits will accrue to about 40,500 poor beneficiaries, of whom roughly 7,000 are very poor.

The Project will target four regions where poverty incidence is worse than the national average. Thus, the Project is classified a geographically targeted intervention.

C. Participation Process

Is there a stakeholder analysis? Yes No

Is there a participation strategy? Yes No

As part of the project preparation, more than 15 consultations (covering both social and environmental aspects) were held with stakeholders, including directly affected people, representatives of local governments and the Council of Elderly, key persons in the communities. Issues and activities related to project implementation were discussed and concerns (especially road safety and increased exposure to communicable diseases and human trafficking) have been integrated in the project design. Stakeholder consultation and participation will continue throughout project implementation. Armenian Roads Directorate Non-Commercial State Organization (ARD), the Implementing Agency, will ensure that the Project is implemented with the active participation of all stakeholders, using participatory practices.

Consultations (social aspects) with key players in the country and road sector development as well as communities within the project areas were conducted during project preparation. Literature reviews on social and poverty analysis of the poverty situation in the project regions were also conducted. The key players involved in the consultations were the World Bank, MCC, Lincy Foundation, ASIF, PRSP secretariat, UNAIDS, and UNDP.

Six consultations (social aspects) were held with representatives of local government and the Council of Elderly (Avagani); key persons in the communities (school principals, teachers, and agronomists); and community members in the project areas (Varnenis in the Gegharkunik region; Barzdrashen and Arevshat in the Ararat region; and Numus, Dzoraghbiur, and Mayakovsky in the Kotayk region).

All stakeholders and project beneficiaries welcomed the initiatives and considered that the Project will have a significant positive impact on rural development. First, they consider that the roads are extremely important for agricultural activities, agro-processing business, and any other business in the communities. People also mentioned that the delivery of agricultural produce to domestic and international markets and the procurement of inputs for agricultural activities and agro-processing business will be more efficient with good roads. Improved rural road infrastructure will also reduce the transportation costs and damages to agriculture produce. As a result, prices of goods are expected to reduce and volumes of agriculture produce for sales will increase. The consultations have concluded that the Project will support improvement of the income-related Millennium Development Goals. Secondly, improved road infrastructure is an important component of social development and of the quality of rural life because it provides rural communities with enhanced access to social service delivery institutions including hospitals, clinics, and schools. The consultations have concluded that the Project will support improvement of the non income-related Millennium Development Goals.

In accordance with the Government’s requirements for externally funded projects,c a project governing council (PGC) will be established. The PGC will provide overall oversight and supervision for the Project. It comprises 11 members: (i) minister of the Ministry of Transport and Communications (MOTC), (ii) first deputy minister of MOTC, (iii) first deputy minister of finance and economy, (iv) first deputy minister of justice, (v) deputy minister of territorial administration, (v) five representatives from civil society, and (vi) head of the project management unit (PMU). Appendix 11 49

PGC meetings will be held at least quarterly, and the PMU will report and seek guidance from the PGC on major procurement issues and policy decisions. The PGC will provide a forum for coordinating activities among project beneficiaries.

D. Gender Development

Strategy to maximize impacts on women:

Women accounted for 53.8% of the total project survey respondents. The overall poverty rate for the project regions was 33.3%; 29.7% of women are poor. The extreme poverty rate for the project regions was 5.8%; 4.6% of the women are very poor. Therefore, women are slightly better off than the overall population in the project regions. The majority of women in the project areas are engaged in agriculture activities or small- and medium-sized agro-industries (including cottage agro-industries). Reduced travel time and more available transport services will help improve the lives of women and children, as improved road transport under the Project will enhance their access to the nearest markets and social service delivery institutions (such as schools, hospitals, and clinics) and increased employment opportunities. It is anticipated that greater road connectivity may have a direct and positive impact on less educated girls and women by promoting their access to more education and training opportunities.

During the project surveys, women considered that the roads are extremely important for agricultural activities, agro- processing business, and any other business in the communities. Secondly, they considered that improved road infrastructure is an important component of social development and of the quality of rural life because it provides rural communities with enhanced access to social service delivery institutions including hospitals, clinics, and schools.

Other concerns are that the Project will increase the potential of the spread of HIV/AIDS and other sexually transmitted infections because of the influx of construction workers and increased transport facilitation caused by the road improvements. Human trafficking of teenage girls and women is an additional risk related to increased road connectivity. These risks will be minimized and mitigated by maintaining close coordination and regular consultations with the National Program on the Response to HIV Epidemic (2007–2011) being implemented by the Government with assistance from UNAIDS and UNDP’s programs on anti-human trafficking to raise awareness and provide preventive measures for local communities (with a special focus on women), construction workers, and mobile population. Appropriate actions will be taken, if necessary.

