Kapchorwa-Suam-Kitale and Eldoret Bypass Roads Project

AFRICAN DEVELOPMENT BANK GROUP

MULTINATIONAL

Public Disclosure Authorized

KAPCHORWA-SUAM-KITALE AND ELDORET BYPASS ROADS PROJECT

RDGE/PICU DEPARTMENTS

March 2017

Public Disclosure Authorized Authorized Public Disclosure

TABLE OF CONTENTS Currency Equivalents ...... i Fiscal Year ...... i Weights and Measures ...... i Acronyms and Abbreviations ...... i Loan Information ...... ii Project Summary ...... iv RESULTS-BASED FRAMEWORK ...... vi PROJECT TIMEFRAME ...... viii 1 – STRATEGIC THRUST & RATIONALE ...... 1 1.1 Project Linkages with Country Strategy and Objectives ...... 1 1.2 Rationale for Bank’s involvement ...... 1 1.3 Donors Coordination ...... 2 2 – PROJECT DESCRIPTION ...... 2.1 Project Objectives ...... 3 2.2 Project Components ...... 3 2.3 Technical Solution Retained and Other Alternatives Explored ...... 4 2.4 Project Type ...... 5 2.5 Project Cost and Financing Arrangements ...... 5 2.6 Project’s Target Area and Population ...... 6 2.7 Participatory Process for Project Design and Implementation ...... 6 2.8 Bank Group experience, lessons reflected in project design ...... 7 2.9 Key performance indicators ...... 8 3 – PROJECT FEASIBILITY ...... 9 3.1 Economic and financial performance ...... 9 3.2 Environmental and Social Impacts ...... 9 4 – IMPLEMENTATION...... 13 4.1 Implementation Arrangements ...... 13 4.2 Monitoring ...... 16 4.3 Governance ...... 16 4.4 Sustainability ...... 17 4.5 Risk Management ...... 18 4.6 Knowledge Building ...... 19 5 – LEGAL INSTRUMENTS AND AUTHORITY...... 19 5.1 Legal Instrument ...... 19 5.2 Conditions Associated with Bank’s Intervention ...... 19 5.3 Compliance with Bank Policies ...... 20 6 - RECOMMENDATION...... 20

APPENDIX I: COMPARATIVE SOCIO-ECONOMIC INDICATORSI APPENDIX II: BANK’S PORTFOLIO IN THE COUNTRYII APPENDIX III: KEY RELATED PROJECTS FINANCED BY THE BANK AND OTHER DPS APPENDIX IV: MAP OF THE PROJECT AREAVII APPENDIX V: PROJECT COST AND FINANCING ARRANGEMENTSVIII APPENDIX VI: JUSTIFICATION FOR BANK FINANCING OF HIGHER PROPORTIONX

Currency Equivalents As of 30 November 2016 1UA = 1 SDR 1UA = UGX 4914.09 1UA = KES 139.389 1UA = USD 1.35376 1USD = UGX 3629.95657 1USD = KES 102.964336 Fiscal Year Uganda/Kenya: 01 July-30 June Weights and Measures 1 metric tonne = 2204 pounds (lbs). 1 kilogram (kg) = 2.200 lbs. 1 meter (m) = 3.28 feet (ft) 1 millimeter (mm) = 0.3937 inch (“) 1 kilometre (km) = 0.62 mile 1 square kilometre (km2) = 0.386 square mile 1 hectare (ha) = 0.01 km2 = 2.471 acres Acronyms and Abbreviations

AC Asphalt Concrete KeNHA Kenya National Highways Authority ADB African Development Bank KRB Kenya Roads Board ADF African Development Fund LC Local Cost BDEV Independent Development Evaluation MoFPED Ministry of Finance, Planning & Econ Devt BQPR Borrowers Quarterly Progress Report MTEF Medium Term Expenditure Framework CBO Community Based Organization MTP Medium Term Plan CEXB China Exim Bank NDP National Development Plan COUG Country Office Uganda NEMA National Environment Management Authority CPIA Country Policy and Institutional Assessment NEPAD New Partnership for Africa’s Development CSP Country Strategy Paper NGO Non-Government Organization DBST Double Bitumen Surface Treatment NPV Net Present Value DFID Department for International Development OCB Open Competitive Bidding DP Development Partner OSBP One Stop Border Post DRF Democratic Partnership Forum PAP Project Affected Persons DRC Democratic Republic of Congo PFM Public Financial Management EA Executing Agency PMS Pavement Management System EAC Eastern African Community PIDA Program for Infrastructure Development EA-RISP Eastern Africa Regional Integration For Africa Strategy Paper RAP Resettlement Action Plan EIRR Economic Internal Rate of Return RMF Road Maintenance Fund ESIA Environmental and Social Impact Assessment RO Regional Operations ESMP Environmental and Social Management Plan RDGE Regional Director General East EU European Union ROW Right of Ways FE Foreign Exchange RSSP Road Sector Support Project FGM Female Genital Mulitation STI Sexually Transmitted Infections FM Financial Management TICPI Transparency International Corruption GBV Gender Base Violence Perception Index GDP Gross Domestic Product TMC Term Maintenance Contract GHG Green House Gas TSWG Transport Sector Working Group GOK Government of Kenya UA Unit of Account GOU Government of Uganda UGX Uganda Shillings HDM- 4 Highway Development and Management UNRA Uganda National Roads Authority Model 4 URF Uganda Road Fund HIV/AIDS Human Immuno Virus/Acquired Immune USD United States Dollar Deficiency Syndrome. UTSDPG Uganda Transport Sector Development IDA International Development Association/ Partners Group World Bank VOC Vehicle Operating Costs JICA Japanese International Cooperation Agency WB World Bank KES Kenya Shillings

Loan Information Client’s information

BORROWERS: Governments of Uganda and Kenya EXECUTING AGENCIES: Uganda National Roads Authority and Kenya National Highways Authority Financing Plan

Source Amount (UA) Instrument UGANDA ADB 28.328 million (USD38.4 million) Loan ADF-PBA 18.962 million Loan ADF-RO 22.50 million Loan GOU 8.33 million Counterpart Financing TOTAL COST UGANDA 78.12 million KENYA ADB 60.62 million (USD82.0 million) Loan ADF- reallocation of Cancelled loans 16.733 million Loan ADF-PBA 8.45 million Loan ADF-RO 9.93 million Loan GOK 13.08 million Counterpart Financing TOTAL COST KENYA 108.81 million GRAND TOTAL 186.93 million

ADF and ADB’s key financing information ADF UGANDA LOAN Loan Currency Unit of Account (UA) Interest Type Not Applicable Interest Rate Spread Not Applicable Service Charge 0.75% per annum on amount disbursed and outstanding Commitment Fee 0.50% per annum on the un-disbursed loan amount Tenor 40 years Grace Period 10 years

ADF KENYA LOAN Loan Currency Unit of Account (UA) Interest Type 1% Interest Rate Spread Not Applicable Service Charge 0.75% per annum on amount disbursed and outstanding Commitment Fee 0.50% per annum on the un-disbursed loan amount Tenor 30 years Grace Period 5 years

ADB UGANADA AND KENYA Loan Currency United States Dollar (USD) Loan type Fully Flexible Loan (FFL)

Base Rate Floating Base Rate ( 6-month USD LIBOR reset each 1st February and 1st august) A free option to fix the Base Rate is available Funding Cost Margin The Bank funding cost margin as determined each 15 January and 15 July and applied to the Base Rate each 1st February and 1st August. ii

Lending Margin 80 basis points (0.80%) Maturity Premium 0.20% Front-end fees 0.25% of the loan amount payable at latest at signature of the loan agreement Tenor 25 years inclusive of Grace Period Repayments 15 January and 15 July Interest Rate Base Rate +Funding Cost Margin+ Lending Margin + Maturity Premium This Interest Rate will be floored to zero Commitment fees 0.25% of the undisbursed amount. Commitment fees start accruing 60 days after signature of the loan agreement and are payable on Payment dates Option to convert the Base In addition to the free option to fix the floating Base Rate, Rate** the borrower may reconvert the fix rate to floating or refix it on part or full disbursed amount. Transaction fees are payable Option to cap or collar the The borrower may cap or set both cap and floor on the Base Base Rate** Rate to be applied on part or full disbursed amount Transaction fees are payable Option to convert loan The borrower may convert the loan currency for both currency** undisbursed or disbursed amounts in full or part to another approved lending currency of the Bank Transaction fees are payable Grace Period 8 years Average Loan Maturity 16.75 years Entire Project EIRR (Base case scenario) 18.3% NPV (Base case scenario) USD24.9 million

Timeframe - Main Milestones (expected) Negotiation March 2017 Project approval 29 March 2017 Effectiveness August 2017 Last Date of Disbursement December 2022 (ADB&ADF) Last repayment (ADB Loan) June 2037 Last repayment (ADF Loan) June 2057

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Project Summary Project Overview: The Project is a multinational operation that provides an important link between Uganda and Kenya by connecting through the border post of Suam. The Uganda side of the project road is Kapchorwa-Suam and the Kenya side of the project road are Suam-Kitale and Eldoret Bypass. The project road supports the regional integration objective of member countries of East African Community (EAC) and Great Lakes Region, especially Uganda and Kenya by connecting to Suam and further linking with Democratic Republic of Congo (DRC) and South Sudan. This is a transformative project that contributes to socio-economic development, poverty reduction and regional integration in eastern Uganda and western Kenya. The overall project cost for the two countries is estimated as Unit of Account (UA) 186.93 million or United States Dollar (USD) 253.0 million. The Uganda side project cost estimate is UA 78.12 million or USD 105.76 million and is to be financed by African Development Bank (ADB) and African Development Fund (ADF) loans and Government of Uganda (GOU) counterpart funding. The project involves the upgrading of Kapchorwa-Suam road (73km). The Kenya side of the project cost estimate is UA 108.81 million or USD147.3 million to be financed by ADB and ADF loans and Government of Kenya (GOK) counterpart funding. The project in Kenya is 77 km consisting of 45 km for Suam –Kitale (rehabilitation and upgrading) and construction of 32 km Eldoret Town Bypass. In both countries, the project also includes supervision consultancy, studies, training of unemployed youth and capacity building components. The construction period of the roads contracts will be 36 months for Uganda and 30 months for Kenya. Project Beneficiaries: The direct beneficiaries of the project outputs are the 1.4 million people living in the project zone of influence area, local and regional traders and transporters using the project road. The outcomes of the project include reduced transport costs; reduced congestion in Eldoret town; increased awareness about ills of gender based violence and female genital mutilation; acquiring of marketable skill by the unemployed youth and improved rate of survival out of vehicle accidents and maternal emergencies. The project will contribute to poverty reduction by improving household incomes and well-being through increased access to markets and social services. Additional benefits will emanate from jobs created during construction, sub-contracts for supply of goods and services and roadside socio-economic activities. The beneficiaries will participate in the project through involvement during public consultations; during implementation through employment and monitoring through representation at various district and local committees. Project Rationale and Need: The project is a regional road traversing via Suam border and supports regional and national social-economic growth strategies and improves the traffic congestion in Eldoret Town. The rationale behind the Kapchorwa-Suam-Kitale and Eldoret Bypass road is that the improvement of the road will promote the effort of the Governments in poverty reduction through better road infrastructure in the two countries by providing all weather access for the supply of farm inputs and evacuation of produce to major market centers, thus improving the level of service and efficiency of the road network and reducing transport costs. It will also support regional integration, economic co-operation and foster transport linkage with Uganda, Kenya, DRC and South Sudan. This project is also aligned to the East African Regional Integration Strategy Paper, 2011-2016 (EA-RISP), which supports development of infrastructure which has impact on regional transport and integration. Bank’s Value Added: The Bank’s added value stems from its long experience in the financing of road projects in both countries. The rationale for Bank’s intervention is to assist the countries’ aspirations of improving transportation services and regional integration while

ensuring green and inclusive growth, and private sector participation in the maintenance of the infrastructure. The proposed intervention is also in line with the Bank’s Ten Year Strategy and meets four of the Hi-Fives with respect to regional integration, improving the living standards of the people, increasing agricultural production through access to markets since it traverses rich agricultural area and reducing cost of doing business which promotes industrialisation. The project design has benefited from the Bank’s extensive experience in the road sub- sector in both countries in implementing similar projects in an environmentally and socially acceptable manner. The Bank will bring, throughout the project cycle, engineering, environmental and economic expertise and experience to realize the objectives and benefits of the project. Knowledge Management: Knowledge will be built within the Executing Agencies (EA) in both countries through the implementation of the capacity building component and studies under the project. The knowledge built will be captured through quarterly reports, supervision missions, mid-term reviews and the project completion report and will be shared with other Executing Agencies and other Development Partners (DPs). The arrangement made for the Term Maintenance Contract of the roads will also provide additional experience of preserving road assets in the two countries.

