Com pletion Report

Project Number: 40610 Loan Number: 2351-ARM (SF) and 2467-ARM (SF) (Supplementary Loan) December 2011

Armenia: Rural Road Sector Project

CURRENCY EQUIVALENTS Currency Unit – Armenian dram (AMD) At Appraisal At Project Completion 13 July 2007 30 September 2011 L2351-ARM: AMD1.00 = $0.003 $0.0027 $1.00 = AMD337.75 AMD367.80 L2467-ARM: AMD1.00 = $0.003 $0.0027 $1.00 = AMD304.51 AMD367.80

ABBREVIATIONS

ADB – Asian Development Bank ARD – Armenian Roads Directorate HDM – Highway Development and Management Model IRI – International Roughness Index MCC – Millennium Challenge Corporation MOTC – Ministry of Transport and Communications NPV – net present value OAI – Office of Anticorruption and Integrity PGC – project governing council PMU – project management unit PPMS – Project Performance Management System PPRR – Project Procurement-Related Review Report SDR – special drawing rights TA – technical assistance

WEIGHTS AND MEASURES

km – kilometer m – meter

NOTES

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

Vice-President X. Zhao, Operations 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director H. Wang, Transport and Communications Division, CWRD

Team leader A. Ahonen, Transport Specialist, CWRD Team members C. Africa, Project Analyst, CWRD G. Mousealyan, Senior Project Officer, CWRD M. Pampolina, Project Analyst, CWRD A. Silverio, Operations Assistant, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

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BASIC DATA i MAP I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 4 D. Disbursements 5 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 6 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants and Contractors 8 K. Performance of the Borrower and the Executing Agency 9 L. Performance of the Asian Development Bank 9 III. EVALUATION OF PERFORMANCE 10 A. Relevance 10 B. Effectiveness in Achieving Outcome 10 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 10 E. Impact 11 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 12 C. Recommendations 13 APPENDIXES 1. List of Subprojects 14 2. Project Framework and Accomplishments 17 3. Contract Awards and Disbursements Funded by the Asian Development Bank 20 4. Chronology of Major Events 24 5. Project Implementation Schedule 26 6. Status of Compliance with Loan Covenants 27 7. Status of Utilization of Consultancy Inputs 34 8. Economic Analysis 35

BASIC DATA

A. Loan Identification

1. Country Armenia 2. Loan numbers 2351-ARM (SF)/ 2467-ARM (SF) 3. Project Title Rural Road Sector Project 4. Borrower Armenia 5. Executing Agency Ministry of Transport and Communications 6. Amount of Loan Loan 2351-ARM (SF): SDR20.075 million ($30.60 million equivalent) Loan 2467-ARM (SF): SDR11.201 million ($17.32 million equivalent) 7. Project Completion Report Number PCR:ARM 1295

B. Loan Data

Loan 2351-ARM (SF)

1. Appraisal – Date Started 9 July 2007 – Date Completed 13 July 2007

2. Loan Negotiations – Date Started 22 August 2007 – Date Completed 24 August 2007

3. Date of Board Approval 28 September 2007

4. Date of Loan Agreement 15 November 2007

5. Date of Loan Effectiveness – In Loan Agreement 16 January 2008 – Actual 7 March 2008 – Number of Extensions 1

6. Closing Date – In Loan Agreement 30 June 2011 – Actual 30 September 2011 – Number of Extensions 1

7. Terms of Loan – Interest Rate 1% during grace period, 1.5% after grace period – Maturity (Number of Years) 32 years – Grace period (Number of Years) 8 years

8. Terms of Relending (if any) None – Interest Rate – Maturity (Number of Years) – Grace period (Number of Years) – Second-Step Borrower

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Loan 2467-ARM (SF)

1. Appraisal – Date Started N/A – Date Completed N/A

2. Loan Negotiations – Date Started 6 October 2008 – Date Completed 6 October 2008

3. Date of Board Approval 7 November 2008

4. Date of Loan Agreement 18 November 2008

5. Date of Loan Effectiveness – In Loan Agreement 18 December 2008 – Actual 6 January 2009 – Number of Extensions 1

6. Closing date – In Loan Agreement 30 June 2011 – Actual 30 September 2011 – Number of Extensions 1

7. Terms of Loan – Interest Rate 1% during grace period, 1.5% after grace period – Maturity (Number of Years) 31 years – Grace period (Number of Years) 7 years

8. Terms of Relending (if any) – Interest Rate None – Maturity (Number of Years) – Grace period (Number of Years) – Second-Step Borrower

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9. Disbursementsa

a. Dates Component Initial Disbursement Final Disbursement Time Interval (months) Loan 2351 26 September 2008 19 September 2011 37 $3,060,000 $463,624 22 May 2009 30 September 2011 Loan 2467 $1,732,000 $590,000 29

Effective Date Original Closing Date Time Interval Loan 2351 7 March 2008 30 June 2011 40 months Loan 2467 6 January 2009 30 June 2011 30 months

b. Amount (SDR million) Loan 2351-ARM(SF) Last Net Original Revised Amount Amount Amount Undisbursed Category Allocation Allocation Reallocated Available Disburseda Balancea 01 Works 16,533,000 18,753,950 2,220,950 18,753,950 18,563,986 189,964 02 Consulting 984,000 1,075,600 91,600 1,075,600 1,057,849 17,751 Services 03 Interest 327,000 227,000 (100,000) 227,000 227,000 0 Charge 04 Unallocated 2,231,000 18,450 (2,212,550) 18,450 0 18,450 99 Imprest 0 0 0 0 -39 39 Account Total 20,075,000 20,075,000 0 20,075,000 19,848,796 226,204b a Figures as of 14 December 2011. b Canceled as of 12 December 2011.

Loan 2467-ARM(SF) Last Net Original Revised Amount Amount Amount Undisbursed Category Allocation Allocation Reallocated Available Disburseda Balancea 01 Works 9,771,400 10,551,290 779,890 10,551,290 10,539,854 11,436 02 Interest 187,600 187,600 0 187,600 138,042 49,558 Charge 03 Unallocated 1,242,000 335,810 (906,190) 335,810 0 335,810 04 Consulting 0 126,300 126,300 126,300 70,126 56,174 Services 99 Imprest 0 0 0 0 33 (33) Account Total 11,201,000 11,201,000 0 11,201,000 10,748,055 452,945b a Figures as of 14 December 2011. b Canceled as of 12 December 2011.

10. Local Costs (Financed) - Amount ($) Local cost financing is not applicable to Loans 2351/2467-ARM - Percent of local costs - Percent of total cost

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C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actuala ADB Government Total ADB GOA Total Foreign Exchange Cost, L2351(SF)- 30.60 10.80 41.40 31.02 12.90 43.92 ARM L2467(SF)- 17.32 6.12 23.44 16.79 6.23 23.02 ARM Local Currency Cost, Not Applicable 0.00 0.00 0.00 0.00 0.00 0.00 Total 47.92 16.92 64.84 47.81 19.13 66.94 ADB = Asian Development Bank, ARM = Armenia, GOA = Government of Afghanistan, SF = Special Funds. a Figure as of 14 December 2011.

2. Financing Plan ($ million) Cost Appraisal Estimate Actuala ADB Government Total ADB GOA Total Implementation Costs Borrower L2351(SF)- 10.80 10.80 13.13 13.13 Financed ARM L2467(SF)- 6.12 6.12 6.47 6.47 ARM ADB Financed L2351(SF)- 30.10 30.10 30.67 30.67 ARM L2467(SF)- 17.03 17.03 16.57 16.57 ARM Other External Financing 0.00 0.00 Total 47.13 16.92 64.05 47.24 19.666.84 IDC Costs Borrower 0.00 0.00 0.00 Financed ADB Financed L2351(SF)- 0.50 0.50 0.35 0.35 ARM L2467(SF)- 0.29 0.29 0.22 0.22 ARM Other External Financing 0.00 0.00 Total 47.92 16.92 64.84 47.81 19.6 67.41 ADB = Asian Development Bank, ARM = Armenia, GOA = Government of Afghanistan, IDC = interest during construction, SF = Special Funds. a Figure as of 14 December 2011.

3. Cost Breakdown by Project Component ($ million) Loan 2351(SF)-ARM Component Appraisal Estimate Actuala ADB Government Total ADB GOA Total A. Investment Cost 1. Civil Works 25.20 4.00 29.20 29.03 4.71 33,74 2. Taxes and Duties 0.00 5.80 5.80 6.89 6.89 Subtotal (A) 25.20 9.80 35.00 29.03 11.60 40.63

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Component Appraisal Estimate Actuala ADB Government Total ADB GOA Total B. Project Management and Administration 1. Project Management Unit 0.00 1.00 1.00 0.00 0.77 0.77 2. Consulting Services 1.50 0.00 1.50 1.63 1.63 3. Consultant's Taxes 0.00 0.00 0.00 0.00 0.53 0.53 Subtotal (B) 1.50 1.00 2.50 1.63 1.30 2.93 C. Contingencies 3.40 0.00 3.40 0.00 0.00 D. Interest During Construction 0.50 0.00 0.50 0.35 0.35 Imprest Account 0.00 0.85 Total 30.60 10.80 41.40 31.01 12.90 43.91 ADB = Asian Development Bank, ARM = Armenia, GOA = Government of Afghanistan, SF = Special Funds. a Figure as of 14 December 2011.

Loan 2467(SF)-ARM Component Appraisal Estimate Actuala ADB Government Total ADB GOA Total A. Investment Cost 1. Civil Works 15.11 2.27 17.38 16.46 2.52 18.98 2. Taxes and Duties 0.00 3.29 3.29 3.68 3.68 Subtotal (A) 15.11 5.55 20.66 16.46 6.20 22.66 B. Project Management and Administration 1. Project Management Unit 0.00 0.57 0.57 0.00 0.00 2. Consulting Services 0.00 0.00 0.00 0.11 0.11 3. Consultant Taxes 0.00 0.00 0.00 0.00 0.03 0.03 Subtotal (B) 0.00 0.57 0.57 0.05 0.03 0.14 C. Contingencies 1.92 0.00 1.92 0.00 0.00 0.00 D. Interest During Construction 0.29 0.00 0.29 0.22 0.22 Imprest Account 0.00 0.00 Total 17.32 6.12 23.44 16.79 6.23 23.02 ADB = Asian Development Bank, ARM = Armenia, GOA = Government of Afghanistan, SF = Special Funds. a Figure as of 14 December 2011.