In general, women as well as the remaining community members within the project areas will benefit from the Project. Thus, a specific gender strategy has not been prepared.

Has an output been prepared? Yes No a World Bank. 2004. Rural Infrastructure in Armenia: Addressing Gaps in Service Delivery. Washington, DC. b The Armenia Social Investment Fund (ASIF) supports community-driven development in Armenia to reduce non- income poverty in rural areas. The World Bank has so far completed ASIF I and II to finance 619 microprojects. Road improvement under the Project will improve rural communities’ access to major economic activities in the capital city and regional centers as well as local social service delivery institutions supported by the Government and ASIF activities. c Republic of Armenia. 1999. On the Activities of Project Implementation with the Proceeds of Loans and Grants Provided to the Republic of Armenia by Foreign States and International Lending Organizations. Yerevan. (Resolution No. 765)

50 Appendix 11

E. Social Safeguards and Other Social Risks

Item Significant/ Plan Required Not Significant/ Strategy to Address Issues None Full Significant The Project focuses on existing roads, so no resettlement Resettlement is expected. Yet, a resettlement framework has been Short Not significant developed as the Project’s approach is sector lending. None None

Significant The Project will reduce road transport costs for road Yes Affordability users, including the poor and the very poor, through Not significant savings in vehicle operating costs. These savings will be No passed on to the poor and the very poor through lower None freight rates and lower passenger fares and time savings, making road transport more affordable. Both passenger and freight transport services in the project areas will become more competitive as more passenger and freight transport service providers are expected to operate. As a result, more passenger and freight transport services will become cheaper.

Significant There are no significant labor issues. One of the Yes Labor objectives under the Project is to maximize benefit Not significant generation for the people of communities within the No project areas—especially the poor and the very poor, None women, and internally displaced persons and refugees (IDPRs)—by ensuring that all applicable labor laws and regulations are adhered to by all road contractors, and that local employment is promoted to the fullest. This does not require a specific plan but the following provision will be built into relevant documents and will be monitored under the project performance monitoring program.

Contracts will specifically refer to maximizing the use of local labor, require that legal wages be paid to workers, prohibit use of child labor for construction and maintenance, and ensure that wages paid to men and women are commensurate with the nature of work. A specific provision will be placed in bidding documents to note that compliance will be strictly monitored during project implementation.

Indigenous Significant There are no indigenous people living in the project areas, Yes Peoples so there is no indigenous peoples’ issue. Not significant No

None

Appendix 11 51

Item Significant/ Plan Required Not Significant/ Strategy to Address Issues None Other Risks Yes and/or Significant Road Safety Vulnerabilities No Not significant Project beneficiaries are concerned about an increase in road accidents because of increased vehicle speeds None induced by improved road infrastructure. Concern was expressed by both women and men about the risk to their children commuting to school along the roads. Pedestrian strips and other necessary road safety measures have been incorporated in the basic design of the roads. A road safety specialist to be engaged under the subproject preparation and project supervision will conduct roads safety audit of all the roads and will recommend all necessary road safety measures along all the roads.

Significant Internally Displaced Persons and Refugees Yes

Not significant The surveys conducted during project preparation found No that nearly 19,000 IDPRs live in the project areas, which None constitute about 15% of the total community population. Of the 19,000 IDPRs, about 18,000 persons are refugees, while the remainder is internally displaced persons. The Project will provide the IDPRs with improved access to markets, job opportunities, and basic social services. The IDPRs do not live near the road alignments, so there will be no negative impact on them during construction. Thus, the surveys have concluded that negative impacts on the IDPRs are found to be very limited. The IDPR development framework has been prepared, as ADB’s sector lending modality is adopted for the Project. Consulting services for subproject preparation and project supervision will review potential negative impacts on IDPRs, and prepare specific actions and development plans for them, if necessary.

Significant Increased Exposure to Communicable Diseases and Human Trafficking Yes Not significant There is a risk of increasing the infection rate of HIV/AIDS No None during the construction stage, when increases in construction trucks and equipment are expected. There is also a risk that lack of awareness of HIV/AIDS among construction workers and communities may make people living in the project areas (especially the poor, very poor, and IDPRs) vulnerable. Human trafficking of teenage girls and women is another related to increased road connectivity. These risks will be minimized and mitigated by maintaining close coordination and regular consultations with the National Program on the Response to HIV Epidemic (2007–2011) being implemented by the Government with assistance from UNAIDS (including the four project regions), and UNDP’s programs on anti- human trafficking to raise awareness and provide preventive measures for local communities (with a special focus on women), construction workers, and mobile populations. UNAIDS and UNDP’s programs have been assessed appropriate and comprehensive for the Armenian situation. Appropriate actions specific to the Project will be taken, if necessary.

52 Appendix 11