MULTINATIONAL: UGANDA–KENYA (KAPCHORWA-SUAM-KITALE AND ELDORET BYPASS ROADS) PROJECT RESULTS-BASED FRAMEWORK Country and project name: Uganda /Kenya: Multinational: Kapchorwa-Suam-Kitale and Eldoret Bypass Roads Project Purpose of the project: to improve access and connectivity between Uganda and Kenya as well as to stimulate economic development in the eastern part of Uganda and western part of Kenya and improve the traffic congestion in Eldoret Town. PERFORMANCE INDICATORS MEANS OF RISKS/MITIGATION RESULTS CHAIN Indicator Baseline Target VERIFICATION MEASURES (including CSI)

1.1 Contribute to the improvement of 1.1) GDP per capita. 1.1) Uganda USD 788; 1.1) Uganda USD 1099, an increase of 39% and Uganda Bureau of Statistics economic and social welfare of citizens Kenya USD 1588 in Kenya, USD 2189, an increase of 38% in 2021. and Kenya National Bureau of of Uganda and Kenya 2015. Statistics (KNBS) 1.2 Enhance regional trade between 1.2) Trade volume in USD 2.1) USD3.69 million in 1.2) To increase to USD4.92million worth of IMPACT Uganda and Kenya using Suam border. 2015. trade (Kenya with Uganda) by 2025. 2.1 Reduced transport costs. 2.1 (a) Average passenger 2.1 (a) USD 1.7 Uganda 2.1 (a) USD 1.2 Uganda (reduction of 29%) and UNRA, KeNHA, EAC, Risk: Capacity Constraints of fare / person Kapchorwa- and USD2.27(Kenya) in USD 1.71(Kenya- reduction of 25%) in 2021. NCTTCA, Transit transport UNRA; Suam and Suam-Kitale. 2015. surveys, customs statistics, Mitigation: Strengthening of UNRA (b) Annual average Composite (b) USD 0.739in Uganda (b) Reduced by 40% to USD 0.449 (Uganda) GOU/GOK, national through training, recruitment of staff VOC per vehicle km. and USD 0.929 in Kenya and by 4 9 % USD 0.472 (Kenya ) in 2021. stati sti cs, new baseline data, and Technical Assistants . (c) Average vehicle travel in 2015. Consultant’s Progress Report, Risk: Failure to sustain the road time Kapchorwa-Suam and (c) About 4hrs (Uganda) (c) Reduced by 63% to 1.5 hrs (Uganda) and by and Bank review reports. networks; Suam-Kitale. and 1.5hr for Kenya in 50% to 45 minutes in Kenya in 2021. Mitigation: Providing a five years 2015. Project Completion Report. maintenance contract after works 2.2 Reduced congestion in Eldoret town. 2.2) Average speed of the 2.2) 26 km/hr in 2015. 2.2) 42 km/hr, an increase of 62 % when the completion in the project design.

entire section of Eldoret road opens to traffic in 2021. Uganda Transport Sector Risk: Overloading; Bypass. Performance Report. Mitigation: UNRA and KeNHA have strategically placed permanent 2.3 Increased awareness about ills of 2.3) Awareness of 2.3) Nil. 2.3) Communities and leaders in 14 locations in Kenya Joint Sector Review/ weighbridges. The project will also gender based violence including FGM. communities and local leaders Kenya1 and 11 locations in the Kapchorwa, Transport sector/ backward have a weighbridge. along the road corridor. Kween and Bukwo districts2 in Uganda made report every year. Risk: Failure to pay counterpart

OUTCOMES aware of evils of gender based violence including financing; FGM. Mitigation: Counterpart fund to be included in the three-Year Rolling 2.4 Improved rate of survival out of 2.4) Rate of survival out of 2.4) 26 and 12.4 fatalities 2.4) Uganda-by 2021, 30% reduction in fatalities Medium Term Expenditure vehicle accidents. accidents. per 100,000 vehicles for per 10,000 vehicles. Kenya - by 2021; 20% Framework (MTEF). Uganda and Kenya reduction in fatalities per 10,000 vehicles. Risk : Road Safety; respectively in 2015. Mitigation: A road safety audit was carried out on the detailed design and it will also be done during construction and at project completion.

1 Locations of Cheplaskei, Ngeria, Kapseret, Simat, Sosianim and Leseru on the Eldoret bypass; and Bidili, Twiga, Endebess, Matumbei, Mubetre, Matisi, Tuwani and Milimani on the Kitale section. 2 Locations of Kapchorwa town, Atari, Kerop, Binyiny, Cheminy, Kaproron, Kabelyo, Nyalit, Kabel, Bukwa town, and Suam town in Kapchorwa, Kween and Bukwo districts. vi

3.1 Upgrading, construction and rehabilitation 3.1) Km of climate change resilient 3.1) Nil km of climate change 3.1) By 2020, In Uganda 73 km climate change resilient Quarterly Progress Reports, Risk: Cost overruns; of road sections and community facilities. road upgraded in Uganda and km resilient road upgraded in upgraded; In Kenya 45km upgraded and 32 km disbursement and financial reports Mitigation: Critical review and road upgraded and constructed in Uganda, Nil km of road constructed. from the executing agencies. provision of adequate contingencies Kenya. upgraded and constructed in Bank supervision mission reports, in the cost estimates to cover Kenya. Progress reports from the 3.2 Social sensitization and awareness program 3.2.1) Number of communities 3.2.1) Nil earmarked 3.2.1) Three sessions each carried out of the pre- executing agency. unexpected cost increases; use of about HIV/AIDS/STI, Gender, Road safety, sensitized in HIV/AIDS, road sensitizations done. identified locations3 in Kenya and Uganda by 2020. current cost estimates and proper GBV/FGM. safety and gender. 3.2 .2) 200 Traditional Birth Attendants (TBAs) and Project completion report. supervision / contact management. 3.2.2) Preparation of an Integrated 3.2.2) No IGAP implemented. Peer educator trained on GBV/FGM (150 from Uganda Risk: Implementation delays due to Gender Action Plan (IGAP). and 50 Kenya) as part of GAP implementation. Beneficiary assessment reports by late start-up; 3.3 ESMP & RAP including tree planting. 3.3.1) Implementation of ESMPs 3.3.1) Nil ESMPs and RAPs 3.3.1) By 2018 full implementation of ESMPs and by local NGOs,/CBOs. Mitigation: use of advance & RAPs. fully implemented. 2019 completed 100% resettlement of PAPs. contracting ; early engagement of 3.3.2) Planting of trees. 3.3.2) Nil seedlings planted. 3.3.2) 6000 trees seedlings planted (Uganda 2000 and 3.4 Post-crash and emergency response along 3.4) No of equipped emergency 3.4) No trauma and Kenya 4000). stakeholders; close follow up and project road and acuity building in first aid and unit; Training district hospital staff emergency center in project 3.4) One district hospital (Kween/Bukwo) in Uganda supervision by the Executing emergency care. and Village Health Teams in first area and no training (Uganda). established as a post-crash trauma and emergency Agencies of both countries, and

aid and emergency care. center and procurement of 2 ambulances for Kween and commencement of RAP Bukwo; training of 30 health workers from all health compensation as early as possible. 3.5) No structured roadside centers along the road and 20 Village Health Teams Risk: Monitoring of E&S issues: markets. (50% women). OUTPUTS Mitigation: Clear contractual 3.5 Construction of roadside markets and lorry 3.5) Number of roadside markets 3.6) Currently gravel road and 3.5) Road-side markets - four in Uganda and two in parking bays. and parking bays. No toilets at Suam border for Kenya and two lorry parking bays in Kenya. provisions in the works contract, 3.6 Paving access road and community access 3.6) Length of paved road link and public. 3.6) Construction of 5 km paved access road to social relevant professionals as part of the road; Improving water and sanitation facilities refurbishing border posts at Suam centers (Kenya); 20 km community access road and supervising team and close follow up at Suam border. to provide water and sanitation 3.7) Nil. provision of water and sanitation facilities (for men and by the executing agencies and the facilities. women) at Suam border (Uganda). Bank team 3.7 Studies related to sustainability of the 3.7) Studies completed in Kenya. investments. 3.7) Three studies produced in Kenya.

COMPONENTS INPUTS Uganda: Uganda: UA m Sources of financing UA m Civil Works: Upgrading Kapchorwa-Suam road (73 km) including (OSBP) at Suam, incorporation of road safety measures and social infrastructure, Suam bridge, construction Civil works 57.54 Uganda of roadside markets , bus terminals and community water supply points), community access roads and environmental and social mitigation measures. Consultancy services including audit 4.24 ADB 28.328 Services: construction supervision; sensitization of HIV/AIDS, STI, TB; GBV/FGM and gender sensitization; road safety awareness and training; technical and financial audit; Capacity enhancement and post-crash 1.25 ADF : PBA 18.962

road safety audit; capacity enhancement on road safety; training of unemployed youth in modern bee-keeping and honey production techniques; training of local entrepreneurs Compensation 4.66 ADF- RO 22.50 in labor based construction techniques; and training and sensitization in Female Genital Mutilation “FGM surgeons”, training Peer educators and Village Health Committees. Base Cost 67.69 GOU 8.33 Goods: refurbishment of a post-crash care center and the procurement of two ambulance and theatre equipment. Contingencies 10.43 Total 78.12 Compensation and Resettlement: Compensation of the PAPs. Project cost 78.12

Kenya Kenya: Kenya Civil works: upgrading of Kitale -Endebess-Suam (45km) and construction of Eldoret Bypass (32 km) including, (OSBP) at Suam; incorporating road safety measures, social Civil works 76.23 ADB 60.62

KEY ACTIVITIES infrastructure, and environmental and social mitigation measures. Consultancy services including studies 7.54 ADF : PBA 25.183 Services: construction supervision; awareness and mitigation of HIV/AIDS, STI, TB; Malaria prevention, GBV/FGM and Gender and road safety; technical audit; road safety; Compensation 10.37 ADF : RO 9.93 development of bridge management system; axle load management and training of unemployed youth in the project area. Base Cost 94.14 GOK 13.08 Compensation and Resettlement: Compensation of the PAPs. Contingencies 14.67 Total 108.81 Project cost 108.81

3 Specific locations to be confirmed during implementation but at least 3 in each of the sub-counties traversed in Kapchorwa, Kween and Bukwo (Uganda) and Kitale, Eldoret and Suam (Kenya).

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PROJECT TIMEFRAME

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REPORT AND RECOMMENDATION OF THE MANAGEMENT THE BOARDS OF DIRECTORS ON PROPOSED LOANS TO UGANDA AND KENYA FOR THE KAPCHORWA-SUAM-KITALE AND ELDORET BYPASS ROAD PROJECT

Management submits the following Report and Recommendation on a proposed ADB Loan of USD 38.4 million and ADF Loan of UA 41.462 million to the Government of Uganda to finance the Kapchorwa-Suam road and ADB loan of USD 82.0 million and ADF loan of UA35.113 million to the Government of Kenya to finance the Suam-Kitale and Eldoret Bypass roads. 1 STRATEGIC THRUST & RATIONALE 1.1 Project Linkages with Country Strategy and Objectives 1.1.1 Road transport is the dominant mode of transport (more than 90%) in Uganda and Kenya for transportation of freight and passengers and therefore plays a pivotal role in supporting economic and social development programs. The Multinational Uganda-Kenya (Kapchorwa- Suam-Kitale and Eldoret Bypass) project supports the regional integration objective of member countries of East African Community (EAC) and Great Lakes Region, especially Uganda and Kenya by connecting the border post of Suam and further linking with Democratic Republic of Congo (DRC) and South Sudan. Eldoret town is highly congested and the Eldoret bypass will reduce the congestion on the Northern Corridor mainly within Eldoret Town. Out of the total project length of 150 km, from Kapchorwa (Uganda) through Suam to Endebess section (100km) is not an all-weather road and is not passable during the rainy season. Endebess to Kitale (18km) is in a poor bitumen standard and the 32 km is a by-pass road to alleviate congestion of the traffic in Eldoret town. These have led the two countries to place this project as one of the key development priority.

1.1.2 Regionally, the project roads are priorities in the Transport Strategy of the EAC. In Uganda, the intervention is in line with the National Vision 2040 and is also one of the priority roads in the National Development Plan (NDP) II for the period covering 2015/16 to 2019/20, requiring upgrading in line with the country’s aspirations of improving transportation services and regional integration. The NDP II identifies investment in infrastructure as one of the priority areas for economic development of the country.

1.1.3 In Kenya, the national development strategy, Vision 2030, identifies insufficient infrastructure as a major constraint to the development endeavours of the Government of Kenya. The goal under the second Medium Term Plan (MTP II) 2013-2017 of Vision 2030 is to close Kenya’s infrastructure deficit by continued expansion of physical infrastructure as an enabler for sustained economic growth, development and poverty reduction. The Suam-Kitale and Eldoret Bypass coupled with provision of social infrastructure is aimed at closing the infrastructure gap whilst seeking to improve and sustain livelihoods via creation of jobs, enhanced access to infrastructure, opening up of produce markets, and facilitating inter-regional trade. 1.2 Rationale for Bank’s involvement 1.2.1 The rationale for Bank’s intervention is to assist the country’s aspirations of improving transportation services, agricultural productivity and regional integration while ensuring green and inclusive growth, and private sector participation in infrastructure. This is in line with Bank’s Ten Year Strategy (2013-2022), which prioritizes support to infrastructure development as one of the key areas for the Bank’s future assistance. The project also meets four of the High Fives of the

Bank by contributing to the integration of the EAC countries; improving the quality of life by providing socio-economic facilities to people in the zone of influence; increasing agricultural production through access to markets and the reduction of the transport cost, which lowers the cost of doing business that will play pivotal role in industrialisation. The project is aligned with the Eastern Africa Regional Integration Policy and Strategy 2011-2016, which supports development of infrastructure that has impact on regional transport and integrations.

1.2.2 In Uganda, the project conforms to the key development policies of the Bank and its assistance strategy to Uganda. The 2017-2021 Country Strategy Paper (CSP) for Uganda, which is under preparation, focuses on two main pillars namely (i) Infrastructure development for industrialization and (ii) Skills and capacity development. The project is therefore in line with Pillar (i) of the CSP. In Kenya, the main objective of the Bank’s Strategy (CSP 2014–2018) under Pillar I, is to create job opportunities by establishing a more conducive environment for the private sector through investments in infrastructure. The Bank’s investments in transport will increase transport connectivity, reduce transport cost and reliability of travel times, all in line with the Government of Kenya’s MTP II. Financing the proposed Project will ensure the Bank’s continued involvement and support for the transport sector in both countries as well as for regional integration. The Bank involvement is necessary to complete the missing link in efficiently connecting western Kenya with eastern Uganda and further linking with DRC and South Sudan and the reduction of the congestion on the Northern Corridor mainly within Eldoret Town.