4. Project schedule Item Appraisal Estimate Actual Date of Contract with Consultant Jan 2008 Jul 2008 Completion of Engineering Designs Package 1 Dec 2007 Apr 2008 Package 2 Dec 2008 Nov 2008 Package 3 Dec 2009 Jun 2010 Civil Works Contracts – Package 1

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Item Appraisal Estimate Actual Date of Award Lot 1 Links 11 and 13 Apr 2008 Sep 2008 Lot 2 Links 3, 18, and 20 Apr 2008 Sep 2008 Lot 3 Link 10 Apr 2008 Sep 2008 Lot 4 Link 12 Apr 2008 Sep 2008 Lot 5 Link 17 Apr 2008 Sep 2008 Lot 6 Link 19 Apr 2008 Sep 2008 Lot 7 Link 21 Apr 2008 Sep 2008 Lot 8 Link 23 (km 0.0–13.8) Apr 2008 Sep 2008 Lot 9 Link 23 (km 13.8–25.7) Apr 2008 Sep 2008 Lot 10 Link 30 Apr 2008 Sep 2008 Civil Works Contracts – Package 2 Date of Award Lot 1 Links 1, 6 and 7 Apr 2009 Apr 2009 Lot 2 Link 2 Apr 2009 Apr 2009 Lot 3 Link 3 Apr 2009 Apr 2009 Lot 4 Link 9 Apr 2009 Apr 2009 Lot 5 Link 14 Apr 2009 Apr 2009 Lot 6 Link 27 Apr 2009 Apr 2009 Lot 7 Link 15 Apr 2009 Apr 2009 Lot 8 Link 24 Apr 2009 Apr 2009 Lot 9 Link 26 Apr 2009 Apr 2009 Lot 10 Links 16 and 25 Apr 2009 Apr 2009 Civil Works Contracts – Package 3 (not envisaged at appraisal) Date of Award Lot 1 Link 31 km 15.2–20.0 n/a Nov 2010 Lot 2 Link 31 km 20.0–25.0 n/a Nov 2010 Lot 3 Link 31 km 25.0–32.0 n/a Nov 2010 Lot 4 Link 31 km 32.0–39.3 n/a Nov 2010 Lot 5 Link 31 km 39.3–44.0 n/a Nov 2010 Lot 6 Link 31 km 44.0–48.7 n/a Nov 2010 Completion of Work Package 1 Lot 1 Links 11 and 13 Nov 2008 Nov 2009 Lot 2 Links 3, 18, and 20 Nov 2008 Sep 2010 Lot 3 Link 10 Nov 2008 Nov 2009 Lot 4 Link 12 Nov 2008 Nov 2009 Lot 5 Link 17 Nov 2008 Jul 2010 Lot 6 Link 19 Nov 2008 Nov 2009 Lot 7 Link 21 Nov 2008 Dec 2009 Lot 8 Link 23 (km 0.0–13.8) Nov 2008 Nov 2009 Lot 9 Link 23 (km 13.8–25.7) Nov 2008 Nov 2009 Lot 10 Link 30 Nov 2008 Nov 2009

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Item Appraisal Estimate Actual Package 2 Lot 1 Links 1, 6, and 7 Nov 2009 Aug 2010 Lot 2 Link 2 Nov 2009 Nov 2009 Lot 3 Link 3 Nov 2009 Aug 2010 Lot 4 Link 9 Nov 2009 Nov 2009 Lot 5 Link 14 Nov 2009 Dec 2009 Lot 6 Link 27 Nov 2009 Nov 2009 Lot 7 Link 15 Nov 2009 Sep 2010 Lot 8 Link 24 Nov 2009 Sep 2010 Lot 9 Link 26 Nov 2009 Sep 2010 Lot 10 Links 16 and 25 Nov 2009 Sep 2010 Package 3 (not envisaged at appraisal) Lot 1 Link 31 km 15.2–20.0 n/a Aug 2011 Lot 2 Link 31 km 20.0–25.0 n/a Aug 2011 Lot 3 Link 31 km 25.0–32.0 n/a Aug 2011 Lot 4 Link 31 km 32.0–39.3 n/a Aug 2011 Lot 5 Link 31 km 39.3–44.0 n/a Aug 2011 Lot 6 Link 31 km 44.0–48.7 n/a Aug 2011 n/a = not applicable.

5. Project Performance Report Ratings Ratings

Development Implementation Implementation Period Objectives Progress From January 2008 to December 2008 Satisfactory Partially Satisfactory From January 2009 to December 2009 Satisfactory Satisfactory From January 2010 to December 2010 Satisfactory Satisfactory From January 2011 to September 2011 Satisfactory Highly Satisfactory

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D. Data on Asian Development Bank Missions No. of No. of Specialization Name of Mission Date Persons Person- of Members Days Fact-finding (Loan 2351-ARM) 7–25 May 2007 6 114 a,b,c,d,e,l,t Appraisal 9–13 July 2007 4 20 a,b,c,l Loan negotiation 22–24 August 2007 4 16 a,c,d,l Inception 6–9 November 2007 2 8 a,l Special administration 28 March–2 April 2008 1 6 b Fact-finding (Loan 2467-ARM) 16–18 July 2008 2 6 a,l Review 17–27 November 2008 3 33 a,p,l Review 16–20 February 2009 1 5 t Review 11–18 May 2009 5 40 t,b,p,l,i Midterm review 7–14 October 2009 4 32 t,p,l,i Review 8–22 March 2010 4 60 t,s,l,i Review 28 May–4 June 2010 5 40 t,s,p,l,i Review 13–20 September 2010 3 24 t,l,i Review 25 October–4 November 2010 5 60 t,b,s,q,i Review 24 February–4 March 2010 3 27 t,b,l Project completion review 18–24 August 2011 5 40 t,p,l,r a = project specialist, b = project administration, c = counsel, d = financial control specialist, e = environmental specialist, i = project implementation specialist, l = liaison specialist, p = project analyst, q = assistant project analyst, r = transport economist, s = social development specialist, t = transport specialist.

I. PROJECT DESCRIPTION

1. On 28 September 2007, the Asian Development Bank (ADB) approved a loan for SDR20,075,000 ($30.6 million equivalent) to Armenia for the Rural Road Sector Project. 1 In conjunction with the loan, ADB approved advisory technical assistance (TA) to prepare a transport sector strategy for developing cost-effective and environmentally and socially sustainable transport infrastructure and services. 2 On 7 November 2008, ADB approved a supplementary loan for SDR11,201,000 ($17.32 million equivalent) 3 to address financial shortcomings of the project.

2. Inefficient infrastructure is one of the main causes of poverty in Armenia. About 38% of the population (about 1.2 million people) lives in rural areas; of that share, more than 45% are poor. Poverty was reduced from 50.0% in 2000 to 29.8% in 2005, but poverty reduction has occurred more slowly in rural areas. This is mainly because constrained economic activities— primarily attributable to mountainous topography and poor transport infrastructure—impose high transport costs on the rural population, limiting their income opportunities and the expansion of rural industries, and constraining access to social service delivery institutions.

3. Rural infrastructure development is a cornerstone of the government’s poverty reduction strategy paper.4 The estimations prepared by the government in 2004 indicated that while about 90% of the main and secondary road network was in good or fair condition, more than 60% of rural roads were in poor or very poor condition, with about 84% of them impassable during the winter months. With assistance from the World Bank, the government formulated the Lifeline Road Network Program in 2004.5 It set targets of rehabilitating some 2,700 kilometers (km) of roads at an estimated cost of $300 million. External contributions for implementing the program were committed by the Millennium Challenge Corporation (MCC, $67 million) and expected from the Japan Bank for International Cooperation ($50 million). The government planned to provide nearly $50 million to finance upgrading of 532 km of rural roads in the 5-year program. To support the program, the government requested ADB to help finance rehabilitation of 220 km of rural roads.

4. The objective of the project was to (i) improve the income and nonincome dimensions of poverty in rural areas in four regions, serving about 10% of the population; (ii) enhance the economic integration of selected communities by providing better access to basic social service delivery institutions, job opportunities, and domestic and international markets for communities and enterprises in the four regions; and (iii) strengthen management capability in the transport sector. The feeder roads improved under the project would lead to higher-quality and more frequent road transport services; more business opportunities for the private sector in general, particularly in agriculture (including agro-processing), industry, and services; and benefits from close partnerships with other donors in the road sector and other relevant sectors. The project’s original scope included (i) improving about 220 km of high-priority asphalt concrete feeder roads; (ii) providing consulting services for road design, subproject preparation, construction supervision, and project monitoring and evaluation; and (iii) implementing the advisory TA.

1 ADB. 2007. Report and Recommendation of the President to the Board of Directors, Proposed Loan and Technical Assistance. Republic of Armenia: Rural Road Sector Project. Manila. 2 ADB. 2008. Transport Sector Development Strategy. Manila. (The TA, $600,000 on a grant basis, was completed and the final report approved by ADB on 28 November 2008.) 3 ADB. 2008. Report and Recommendation of the President to the Board of Directors, Proposed Supplementary Loan Republic of Armenia: Rural Road Sector Project. Manila. 4 World Bank. 2003. Republic of Armenia: Poverty Reduction Strategy Paper 2009–2015. Yerevan. 5 World Bank. 2004. Rural Infrastructure in Armenia. Washington.

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5. The Ministry of Transport and Communications (MOTC) was the project’s executing agency. Responsibility for implementation of the project was delegated to the Armenian Roads Directorate (ARD), which was responsible for planning and managing construction and maintenance work for the road assets under MOTC’s purview. The principal loan became effective on 7 March 2008 and the supplementary loan on 6 January 2009. Physical works under both loans were completed in August 2011. The closing of both loans is under way. The total amount disbursed was SDR$30.60 million ($47.8 million equivalent), or 99.7% of the total loan amounts. ADB granted one loan extension for 3 months to allow the project to be completed.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

6. The project design and formulation were consistent with the government’s poverty reduction strategy paper, 2006–2015 and the road network program, both of which emphasized the importance of infrastructure development. The program was expected to (i) significantly increase the opportunities for rural development by improving access to markets for agricultural produce; (ii) bring job opportunities in nearby urban areas within daily travel distance; and (iii) improve rural access to essential social service facilities, such as schools and health centers. These achievements would alleviate poverty directly by creating jobs and enhancing value added for agricultural produce, and indirectly by reducing the transport cost of daily living. The project was also in line with ADB’s interim operational strategy for Armenia,6 which focused on rural development, private sector development, and regional cooperation.

7. The government and ADB carefully identified the subprojects financed under the project, avoiding duplication and systematically planning them to achieve maximum synergy with other donors such as the MCC, the Armenia Social Investment Fund, the World Bank, the United States Agency for International Development, and the United Nations, which all had ongoing projects in the country. To avoid land acquisition and resettlement issues, no roads that would require realignment or widening outside the right-of-way were considered for the project. Similarly, only works that would have insignificant environmental impacts during and after implementation were considered. Compliance with these subproject selection criteria was determined through the TA conducted for project preparation. The list of subprojects identified for the project and completed under the project are in Appendix 1.

8. Soon after the principal loan became effective, ADB and MOTC recognized that the project faced serious implementation delays and a shortfall in the target program of works if the cost overruns in civil works were not addressed. The cost overruns resulted from sharp price escalations in material costs, depreciation of the U.S. dollar against the Armenian dram, and domestic inflation. To meet the project’s initial targets and ensure timely and successful completion, a supplementary loan was processed.

9. A fact-finding for the supplementary loan was carried out in July 2008. No major issues arose; there was close agreement that the additional funding would enhance the relevance of the overall project to the development strategy of the country and ADB’s country strategy. The supplementary loan became effective in January 2009 and enabled a second package of civil works to be implemented. The cost, shared between the principal and supplementary loan, amounted to AMD11,925 billion (including tax), of which the ADB portion was AMD8.57 billion

6 ADB. 2006. Economic Report and Interim Operational Strategy (ERIOS) for 2006–2009 for Armenia. Manila.

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($25.40 million equivalent), with the government financing the rest. Cost savings during the implementation of the first and second civil works package made it possible to include a third package of works. These works (33.5 km) had been assigned originally to the MCC-assisted projects. The supplementary loan was in compliance with ADB’s policy for supplementary financing.7

10. The government had prepared a transport sector strategy with World Bank assistance in 1997. Since then international economic integration had deepened, new technologies and knowledge had emerged, and concern over risks associated with mobility improvement had grown. In response to new challenges and opportunities, in 2007 the government requested TA from ADB to develop a new transport sector strategy. The TA was included in the 2007 assistance program and approved on 28 September 2007 in conjunction with the principal loan.

B. Project Outputs

11. Overall, the project achieved its outputs as follows: (i) 263 km of rural roads were improved (Road Connectivity Improvement Component); (ii) an improved transport sector management system was developed, including a new transport sector strategy to strengthen MOTC’s capability; and (iii) an improved road asset management system was introduced to enhance the institutional capacity of ARD (Road Infrastructure Management Component). Appendix 2 presents the project framework and the outputs achieved.

12. Improved high-priority roads. The project achieved and exceeded its original target of rehabilitating 220 km of rural roads that had severely deteriorated. This target could not have been achieved without early recognition of the need for a supplementary loan. With similar prompt action it was possible to extend the works program by incorporating an additional package of 33.5 km of road improvement works that is part of the high-priority MCC program and would have otherwise been deferred when that program ended.

13. Post-implementation traffic surveys show a mixed impact on traffic levels since 2006, when counts were carried out at appraisal. An increase in traffic is apparent but less than the 40% expected. This is likely caused by declines in income levels between 2006 and the completion of the works that depressed the propensity to travel.

14. Before the improvements, road roughness levels measured by International Roughness Index (IRI) averaged 10.9 m/km on the originally selected roads and over 15.0 m/km on the additionally included roads. Surveys carried out on completion of the works showed that IRI levels had fallen to 3–4 m/km. The average saving in travel time of 47% exceeded the target reduction of 40%. Based on the reduced roughness and travel time, the project achieved its 40% saving target for vehicle operating cost.

15. Improved transport management capability of MOTC. The project achieved this output. The component consisted of (i) overall project management, and (ii) support for subproject preparation and construction supervision provided to the project management unit (PMU). The quality of works and their timeliness was satisfactory, particularly during the implementation of the second and third packages. This suggests strongly that road sector management capability was improved.

7 ADB. 2005. Review of the Policy on Supplementary Financing: Addressing Challenges and Broader Needs. Manila (R303-05, 7 November).

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16. Established road asset management system to enhance the institutional capacity of the ARD. The project partially achieved this output. The TA attached to the project achieved its expected outcome and outputs, namely to develop a cost-effective and environmentally and socially sustainable transport infrastructure and services, and prepare a long-term strategy for transport sector development. The TA completion report rated the TA highly successful. 8 However, an improved system for managing road assets remains to be established. The transport sector strategy provided MOTC with a sound road map for improving the transport sector in general. The time spent by MOTC staff with the TA team raised MOTC staff’s capability. Similarly, ARD staff assigned to the PMU and working with the supervision consultant on project management have benefited from the transfer of knowledge on road asset management.

C. Project Costs

17. The total appraised project cost was $41.4 million equivalent in foreign exchange cost, including contingencies, interest during construction, and taxes and duties. The ADB loan financed $30.6 million equivalent (about 74% of the original project costs), including civil works, consulting services, and contingencies. The government financed the remaining $10.8 million, including taxes and duties, civil works and project management (about 26% of the original project costs). For the supplementary loan, the total cost at fact finding was $23.44 million equivalent in foreign exchange cost, with ADB financing $17.32 million and the government financing $6.12 million.

18. The cost of the civil works for package 1, under the principal loan, was about $23.57 million, 45% higher than the cost estimated at appraisal in 2006. The first cost estimate prepared for package 2 was 98% higher than the estimate at appraisal, primarily because of increases in the costs of raw materials and oil. The increase also resulted from domestic inflation and the appreciation of the dram. At appraisal, inflation was expected to grow to 6.0% in 2008 from 4.4% in 2007; however, the actual annual average inflation rate was 9.0%. The dram appreciated by about 16%, from AMD364.84 to $1 in December 2006 to AMD307.13 to $1 in May 2008. To mitigate the financial shortfall, a supplementary loan was processed. It increased ADB’s financing of the civil works from the $25.20 million equivalent estimated at appraisal to $43.52 million (about 91% of total ADB financing for the project). The total project cost at completion is $66.94 million equivalent, with about 76% allocated to civil works. This share is slightly higher than estimated.

19. MOTC requested using the savings, contingencies, and unallocated amounts under the ADB loan to finance construction and design update of additional road sections (package 3, six lots totaling 33.5 km) of the canceled MCC grant. ADB agreed to finance the sections under the project, provided that the additional sections complied with ADB's due diligence requirements, ADB's procurement guidelines were followed, and the government confirmed the availability of counterpart financing. ADB found the feasibility studies prepared for the supplementary road sections in compliance with ADB’s requirements. The Ministry of Finance’s confirmation of the government's counterpart financing was received on 30 July 2010. On 6 August 2010, ADB agreed to extend the loan closing to 30 September 2011, with a provision that the government would financer any uncompleted works after loan closing. The construction supervision consultant carried out required updates to the detailed designs for the supplementary road sections and prepared bidding documents under a contract variation.

8 ADB. 2009. Technical Assistance Completion Report for the Transport Sector Development Strategy. Manila. (TA 4973-ARM).

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20. During implementation, ADB approved five variation orders for the consulting services for construction supervision. The orders were for design updates for the additional road sections included under the project, changes in staff, and extension of the contract duration. They increased the contract amount from $1,326,287 (net of taxes) to $1,740,982. ADB also approved ten variation orders for civil works for the three packages, increasing the total contract amounts by AMD1,502,604,052. Intermediate and final remeasurements of the works resulted in another 52 variation orders decreasing the total contract amounts by AMD215,725,700.

D. Disbursements

21. The loan proceeds were disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). A total of SDR30.6 million ($47.8 million equivalent), about 99.7% of the ADB loan proceeds, was disbursed. The first disbursement for the principal loan was made on 26 September 2008 and for the supplementary loan on 22 May 2009. The final disbursement for the principal loan was made on 19 September 2011 and that for the supplementary loan on 30 September 2011. To facilitate project implementation and reduce cash flow difficulties in prefinancing project expenditures, MOTC requested advance disbursement through the imprest fund procedure. MOTC established an imprest account at a bank acceptable to ADB. The imprest account was used exclusively to pay contractors, consultants, suppliers, and others for ADB’s share of eligible expenditures. The initial advances to the imprest account were planned expenditures representing 10% of the loan amounts, $3,060,000 (for the principal loan) and $1,732,000 (for the supplementary loan). The imprest account was liquidated promptly towards the project completion and the unutilized balance was refunded to ADB. Contract awards and disbursements are shown in Appendix 3.

Disbursements ($ millions)

Category Allocation at Supplementary Current Amount Percent Loan Appraisal Allocation Disbursed Disbursed Balance 1. Civil Works 25.20 15.11 45.81 45.50 99 0.31 2. Consulting Services 1.50 0.00 1.96 1.74 89 0.22 3. Unallocated 3.40 1.92 0.88 0.00 0 0.88 4. IDC 0.50 0.29 0.23 0.57 248 -0.34 5. Imprest Account 0.00 0.00 0.00 0.00 0 0.00 Total 30.60 17.32 48.88 47.81 1.07 IDC = Interest during construction. Note: Figures as of 14 December 2011.

E. Project Schedule

22. The project experienced delays in the first 2 years, but rapid progress in the final year enabled it to complete only 4 months after the original loan closing date. The initial delays related mainly to the inability to start the first package of works at the beginning of the annual construction season (April to December) and the delay in appointing the design and supervision consultant. The works contracts for the initial 10 lots were not signed until September 2008, and the design and supervision consultant was not mobilized until October 2008. Eight contracts under package 1 were completed by 2009, and the remaining two by 2010.

23. Uncertainties regarding the funding for package 2 contracts were resolved with the signing of the supplementary loan agreement in November 2008. Four of the 10 contracts under package 2 were completed in 2009 and the remaining six in November 2010. All six package 3 contracts were completed in August 2011. To allow completion of package 3 civil works, ADB

6 approved extending the closing of both loans from 30 June to 30 September 2011. The chronology of major events is shown in Appendix 4 and the project implementation schedule in Appendix 5.

F. Implementation Arrangements

24. MOTC was the executing agency and ARD was the implementing agency. Within ARD a PMU was set up for day-to-day coordination, implementation, and administration. The PMU was also responsible for providing and supervising staff at the regional level for subproject contract management. ARD was responsible for recruiting consultants to carry out subproject preparation, construction supervision and auditing, preparation of bidding documents, and monitoring, evaluation, and award of contracts. In the event, recruitment of the TA consultants was handled by ADB at the request of MOTC.

25. In conformity with the government’s requirements, a project governing council (PGC) was established to provide oversight of the project. The PGC was chaired by the minister of MOTC and included the first deputy ministers of finance and economy, justice, territorial administration as well as five representatives of civil society and the head of the PMU. PGC approval was required for bidding documents, contract awards, and major variations to contracts, and for all strategic decisions (such as the scope and content of the civil works component). The PGC met quarterly and responded timely and effectively when approvals were required. It also provided a useful forum for coordinating activities among project beneficiaries.

G. Conditions and Covenants

26. All covenants were fully complied with except for three, which were partially complied with. These three covenants relate to the likelihood of maintenance being sustained on project roads and the likelihood of the government’s road rehabilitation and maintenance budget being sustained at the level of inflation. During the economic downturn, when budget cutbacks were necessary, the government protected the integrity of the project by honoring its provision for required counterpart funding in a timely manner. However, because it had to satisfy other government budgetary needs, it could not provide appropriate maintenance funds for the transport sector as required by the loan conditions. The government’s road rehabilitation and maintenance budget was not increased in 2010 and 2011. MOTC has informed ADB that the budget will gradually be increased now that all road sections have been completed.

27. The institutional structure of MOTC is changing, but the new structure is not yet clear. Under the loan covenants for the ongoing ADB-assisted North–South Corridor Investment Program, MOTC is required to prepare a long-term road subsector plan (2010–2020) and adopt it for implementation. 9 The plan must detail policy actions and measures to (i) establish a system for efficient planning and prioritization of road maintenance works, (ii) provide funding modalities acceptable to ADB to finance maintenance of relevant roads, (iii) develop or adopt adequate road maintenance standards and prepare relevant road maintenance planning and operational manuals, and (iv) provide training to strengthen the capacity of local maintenance units. There is uncertainty about whether the ARD will retain its current role. The responsibility for maintaining the project’s roads after project completion remains with MOTC. The project’s compliance with the loan covenants is described in Appendix 6.

9 ADB. 2009. Proposed Multitranche Financing Facility and Administration of Cofinancing North–South Road Corridor Investment Program (Armenia). Manila (Loan 2561-ARM: MFF, Project 1).