1.2.3 The project is part of the EAC Priority Projects (2012-2020) and the Program for Infrastructure Development in Africa (PIDA). It contributes to the integration of the EAC countries (Uganda and Kenya) by promoting regional trade along the border at Suam, instead the congested Malaba border between the two countries. The project complements Bank supported Irrigation Scheme and Drought Resilience and Sustainable Livelihood projects in Uganda and Kenya respectively. The Bank has a comparative advantage in the sub-sector due to its previous interventions. Therefore, the continued support is crucial and logical. 1.3 Donors Coordination Table 1.1: Overview of Major Development Partners Assistance (Uganda and Kenya)

Sector or subsector Size GDP Exports Labor Force Road Transport Uganda * 3.0 n.a n.a Land Transport Kenya ** 5.94 n.a n.a Players - Public Annual Expenditure (Average)

GOUa Donors GOKb Donors

UA 335.3 m UA 160.6m UA657 m UA349m

67.6% of the total 32.4% of the total 65% 35% Level of Donor Coordination Existence of Thematic Working Groups- Uganda / Kenya [Y] [Y] Existence of SWAps or Integrated Sector Approaches- Uganda / Kenya [Y] [Y] ADB's Involvement in donors coordination*** Uganda / Kenya [M] [M] * 2013/2014 for transport; as most appropriate, ** average of five years (2011-2015) *** L: leader, M: member but not leader, none: no involvement ‘a’ for 2013/2014 and ‘b’ Average of the five years (2009-2013).

1.3.1 Uganda - There is a well-established structure for aid coordination and harmonization dialogue. The Bank is one of the leading Development Partners (DP) in the transport sector. Other major DPs are EU, European Investment Bank, WB, JICA, DFID, DANIDA, Islamic Development Bank, the China Exim Bank, Arab Bank for Economic Development in Africa

(BADEA), OPEC Fund for International Development and TradeMark East Africa (TMEA coordinated under the Uganda Transport Sector Development Partners Group (UTSDPG). The Bank actively participates in all sector coordination activities and overall there is effective planning and investment co-ordination in the sector. 1.3.2 Kenya– Donor coordination in Kenya is carried out at national and sector levels. The apex aid coordination body is the Development Partnership Forum (DPF). The DPF discusses key policy issues, and agrees on a set of deliverables. As one of the sector groups, the Roads and Transport Sector Donor group meets regularly to harmonize donors’ responses and positions with respect to institutional, policy and projects financing and implementation issues. The Bank is one of the leading financiers in the road sub-sector in Kenya. Other major donors involved in the sector include WB, EU, Agence Francaise Developpement (AFD), CExB, JICA, and TMEA. 2 PROJECT DESCRIPTION 2.1 Project Objectives 2.1.1 The sector goal of the project is to contribute to socio-economic development, poverty reduction and regional integration through an improved and sustainable transport system that links centers of economic activity. The objective of the project is to improve access and connectivity between Uganda and Kenya as well as to stimulate economic activity in the eastern parts of Uganda and western part of Kenya and ease the traffic congestion along the Northern Corridor and within Eldoret Town. The project development objectives are two-fold: at regional level (for both countries), the objective is to contribute to improving road transportation and trade facilitation along the Suam border to foster transport linkage with Kenya, Uganda, South Sudan and DRC and improve traffic congestion of Eldoret town in the Northern Corridor. At national level, the development objective is to contribute to improving transport services and agricultural productivity in the Kapchorwa-Suam-Kitale area and reduce the traffic congestion in Eldoret Town to stimulate and support local economic activities by reducing road maintenance costs, vehicle operating costs and travel time in the eastern Uganda and western part of Kenya. 2.1.2 The expected project outcomes include reduced transport costs; reduced congestion; increased awareness about ills of gender based violence; and improved rate of survival out of vehicle accidents and maternal emergencies. The expected outputs include : (i) construction, upgrading and rehabilitation of roads, (ii) social sensitization and awareness program about Human Immuno Virus/Acquired Immune Deficiency Syndrome / Sexually Transmitted Infections (HIV/AIDS/STI), Gender, Road safety, Gender Based Violence (GBV)/Female Genital Mutilation (FGM); (iii) Environmental and Social Management Plan (ESMP) & Resettlement Action Plan (RAP) including tree planting; (iv) post-crash and emergency response along project road and capacity building in first aid and emergency care; (v) roadside markets and lorry parking bays; (vi) paving access roads and community access roads; Improving water and sanitation facilities at Suam border; and (vii) studies related to sustainability of the investments. 2.2 Project Components 2.2.1 The project components are outlined in Table 2.1 and Table 2.2 below.

Table 2.1: Project Components (Uganda) No Component name Cost Component description* (UA m) 1 Civil works for the 67.66 Upgrading to bituminous standard including community access upgrading of Kapchorwa- roads, HIV/AIDS/STIs and environmental and social mitigation Suam road (73km) measures (one lot) and One Stop Border Post (OSBP). 2 Services 5.45 Design Review and Construction supervision services; Road safety awareness and training; Technical and Financial Audit; Road safety audit; Gender Sensitization on GBV;Training in modern bee-keeping techniques; Training in labor based construction techniques; Training in sensitization of FGM; and Capacity enhancement on road safety 3 Goods (Post-crash and Refurbishment of a post-crash care centre and the procurement of emergency responses) 0.35 ambulance and theatre equipment. 4 Compensation 4.66 Compensation of Project Affected Persons (PAP). Total 78.12 *The project will also include construction of about 20 km of rural access roads, under the civil works contract. UNRA will identify the locations with criteria for selection. The above services are for Kapchorwa, Kween and Bukwo districts.

Table 2.2: Project Components (Kenya) No Component name Cost (UA m) Component description

1 Civil works for the 90.36 Upgrading and construction (in two lots) to bituminous standard, rehabilitation, upgrading including OSBP and environmental and social mitigation and construction of Suam- measures. Kitale and Eldoret Bypass roads (77km). 2 Services 8.08 Construction supervision services for the two lots; Studies on road safety; Development of bridge management system; Axle load management; Technical Audit; Training of unemployed youth ; and HIV/AIDS/SITs, road safety, GBV/FGM and gender awareness and sensitization. 3 Compensation 10.37 Compensation of PAP. Total 108.81

2.3 Technical Solution Retained and Other Alternatives Explored 2.3.1 For each country, two options were considered for the intervention as outlined in Table 2.3 and 2.4 below. The technical solutions retained comply with the specified geometric design parameters; minimising interference with traffic flow on the Bypass; and socio-environmental considerations like minimising impact to sensitive areas like swamps. For Uganda and Kenya, the retained solutions are mentioned under Tables 2.1(1) and 2.2 (1) above respectively. Table 2.3 Project Alternatives Considered and Reasons for Rejection (Kenya) Alternative Brief description Reasons for rejection Option 1 AC pavement (retained) Option 2 DBST  The surface treatment option was not selected because of heavy traffic in case of the Eldoret by pass; and  Terrain and rainfall of the area for the Kitale–Suam road, which requires stronger pavement for durability.

Table 2.4: Project Alternative Considered and Reasons for Rejection (Uganda) Alternative Brief description Reasons for rejection Option 1 Asphalt Concrete (AC) pavement (retained) Option 2 Double Bituminous  Climatic condition of the project area which receives heavy rainfall, Surface Treatment approximately 100mm/day for which a wearing course such as DBST over (DBST) granular lower layers would be prone to ingress of storm water resulting in premature failures; and  Approximately 40% of the project road terrain is mountainous with higher grades and curves and do not favour the DBST pavement option; 2.4 Project Type 2.4.1 The project is a stand-alone operation in support of the priorities identified by the Governments, an approach that is similar to other projects previously undertaken by the Bank. 2.5 Project Cost and Financing Arrangements 2.5.1 The overall project cost estimate (net of taxes) is Unit of Account (UA) 186.93 million or United States Dollar (USD) 253.0 million, of which the foreign exchange (FE) is UA 137.52 million or 73.6%, and the local cost (LC) is UA 49.11 million or 26.4% of the total. The Uganda side of the project cost estimate is UA 78.12 million or USD 105.76 million UGX 383.87 billion); of which UA 58.76 million (75.2%) in FE and UA 19.36 million (24.8%) in LC. The Kenya side of the project cost estimate is UA108.81 million or USD 147.3 million (KES 15.17 billion); of which UA78.75 million (72.4%) in FE and UA30.06 million (27.6%) in LC.

2.5.2 In Uganda, the Bank financing for the project will come from African Development Bank (ADB) resource of USD38.4 million (UA28.328 million); African Development Fund (ADF) 13 Performance Based Allocation (PBA) of UA18.962 million and UA22.5 million from the Regional Operation (RO) envelope. For Kenya, the Bank financing will come from ADB resource of USD 82.0 million (UA60.62 million) and ADF 13 resource of UA35.113 million, (including UA16.733 million from cancelled ADF resources, UA8.45 million from ADF 13 PBA and UA 9.93 million from RO). The cost estimates and source of finance are indicated in Tables 2.5 to 2.7 below. The details of the cost and the justification for Bank’s high contribution as per the Bank’s guidelines on Expenditure Eligible for Bank Group Financing for ADB resources are presented as Appendix V and VI and further details in Annex B2 of the Technical Annexes.

Table 2.5 - Project Cost Estimates by Component (Net of Taxes) U A(million) USD (million) COMPONENT FE LC Total FE LC Total Civil works 107.01 26.75 133.76 144.87 36.22 181.09 Consultancy Services including audit 7.91 1.98 9.89 10.70 2.68 13.38 Studies and capacity building 2.52 0.63 3.15 3.41 0.85 4.26 Others (Compensation) 0.00 15.03 15.03 0.00 20.34 20.34 Base Cost 117.44 44.39 161.83 158.98 60.09 219.07 Physical Contingency 10.70 2.68 13.38 14.49 3.62 18.11 Price Contingency 9.38 2.34 11.72 12.70 3.17 15.87 Total Project cost 137.52 49.41 186.93 186.17 66.88 253.05

Table 2.6 Source of Finance (net of taxes) in million Unit of Account Uganda Kenya SOURCE FE LC Total % FE LC Total % ADB 28.328 0.00 28.328 36.26 60.62 0.00 60.62 55.71 ADF-PBA 7.932 11.03 18.962 24.27 8.20 16.98 25.18 23.14 ADF-RO 22.50 0.00 22.50 28.80 9.93 0.00 9.93 9.13 GOU/GOK 0.00 8.33 8.33 10.67 0.00 13.08 13.08 12.02 Total 58.76 19.36 78.12 100.00 78.75 30.06 108.81 100.00 Percentage 75.22 24.78 100.00 72.38 27.62 100.00

Table 2.7 Source of Finance (net of taxes) in million US Dollars Uganda Kenya SOURCE FE LC Total % FE LC Total % ADB 38.36 0.00 38.36 36.26 82.06 0.00 82.06 55.71 ADF-PBA 10.74 14.92 25.66 24.27 11.11 22.98 34.09 23.14 ADF-RO 30.46 0.00 30.46 28.80 13.44 0.00 13.44 9.13 GOU/GOK 0.00 11.28 11.28 10.67 0.00 17.71 17.71 12.02 Total 79.56 26.20 105.76 100.00 106.61 40.69 147.30 100.00 Percentage 75.22 24.78 100.00 72.38 27.62 100.00

2.6 Project’s Target Area and Population 2.6.1 The project target areas are eastern Uganda and western Kenya. The project has three road sections, one of which is in Uganda (Kapchorwa–Suam) and two are in Kenya, (Suam–Kitale and Eldoret bypass). The Kapchorwa – Suam section (73km) starts from Kapchorwa town in Kapchorwa District, passes the district of Kween and ends at Suam Bridge, in Bukwo District which forms the boundary with Kenya. In Kenya, the first section of the Kitale – Suam (45km) road is Kitale–Endebess (19 km), situated in the North Rift Valley region, which is a worn out bitumen road; and the second is Endebess–Suam (26 km) which is gravel. It starts at Kibomet, Municipality and Matisi locations in Trans–Nzoia West Sub-County and Endebess, Kaibei and Chepchoina locations in Kwanza Sub-County. The project road stretches for about 32 km and is currently motorable on a very short stretches. 2.6.2 Estimated populations to benefit from the project from the two countries are 1.4 million, with approximately 593,500 directly benefiting within the immediate zone of influence. The benefits shall include reduced time of travel to economic and social services notably markets, schools, health facilities, administrative facilities and a boost to more sustainable trade both locally and regionally. Reduced travel time shall be associated with reduced travel costs; reduced congestion of traffic in Eldoret; improved survival out of vehicle accidents and maternal emergencies and health services of local communities; economic empowerment through employment creation, bee-keeping and entrepreneurial training, and supplies of goods and services to project works; and increased awareness of evils of gender based violence.