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H. Related Technical Assistance

28. As an attachment to the project, ADB provided advisory TA to improve transport sector management.10 The TA cost of $600,000 was financed on a grant basis from ADB’s Technical Assistance Special Fund. The TA was intended to contribute to sustainable economic development and poverty reduction by improving transport sector performance through the development of cost-effective and environmentally and socially sustainable transport infrastructure and services. It was to provide an analytical overview of transport networks and cross-border arrangements, and a long-term strategy for transport sector development.

29. The TA was approved in September 2007 and closed in March 2009, 6 months later than the expected date. The consultants delivered their inputs satisfactorily between May and November 2008. They coordinated with government agencies, private companies, nongovernment organizations, and development partners from more than 54 organizations. MOTC actively participated in the two workshops and tripartite meetings held under the TA. It ensured good coordination between the consultants and government offices, and supported the consultants' work.

30. The TA Completion Report prepared in April 2009 rated the TA highly successful because it helped develop the strategy that would improve the government’s capacity to manage the transport sector.11 The report recommended that ADB support implementation of the strategy by providing loans and TA to the transport sector. On the basis of the consultant’s report, ADB published “Armenia’s Transport Outlook” in 2011.12

I. Consultant Recruitment and Procurement

31. Consultant Recruitment. Consultants were recruited in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended to date). To expedite implementation, because MOTC and ARD staff was unfamiliar with ADB procedures, the ministry asked ADB to recruit consultants for subproject preparation and construction supervision on its behalf. The supervision consultant’s contract was signed between ARD and Egis-BCEOM International (France) in July 2008. On 4 August 2008 the consultant asked to replace the team leader for health reasons. ADB approved the replacement on 18 September. Because of the lengthy government approval procedures, the consultant did not mobilize until October 2008. Soon after mobilization the consultant, ADB and ARD realized that the original staff composition would not be sufficient to cover the daily supervision of both civil works packages. A contract variation to engage an additional seven site supervisors and to replace all other national specialist positions, except the deputy team leader, with site supervisors was approved by ADB on 29 May 2009. The use of consultants’ inputs is shown in Appendix 7.

32. Procurement. The civil works were procured following ADB’s Procurement Guidelines (2007, as amended to date) and standard bidding documents for international competitive bidding (single-stage, one envelope). Procurement of civil works for package 1 (10 lots totaling about 109 km of road rehabilitation) started in early 2008 as scheduled. The invitation for bids was issued on 23 April 2008. The executing agency received bids on 6 June 2008 and

10 ADB. 2007. Transport Sector Development Strategy. Manila (TA 4973-ARM is associated with the Rural Road Sector Project). 11 ADB. 2009. Technical Assistance Completion Report for the Transport Sector Development Strategy (Armenia). Manila. 12 ADB. 2011. Armenia’s Transport Outlook—Transport Sector Master Plan. Manila.

8 submitted the bid evaluation report to ADB on 24 June 2008. The total bid amount for the 10 lots was about $23.57 million, 45% higher than the cost estimated at appraisal in 2007. ADB endorsed the bid evaluation report on 3 July 2008. Signed contracts for the 10 lots were submitted to ADB in September and contractors mobilized in October 2008, with completion planned by 30 November 2009.

33. The bidding process for package 2 (10 lots totaling about 118 km of road rehabilitation) began in the second week of December 2008. The executing agency received and opened bids on 9 February 2009 and submitted the bid evaluation report to ADB on 27 February 2009. Only one bid was submitted for each lot, despite the purchase of bids by several bidders. The Transport and Communications Division of ADB’s Central and West Asia Department reported a possible case of collusion among bidders to the Office of Anticorruption and Integrity (OAI) but because the division did not find evidence of misprocurement at this stage, ADB’s “no objection” to the contract awards was issued on 16 March 2009 (subject to rebidding part or all of the works should OAI determine that bidders did collude). Contracts for 10 lots were signed on 28 April 2009 for a total of AMD10.857 billion or about $29.08 million (including taxes), with completion planned by September 2010.

34. OAI conducted an audit of the project in November 2009. Its Project Procurement- Related Review Report (PPRR) showed no evidence of misprocurement or collusion among contractors. 13 The PPRR results indicated that the project generally complied with ADB's Procurement and Consulting Guidelines and Loan Agreement, except for some control weaknesses. The project funds were disbursed properly and used for their intended purposes. However, shortcomings on some road construction works and unclear engineer’s cost estimates were concerns. The shortcomings were generally caused by inadequate designs or poor contractual works and materials. The report recommended that these deficiencies be eliminated in the future for this and similar projects to fully achieve development effectiveness.

35. ARD submitted the draft bidding documents for package 3 to ADB on 19 July 2010, for 12 civil works contracts totaling about 70 km of road rehabilitation. ADB responded with required revisions to ARD on 10 August 2010. ARD revised the documents and reduced the number of civil works contracts to six (total of 33.5 km), with a total estimated cost of about $10 million. ADB’s “no objection” to the documents was sent on 13 August 2010. The invitation for bids was posted on the ADB website and advertised in national newspapers on 19 August 2010. Bids for the six civil works contracts under package 3 were received on 5 October 2010, and ARD submitted the bid evaluation report to ADB on 14 October 2010. ADB gave its “no objection” to the proposed contract awards ($9.4 million with about $7.0 million ADB financing) on 15 October 2010. The contracts were signed on 17 November 2010, and works completed in August 2011.

J. Performance of Consultants and Contractors

36. Consultant. The performance of the construction supervision consultant is rated satisfactory. Most of the tasks were performed professionally and in accordance with the terms of reference. Mobilization was effective from October 2008, and staff were deployed generally in a timely manner, except for the period from the end of 2010 to the end of May 2011 as the result of the transfer of the team leader to the ADB-funded North–South Road Corridor Investment

13 ADB. 2009. Project Procurement-Related Review Report – Loans 2351-ARM(SF) and 2467-ARM(SF): Rural Road Sector Project. Manila.

9

Program, Project 1 and the replacement of the team leader. These exceptions did not affect project progress significantly because much of this period was in winter when little construction activities were ongoing and the construction supervision activities were within the capabilities of the remaining staff. Factoring in all the variations, 30 person-months of international staff time were budgeted and 31 person-months provided. For national staff, 162 person-months were budgeted and 193 provided. Reports prepared by the consultant were generally on time and of adequate quality in terms of content, although estimates of subproject completion status tended to overestimate work progress.

37. Contractors. The performance of the civil works contractors is rated satisfactory and the works completed of good quality. In several cases, contractors carried out work not included in the design documentation under their contracts to extend access and ensure good transition at road junctions. They employed local labor to a large extent and maintained generally good community relations during construction. They addressed defects arising after handover promptly and effectively. Particular areas in which their performance could have been improved concern matters of safety and environmental impact. With respect to safety, it was noted that workers were inadequately protected in terms of footwear and headgear and that traffic control near ongoing work could have been improved. With respect to negative environmental impact mitigation, the contractors paid little attention to dust and noise control. However, dust pollution was not much worse than that generated by traffic before the construction began and that local communities found the noise acceptable over the short periods of occurrence.

K. Performance of the Borrower and the Executing Agency

38. The borrower’s performance is rated satisfactory. During the economic downturn, when budget cutbacks were necessary, the government protected the integrity of the project by honoring its provision of required counterpart funding in a timely manner. However, because of the need to meet other government budgetary requirements, it could not provide appropriate maintenance funds for the transport sector, as required by the loan conditions.

39. MOTC’s performance as the executing agency is rated satisfactory. The project outputs were achieved, despite implementation delays during the first 2 years. ARD satisfactorily carried out most of the tasks for project implementation covering (i) project management; (ii) procurement of works, goods, and services; (iii) consultant recruitment; (iv) reporting; and (v) coordination with MOTC, contractors, suppliers, government agencies, and ADB. However, ARD did not survey traffic regularly and take roughness measures, instead relying on the survey reports prepared by the consultant from the project performance management system.

40. Because this was the first ADB loan for the transport sector in Armenia, MOTC staff were unfamiliar with ADB procedures. To expedite implementation, MOTC requested that ADB procure consultant services for subproject preparation and construction supervision. Within ARD, the PMU staff gained valuable experience from this pioneer loan to the road sector. However, the PMU is not yet capable of performing externally assisted project management and monitoring independently without further assistance from consultants.

L. Performance of the Asian Development Bank

41. ADB’s performance is rated satisfactory. ADB fielded 10 project review missions and approved 5 minor changes in project scope or implementation arrangements. The executing agency rated the overall performance of ADB as satisfactory in that issues were dealt with effectively and efficiently during and between missions. ADB responded promptly and sympathetically to the government’s request for supplementary funds for the project. As a result,

10 the supplementary loan was prepared efficiently and the loan agreement drawn up with minimal extension of the date of loan closure.

III. EVALUATION OF PERFORMANCE

A. Relevance

42. The project is rated highly relevant. The relevance was further enhanced during implementation when the setbacks of 2010 required the government to cut back funding for the road sector. Also because the project underspent the supplementary loan funds, it was able to take up additional road improvement works that would have been abandoned or delayed by the termination of the MCC loan. The impact and outcomes of the project remain consistent with sector development goals, as expressed in the government’s Lifeline Road Network Program and ADB’s interim operational strategy for Armenia, and with the transport sector master plan ADB prepared in 2011. The government remains committed to its poverty reduction programs. Whereas significant progress had been made with respect to the urban poor, poverty reduction has been slower in rural areas. Good road access to markets and services is a key component of rural poverty reduction programs. The roads improved under the project are estimated to serve over 10% of the rural population. The rehabilitated project roads facilitated year-round travel and increased communities’ access to works, jobs, and social services.

B. Effectiveness in Achieving Outcome

43. The project is rated effective in achieving its outcome. Despite the need for a supplementary loan to mitigate the shortfall of the initial cost estimates, it improved a total of 263 km of rural roads and contributed to the efficient movement of freight and passenger traffic. The project generated frequent use of transport services by area residents and enhanced their access to social services and job opportunities. It also reduced transport costs. The road roughness target was achieved in full, and consequent improvements have been realized in reduced travel times and vehicle operating and maintenance costs. The transport sector strategy prepared under the TA provided MOTC with a sound road map for transport sector development in the long term.

C. Efficiency in Achieving Outcome and Outputs

44. The project is rated efficient in achieving its outcome and outputs. The project completion review mission reevaluated the economic internal rate of return (EIRR) for the project by calculating all incremental costs and benefits. The recalculated EIRR remained well above 12% despite falling from 43% at appraisal to 27% at completion. The reduction resulted mainly from increased construction costs. Similarly, the net present value fell from $83 million at appraisal to $50.8 million at completion. Evaluations of each of the 31 subprojects also indicated their economic viability as stand-alone investments, with only 5 of them in the range of marginal viability (EIRRs of 12–15%). Sensitivity analyses were carried out for variations of 20% from the base level for (i) vehicle operating cost savings, (ii) value of travel time savings, and (iii) both measures combined. These analyses showed that the project’s EIRR remained well above 12%. Appendix 8 presents the economic analysis.

D. Preliminary Assessment of Sustainability

45. Project sustainability requires adequate funds for maintaining the improved roads and adequate capable and responsible staff at the institutional organizations established for planning and implementing maintenance. Because the transport sector is undergoing a

11 structural change, a strong possibility remains that a transition period will be needed before maintenance of the improved roads is adequately provided. Therefore, the project is rated less likely to be sustainable (in the short term) with respect to both the civil works and road management support components. The organizational structures and human resource capacities and capabilities in the road management agencies need to be reviewed to determine their adequacy with respect to the needs for planning, programming, and implementing road maintenance. The government needs to take necessary actions on institutional reforms and staff relocation, acquisition, and training to ensure that road management and maintenance is efficiently and effectively planned, programmed, and implemented. At a minimum, to enable funding and other resources to be available as required for efficient and effective implementation, each relevant agency need to prepare 3-year rolling programs for road maintenance.

E. Impact

46. There are strong indications that the road improvements have had a positive impact on the economic and social welfare of the affected rural communities. The project also contributed to reducing poverty in the project area. However, no measurable estimates are yet available. The consultant interviewed randomly selected community leaders throughout the areas of the three construction packages after works completion. The interviews were highly positive. Leaders in all communities, particularly in remote areas, stated that community life improved significantly since the roads were improved and communications between neighboring communities improved greatly. Transport systems are gradually improving. There is also evidence of new businesses developing. Although public transport operators were not generally reducing passenger fares, all community leaders commented on the greatly reduced travel and vehicle operating costs. Access to markets is now easily possible throughout the year, and damage to delicate fruits and other produce is reduced. Dust and air pollution from traffic is also reduced. Both local and external parties have expressed Interest in land acquisition and development for residential and other uses. A rapid qualitative social and gender assessment carried out in August 2011 showed that the improved rural roads had positive impacts on women’s lives in terms of shortened time spent to reach markets and services, increased opportunities to sell agricultural products and decreased dust and dirt. Negative impacts that surfaced were the increasing speed of vehicles in connection with the lack of road safety measures such as sidewalks. Thus children walking to school are exposed to higher risks of road accidents. The impact on motorability during the harsh winter conditions has yet to be fully realized, but motorability can be expected to be greater now that the roads are less difficult to keep open. As a result, all-year access to markets, schools, health facilities, and other service centers is more assured.

47. An initial environmental examination was prepared in accordance with ADB’s Environment Assessment Requirements and Environmental Review Procedures, and mitigation measures were clearly outlined for each step of design, construction, and operation. 14 The supervision consultant monitored the implementation of mitigation measures that were incorporated into the detailed design and civil works contract. These measures included selecting and restoring borrow pits, extracting water for construction, controlling hazardous and toxic materials, and managing waste in construction camps. The landscapes that were modified and disturbed during construction were brought back to their prerehabilitation state in

14 ADB. 1998. Environment Assessment Requirements and Environmental Review Procedures of the Asian Development Bank. Manila.

12 accordance with the provisions of contracts and local environmental standards. The long-term impacts on the environment will be the consequence of the operation of the roads within their service life. They will include increased emission levels from the use of petroleum-based fuel, elevated noise levels, traffic safety concerns, and disturbance to biodiversity as a result of the increased volumes of traffic. However, the improved road quality compensates for these consequences.

48. Because the project activities took place within the existing road alignment or on state- owned land, no resettlement impact was anticipated or occurred. The government ensured that the project was implemented with participation by beneficiaries, using participatory practices as described in ADB’s handbook, Mainstreaming Participatory Development Processes.15

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

49. On the basis of the preceding assessments—which found the project to be highly relevant, effective, and efficient, but less likely to be sustainable—the project is rated successful. It was generally implemented as conceived. It achieved the desired outcome, outputs, and inputs through planned activities and is likely to achieve the intended impact.

B. Lessons

50. The following lessons were identified from the implementation of the project:

(i) At appraisal, ADB overestimated ARD’s capability to procure consultant services for subproject preparation and construction supervision. For future projects, a more detailed capacity assessment of the executing and implementing agencies is needed during project processing. (ii) Sufficient contingency is needed to cover cost increases. For future projects, design-build contracting can ensure better engineering and mitigate the risk of price escalation. (iii) An ADB review identified shortcomings on some road construction works and poor quality in engineer’s cost estimates. These were caused mainly by inadequate designs or poor contractual works and materials. ADB needs to ensure strict compliance with contractors’ contractual specifications. Contractors should be held accountable for poor contract performance or substandard materials before the defect liability period following the contract agreements. (iv) The roles and responsibilities of road network development and management are unclear. Stronger government commitment is needed to develop the road sector. (v) During the surveys and preparation of road works design, more attention should be paid to the current and expected needs of pedestrians in road sections passing through villages.

15 ADB. 1996. Mainstreaming Participatory Development Processes into Bank Operations. Manila.

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C. Recommendations

1. Project Related

51 Future Monitoring. ADB needs to clarify with the executing agency the requirements for procedures for preproject actions by the borrower.

52. Covenants. ADB needs to monitor the government’s fulfillment of its promise that the road maintenance budget will be increased.

53. Further Action. To improve road safety by reducing the potential for road accidents involving pedestrians, ARD needs to extend the provision of sidewalks near villages in the project area.

54. Additional Assistance. ADB needs to consider providing financing for the design and implementation of an improved asset management system.

55. Project Performance Evaluation. ADB needs to conduct a project performance evaluation at the end of 2014, when most of the project roads will have been operational for 4 years and the adjacent road sections will have been operational for at least 2 years. This will allow an in-depth analysis of the impact and benefits of the project.

2. General

56. When preparing future road rehabilitation projects, the following issues should be taken into account:

(i) The monitoring of project impacts and outcome needs to be based on regular and reliable reporting. (ii) The roles and responsibilities of agencies under MOTC must be reviewed to determine the optimum distribution of staff capabilities in good governance, pragmatic management, and human resources. The review should include the legislative framework that determines responsibilities and should recommend any revisions necessary. Procedures should be drawn up to ensure smooth transfers of “ownership” between agencies when such transfers are required. The review should include institutional development needs in terms of organization structure, human resources, and training needs. The government needs to review and, as necessary, reorganize the institutional organization that manages and maintains the rural road network. MOTC needs to ensure that all relevant agencies are adequately staffed competent to plan, program, and implement road maintenance works. (iii) With increases in traffic, road safety becomes an increasingly important issue that must be addressed under future projects. To improve road safety, the project design must include safety features, the safety awareness of local communities must be raised, and traffic rules must be enforced. (iv) Future economic evaluations of rural roads must address economic and social impacts other than reductions in vehicle operating costs and travel time for existing traffic. An extensive program of research into these indirect benefits would be of value both to the government and lending agencies in their planning and programming of rural road development programs.

14 Appendix 1

LIST OF SUBPROJECTS

Table A1.1: List of Subprojects Identified for the Project

Link Communities Length Roughness Cost No. No. Link Name Region District Connected (km) (IRI) ($’000) Bid 1 L1 Vardenis– Gegharkunik Vardenis Vardenis–Shatvan 7.0 9.4 920 1 Shatvan junction junction 2 L2 Vardenis– Gegharkunik Vardenis Vardenis–Mets 17.9 9.2 2,689 Ghehamakar Masrik–Pokr Masrik– Geghamasar 3 L3 M–11–Geghakar Gegharkunik Vardenis M–11– 8.7 18.1 1,879 Khachaghbiur– Geghakar 4 L6 M–11– Gegharkunik Vardenis M–11–Shatjrek– 4.8 15.5 900 Geghamakar Geghamabak 5 L7 M–11– Gegharkunik Vardenis M–11–Shatvan– 5.8 18.8 1,253 Jaghacadzor Geghamabak– Jaghacadzor 6 L9 M–14–Kutakan Gegharkunik Vardenis Mets Masrik– 9.3 17.8 2,009 Tretuk–Kutakan 7 L10 M–14– Gegharkunik Vardenis M–14–Tsovagiuh– 12.1 10.7 1,591 2 Semenovka Semenovka 8 L11 M–11– Gegharkunik Vardenis M–11–Astkhadzor 3.0 12.3 446 Astkhadzor 9 L12 M–10– Gegharkunik Vardenis M–10–Tsakkar– 5.3 14.1 947 Tazagiugh Tazagiugh 10 L13 M–10– Gegharkunik Vardenis M–10–Vardadzor 2.6 20.2 562 Vardadzor 11 L14 Abovyan– Kotayk Kotayk Abovyan–Arzni – 10.2 10.1 1,150 3 Nurnus Biurehava–Nurnus 12 L15 Piunik– Kotayk Hrazdan Piunik–Artavaz– 13.0 14.2 2,322 Hankavan Hankavan 13 L16 Zoravzn– Kotayk Nairi Zoravzn–Aragiugh 5.3 11.6 947 Aragiugh 14 L24 Yerevan– Kotayk Nairi Zovuni 8.0 11.1 1,232 Yeghvard 15 L25 Bujakan– Kotayk Nairi Bujakan–Aragyugh– 8.0 10.7 901 Saralandj Saralandj 16 L26 Zovuni– Kotayk Nairi Zovuni– 8.5 14.6 1,518 Mrgashen Kanakeravan– Mrgashen 17 L27 Mayakovski– Kotayk Kotayk Mayakovski– 9.1 10.6 1,196 republican Dzoraghbyur (secondary) road H–3 18 L17 Bardzrashen– Ararat Artashat Bardzrashen– 12.4 11.4 1,397 4 republican Landjazat– (secondary) Abovyan–Arevshat– road H–8 Nshavan– Byuravan–Burastan 19 L18 Aygezard– Ararat Artashat Aygezard–Aygepat– 4.2 14.8 750 interstate (main) Shahumyan road M–2

Appendix 1 15

Link Communities Length Roughness Cost No. No. Link Name Region District Connected (km) (IRI) ($’000) Bid 20 L19 Kaghtsrashen– Ararat Artashat Kaghtsrashen– 8.5 10.9 958 Artashat Vostan

21 L20 Getazat– Ararat Artashat Getazat–Mrganush 2.9 10.4 326 republican (secondary) road H–9 22 L21 Geghanist– Ararat Masis Geghanist– 9.2 10.6 1,037 4 Nizami Ghukasavan– Darakert– Dashtavan–Zorak– Nizami 23 L23 Urtsadzor– Ararat Ararat Urtsadzor–Shahap– 26.8 17.4 5,789 5 interstate (main) Lusashogh– road M–2 Landjar–Urtsalandj 24 L30 Margara– Armavir Armavir Margara–Arazap– 20.2 11.1 2,285 4 Armavir Argavand–Tandzut– Aygeshat–Armavir village–Haykavan– Norapat–Armavir Ararat 64.0 13.9 10,257 Armavir 20.2 11.1 2,285 Gegharkunik 76.5 13.5 13,196 Kotayk 62.1 12.0 9,266 Total 222.8 10.9 35,004 H = highway (secondary road), IRI = International roughness index, km = kilometer, L = Link, M = magisterial road (main highway). Source: Asian Development Bank.