2.7 Participatory Process for Project Design and Implementation 2.7.1 The project benefited from wider consultations within relevant Government departments, DPs and private sector in both countries. The design and implementation arrangements benefitted

from several public and stakeholder consultations during the preparation of the Environmental and Social Impact Assessment (ESIA) and RAP reports. The participants included local communities and authorities; political leaders and Non-Government Organizations (NGOs). Key concerns raised during the consultations have been incorporated in the project design and these include: creation of local employment opportunities during construction; concern over land disputes that must be carefully considered during resettlement; timely compensation; contamination of water sources (wells); establishment of a grievance mechanism; and the potential spread of HIV/AIDS and STIs. There will be continuous consultations during the life of the project where UNRA and KeNHA will participate in public sector stakeholders meetings and DP meetings of the UTSDPG and DPF. Local communities, NGOs, UNESCO and other stakeholders will participate in various fora put in place for implementation and monitoring of the project. 2.8 Bank Group experience, lessons reflected in project design Status and impact of prior Bank Intervention in the Sector 2.8.1 Uganda - The Bank has a comparative advantage in the road sub-sector due to its long standing experience that commenced in 1975; and to date, it has financed fifteen projects and sixteen studies in the transport sector for a total value of UA 515.37 million, of which UA 12.25 million has been grants. 13 projects and 16 studies have been completed and satisfactorily executed. The Bank has 3 on-going operations and no backlog of PCRs. The entire Bank portfolio comprises 20 on-going operations as at December 2016, amounting to UA893.57 million, of which the transport sector accounts for 28%. The portfolio has one problematic (in the social sector) and no potentially problematic or aged project. 2.8.2 Kenya – The Bank has since 1967 committed up to UA 3.2 billion covering: investments, knowledge and policy dialogue, and technical assistance. As of November 2016, the Bank’s portfolio in the country comprises of 32 active operations (including approvals) to the tune of UA 2.15 billion. Of these ongoing operations, 26 are in public sector worth UA1.87 billion. Transport sector constitutes the second largest share of the portfolio by value at 30%. The Bank has to date financed 26 operations in the transport sector with a total value of UA 1.0 billion. These projects have made significant contributions towards improving mobility, providing access to socio-economic opportunities and facilitating regional integration. 2.8.3 The Bank’s Post evaluation undertaken for the completed projects has indicated that the Bank interventions in both countries have led to opening up of isolated and inaccessible areas to markets, health, education and other social services and improved the quality of transport services and trade and regional integration. In both countries, the conditions precedent to first disbursements for previously approved transport loans/grants of the Bank have been satisfied by the Governments. None of the transport projects are problematic or potentially problematic. Lessons Learned and Reflected in project Design 2.8.4 In both countries, the project design has taken into account lessons learnt from Bank’s ongoing as well as previous interventions in the sub-sector in the countries and recommendations of the Independent Development Evaluation (BDEV) findings. Such lessons include (i) avoiding delays in start-up activities and commencement of project implementation, especially compensation and parliamentary ratification for Uganda. This has been mitigated by streamlining loan conditions by requiring compensating by sections and advance contracting to reduce delays in procurement and engagement of all stakeholders including members of parliament; (ii) improving timely release of

counterpart funds-this is addressed in the Medium Term Expenditure Framework (MTEF) by placing the projects in the ‘core area’ of the consolidated budget; (iii) monitoring of project management has been mitigated by allowing for an independent technical audit of the project to ensure technical compliance and value for money; (iv) to avoid cost over-runs, critical review of the detailed design documents by the Executing Agencies (EA) during project processing was carried out to avoid modification of the scope of works during implementation; (v) premature failure of the pavements is mitigated by the inclusion of weighbridges on the project road to manage vehicle axle load; (vi) addressing road accidents through enhanced road safety measures and awareness campaign; (vii) lessons learnt from the World Bank Technical Investigation are considered in the Bank portfolio and this project. In June 2016, following the World Bank suspension of its financing to the transport sector, there were concerns on the capability of UNRA to comply with the Environment and Social (E&S) safeguard issues, due to failures to meet the requirements. In order to address the concerns of safe guard issues, an action plan was agreed upon with UNRA. Out of the twelve, UNRA has complied on three, although there will be a need for frequent follow up and making progress on the rest. (viii) to minimize delays in procurement and disbursements, East Africa Regional Development and Business Delivery Office and Country Office Uganda (COUG) will follow-up on required activities by the EAs. 2.9 Key performance indicators 2.9.1 In both countries, at completion of project, the following four outcomes are expected; (i) reduction in transport costs; (ii) reduction in traffic congestion in Eldoret town; (iii) increased awareness about ills of gender based violence and female genital mutilation; and (iv) improved survival out of vehicle accidents. Progress towards achieving the outcomes shall be through observing the outcome targets which include: (i) comparison of the before and after project transport fares and rates; (ii) reduction in average passenger fare/person by 29% in Uganda and 25% in Kenya; (iii) reduction in annual average composite VOC by 40% and 49% in Uganda and Kenya respectively; (iv) reduction in average vehicle travel time by 63% in Uganda and 50% in Kenya (v) average speed increased by 62% from 26 km/hr to 42 km/hr in Eldoret bypass; (vi) created job opportunities during construction (600 jobs in Uganda and 800 in Kenya (at least 30% for women); The output indicators will be measured during implementation as sections of the road are opened to traffic and after project completion. In the medium term (end of 2018), progress shall be gauged by completion of at least 50% of the construction of each lots of the road contracts. There will also be full compliance with ESMP, complete RAP implementation, at least 2 schools and 5 communities in Kenya and 3 schools and 9 villages in Uganda sensitized about HIV/AIDS and road safety; completion of the post-crash and emergency response along project road and capacity building in first aid and emergency care; completed roadside markets and lorry parking bays; completed paved link road and community access road; improved water and sanitation facilities at Suam border; and completed studies. 2.9.2 The supervision consultants will be responsible for the collection of baseline data (disaggregated by gender) at the beginning, mid and project completion and compare with the baseline data. This includes (i) trade data between Kenya and Uganda along Suam border; (ii) costs and travel time for specific types of vehicles and trips; (iii) transport fares and freight charges; (iv) accessibility index; (v) road accidents (fatalities per 10,000 vehicles); (vi) jobs created in construction and maintenance with gender deferential in roles and responsibilities; (vii) HIV/AIDS prevalence; (viii) utilization of health facilities by expectant women; (ix) girls secondary school attendance; (x) implementation of the ESMP; and (xi) income /poverty indicators. UNRA, KeNHA

and the Bank will review the indicators as sections of the road are opened to traffic and at project completion. The EAs will also review the indicators after three years of project completion. Furthermore, additional sources of data shall include Borrowers Quarterly Progress Reports (BQPRs), financial and technical reports, audit reports, disbursement records, Bank supervision mission and mid–term review reports. 3 PROJECT FEASIBILITY 3.1 Economic and financial performance 3.1.1 The methodology for the economic analysis is based on cost benefit analysis by comparing the “with” and “without” project scenarios over a period of 20 years for the roads, using the Highway Development and Management Model (HDM-4). A discount rate of 12%, a residual value of 20%; and construction, upgrading and rehabilitation period of 36 months starting October 2017 for Kapchorwa-Suam and 30 months for the Suam–Endebess and Eldoret Bypass are adopted. The economic costs include both the maintenance and investment cost of the construction of Eldoret Bypass (Kenya) and upgrading and rehabilitation (Uganda and Kenya) with Asphalt Concrete (AC) surfacing. The principal benefits of the project are derived from reductions in road user costs, comprising vehicle operating costs (VOC) and passenger time costs, as a result of the lower road roughness and higher average travel speeds for the normal, generated and diverted traffic. Diverted traffic from Malaba to Suam border is assumed when the road opens to traffic. The details of the traffic and economic analysis results for the project are presented in Annex B7 and the summary for the entire project is shown in Table 3.1.

Table 3.1 - Summary of the Economic Analysis Parameter Entire project Economic Internal Rate of Return(EIRR) 18.3% Net Present Value (NPV) in US$ 24.9million Cost increased by 20% (EIRR) 15.6% Benefit decrease by 20% (EIRR) 15.0% Sensitivity of EIRR of concurrently 20% increase in cost and 20% decrease in traffic 12.9%

3.2 Environmental and Social Impacts Environmental 3.2.1 The project road is classified as Category I due to the potential environmental and social impacts likely to be experienced during the construction of the road. The project road comprises three road sections: Kapchorwa–Suam Road (73Km); Kitale–Suam Road (45Km) and Eldoret Town Bypass (32Km), a total length of 150 km. The Kapchorwa–Suam section is in Eastern Uganda and passes and traverses north of Mt. Elgon National Park through the districts of Kapchorwa, Kween and Bukwo ending at Suam at the border with Kenya. The road passes mainly through farmland and rural settlements along one of the most densely populated rural areas in Uganda. The road will not have any direct impact on the section of the of the park under natural tree cover since the buffer distance is wide enough and occupied by an extensive soft wood plantation. The Kitale-Suam road section is located in Trans Nzoia County in the North Rift Region of Kenya. It starts at the junction with A1 Road in Kitale town and traverses through the trading centers of Endebess, and thereafter northwards up to Suam at the Kenya-Uganda border, at the boundary of Suam Forest. The Eldoret Bypass is a new alignment on green field, traversing farmland, rivers and swamps. A summary of the ESIA and RAP study reports have been prepared,

approved, posted on the Bank’s website on 22 December 2015, and distributed to the Board on 29 February 2016 ref. no. ADF/BD/IF/2016/15. 3.2.2 The negative environmental impacts anticipated from the proposed project include (i) impacts on surface water and wetlands; (ii) loss of vegetation due to diversions and material sourcing; (iii) sedimentation in watercourses and wetlands during construction; (iv) soil erosion from exposed areas during earthworks; (v) dust and fugitive emissions from construction equipment, asphalt and crushing plants; (vi) soil and water contamination from oils, grease and fuels; (vii) environmental pollution from liquid and solid waste generation from construction camps and work sites; (viii) social disruption including physical and economic displacement of persons living within the road Right of Way; and (ix) socially related infections associated with interactions including HIV/AIDS and other communicable diseases. 3.2.3 Mitigation measures for adverse impacts have been included in the ESMP. These measures include (i) construction work at all rivers, streams and wetlands must be preceded by production of method statements; (ii) no stockpiling of construction materials within a distance of 200-300m of a watercourse or wetland; (iii) restoration of borrow sites and rehabilitation of quarry sites after use; (iv) suppression of dust by watering the diversions and haulage routes; suppression of dust in the crushers by installing sprinkler system and maintaining equipment to manufacturer’s standards; (v) construction of bridges and culverts during the dry season and provision of protection measures for streams to limit sediment transport into watercourses; (vi) limit clearance of vegetation to areas where it is absolutely necessary; (vii) re-vegetation of degraded areas upon completion; (viii) implementation of a waste management plan; (ix) implementation of the RAP; and (x) undertaking sensitization campaigns on HIV/AIDs along the project during construction. The contracts will clearly stipulate obligations on contractors to ensure a healthy environment and take measures to reduce the risk of abuse by their workers. Contractors will also be required to have a workers code of conduct. The costs for mitigation measures (implementing ESMP) excluding compensation is estimated at USD2.3 million in Uganda because of the mountainous terrain of the road section and USD0.5 million in Kenya. 3.2.4 Positive impacts identified include; (i) facilitation of regional integration and cross border trade at Suam. The project will foster transport linkage with Kenya, Uganda, South Sudan and DRC; (ii) creation of employment opportunities for the host communities especially during construction; (iii) enhance agricultural production in the project districts and rapid transportation of perishable agricultural produce; (iv) increasing road safety; (v) reduction of travel time; and (vi) improving drainage systems. Climate Change

3.2.5 The project has been classified as category 2. The Intergovernmental Panel on Climate Change fourth assessment report climate change models project an increase in average temperatures in Uganda of up to 1.5 oC in the next 20 years and up to 4.3 oC by 2080 if the current trend is not reversed. Changes in rainfall patterns and annual totals are also expected. Prediction models indicate an increase in rainfall of 10-20%. It is estimated that runoff will increase in the magnitude of 10-20%. According to the Kenya National Climate Change Response Strategy, climate change is already being experienced in Kenya. Over the inland areas, the trends in both minimum (night/early morning) and maximum (daytime) temperatures depict a general warming (increasing) trend with time. There is a general positive trend (increase) in rainfall events of September to February period suggesting a tendency for the ‘Short Rains’ (October-December)

season to be extending into what is normally hot and dry period of January and February over most areas. 3.2.6 The Kapchorwa-Suam road has opportunely been designed to enhance resilience and adaptation to impacts of climate change most especially slope failure, landslides and flood episodes on the most vulnerable sections. Further attention on adaptation has been focused on fill sections to improve resilience to slope failure. River and stream crossings have been particularly designed to improve resilience of structures and further aid communities adapt to climate change. For the Kitale–Suam road section, adaptation measures have been incorporated in the design of drainage structures such that design capacity of these structures would be able to cope with maximum levels that have occurred in the past and that are likely to occur within the 20 year life of the project. 3.2.7 The Eldoret Bypass design and intervention provides an opportunity for climate change mitigation through reduction of net emissions. The 2017 (commencement of construction) scenario will result in marginally higher emissions in comparison with the existing scenario. As expected, the “Do Nothing” Scenario would result in the highest emissions in the future horizon year with over 6,200 tons of carbon monoxide in a year. Without any improvements on the Eldoret Town road, the speeds would drop to less than 8 km/h between Ngeria and Leseru and result in even higher pollutant emission rates. The Bypass Alternative will result in the least quantities of Green House Gas (GHG) emissions, 3560 tons. That is because it will provide the highest average travel speeds on the both the Bypass lanes and existing alignment through the town. Gender