16 Appendix 1

Table A1.2: List of Subprojects Completed under the Project

Construction Roughness Cost After including Link Length Improvement Taxes (AMD Construction No. No. Link Name Marz (Region) (km) (IRI) Million) Period Package 1 1 11 M11–Astghadzor Gegharqunik 2.32 3.41 153.522 2008–2009 2 13 M10–Vardadzor Gegharqunik 2.62 2.59 233.298 2008–2009 3 18 M2–Aygezard Ararat 4.20 3.25 273.132 2008–2009 4 20 H9–Getazat Ararat 3.46 3.41 311.150 2008–2010 5 10 Tsovagyuh–Semyonovka Gegharqunik 14.34 3.12 615.161 2008–2009 6 12 M10–Tazagyuh Gegharqunik 5.98 3.37 448.501 2008–2009 7 17 Masis–Bardzrashen Ararat 14.51 2.98 895.240 2008–2010 8 19 H8–Kahtsrashen Ararat 7.31 2.79 449.590 2008–2009 9 21 Gehanist–Nizami Ararat 9.34 3.19 643.487 2008–2009 10 23 Urtsadzor–M2 Ararat 25.71 3.24 2,326.089 2008–2009 11 30 M5–Margara Armavir 19.96 2.79 1,413.539 2008–2009 Package 2 12 1 Vardenis–Shatvan junction Gegharqunik 5.20 3.34 349.527 2009–2010 13 6 M11–Geghamabak Gegharqunik 5.04 2.71 591.669 2009–2010 14 7 M11–Jaghacadzor Gegharqunik 5.75 2.71 720.676 2009–2010 15 2 Vardenis–Ghehamasar Gegharqunik 17.90 3.00 1,642.122 2009 16 3 M11–Geghakar Gegharqunik 8.40 2.67 1,066.770 2009–2010 17 9 M14–Kutakan Gegharqunik 11.94 3.26 1,601.018 2009 18 14 Abovyan–Nurnus Kotayq 9.57 3.05 739.134 2009 19 27 Mayakovski–Republican Kotayq 9.37 3.01 747.741 2009 road H3 20 15 Piunik–Hankavan Kotayq 13.09 3.50 1,347.300 2009–2010 21 24 Yerevan–Yeghvard Kotayq 8.75 3.22 937.460 2009–2010 22 26 Zovuni–Mrgashen Kotayq 9.33 2.44 829.210 2009–2010 23 16 Zoravan–Aragiugh Kotayq 6.59 2.43 503.545 2009–2010 24 25 Bujakan–Saralandj Kotayq 8.90 3.05 848.753 2009–2010 Package 3 25 31 Dprabak–Aghberk Gegharqunik 33.49 2.63 3,513.451 2010–2011 Ararat 64.53 4,898.688 Armavir 19.96 1,413.539 Gegharqunik 112.98 10,935.715 Kotayq 65.60 5,953.143 TOTAL 263.07 23,201.085 AMD = Armenian dram, IRI = international roughness index, km = kilometer.

PROJECT FRAMEWORK AND ACCOMPLISHMENTS

Design Performance Indicators Project Monitoring Assumptions and Risks Summary Targets Achievements Mechanisms Appraisal Actual Impact Poverty Reduced average Likely to be achieved National Statistics Assumptions reduction in the poverty level in the Progress is apparent but Government continues to accord Government retains these project area project area from no measurable to assess ADB’s project high priority to Poverty priorities but economic slowdown 33.3% in 2005 to impact of the project. performance audit report Reduction Strategy Paper and curtailed government less than 20% after the Lifeline Road Networks expenditures. 10 years from Program. project completion

Outcome Improved Level of motorized Likely to be achieved Direct measures of Assumptions access of rural traffic on improved No subprojects traffic volume, road Continued political stability and Political stability sustained in populations in roads increased by completed within the last roughness and travel economic growth in Armenia Armenia, but the economy has the project area average of 40% 2 years. Of those time through periodic and the region been affected by adverse external to jobs, from 2007 within 2 completed more than 18 surveys conducted by conditions. markets, and years of project months ago, 50% show ARD Effective implementation of the social services, completion increase in traffic but Poverty Reduction and Strategy Implementation of the Poverty and the major less than 40%, and 50% MOTC annual traffic Paper Reduction and Strategy paper trunk road show a decrease statistics under way. networks because a declined Adequate government funding through income levels since Periodic household for the road sector Counterpart funding for the project reduction in 2006. surveys in the project was not affected, although road transport area Sufficient capacity of domestic government spending on road costs Reduction of travel Average travel times road construction and sector was reduced. time more than 40% estimated to have Project progress reports maintenance companies on average for the decreased by 47%. Capacity of road construction and whole project after ADB review missions maintenance industry sufficient. project completion and project completion report Risk Inadequate maintenance of the Risk at appraisal remains project roads after completion

because of insufficient funding. 2 Appendix

17

18 Design Performance Indicators Project Monitoring Assumptions and Risks Summary Targets Achievements Mechanisms Appraisal Actual Outputs 2 Appendix Improvement of Complete Target exceeded Consultants’ contract Assumptions high-priority rehabilitation or A total of 268 km of milestones Continued high priority given by High priority accorded to the roads rural roads totaling roads improved. the government to the project project evidenced by timely about 220 km after Project Progress provision of counterpart funding. project completion Reports Government’s continued ADB review missions cooperation during project Average surface Achieved implementation roughness for the Average surface Consultants’ PPMS subprojects reduced roughness estimated at survey data Availability of key statistics and MOTC and ARD responded well from an IRI of 10.9 3–4 m/km for all project information relating to the to ADB requests for information m/km in 2007 to no roads. MOTC annual traffic project and reports. more than 4 m/km statistics after project High-quality consulting services Consultant performed completion ADB’s project for subproject preparation and satisfactorily. completion report construction supervision Reduction in vehicle Achieved operating costs by Vehicle operating cost Risks more than 40% on reduced as result of Project implementation delay The project faced delays in the average for the reduced roughness first 2 years, but rapid progress in whole project after Poor quality of civil works the final year enabled it to project completion complete only 4 months after the Delay in the engagement of the original loan closing date. Quality TA consultants of civil works is satisfactory. Improvement of Introduction of a Likely to be achieved transport transport sector Not implemented to date, management management but MOTC has agreed to capability of program prepare a long-term road MOTC recommended by subsector plan (2010 – the TA attached to 2020). the project

Improvement of Introduction of a Partly achieved road asset road sector Improved project management management management monitoring capability of the program implemented with advice Armenian recommended by and assistance of TA for Roads the TA attached to subproject preparation Directorate the project and construction supervision.

Activities with milestones Inputs Activity Target Actual Target Actual Consulting Begin in January Began in October 2008 and completed in September ADB: ADB: Services for 2008 and complete 2011. L2351-ARM: $30,6 million L2351-ARM: $30,4 million Subproject in November 2010 L2467-ARM: $17.03 million L2467-ARM: $16.0 million Preparation and Total: $47.63 million Total: $46.4 million* Project Including $1.5 million for Including $1.7 million for Supervision consulting services for consulting services (i) construction supervision of subprojects, and (ii) auditing Government: L2351/2467-ARM: $16.0 million* Government: *Estimated as of 28 September Original target for L2351-ARM: 2011 $10.8 million Revised target for L2351/2467- ARM: $16.92 million

Civil Works Subprojects for Completed from September 2008–November 2010. 2008 implemented from May– November 2008 Subprojects for Completed from May 2009–November 2010. 2009 implemented Additional 33 km of subprojects implemented from April 2009– November 2010–August 2011. November 2009

Consulting Implemented from Completed from May to November 2008. The TA Transport Sector Services for April–September Completion Report prepared in April 2009 rated the Development TA (Consulting Transport 2008 TA highly successful because it helped develop the Services) ADB: $555,600 Sector strategy that would improve the government’s ADB: $600,000 Government: taxes, duties, and Development capacity to manage the transport sector. Government:$200,000 project management costs Strategy Appendix 2 2 Appendix 19

20

CONTRACT AWARDS AND DISBURSEMENTS FUNDED BY THE ASIAN DEVELOPMENT BANK Appendix 3

Table A3.1: Civil Works and Consultancy Awards and Disbursements

Loan 2351-ARM

Final Contract Amount Amount Currency Taxes Disbursed

PCSS Contractor of (GOA (as of 14 Dec

Type No. Name Contract Sections Contract Total ADB Portion GOA Portion Portion) 2011) CS 0001 Egis–BCEOM Contract No. CS-SUP-DES- $ 2,321,309 1,548,312 0 580,327 1,548,311 International/ 01/2008 Subprojects Preparation France and Construction Supervision CW 0002 Shinforum Lot 6, Link 19 Road H8– AMD 449,590,726 323,330,664 51,328,275 74,931,788 323,330,664 LLC/ Arm. Kahtsrashen km0+947–km8+280 (Package 1) CW 0003 RBE of Gavar Lot 4 Link 12 Road M10– AMD 448,501,196 322,547,110 51,203,887 74,750,199 322,547,110 OJSC/Arm. Tazagyuh km0+000–km5+981 (Package 1) CW 0004 RBandE of Lot 3 Link 10 Road Tsovagyuh– AMD 615,160,837 442,403,171 70,230,862 102,526,806 442,403,169 Sevan Semyonovka km0+000– CJSC/Arm. km14+340 (Package 1) CW 0005 Kapavor Ltd/ Lot 1, Link 11 Road M11– AMD 386,820,144 278,188,154 44,161,966 64,470,024 278,188,153 NK Astghadzor km0+000–km2+322 and Link 13 Road M10–Vardadzor km0+000–km2+124 (Package 1) CW 0006 Rukostroy Lot 2, Link 18 Road M2– AMD 584,280,774 420,195,257 66,705,388 97,380,129 416,026,618 LLC/ Arm. Aygezard km0+000–km4+200 and Link 20 Road H9–Getazat km0+000–km3+455 (Package 1) CW 0007 Dorozhnik Lot 5, Link 17 Road Masis– AMD 895,237,594 643,825,036 102,206,292 149,206,266 643,825,030 Ltd/ NK Bardzrashen km0+000– km14+510 (Package 1) CW 0008 Kapavor Ltd/ Lot 7, Link 21 Road Gehanist– AMD 643,487,465 462,774,735 73,464,819 107,247,911 462,774,735 NK Nizami, km0+000–km9+340 (Package 1) CW 0009 Ararat– Lot 8, Link 23 Road Urtsadzor–M2 AMD 1,217,660,006 875,700,488 139,016,184 202,943,334 875,700,487 Chanshin km0+000–km13+800 (Package 1) LLC/ Arm. CW 0010 Ararat– Lot 9, Link 23 Road Urtsadzor–M2 AMD 1,108,429,490 797,145,542 126,545,700 184,738,248 797,145,541 Chanshin km13+800–km25+708 (Package

LLC/ Arm. 1)

Final Contract Amount Amount Currency Disbursed

PCSS Contractor of Taxes (as of 14 Dec Type No. Name Contract Sections Contract Total ADB Portion GOA Portion (GOA Portion) 2011) CW 0011 Kapavor Ltd/ Lot 10, Link 30 Road M5–Margara AMD 1,413,539,080 1,016,570,188 161,379,045 235,589,847 1,016,570,188 NK km0+000–km19+960 (Package 1) CS 0012 Grant Contract No. CS–Aud–01/2008 $ 119,528 99,607 0 19,921 87,107 Thornton Audit of Annual Project Accounts Amyot LLC CW 0013 AAB Project Lot 5, Link 14 Road Abovyan– AMD 739,134,258 531,560,721 84,384,494 123,189,043 531,560,720 LLC/Arm Nurnus km0+000–km9+570 (Package 2) CW 0014 Kotayk REC Lot 6, Link 27 Road Mayakovski– AMD 747,741,430 537,750,712 85,367,147 124,623,572 537,750,711 LLC/Arm. Republican road H3 km0+000– km9+370 (Package 2) CW 0015 Chanapar Lot 7, Link 15 Road Piunik– AMD 1,347,299,012 968,932,540 153,816,637 224,549,835 968,932,540 LLC/Arm., Hankavan km19+000–km32+086 RukostroyLL (Package 2) C/Arm CW 0016 Nairi RMC Lot 8, Link 24 Road Yerevan– AMD 937,459,450 674,189,588 107,026,621 156,243,242 674,189,586 OJSC/Arm. Yeghvard km0+000–km6+000 and km10+700–km12+500 (Package 2) CW 0017 Khachhar Lot 9, Link 26 Road Zovuni– AMD 829,205,569 596,337,007 94,667,636 138,200,928 596,337,007 LLC/Arm. Mrgashen km0+000–km8+848 (Package 2) CW 0018 Khachhar Lot 10,Link 16 (Zoravan– AMD 908,195,368 736,050,555 see PCSS 0005 Loan 2467a 736,050,555 Aragiugh) and Link 25 (Package 2) CW 0019 Khachhar Lot 5 Link 31 ,Road Antaramech– AMD 692,023,894 497,459,852 79,006,061 115,337,316 497,459,852 LLC/Arm. Dzoravank– Dprabak–Aygut– Martuni–Getik–Ttujur– Chambarak–Aghberk–M14 (km 39.30 – 44.00) (Package 3) CW 0020 Chambarak Lot 6 Link 31 ,Road Antaramech– AMD 601,445,370 431,914,197 68,665,013 100,240,895 431,914,197 3 Appendix RCEC Dzoravank– Dprabak–Aygut– OJSC/Arm Martuni–Getik–Ttujur– Chambarak–Aghberk–M14 (km 44.00 – 48.73) (Package 3) a PCSS 0018 (Loan 2351) and PCSS 0005 (Loan 2467) are for the same contract.

21

22

Loan 2467–ARM

Final Contract Amount 3 Appendix Amount Currency Taxes Disbursed PCSS Contractor of GOA (GOA (as of 18

Type NO Name Contract Sections Contract Total ADB portion portion portion) October 2011 CW 0001 Kapavor Ltd/ Lot 1, Link 1 Road Vardenis–Shatvan AMD 1,661,871,936 1,195,162,901 189,730,379 276,978,656 1,195,162,901 NK junction km0+000–km5+200, link 6 Road M11–Geghamabak km0+000– km5+042, link 7 Road M11– Jaghacadzor km0+000–km5+752 (Package 2) CW 0002 Ararat- Lot 2, Link 2 Road Vardenis– AMD 1,642,122,027 1,180,959,424 187,475,598 273,687,005 1,180,959,424 Chanshin Ghehamasar km0+000–km17+900 LLC/ Arm. (Package 2) CW 0003 Kapavor Ltd/ Lot3, Link 3 Road M11–Geghakar AMD 1,066,774,519 767,188,675 121,790,091 177,795,753 767,188,675 NK km0+000–km8+548 (Package 2) CW 0004 Ararat– Lot 4, Link 9 Road M14–Kutakan AMD 1,601,018,237 1,151,398,949 182,782,915 266,836,373 1,151,398,949 Chanshin km0+000–km11+942 (Package 2) LLC/ Arm. CW 0005 Khachhar Lot 10, Link 16 Road Zoravan– AMD 1,352,298,040 236,477,119 154,387,360 225,383,007 236,477,119 LLC/Arm. Aragiugh km 0+000–km6+000 and link 25 Road Bujakan–Saralandj km0+000– km8+900 (Package 2) CW 0006 RB and E of Lot 1 Link 31 ,Road Antaramech– AMD 586,629,254 421,796,742 66,973,506 97,771,542 Ijevan Dzoravank– Dprabak–Aygut–Martuni– 421,796,742 CJSC/Arm. Getik–Ttujur–Chambarak–Aghberk– M14 (km 15.24 – 20.00) (Package 3) CW 0007 Kapavor Ltd/ Lot 2 Link 31 ,Road Antaramech– AMD 630,032,818 452,125,966 71,928,747 105,005,470 452,125.963 NK Dzoravank– Dprabak–Aygut–Martuni– Getik–Ttujur–Chambarak–Aghberk– M14 (km 20.00 – 25.00) (Package 3) CW 0008 Kapavor Ltd/ Lot 3 Link 31 ,Road Antaramech– AMD 589,612,678 421,157,923 67,314,114 98,268,780 421,157,921 NK Dzoravank– Dprabak–Aygut–Martuni– Getik–Ttujur–Chambarak–Aghberk– M14 (km 25.00 – 30.00) (Package 3) CW 0009 AAB Project Lot 4 Link 31 ,Road Antaramech– AMD 424,890,038 302,302,545 48,508,279 70,815,006 302,302,545 LLC/arm Dzoravank– Dprabak–Aygut–Martuni– Getik–Ttujur–Chambarak–Aghberk– M14 (km 32.02 – 39.90) (Package 3) CS 0010 Egis– Contract No. CS–SUP–DES–01/2008 $ 2,321,309 192,670 0 580,327 111,227 BCEOM Subprojects Preparation and International/ Construction Supervision France CW = civil works, CS = consulting services.

Table A3.2: Projected and Actual Disbursements, 2007–2011 (million)

Item 2007 2008 2009 2010 2011 Projected Annual Disbursement Loan 2351 0 7.05 14.50 3.50 1.95 Loan 2467 0 0.00 5.00 3.08 3.42 Total Projected Disbursement 0 7.05 19.50 6.58 5.37 Actual Disbursement Loan 2351 0 6.12 17.94 4.68 2.27 Loan 2467 0 0.00 8.90 3.98 3.91 Total Actual Disbursement 0 6.12 26.84 8.66 6.19

Appendix 3 Appendix

23

24 Appendix 4

CHRONOLOGY OF MAJOR EVENTS

Date Main Event 17 November 2006 Concept clearance obtained 8 December 2006 First entry in Project Processing Information System (PPIS) 7–25 May 2007 Fact-finding mission 9–13 June 2007 Appraisal mission 28 June 2007 Management review meeting 8 August 2007 Staff review meeting 21–24 August 2007 Loan negotiations 7 September 2007 Board circulation of the Report and Recommendation of the President (RRP) 28 September 2007 Board approval 15 November 2007 Loan agreement signing (Loan 2351-ARM) 9 March 2008 Loan effective (Loan 2351-ARM) 7 July 2008 Consultancy services contract signed for subprojects preparation and construction supervision (Contract no. CS-SUP-DES-01/2008) 4–19 July 2008 Loan inception mission/fact-finding for supplementary loan 17 July 2008 First entry in PPIS for supplementary loan 5–19 September 2008 Contract signing for package 1 civil works (118 km) 7 September 2008 Concept clearance obtained for supplementary loan 11 September 2008 Management review meeting (supplementary loan) 6 October 2008 Loan negotiations (supplementary loan) 17 October 2008 Board circulation of RRP (supplementary loan) 7 November 2008 Board approval for supplementary loan 18 November 2008 Supplementary loan signing (Loan 2467-ARM) 6 January 2009 Supplementary loan effective 18–20 February 2009 Loan review mission 1 10 April 2009 Contract signing of audited project accounts 28–30 April 2009 Contract signing for package 2 civil works (118 km) 11–18 May 2009 Loan review mission 2 5 June 2009 Extension of works on 9 lots under package 1 in the amount of AMD286,872,488 charged to the principal loan approved 17 June 2009 Extension of works on 2 lots under package 1 in the amount of AMD74,470,967 charged to the principal loan approved August–November 2009 Review by the Office of Anticorruption and Integrity (OAI) 4 September 2009 Extension of works on 3 lots under package 2 in the amount of AMD164,730,164 charged to the supplementary loan approved 18 September 2009 Extension of works on lot 1under package 1 in the amount of AMD14,548,648 charged to the principal loan approved 7–14 October 2009 Loan midterm review mission 28 October 2009 Extension of works on six lots under package 1 and six lots under package 2, charged against the uncommitted amount under the civil works category of both loans (AMD159,069,728 to the principal loan, and AMD309,788,221 to the supplementary loan) approved 26 November 2009 Extension of works on two lots under package 1 in the amount of AMD51,868,081 charged to the principal loan approved 8–22 March 2010 Loan review mission 3 12 March 2010 Minor change in scope to rehabilitate 33.5 km of additional road sections approved 28 May–4 June 2010 Loan review mission 4

Appendix 4 25

Date Main Event 14 June 2010 Minor change in scope for detailed design to include additional road sections approved 2 July 2010 Extensions of works on lot 8 under package 2 in the amount of AMD185,588,348 charged to the principal loan approved 6 August 2010 Loan closing of both loans extended to 30 September 2011 6 August 2010 Extensions of works on lots 9 and 10 under package 2 in the amount of AMD174,940,138 charged to the principal loan approved 1 September 2010 Minor change in implementation arrangements to cover costs of contract variation for the supervision consultant approved 13–20 September 2010 Loan review mission 5 25 October–4 November 2010 Loan review mission 6 November 2010 Contract signing for package 2 civil works (118 km) 14 December 2010 Minor change in scope to include consulting services under the supplementary loan approved December 2010 Report on Project Procurement-Related Review Report by OAI 24 February–4 March 2011 Loan review mission 7 11 July 2011 Extension of works for five lots under package 3 in the amount of AMD74,635,663 charged to the principal loan and AMD6,091,606 charged to the supplementary loan approved 18–31 August 2011 Loan completion mission 25 August 2011 Minor change in scope to reflect 100% financing of consulting services under the supplementary loan approved. ARM = Armenia, km = kilometer, RRP = report and recommendation of the president. Sources: Project RRP Document and ADB project team’s review mission reports.