3.2.8 The project outcomes are not expected to disadvantage any gender group per se. However, the project is expected to result in a wide range of benefits to the communities and women in particular and aligned with the Bank Gender Strategy. The gender analyses carried out for project indicated several gender related hardships and challenges for which the project shall contribute to addressing them. The project shall booster economic empowerment for women through allocation of jobs to women in the areas (at least 30%). The project has also included training and equipping communities in modern bee-keeping and honey production techniques where 50% of the 300 beneficiaries shall be women. An additional economic empowering intervention is training of unemployed youth and local entrepreneurs in labor based construction techniques though Mt. Elgon Training Center. At least 50% of the people to be trained shall be women, and also with a focus on the youth. 3.2.9 From the analysis and consultation held with local leaders and authorities, and NGOs such as REACH (Reproductive and Community Health) funded by UNFPA and GOU, and feedback from Action Aid (Human Rights program); GBV and FGM is a major concern in the area (in both Uganda and Kenya). The project shall implement a multifaceted approach to deal with this problem given its intricacies and complications. It will train and sensitize communities in particular the so call “FGM surgeons”, Peer educators and most importantly, Village Health Committees who interface with Traditional Birth Attendants. The establishment and equipping of the trauma care centers shall give an opportunity to women seeking maternal care especially caesarean section a service which has not been available especially on the Uganda side. The economic empowerment and training of local communities shall include women who have capitalized on FGM as a source of income. All the training activities shall ensure both men and women benefit. The HIV/AIDS/STI and gender violence sensitization programs shall focus on

school going age population especially girls who are often exploited by either construction workers or truck drivers leading to underage sex, unwanted pregnancies and school dropout. In addition the constructions contracts will clearly spell out the obligation of the contractors for ensuring safe and healthy working environment which will reduce the risk of abuse of any workers. The supervising consultants will also have appropriate experts in their team to monitor the environmental and social issues. Implementation of the safeguard action matrix of the ongoing Bank financed transport projects is included as one of the other conditions of the project. Social 3.2.10 The project shall economically contribute to the areas through various ways. Initially, it is expected that at least 600 jobs shall be created in Uganda and 800 in Kenya during road construction, and subsequently, additional jobs shall be created during maintenance. An additional 400 people shall be employed for at least 3 years to plant and tender the trees to be planted under the Mt. Elgon Forest conservation. As a way of increasing awareness of the importance of preserving trees in the Mt. Elgon buffer area, the project shall introduce community bee-keeping and honey making. It is expected that at least 400 people shall benefit from this program. In all these jobs, a minimum of 30% shall be allocated to women. The project interventions shall also include construction of road side markets which will offer a better and structured means for earning income. The project shall facilitate trading through the realization of reduced time of travel and cost of transportation. This will benefit both the local traders and those plying cross border trading between the two countries. The areas are rich in agricultural produce and a good transportation system can only boost trade. 3.2.11 The project has included a set of integrated activities which shall include road safety campaigns and the establishment of the post-crash trauma center at one of the two districts in the project area (Kween or Bukwo). Within the design of the road there shall be measures such as demarcating zebra-crossings, speed calming measures, appropriate and clear signage, including those indicating where schools are, animal crossings, etc. This will ensure lives are saved through adequate and immediate care. Although the area has several rivers, the issue of clean and sustainable water supply has been highlighted and the project will drill at least 7 boreholes (5 in Uganda and 2 in Kenya) for community use. The project shall also provide improved water and sanitation services at Suam border for the public. This shall ensure toilets for both men and women are provided. Realizing transportation systems and construction works play as a vector for transmission of HIV/AIDS STI and risk of sexual exploitation of underage girls, the project has included an awareness, prevention and testing program for construction workers, truck drivers and communities in the project areas. Involuntary Resettlement 3.2.12 One of the significant impacts of carrying out road works is the resultant land acquisition and potential destruction of private, community and public property. Although the Eldoret bypass is a short stretch, the fact that much of it will be green-field, has had quite a sizeable impact on land take to claim the 80 m Right of Ways (ROW). A total of 250 ha shall be acquired. 576 PAPs shall be affected through demolition of dwelling houses, business houses, trees, crops, cultural properties like graves and circumcision sites, and some public assets. A total of KES1.05 billion (of which KES1.02 billion is direct compensation and allowances, KES 34 million for RAP implementation and monitoring) has been earmarked for this road.

3.2.13 On Kitale–Suam road section, a total of 108 acres of land will be acquired for this proposed project which comprises of 387 pieces of land, 567 structures (residential houses, business premises, sanitation facilities and fences), seasonal crops on 7.42 acres of land, 951 trees and one (1) grave along the proposed Kitale–Endebess–Suam road. Counted separately is a total of 2,895 PAPs who are operating at the markets and who are small-scale road side vendors. These will be given priority into the new markets to be constructed under the project and will also be offered facilitation fee of 5% asset value totaling KES4.3 million. These traders are concentrated in Kitale Town and Chepchoina/Soko Mjinga. The total number of PAP households and/or affected establishments is 405 (387 households and 18 institutions). The total compensation cost is estimated at KES 390.0 million which includes KES35 million as RAP implementation and monitoring costs. 3.2.14 On Kapchorwa–Suam road, it is estimated that a total of 2,564 people will lose land with structures thereon and of these only 34 are built with permanent materials and the rest are in either semi-permanent or temporary materials. The project will have an impact on assets such as land, structure, crops, trees, forests, conservancy areas, small shops, open markets, public facilities e.g. schools, health, prayer houses, police post, veterinary and Uganda Revenue Authority facilities. The estimated total resettlement budget is UGX 22.9 billion (USD 7.6 million). Road Safety

3.2.15 The road safety situation in Kenya and Uganda continues to be a challenge. The reported road traffic fatalities in the past five years (2011–2015) ranges between 3264 and 3981 for Uganda; 2907 and 3,302 for Kenya. This shows an average of 36.6 and 16.01 fatalities per 100,000 vehicles for Uganda and Kenya respectively. GOK has established the National Road Safety Authority in 2013. A total of 26 and 11 fatalities were recorded in Eldoret and Kitale town respectively in the year 2015. Pedestrian and motorcyclist are the highest victims of the road accident in the region. National Transport Safety Authority (NTSA) is actively involved in different activities to improve the road safety situation in the country. The engineering design has taken into consideration road safety measures. In Uganda, the Road Safety Council under the Ministry of Works and Transport has limited power and capacity to lead and coordinate road safety activities. The project has therefore incorporated provisions for improving the emergency medical services along the project road in Uganda. For both countries, the project has made provisions for capacity building on safety, road safety audit and safety sensitization. 4 IMPLEMENTATION 4.1 Implementation Arrangements Executing Agencies 4.1.1 UNRA and KeNHA will be the implementing agencies in Uganda and Kenya respectively. Both EAs have in the past satisfactorily implemented similar road projects financed by the Bank and other DPs. KeNHA has the institutional capacity to handle this project. UNRA is however undergoing restructuring since October 2015. The new structure has a total staff establishment of 1736 compared to the previous 1012. With the ongoing recruitment process, the total number of filled positions is expected to reach 1400 by end of June 2017. Regarding implementation of environmental and social safeguards, UNRA has established a Department of Environmental and Social Safeguards. By December 2016, the Safeguards Department had filled eight out of the twelve established positions. To assist the capacity of UNRA, the Bank is financing four technical

assistants (environment and social development specialist, and Right of Way Experts (surveyor and valuer) from the capacity building component of earlier approved project, RSSP 4. Furthermore, the World Bank, EU and DFID are also providing technical assistance in a coordinated effort of DPs. The staffing is addressed in the Technical Annex under B3.1. The EAs through the nominated Project Coordinators assisted by engineers, procurement, environmental, social and finance experts will be responsible for coordination of the activities, and serve as contact persons for all the parties involved in the project. On the road safety and axle load management studies, KeNHA will closely work with NTSA and Kenya Road Board. 4.1.2 There will be a joint committee of the two Governments to harmonize the implementation of the project mainly the OSBP and Suam Bridge. In Uganda, the upgrading works of Kapchorwa- Suam will be implemented under one contract for 36 months. In Kenya, the upgrading and rehabilitation work of Suam-Kitale and the construction of Eldoret Bypass will be implemented under two contracts each 30 months. The roads in both countries will have a routine Term Maintenance Contract (TMC), to be procured in the final year of construction to ensure that the TMC are in place by the time the works are completed. The cost of the TMC is not included in the loan and will be financed by the respective governments. Procurement 4.1.3 All procurement of goods, works under Open Competitive Bidding (OCB) and acquisition of consulting services will be carried out in accordance with the Bank’s Procurement Policy for Bank Group Funded Operations dated October 2015 as amended from time to time, using the relevant Bank Standard Bidding Documents and provisions stipulated in the Legal Agreement. UNRA and KeNHA shall periodically update the Procurement Plans for their respective countries and submit to the Bank for approval before negotiations of the Loan Agreement. To expedite project implementation, the Bank has approved the request of both governments for advance contracting for the civil works and for construction supervisions. The detailed procurement arrangements and assessment of the EAs are provided in Technical Annex B 5. 4.1.4 UNRA has in its establishment a Directorate of Procurement headed by a Director reporting directly to the Executive Director. The Directorate is responsible for procurement across the institution including road sub-sector projects. UNRA is undertaking an organization wide restructuring and contracts for all staff of the directorate were terminated in October 2015. In the new structure, the Directorate will have 24 staff at the head office and the regional level. A Director and eleven Procurement Officers have been recruited and the process of recruiting additional 8 staff is ongoing and expected to be completed by June 2017. Other than the Director who has worked in the road sector for some time, the rest of the recruited officers do not have experience in procurement for donor funded projects. It is recommended that the remaining key positions in the Directorate, including the Procurement Manager–Works, should be filled with well experienced officers with engineering background and knowledge in donor financed procurement. Further a skills gap analysis and recommendations for capacity building in procurement will be undertaken for the organisation with close coordination with other DPs, EU, DFID and WB. 4.1.5 Assessment of the Procurement Unit of KeNHA, which is responsible for the procurement activities of the EA, was made through discussions with pertinent officials of KeNHA and review of the relevant documents in use. Generally, it has been concluded that Procurement Unit of KeNHA is competent enough to conduct procurements envisaged under the project. The

Procurement Specialist to be procured under an ongoing Bank-financed project shall also strengthen the capacity of the unit. Financial Management 4.1.6 Uganda-The Financial Management (FM) capacities of UNRA is found to be adequate but needs improvement. With the ongoing recruitment, about 90 % of the 56 positions are already filled. There were weaknesses in the audit process as demonstrated in the submission of the audit reports of previous Bank financed projects. Meetings between the Bank, UNRA and the Office of the Auditor General have been held to ensure there are no delays in future audit engagements. The results of the assessment indicate that the FM of UNRA risk rating for the project is substantial because UNRA restructuring is still ongoing, the Bank is not able to receive financial and audits reports on time and also the accounting system lacks the robustness needed for an organization the size of UNRA. However, there is improvement and the 2016 Audit report has been submitted in time. The project will substantially make use of the Uganda’s Public Financial Management (PFM) systems except the use of the accounting system. 4.1.7 UNRA uses Pastel Partner, Version 9 Build 9.3.3 accounting software but UNRA is in the process of replacing this with a robust system. The project financial statements will be audited by the Auditor General using the Bank’s audit TOR and will be submitted to the Bank within six months after the close of the fiscal year. UNRA will second an Accountant to the project who will be in charge of the financial transactions of the project. The 2013/2014 audit reports for two Bank financed projects have been submitted in August 2015 yet they were due before 31 December 2014 mainly due to delays in the auditor procurement. The 2015/16 audit report is however submitted in time, in December 2016. 4.1.8 The FM capacity of KeNHA is found to be adequate. The risk taking for the project is moderate. KeNHA has proper structures in place as well as adequate staff to carry out the FM responsibilities. KeNHA is currently implementing eight Bank financed projects. The project will substantially make use of the Kenya’s PFM systems where applicable. KeNHA uses Pastel accounting software which is adequate and capable of recording accurate and complete transactions and delivering financial reports timely. Due to increased activities, KeNHA is in the process of implementing Microsoft Dynamics AX but they are yet to migrate to the new system. A list of location accounts codes in this system’s chart of accounts for the project should be drawn in order to capture the project accounts separately. This should match with the classification of expenditures and sources and application of funds indicated in the Loan Agreement. The Financial Management Specialist procured under an ongoing Bank-financed project shall also strengthen the capacity of the unit. 4.1.9 The project financial statements will be prepared in accordance with the International Public Sector Accounting Standards annually by 30 September. The Project will provide an update on financial performance as part of the BQPR not later than 45 days after the end of the quarter. The project financial statements will be audited the Kenya’s Office of the Auditor General using the Bank’s audit terms of reference. The audited project financial statements will be submitted to the Bank within six months after the close of the fiscal year. Disbursement Arrangements 4.1.10 The project will utilize the direct payment methods of disbursement as prescribed in the Bank’s Disbursement Handbook.

4.2 Monitoring 4.2.1 UNRA, KeNHA, Supervision Consultants and Bank supervision missions will monitor and assist the implementation of the project. However, the day to day activities for the civil works contract will be supervised by the Supervision Consultants. The EAs through the respective Project Co-ordinators will submit BQPR, which will include physical, financial, social and environmental indicators that the project has achieved. The reports will also provide updated information on project implementation, highlighting key challenges, and recommending action plans for resolving identified bottlenecks. RDGE and COUG will follow up on required activities.

4.2.2 Monitoring of the ESMP and RAP shall be the responsibility of the EAs, respective environment management authorities, and concerned ministries. In all cases, local NGOs, Community Based Organizations (CBOs) and local administration shall monitor the relevant activities. Consulting firms shall be engaged to carry out technical audits to independently determine the compliance with technical environmental, legal and contractual provisions, verification of implementation, good practice and ensuring that the expected quality is achieved. The technical audit shall determine any corrective timely actions to ensure quality is enhanced, and the sustainability of the asset is not compromised. The Bank (the East Africa Regional Development and Business Delivery Office in Kenya and COUG) shall conduct Supervision Missions (twice a year) and a mid-term review to monitor the performance indicators and compliance with the loan conditions; Banks procurement, financial management, rules, procedures and work plans. 4.3 Governance 4.3.1 Uganda–At national level, the Transparency International Corruption Perception Index (TICPI) ranked Uganda 127 out of 175 countries in 2014 and declined to 139 out of 168 countries in 2015. The Country Policy and Institutional Assessment (CPIA) rating of Uganda is 4.1 in 2015. The low CPIA could be mainly attributed to the weaknesses in governance that led to wastage and leakage of public funds in some sectors. 4.3.2 Kenya-According to TICPI, Kenya has slightly improved from 145 out of 175 countries in 2014, to 139 out of 168 countries in 2015. The CPIA rating of Kenya is 4.3 in 2015. Nevertheless, the Government continues to fight corruption and is stepping up the war with support from the DPs. In 2015, the Government adopted e-procurement system to ensure procurement processes are transparent, more predictable, and less prone to manipulation. The use of Integrated Financial Management Information System has also been made mandatory for all government and donor funded projects to enhance accountability and ensure project funds are used for intended purposes. 4.3.3 At sector level, in both countries, there have been significant policy reforms that have culminated in the separation of roles and responsibilities, with respect to policy formulation, road development, maintenance, regulation and financing, including the establishment of road funds and authorities. Currently, in Kenya reforms are also being done to decentralize responsibility for road asset management to the County government depending on the class and function of roads. The Bank’s portfolios were satisfactorily managed as they are mainly under projects financing arrangement. In Uganda, UNRA enrolled for the Construction Sector Transparency initiative in September 2013 which is a country centered multi-stakeholder initiative designed to promote transparency and accountability in publicly financed construction and the Bank is providing

support. In both countries, the audit and supervision reports of the recent Bank projects have not confirmed any irregularities that would compromise fiduciary assurance. 4.3.4 At project level, specific risk mitigation measures will be taken. These include (i) the appointment of an independent financial auditing firm for Uganda and Office of the Auditor General in Kenya, to ensure the proper fund utilization; (ii) carrying out independent technical audit of the project to ensure that there is value for money; (iii) Bank prior approval of all project procurement activities; and (iv) use of direct disbursement methods for contracts to channel funds to service providers. 4.4 Sustainability 4.4.1 In Uganda, the institutional arrangement for road maintenance include UNRA for maintenance planning and management, the Uganda Road Fund (URF) for maintenance financing, and private sector contractors for the execution of maintenance works. UNRA has set up a road asset management system which includes both a Pavement Management System (PMS) and a Bridge Management System (BMS) modules, which are now operational. At national level, Axle Load Control Policy is going to be reviewed taking into consideration the East Africa Community Vehicle Load Control Bill in order to ensure regional harmonization and compliance with axle load limit. To prevent overloading, UNRA is enforcing axle load control throughout the primary road network using eight fixed and four mobile weighbridges. An additional two fixed and four automated and weigh-in-motion weighbridges will be operational at strategically important locations. The project will also have a weighbridge facility. 4.4.2 The Uganda Road Fund (URF) derives its revenues mainly from road user charges like fuel levies, transit charges and overloading fees. The levies and fees are collected by the revenue authority and transferred to URF through budgetary appropriations. In 2014/15, UNRA received UGX261.44 billion representing 51% of the maintenance requirement of the overall network estimated at UGX 514.0bn. The maintenance funding gap is particularly affecting low volume gravel and earth rural roads. The URF resources are allocated in priority to the core national road network of 21,000 km which carries the overwhelming share of traffic. Currently, 78.5% of the paved and 71% of the unpaved national road network is in good or fair condition. 4.4.3 In Kenya, Government’s Draft Roads Bill aims to reorganize the roads sub-sector institutions and expand their mandates so that they can deliver the infrastructure promise as articulated under Vision 2030. KRB has Board of Directors made up of stakeholder representatives, representing various interest groups and areas and chaired by private sector representative, which allows for broader ownership of road sector policies and related interventions. 4.4.4 In Kenya, the BDEV findings of 2015 identified three main factors as threat to sustainability of results in the sector: inherent weaknesses in regulation of axle load controls on the network, suboptimal financing for maintenance, and persistent road safety problems. The Government has in the recent past instituted a raft of measures to correct the trend by: (i) privatization of management of axle load control functions to inject the needed efficiency and accountability; (ii) installation of additional High Speed Weigh-In-Motion (HSWIM) weighbridges to adequately cover the road network with minimal delays to transporters; (iii) initiated self-regulatory charter with the Transporters Associations, Port’s management, and logistics companies intended to promote broad-based compliance on the Country road network; (iv) creation of the NTSA; (v) Increment in fuel levy by additional KES3 per liter in the 2015/16

budget and additional KES 6 per liter in the 2016/17 budget to boost road maintenance financing. The increment in levy is estimated to generate some KES 20 billion annually. The collection for the year 2016/17 is projected to be KSH 60.5 billion against present annual maintenance needs of KES70 billion. These initiatives are therefore, expected to finally close the funding shortfall for maintenance in the short-to-medium term, and consequently, assure sustainability of road infrastructure. In view of the latest records of fuel levy collections the projected collection of KSH 60.5 billion in the year 2016/17 is more than double of the collection in 2013/14 which was KES 27.9 billion. The GOK is thus not expected to experience any challenges in funding maintenance of the national trunk road network of which the project road is part of. 4.4.5 Overloading is a concern as it leads to premature road failure. KeNHA has 9 weighbridge stations managed in five management clusters over the country by a private firm. Each cluster also has additional mobile weigh bridges. Out of the nine active weighbridges four of them also have HSWIM facility to filter the trucks and significantly reduce delay at the weigh stations. The need to develop a comprehensive axle load control framework was found to be necessary and this study is included as one of the components of this project. 4.4.6 With respect to the project roads in both countries, to ensure the sustainability, construction works will be undertaken under admeasured contracts and upon completion, Term Maintenance Contracts (TMC), which is a private sector participation are to be procured in the final year of construction to ensure the TMCs are in place by the time the works are completed. The TMC is to be for a period of 3 years renewable, which is the conventional method of maintaining road using agreed maintenance parameters. Both Governments will provide an undertaking for the TMCs and submission of commitment letter (undertaking) to the Bank has been made one of the other conditions of the loan. From the foregoing, it is evident that implementation of the measures above will ensure sustainability of the investment. 4.5 Risk Management 4.5..1 The identified following risks, their rating and the mitigation measures are summarized in Table 4.1 below. Table 4.1 – Summary of project Risk Management Description of Risk Identified Risk Mitigation measures Rating (i) Start-up delays: commencement of Moderate Conditions for effectiveness are reasonable; early engagement of projects might be delayed due to fulfilling stakeholders to get Parliament ratification (Uganda); use of Advance loan conditions, or delayed procurement or Contracting ; commencement of RAP compensation by section; and close Right of Way clearance (mainly in supervision by UNRA/KeNHA and the Bank. Submission by the Uganda) Borrower to the Fund of a letter from the Borrower’s Minister for Finance, stating the budgetary allocation for the RAP compensation for the first section of the road, in accordance with the Works and Compensation Schedule. (ii) Cost Overrun: The potential for cost Low Critical review of the design reports; cost estimate takes into account overrun remains low in the past similar recently awarded tenders; implementing the project according to time operations but could still happen if designs schedule; periodic technical audits; close follow up by UNRA/KeNHA are not optimized even at implementation and the Bank. and due to luck of close follow up (iii)Increased road accident: when Moderate Kenya has established a dedicated institution, NTSA and in Uganda, it is conditions of the road improve road under process; conducting road safety audit of the design before and accident might increase for short period during construction and at project completion; road safety awareness after opening. 26 and 12.4 fatalities per campaign will be conducted throughout the implementation period; the 100,000 vehicles were recorded in Uganda projects components (study on road safety, ambulance and medical and Kenya respectively. equipment for post- crash care center and training) will also contribute to

Description of Risk Identified Risk Mitigation measures Rating the mitigation measures. (iv) Overloading: if overloading is not Moderate UNRA and KeNHA having strategically placed weighbridges, controlled it will cause failure of the road supplemented by mobile weighbridges and the project has also a earlier than the design life. weighbridge; the management of weighbridges is given to the private sector in Kenya; the project in Kenya has also included a component to develop a comprehensive axle load management framework. (v) Capacity constraints of UNRA; Moderate - Strengthening of UNRA through training and recruitment of staff and failures to sustain the road network and to Technical Assistants; providing a five years maintenance contract after pay counterpart financing (Uganda). works completion; a careful review of the design to ensure that appropriate technical standards are set and technical audits to be undertaken on the works for compliance; and counterpart fund to be included in the three-Year Rolling Medium Term Expenditure Framework (MTEF). (vi) Monitoring of Environmental and Moderate - The works contracts will clearly indicate the obligation of the Social issues: lack of strict follow up of contractor on environmental and social issues, the supervising team will environment and social issues have Environmentalist, Sociologist and road Safety professionals. In addition there will be close follow up by UNRA/KeNHA and Bank team. The E&S action plan agreed upon with UNRA for the ongoing Bank financed transport projects will be followed up in the new project. 4.6 Knowledge Building 4.6.1 Knowledge will be built in the EAs in both countries through the implementation of the capacity building component and studies under the project. The effectiveness in knowledge building will be captured through BQPRs, supervision missions and project completion report and will be shared with the EA and other DPs. The TMC of the roads will also provide additional experience of financing and preserving road assets. 5 LEGAL INSTRUMENTS AND AUTHORITY 5.1 Legal Instrument 5.1.1 The legal instruments for the Project loans for both countries are: an ADB and ADF Loans. The ADB and ADF loans to Uganda amount to USD 38.4 million and UA 41.462 million, respectively, while the ADB and ADF loan to Kenya amounts to USD82.0 million and UA 35.113 million respectively. The standard ADB and ADF loan terms and conditions will apply to each relevant loan.

5.2 Conditions Associated with Bank’s Intervention 5.2.1 Each of the loans shall be subject to the following terms and conditions: (A) Conditions Precedent to Entry into Force: The entry into force of the Loan Agreements shall be subject to the fulfilment by the Borrowers of the conditions set forth in Section 12.01 of the Bank’s, or as applicable, the Fund’s General Conditions Applicable to Loan Agreements and Guarantee Agreements (Sovereign Entities). (B) Conditions Precedent to First Disbursement: The obligations of the Bank and/or the Fund to make the first disbursement of each of the loans shall be conditional upon entry into force of the relevant Loan Agreements as stated in paragraph 5.2.1(A) above and the provision of evidence by the relevant Borrower, in a form and substance satisfactory to the Bank and/or the Fund, of the fulfilment of the following conditions:

(i) Submission of an updated Resettlement Action Plan (RAP) for the relevant national component

of the project in form and substance acceptable to the Bank and/or (as applicable) the Fund, together with a Works and Compensation Schedule detailing the sections into which the works will be divided and a timeframe for the compensation and/or relocation/resettlement of all PAPs in each section;

(ii) For Uganda, submission by the Borrower to the Fund of a letter from the Borrower’s Minister for Finance, stating the budgetary allocation for the RAP compensation for the first section of the road, in accordance with the Works and Compensation Schedule. .

(C) Other Conditions: (i) For each Loan, the respective Borrower shall provide evidence in form and substance acceptable to the Bank and/or (as applicable) the Fund confirming that prior to the commencement of the civil works on any section of the Project, all project-affected Persons in respect of such section of civil works have been compensated and/or resettled in accordance with the RAP and the Works and Compensation Schedule; and,

(ii) For both countries, the Borrowers shall provide the Bank and Fund with a commitment letter for a 3 years renewable Term Maintenance contract to be procured using their respective Government resources in the final year of construction to ensure sustainability and thereafter allocate maintenance fund for the project road from the Road Maintenance Fund.

(iii) For Uganda, implementation of the safeguard action matrix of the ongoing Bank financed transport projects as discussed under sections 2.8.4 and 3.2.9 above.

(D) Undertakings: The Borrowers to; (i) carry out, and cause their contractors to carry out the Project in accordance with: (a) The Bank’s rules and procedures; (b) national legislation; and (c) the recommendations, requirements and mitigation measures set forth in the ESMP prepared for the project and submit Quarterly ESMP Implementation Reports and Annual ESMP Report; (ii) undertake traffic counts on the project roads on a bi-annual basis as from the commencement of the civil works and on the national paved road network every two years; (iii) provide the Bank/Fund with annual reports, including statistics on road accidents on the project road on measures adopted for the safety of the Project roads; (iv) submit to the Bank/Fund quarterly reports on the implementation of the ESMP and RAP; and (iv) For Uganda, include the funds required as counterpart financing for the Project in their three years Mid Term Expenditure Frameworks and in the annual budget for all Fiscal Years when the Project is under implementation. 5.3 Compliance with Bank Policies 5.3.1 This project complies with all applicable Bank policies and does not require any exception. 6 RECOMMENDATION 6..1 Management recommends that the Boards of Directors approve the proposed ADB loan of USD 38.4 million and ADF loan of UA 41.462 million to the Republic of Uganda for financing Multinational Kapchorwa-Suam road, and the proposed ADB loan of USD 82.0 million and the ADF loan of UA 35.113 million to the Republic of Kenya for financing the Suam-Kitale-Eldoret Bypass Road Project, subject to the terms and conditions stipulated in this report.

APPENDIX I: COMPARATIVE SOCIO-ECONOMIC INDICATORS

APPENDIX II: UGANDA - BANK PORTFOLIO DECEMBER 2016

Approved Amount UA million Net Commi Disbur Approval Closing Project Description tments sed Date ADF ADF Date ADB NTF (UA (%) Loan Grant million)

Community Agricultural Infrastructure 17/09/08 nil 45.00 nil nil 45.00 99.2% 30/12/2016 Improvement Program- Project II Community Agricultural Infrastructure 03/05/2011 nil 40.00 nil nil 40.00 72.6% 31/12/2017 Improvement Program III Markets and Agricultural Trade 10.12.2014 58.78 nill nil nil 58.78 0.2% 30.06.2020 Improvement II (MATIIPII) Preparation for Strategic Plan for 17.03.2016 1.11 nill nil nil 1.11 18.0% 30.04.2018 Climate Resilience Farm Income Enhancement and Forestry 20.01.2016 53.40 nill nil nil 53.40 1.5% 30.06.2021 Conservation Project II Road Sector Support Project 4 13/03/2013 nil 72.94 nil nil 72.94 7.8% 30/06/2018 Road Sector Support Project V 28/05/2014 nil 70.00 nil nil 70.00 0.5% 31/12/2020 Kampala Sanitation Project 16/12/2008 nil 35.00 nil nil 35.00 75.7% 31/12/2017

Water Supply and sanitation program 5/10/2011 nil 40.00 nil 3.59 43.59 95.3% 31/12/2017 Phase 1 Water Supply and sanitation program 3/2/2016 nil 65.80 nil nil 65.80 21.6% 30/06/2021 Phase 2 Additional Funds to Water Supply and 4/3/2015 nil nill nil 8.37 8.37 28.4% 30/06/2018 Sanitation Program Rehabilitation of Mulago and KCC 06/07/2011 nil 46.00 10.00 nil 56.00 61.0% 31/12/2017 Clinics Education V Project (HEST) 21/11/2012 nil 67.00 nil nil 67.00 20.1% 30/06/2018

Rural Electricity Access 16.09.2015 70.92 nil nil 0.00 70.92 0.2% 31.12.2020

Mbarara-Nkenda/Tororo- 16/12/08 nil 52.50 nil nil 52.50 78.6% 31/08/2017 LiraTransmission Lines Project

NELSAP 1 27/11/08 nil 7.59 nil 0.00 7.59 95.7% 30/10/2016

East Africa's Centre of Excellence for 03/10/2014 nil 22.50 nil nil 22.50 0.7% 31/12/2019 Skills Lake Edward Integrated Fisheries & 20.05.2016 nil 5.00 nil nil 5.00 4.8% 30.06.2021 Water Resources Mgt Project Lake Victoria Water Supply and 17/12/2010 nil nill nil 11.13 11.13 88.9% 31/12/2017 Sanitation program phase II Multinational Uganda / Rwanda- 22/06/2016 64.44 42.50 nil nil 106.94 0.0% 31/12/2021 Busega-Mpigi Express Highway TOTAL 893.57 30.44

KENYA – BANK PORTFOLIO DECEMBER 2016

Source of Approval Closing Loan Amount Disb. Project Name Financing Date Date (UA ) Ratio A. Public Nairobi Outer Ring road project improvement project [ ADF ] 11/13/201 12/31/2018 77,040,000.00 28.90 3 Nairobi Outer Ring road project improvement project [ ADF ] 11/13/201 12/31/2018 560,000.00 21.01 3 Mombasa-Mariakani road highway project [ ADF ] 03/11/201 6/30/2021 80,000,000.00 0.51 5 Sirari Corridor Accessibility & Road Safety Impr. project [ ADB ] 03/30/201 12/31/2020 170,083,251.28 0.29 6 Sirari Corridor Accessibility & Road Safety Impr. project [Others] 03/30/201 12/31/2020 7,787,312.91 0.00 6 Mombasa-Nairobi-Addis Corridor Phase II - Kenya [ ADF ] 07/01/200 6/30/2017 125,000,000.00 82.98 9 Multinational: Arusha-Holili/Taveta-Voi road - Kenya [ ADF ] 04/16/201 12/31/2018 75,000,000.00 58.73 3 Mombasa -Nairobi-Addis Ababa corridor Phase III - [ ADF ] 11/30/201 12/31/2017 120,000,000.00 69.88 Kenya 1 Kenya - Lake Victoria maritime comm. and transport [ ADF ] 10/24/201 04/30/2021 3,770,000.00 0.00 6 ADF PRG Menengai [ ADF ] 10/22/201 12/31/2020 9,473,935.49 0.00 4 Power transmission improvement project [ ADF ] 12/06/201 4/30/2017 46,700,000.00 81.87 0 ADF - PRG for Turkana T-line [ ADF ] 10/02/201 3/15/2019 15,574,625.82 0.00 3 Kenya - last mile connectivity project [ ADF ] 11/19/201 12/31/2019 90,000,000.00 29.84 4 Last mile connectivity project - 2 [ ADB ] 06/27/201 6/30/2021 100,438,635.75 0.00 6 Menengai geothermal development project [ ADF ] 12/14/201 12/31/2017 80,000,000.00 72.78 1 Menengai geothermal development project [Others] 12/14/201 12/31/2017 5,594,843.79 61.64 1 Menengai geothermal development project [Others] 12/14/201 12/31/2017 13,054,635.51 46.06 1 NELSAP interconnection project - Kenya [ ADF ] 06/16/201 12/31/2017 39,770,000.00 53.85 0 Ethiopia-Kenya electricity highway(Kenya) [ ADF ] 09/19/201 12/31/2018 75,000,000.00 35.79 2 Kenya - Tanzania interconnection (Kenya) [ ADF ] 02/18/201 12/31/2019 27,500,000.00 1.18 5 Small scale irrigation & agriculture value chain deve. [ ADB ] 11/18/201 6/30/2022 29,500,492.35 1.58 5 Small scale irrigation & agriculture value chain deve. [Others] 11/18/201 6/30/2022 17,008,325.13 3.38 5 Kenya-drought resilience & sustainable livelihood [ ADF ] 12/19/201 6/30/2018 37,410,000.00 12.87 program 2 Support to higher education science and technology [ ADF ] 11/14/201 6/30/2018 28,000,000.00 60.17 2 Support to TVET and training for relevant skills deve. [ ADF ] 07/01/201 6/30/2021 41,000,000.00 2.26 5 East Africa centres of Excellence Kenya [ ADF ] 10/03/201 12/31/2019 25,000,000.00 2.23 4 Small med towns water supply & waste [ ADF ] 11/03/200 12/30/2016 70,000,000.00 79.00 9 Thwake multipurpose water development program [ ADF ] 10/30/201 12/31/2019 61,680,000.00 1.05 3 Thwake multipurpose water development program [ ADF ] 10/30/201 12/31/2019 1,210,000.00 6.87 3 Kenya towns’ sustainable water supply and sanitation [ ADB ] 11/09/201 01/05/2021 284,360,546.65 0.00 prog. 6 Kenya towns’ sustainable water supply and sanitation [ ADF ] 11/09/201 01/05/2021 5,134,564.00 0.00 prog. 6 Kenya towns’ sustainable water supply and sanitation [ ADF ] 11/09/201 01/05/2021 511,820.00 0.00 prog. 6 Kenya town’s sustainable water supply and sanitation [ ADB ] 11/09/201 01/05/2021 1,200,000.00 0.00 prog. 6 Nairobi river rehabilitation: sewerage improvement [ ADF ] 12/06/201 12/30/2016 35,000,000.00 83.40 project 0 Lake Victoria water and sanitation program [ ADF ] 12/17/201 12/30/2017 72,980,000.00 72.99 0

III

Sub Total public 1,872,342,988.7 32.0% B. Private Jamii bora Kenya [ ADB ] 06/14/201 02/05/2025 3,729,895.86 0.00 6 Imperial bank Kenya in respect of Commerzbank RPA [ ADB ] 05/03/201 05/31/2017 499,414.63 97.59 6 Lake Turkana wind power project [ ADB ] 04/26/201 9/15/2017 89,554,098.46 76.65 3 Lake Turkana wind power EKF 04/26/201 9/15/2017 15,574,625.82 [ ADB ] 3 76.66 Sub Total Private 109,489,840.1 74.2% TOTAL 1,981,832,828.8 34.3%

APPENDIX III: UGANDA: APPENDIX III: KEY RELATED PROJECTS FINANCED BY THE BANK AND OTHER DEVELOPMENT PARTNERS

USD Remark Project Title Donor million 1 Upgrading of Kigumba-Masindi-Hoima-Kabwoya AfDB/DFID 122 road 2 Upgrading of Rukungiri-Ishasha & Bumbobi- AfDB 100 Lwakhakha 3 Multinational Uganda /Rwanda – Busega-Mpigi AfDB 151 Express Highway 4 Construction of Jinja Nile Bridge JICA 111 5 Upgrading of Atiak-Nimule road JICA 34 6 Kampala Flyover Construction and Road Upgrading JICA Project 200 7 Rehabilitation of Mbarara-Katuna road EU 159 8 Dualising of Kampala Northern Bypass EU/EIB 80 9 Construction of Mbarara-Bypass EIB 30 10 Upgrading of Kyenjojo-Kabwoya IDA 75 Suspended 11 North Eastern Road-corridor Asset Management IDA 243 Suspended Project (NERAMP) – Tororo – Mbale – Soroti – Dokolo – Lira – Kamdini Road 12 Muyembe – Nakapiripirit Road IsDB 110 13 Rwenkunye-Apac-Puranga IsDB 210 14 Masaka – Bukakata Road IsDB/OFID 30 15 Tirinyi-Pallisa-Kumi/Kamonkoli BADEA/OFID 78 16 Luwero-Butalangu BADEA/OFID 23 17 Upgrading of Ntungamo-Mirama Hills DFID/TMEA 20 18 Kampala – Entebbe Expressway CEB 350 TOTAL 2,126

APPENDIX III: KENYA: KEY RELATED PROJECTS FINANCED BY THE BANK AND OTHER DEVELOPMENT PARTNERS

USD Project Title Donor Region million Mombasa-Nairobi-Addis Road Corridor Project III AfDB Eastern Province 180 Upgrading of Mwatate-Taveta AfDB Taita/Taveta 112 Outer Ring Road upgrading AfDB Nairobi 115 Mombasa-Nairobi-Addis Road Corridor Project II AfDB Eastern Province 187 Rehabilitation of Isebania – Kisii – Ahero Road AfDB Nyanza 228 Mombasa-Mariakani Highway Improvement Project AfDB Mombasa 112 BADEA/OPEC/Kuwait North Eastern Construction of the Garissa - Modogashe Road Fund/Saudi Fund/ Abu 87 Province Dhabi Fund Northern Corridor Rehabilitation Programme – Phase II EC Kenya 82 Northern Corridor Rehab. Programme – Phase III (Eldoret- EC Kenya 122 Webuye-Malaba Road) Merille River -- Marsabit Road EC Northern Kenya 223 Mombasa Port Development Project JICA Mombasa 175 Northern Corridor Transport Improvement Project WB/NDF Kenya 460 Mombasa Southern Bypass Road and Kipevu New JICA Mombasa 253 Container Terminal Link Road Northern Corridor Transport Imp. Project - Additional World Bank Kenya 300 Kenya Transport Sector Support Project World Bank Kenya 45 Rehabilitation of Kericho-Nyamasaria Road A1 World Bank Kericho/Kisumu 95 Rehabilitation of Mau summit-Kericho Road (B1/A1) World Bank Baringo/Kericho 80 Rehabilitation of Nyamasaria- Kisumu-Kisian Road (A1) World Bank Kisumu Including Kisumu Bypass 68 Rehabilitation of Kisumu-Kakamega (A1) World Bank Kisumu 66.38 Rehabilitation of Kakamega-Webuye World Bank Kakamega 39 Rehabilitation of Webuye-Kitale World Bank Bungoma 52 Rehabilitation of Maji ya Chumvi-Bachuma Gate (A109) World Bank Kwale 54 Dualing Kisumu boys - Mamboleo World Bank Kisumu 13.5 Construction of HQ complex for road sector institutions World Bank Nairobi including access roads 23 National Urban Transport Improvement Project ( Capacity World Bank Nairobi Enhancement of JKIA- Rironi Highway 300 3 Interchanges on, Nakuru-Njoro Turn off, Nakuru- Nyahururu Mau Summit Kericho Turn off, Ahero A1/B1, World Bank Nakuru Kericho B1/c23 42.8 Construction of second carriageway of Athi River – World Bank Machakos Machakos Turn off 31 Construction of Nairobi Southern Bypass China Nairobi/Kiambu 202 Construction of One Stop Border Posts World Bank/DFID Kenya 30 Moi International Airport Access Road and Port reitz road TMEA/DFID Mombasa improvement project 20 East Africa Regional Transport, Trade and Development World Bank North Rift Project (Reconstruction of Lodwar-Nandapal Road) 500 TOTAL 4,298

PPENDIX IV: MAP OF THE PROJECT AREA

This map has been drawn by the African Development Bank Group exclusively for the use of readers of the report to which it is attached. The names used and the borders shown do not imply on the part of the Bank and its members any judgment concerning the legal status of a territory or any approval or acceptance of these borders.

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APPENDIX V: PROJECT COST AND FINANCING ARRANGEMENTS

V.1. In Uganda, the project cost estimate net of taxes is UA78.12 million or USD 105.76million (UGX383.87 billion), which is made up of UA 58.76 million (75.2%) in foreign exchange cost and UA 19.36 million (24.8%) in local cost. In Kenya, the project cost estimate net of taxes is UA108.81 million or USD 147.3 million (KSH 15.17 billion), which is made up of UA78.75 million (72.4%) in foreign exchange cost and UA30.06 million (27.6%) in local cost. The project cost by components, source of finance, category of expenditure and expenditure schedule by component are presented under Tables V1.1 to V1.6 with further details included in Annex B2

Table V1.1 Project Cost Estimates by Component (UGX billion; KSH billion and UA million–net of taxes)

Uganda Kenya Unit of Account Kenyan Shillings Ugandan Shillings (billion) Unit of Account (million) COMPONENT (million) (billion) FE LC Total FE LC Total FE LC Total FE LC Total

Civil works 226.19 56.55 282.74 46.02 11.52 57.54 8.50 2.12 10.62 60.98 15.25 76.23 Consultancy Services including audit 16.69 4.17 20.86 3.40 0.84 4.24 0.63 0.16 0.79 4.51 1.13 5.64 Studies and capacity 1.90 building 4.91 1.23 6.14 1.00 0.25 1.25 0.21 0.05 0.26 1.52 0.38 Others (Compensation) 0.00 22.90 22.90 0.00 4.66 4.66 0.00 1.45 1.45 0.00 10.37 10.37

Base Cost 247.79 84.85 332.64 50.42 17.27 67.69 9.34 3.78 13.12 67.01 27.13 94.14

Physical Contingency 22.62 5.65 28.27 4.60 1.15 5.75 0.85 0.21 1.06 6.10 1.52 7.62

Price Contingency 18.37 4.59 22.96 3.74 0.934 4.68 0.79 0.20 0.99 5.64 1.41 7.05

Total Project cost 288.78 95.09 383.87 58.76 19.36 78.12 10.98 4.19 15.17 78.75 30.06 108.81

Table V1.2 Source of Finance by Country (UA million – net of taxes)

Uganda Kenya SOURCE* FE LC Total % FE LC Total % ADB 28.328 0.00 28.328 36.26 60.62 0.00 60.62 55.71 ADF-PBA** 7.932 11.03 18.962 24.27 8.20 16.98 25.18 23.14 ADF-RO 22.50 0.00 22.50 28.80 9.93 0.00 9.93 9.13 GOU/GOK 0.00 8.33 8.33 10.67 0.00 13.08 13.08 12.02 Total 58.76 19.36 78.12 100.00 78.75 30.06 108.81 100.00

Percentage 75.22 24.78 100.00 72.38 27.62 100.00 *For Uganda, the ADB financing of UA 28.328 million will be for the civil works; the ADF financing of UA36.092 million will be for the civil works; UA3.82 million for supervision consultancy and UA1.55 million for studies. For Kenya, the ADB financing of UA 62.02 million will be for the civil works; the ADF financing of UA27.03million will be for the civil works; UA6.18 million for supervision consultancy and UA 1.90 million for studies. **The PBA for Kenya includes UA 16.73 million drawing from cancelled ADF resources and PBA ADF 13 of UA8.45 million

Table V1.3 Source of Finance by Country (USD million – net of taxes)

Uganda Kenya SOURCE FE LC Total % FE LC Total % ADB 38.36 0.00 38.36 36.26 82.06 0.00 82.06 55.71 ADF-PBA 10.74 14.92 25.66 24.27 11.11 22.98 34.09 23.14 ADF-RO 30.46 0.00 30.46 28.80 13.44 0.00 13.44 9.13 GOU/GOK 0.00 11.28 11.28 10.67 0.00 17.71 17.71 12.02 Total 79.56 26.20 105.76 100.00 106.61 40.69 147.30 100.00 Percentage 75.22 24.78 100.00 72.38 27.62 100.00

VIII

V.2. In Uganda, the project is to be financed by ADB and GOU. The proposed financing from ADB (USD 38.4 million), which is equivalent to UA28.328 million, ADF13 PBA of UA18.962 million and UA 22.5 million from ADF RO, which will cover the 89.33% of the total project cost, amounting to UA 69.79 million (UGX 342.95 billion). The GOU will finance 10.67% of the total project cost, amounting to UA 8.33 million (UGX 40.93 billion) and the GOU has agreed to provide the required counterpart funding. The Government contribution is for financing of the entire compensation and resettlement expenses and partly the civil works and supervision consultancy services. V.3. In Kenya, the project is to be financed by ADB and GOK. The proposed financing from ADB (USD82.0 million equivalent to UA 60.62 million), ADF-PBA (UA 35.113 million) of which UA8.45 million from the ADF 13 PBA and UA 16.73 drawing from cancelled ADF resources and ADF RO (UA 9.93 million) will cover the 87.98% of the total project cost, amounting to UA95.73 million (KSH 13.34 billion). The GOK will finance 12.02% of the total project cost, amounting to UA 13.08 million (KSH 1.82 billion) and the GOK has agreed to provide the required counterpart funding. The Government contribution is for financing of the entire compensation and resettlement expenses and partly the civil works. The project cost by Country by Category of Expenditure and Expenditure schedule by Component are shown below in Tables V1.4 to V1.6. Table V1.4 Project Cost by Category of Expenditure by country in UA and USD (million-net of taxes)

CATEGORY Uganda in UA Kenya in UA Uganda in USD Kenya in USD OF TOT TOTA TOTA TOTA FE LC FE LC FE LC FE LC EXPENDITURE AL L L L Civil Works 54.12 13.54 67.66 72.29 18.07 90.36 73.28 18.32 91.60 97.86 24.48 122.34 Supervision 3.40 0.85 4.25 4.94 1.24 6.18 4.60 1.15 5.75 6.69 1.67 8.36 Studies, ancillary works 1.24 0.31 1.55 1.52 0.38 1.90 1.68 0.42 2.10 2.06 0.51 2.57 and Institutional Support Compensation 0.00 4.66 4.66 0.00 10.37 10.37 0.00 6.31 6.31 0.00 14.03 14.03 TOTAL 58.76 19.36 78.12 78.75 30.06 108.81 79.56 26.20 105.76 106.61 40.69 147.30

Table V1.5 Uganda - Expenditure Schedule by Component (UA Million – net of taxes)

COMPONENTS 2017 2018 2019 2020 2021 TOTAL Civil Works 16.91 23.68 20.30 6.77 0.00 67.66 Supervision 1.28 1.28 1.06 0.42 0.21 4.25 Institutional Support , Ancillary Works and Studies 0.37 0.69 0.33 0.08 0.08 1.55 Compensation & Resettlement 2.33 2.33 0.00 0.00 0.00 4.66 Total 20.89 27.98 21.69 7.27 0.29 78.12

Table V1.6 Kenya - Expenditure Schedule by Component (UA Million – net of taxes)

COMPONENTS 2017 2018 2019 2020 2021 TOTAL Civil Works 13.55 31.63 40.66 4.52 0.00 90.36 Supervision 0.81 2.22 2.59 0.56 0.00 6.18 Institutional Support , Ancillary Works and 0.47 0.87 0.40 0.08 0.08 1.90 Studies Compensation & Resettlement 5.18 5.19 0.00 0.00 0.00 10.37 Total 20.01 39.91 43.65 5.16 0.08 108.81

APPENDIX VI: JUSTIFICATION FOR BANK FINANCING OF HIGHER PROPORTION OF ADB Uganda

VI.1. The proposed 73 km Kapchorwa-Suam road is programmed under the Uganda 2011-16 CSP. The project will be implemented during the period 2017 to 2020 at a total cost of UA 78.12 million. Uganda’s contribution comprises of an ADB Loan of USD 38.4 million; and an ADF Loan UA of 41.462 million. The GOU counterpart financing is 10.67%, instead of 50% for the ADB and 10% for ADF portion and the justification is summarized as follows and the detail is in the Technical Annex B2. VI.2. GOU’s commitment to implement the overall National Development Plan (NDPII) Infrastructure development is one of the key objectives set out by the NDPII. Government of Uganda aims at increasing the quantity of total national paved road network from 3,795 kilometers to 6000 kilometers. Uganda’s medium term expenditure plans are aligned with strategic budget priorities, which includes infrastructure development in roads and energy; agricultural production and productivity; human resource development; employment generation; private sector development; and improvement of public service delivery. As such, the proposed 73 km road is consistent with the country’s key objectives to increasing the quantity of total national paved road network, and to forge functional integration within the East African Community. VI.3. GOU’s budgetary allocation to sector’s targeted by the Bank’s assistance - The overarching objective of the Bank’s Country Strategy Paper (CSP) 2012-16 for Uganda is to support infrastructure development with focus on transport, energy and agricultural infrastructure; and skills and technology development. These areas of emphasis are in agreement with Uganda’s Vision 2040, the National Development Plan II (2015/16-2019/20) and the Bank’s Ten-Year Strategy 2013-2022. The Bank’s support to Uganda has been channelled through both Policy-Based Operations and project financing. The entire Bank portfolio comprises 20 on-going operations as at December 2016, amounting to UA893.57 million, of which the transport sector accounts for 28%. Developing infrastructure in all the sectors is given high importance in the country, which is in line with the Bank’s Ten Year Strategy (2013-2022), and Uganda’s national development priorities under NDPII. VI.4. GOU’s budget performance, and debt levels - Uganda’s budgeting process remains highly consultative and transparent. Following the introduction of new tax related policies, domestic Revenue/GDP significantly increased from 11.9% in FY 2013/14 (after GDP rebasing) to an estimated 13.1% in FY 2014/15. However, the revenue performance still slightly fell short of the revenue target of 13.7% in the budget proposal. The budget estimates for FY 2014/15 was 22.5% of GDP (or UGX 16,101bn), however the outturn fell short of target reaching 18.6% of GDP in FY 2014/15 owing to delayed implementation of the development projects. Total expenditure is projected to rise by 49% to US$ 8.58bn in FY 2015/16 from $6.23bn in FY2014/15. This FY 2015/16 budget is equivalent to 22.5% of GDP. During February 2015, the Government unveiled a new law, the Public Finance Management Act (PFMA 2015) which provides an enhanced framework for managing public finance, and accountability for improved public service delivery. The PFMA Act is expected to improve absorptive capacity of public expenditure. In terms of Debt Sustainability, Uganda’s public debt-to-GDP ratio is projected to rise to 34% during the FY 2015/16. However, the Fifth PSI Review for Uganda recently concluded that Uganda remains at low risk of debt distress in spite of ongoing large infrastructure investments in energy and transport. VI.5. Conclusion - The Government contribution is for financing of the entire compensation and resettlement expenses and partly the civil works and the supervision consultancy services. The relatively low counterpart fund of GOU (10.67%) is due to: (i) the fact that all local taxes

for all works and services will be paid by the GOU (ii) ADF allocation has been reduced under the ADF-13 replenishment cycle and the available ADF resources were insufficient to cover all the pipeline projects in Uganda. Ideally, roads should have concessional financing; (iii) GOU has committed to increasing the quantity of total national paved road network by 58% from 3,795 km in 2013/14 to 6000 kilometres by 2020 and (v) GOU’s overall budget for Fiscal Year 2015/16 is USD 8.58 billion; of which 18% is devoted to transport and this shows the priority assigned to the transport sector. The debt level is projected to a Nominal Debt to GDP Ratio of 34% on account of large infrastructure projects; but Uganda’s Debt Service to Revenue at 9.1%, remains sound. To reduce the GOU’s financial burden in this project, the Bank’s contribution has been increased. See Technical Annex B.2.3. Kenya VI.6. Out of the estimated project total cost of UA 108.81 million, the GOK shall contribute UA13.08 million representing 12.02% of the total costs net of taxes. This is less that the recommended 50% minimum counterpart contribution as per the Bank’s 2008 Policy on Expenditure Eligible for Bank Group Financing. Further, the Policy states that the ADB may finance more than 50% of the total project costs on a case-by-case basis and up to a limit that does not exceed 100%. VI.7. The justification sought in this case is premised on the fact that the GOK only qualifies from 1st September 2015 as a Blend Country with access to ADB funds, and at a time when the Government already committed substantial budgetary resources to infrastructure development particularly, new intercity railway line, new port developments, and expansion of airport infrastructure, amongst others, which have significant fiscal impact to the country. In line with the transition framework that stipulates a definite period for countries graduating from ADF only to ADB only described under the ADF Resource Allocation Guidelines, the GOK qualifies for waiver on the 50% requirement criterion. The justification for the reduced Government contribution is further qualified on the following considerations: VI.8. Country Commitment to Implement Its Overall Development Program: Kenya’s development strategy is the MTP II (2013 - 2017). The Government is committed to implementing the MTP II and continues to both mobilize resources for the purpose and to strengthen the linkage between the plan and the national budget. The Government is also under obligation to provide at least 15% of its resources to 47 County Governments while also providing for all other sectoral investments. VI.9. Financing Allocated by the Country to Sectors Targeted by Bank Assistance: Government continues to prioritize infrastructure (of which transport and energy subsectors are the largest components) by allocating 22% and 22.6%o of its 2013/14 and 2014/15 annual budget allocations respectively. VI.10. Country Budget Situation and Debt Level: The current budget situation shows that less than 5% of government spending is dependent on foreign aid. According to a debt sustainability analysis (DSA) concluded by the National Treasury jointly with the IMF in October 2014, Kenya’s debt burden in relation to thresholds for a comparator ‘medium performer’ country would decline substantially over the next ten years. Hence, there is space for the uptake of more debt. The analysis incorporates as a key assumption contracting the US $ 2 billion sovereign debt in 2013/14. The findings of the DSA include: Present value of debt to GDP ratio projected to decline from 40% (spot on target) in 2013 to 36% by 2023; The present value of debt to revenue ratio projected to decline from 156% (below the target of 250%) in 2013 to 144% by 2023. The debt service to revenue ratio projected to decline from 22% (below the target 30%) in 2013 to 22% in 2023.

VI.11. Conclusion - In light of the above considerations, there is therefore a case for the Bank to limit the Government’s counterpart funding requirement for this very important project to 12.02%. It is expected that this amount will ensure requisite ownership by the authorities and help expedite the project’s implementation process.

XII