.PROJECT IMPLEMENTATION SCHEDULE 26

Apprais al

Actual 2007 2008 2009 2010 2011 5 Appendix 891011121234567891011121234567891011121234567891011121234567891011 Construction season ADB Missions Loan Effectivity

PIA PPMS Imprest Account Mid-term Review PCR Preparation A. Technical Assistance Sub-project screening Surveys (2008 Program) EEES Auditing Preliminary Design B. Consultant for Sub-project Recruitment Services Sub-project preparation EEES Auditing Project Supervision EEES Auditing PCR C. Auditing D. Civil Works 1. 2008 Program (107.2 km) Detailed Design Prep of Bid documents Bidding /award Construction Liability period 2. 2009 Program (115.6 km) Detailed Design Prep of Bid documents Bidding Construction Liability period 3. Package 3 Design / Design review Prep of Bid documents Bidding Construction Liability period Appendix 6 27

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Status of Compliance Rating L.A. Schedule 5, para. 6 The Borrower shall ensure that MOTC has the MOTC exercised authority by assigning Complied authority and control over the project roads control over the project roads throughout with necessary to implement the Subprojects the duration of the project to the Armenian Roads Directorate (ARD). L.A. Schedule 5, para. 7 The borrower shall MOTC is undergoing a change in its Partially institutional structure, but the new structure complied (a) Allocate and make available, on a is not yet clear. Preparation of a road with timely basis, sufficient funds for the operation subsector plan has been included under and maintenance of the project roads, and Project 1 of the North–South Road Corridor shall ensure that the project roads are Investment Program. Further, MOTC has adequately maintained in accordance with asked ADB to include the development of a applicable standards and best international road asset management system, practice. investigating opportunities for cooperation between public and private sectors, and update the current road design, construction, and maintenance standards under Tranche 3 of the Multitranche Financing Facility. There is uncertainty about whether ARD will retain its current role; however, at the moment the authority for maintaining the projects roads after completion of the project remains with MOTC. The government’s road maintenance budget was increased in 2010 and 2011. However, MOTC has stated that the budget will be increased gradually.

(b) Increase its annual road rehabilitation Road rehabilitation and maintenance Partially and maintenance budgets for the whole road budget for: complied network by no less than annual inflation rates - 2008: AMD18.14 billion, increase of with from the amount allocated for the same 12.25% compared with the inflation purpose in fiscal year 2007 (AMD16.16 rate of 4.4% billion), provided that sound fiscal balance is - 2009: AMD22.14 billion, increase of maintained. 22.05% compared with the inflation rate of 7.5% - 2010: AMD8.72 billion, decrease of 60.0% 2011: AMD10.23 billion, increase of 17.3% over 2010. During the period of economic downturn when budget cutbacks were necessary, the government protected the integrity of the project by providing the required counterpart funding in a timely manner. However, because of the need to satisfy other government budgetary needs, it could not provide the appropriate maintenance funds for the transport sector as required by the loan conditions.

28 Appendix 6

Covenant Status of Compliance Rating (c) Ensure that actual annual expenditure 2007/08: Total national budget increased by Partially for maintenance of the roads that fall under 28.5% versa 4.8% increase in road complied MOTC’s scope of responsibilities are rehabilitation and maintenance with increased at least at the same rate as expenditures. increases in the overall national budget in 2008/09: Total national budget increased by each year during Project implementation. 14.5% versa 16.6% increase in road rehabilitation and maintenance expenditures. 2009/10: Total national budget decreased by 0.7% versa 4.5% decrease in road rehabilitation and maintenance expenditures. 2010/11: Total national budget increased from AMD5.11 billion in 2010 to AMD5.33 billion in 2011. The road rehabilitation and maintenance expenditure as of November 2011 is AMD4.79 billion.

The actual budget allocations for road maintenance are as follows: 2008 - AMD5.6 billion 2009 - AMD4.55 billion 2010 - AMD5.11 billion 2011 - AMD5,33 billion

(d) Ensure that details of actual road Maintenance expenditures have been Complied maintenance are included in every other incorporated in the quarterly progress with quarterly progress report to be submitted by reports, and audit reports for FY2009, 2010, MOTC to ADB and have such expenditures and 2011 were submitted to ADB on time audited annually in accordance with and were of good quality. appropriate auditing standards by independent auditors acceptable to ADB, and furnish such audited statements of expenditures to ADB within 9 months from the end of the fiscal year. L.A. Schedule 5, para. 8 All subprojects require the prior approval of All subprojects were approved by ADB. Complied ADB. The borrower, through MOTC, shall Package 1 subprojects were approved on with annually submit off ADB’s approval a list of 25 September 2008. Package 2 subprojects roads it wishes to propose for Subprojects in were approved on 16 March 2009. the succeeding year. The list shall be Reallocation of loan proceeds to finance the accompanied by a feasibility study for each proposed package 3 subprojects were proposed Subproject, The Borrower, through approved on 12 March 2010. MOTC, shall ensure that the feasibility studies are prepared with sufficient detail and quality for ADB to assess whether the proposed Subprojects meet the criteria set forth in Schedule 6 and are otherwise suitable and viable. L.A. Schedule 5, para. 9 The Borrower, through MOTC, shall ensure MOTC has provided all documents required Complied that all relevant documents forming the basis and is committed to keeping all such with for screening, selection and processing of documents for 5 years after completion. Subprojects are made available to ADB upon request and are kept available for such purposes for a minimum period of five years

Appendix 6 29

Covenant Status of Compliance Rating from the date of the project completion report for the Project. L.A. Schedule 5, para. 10 The Borrower shall obtain prior written consent There are no plans to change the Complied of ADB in the event that the Borrower plans to ownership structure of ARD. with (a) change the ownership structure of ARD or (b) otherwise make any material organizational change in the structure of ARD, either financial or operational, where such change may have an adverse effect on the Borrower’s ability to perform its obligations in respect of the Project or under this Loan Agreement. In the event that any such change is approved by ADB, the Borrower shall ensure that the change in ownership structure is carried out in a transparent manner and does not affect repayment of the Loan made under this Loan Agreement. Depending on the nature of the approved change in ownership structure, ADB shall have the right to modify the repayment terms of the Loan. L.A. Schedule 5, para. 11 If there are plans for (i) a sale, transfer, lease There are no plans to change ownership or Complied or assignment of interest or control in any of control over the project roads. However, with the Project Roads, or (ii) any material change rural roads are generally assigned to in MOTC’s or ARD’s responsibilities for the regional administrations for their operation and maintenance of any of the management. Project Roads, then the Borrower shall obtain ADB’s consent at least 6 months prior to the implementation of such a plan, and shall ensure that any such plan will be carried out in a lawful and transparent manner. L.A. Schedule 5, para. 12 The Borrower, through MOTC, shall ensure MOTC is committed to quality project Complied that each Subproject is carried out in outputs. Through project supervision with accordance with the technical specifications consultants, ARD ensured that the works and the design for such Subproject, and that were implemented according to technical the construction supervision, quality control, specifications and design following FIDIC and project management of the Subprojects conditions of contract. are performed according to applicable standards and best international practices. L.A. Schedule 5, para. 13 The Borrower shall ensure appropriate safety With assistance of supervision consultants, Complied enforcement measures on the Project Roads ARD monitored accident and traffic with and shall cause ARD to monitor the accident statistics. No accidents were reported on rate and traffic volume after commencement of roads where works were completed. ARD the operation of the Project Roads. has agreed to sustain monitoring in the future. L.A. Schedule 5, para. 14 The Borrower shall further ensure that relevant There is no evidence of illegal trafficking. Complied government agencies provide strict road patrol with to prevent trafficking of humans, wildlife, endangered species, and illegal substances on the Project Roads.

30 Appendix 6

Covenant Status of Compliance Rating L.A. Schedule 5, para. 22 The Borrower shall comply with, and shall There is no evidence of breach of ADB's Complied ensure MOTC complies with ADB’s Anticorruption Policy. The audit report of with Anticorruption Policy (1998, as amended to 2008 did not find irregularities with project date). The Borrower, consistent with its accounts. commitment to good governance, accountability and transparency, agrees (a) A review carried out by ADB in December that ADB reserves the right to investigate, 2009 indicated issues such as directly or through its agents, any alleged shortcomings on some road construction corrupt, fraudulent, collusive or coercive works and poor quality in the engineer's practices relating to the Project and (b) to cost estimates. These were caused by cooperate fully with any such investigation and inadequate designs or poor contractual to extend all necessary assistance, including works and materials. ADB ensured that the providing access to all relevant books and PMU enforced strict compliance with records, as may be necessary for the contractors' contractual specifications. satisfactory completion of any such Contractors were held accountable for investigation. In particular, the Borrower shall poor contract performance or substandard (aa) conduct periodic inspections on the materials before the defect liability period contractors’ activities related to fund following the contract agreements. withdrawals and settlements, (bb) ensure that all contracts financed by ADB in connection ARD cooperated fully with the teams with the Project include provisions specifying appointed to carry out audit reports and the right of ADB to audit and examine the the Project Procurement-Related Review records and accounts of all contractors, teams. suppliers, consultants and other service providers as they relate to the Project, and (cc) the construction supervision consultant shall verify the contractors’ invoices in accordance with working drawings and contract specifications. L.A. Schedule 5, para. 23 The Borrower, through MOTC, shall, within six The PPMS was finalized and approved. Complied months of the Effective Date, finalize and The baseline PPMS report was approved with adopt a comprehensive project performance in May 2009. The first PPMS survey was monitoring system (PPMS) acceptable to carried out at the end of December 2009 ADB, based upon the PPMS indicators agreed after completion of the first civil works upon between the Borrower and ADB. The contracts on package 1. The consultant Borrower, through MOTC, shall (a) monitor the submitted the final PPMS report for PPMS indicators on a quarterly basis to packages 1 and 2 on 30 October 2010, determine the efficiency and effectiveness of following the completion of all works under the Project and its impacts, and (b) provide to these packages. In September 2010 and ADB quarterly PPMS monitoring reports, in additional work on package 3 roads in form and substance satisfactory to ADB, from August/September 2011, interviews were the commencement of Project implementation carried out with randomly selected until Project completion and on the third community leaders throughout the anniversary of Project completion. construction areas. The interviews were highly positive for the project. Leaders in all communities, particularly those in remote areas, stated that community life had improved significantly since the road improvements and communications between neighboring communities had greatly improved. Transport systems are gradually improving. There is also evidence of new businesses developing.

Appendix 6 31

Covenant Status of Compliance Rating Although public transport operators were not generally reducing passenger fares, leaders in all communities commented on the greatly reduced travel and vehicle operating costs. Access to markets is easily possible throughout the year, and damage to delicate fruits and other produce is reduced. Dust and air pollution from traffic is also reduced. L.A. Schedule 5, para. 24 The Borrower, MOTC, ARD, and ADB shall, The midterm review was conducted from 9- Complied during the second year of Project 14 October 2009. Scope, costs, overall with implementation, jointly undertake a implementation progress, and status of comprehensive mid-term review of the Project. compliance with loan covenants were The mid-term review will assess the Project’s assessed. achievements and progress in implementing the Project against the PPMS indicators and the Project implementation schedule in order to identify any difficulties or constraints being encountered in implementing the Project and to make adjustments, if necessary, for the remaining Project implementation period. In particular, the mid-term review will, among others, evaluate the project scope, costs, overall implementation progress, and status of compliance with loan covenants. L.A. Schedule 5, para. 25 The Borrower shall: All quarterly reports due were submitted, Complied (a) submit to ADB Project progress reports, in and all reports were satisfactory. with form and substance satisfactory to ADB, on a quarterly basis. (b) within 3 months of Project completion, the The report was submitted. Complied Borrower shall submit to ADB a Project with completion report, in form and substance satisfactory to ADB. Social Covenants L.A. Schedule 5, para. 17 The Borrower (a) shall ensure that all land and None of the project road sections require Complied rights-of-way required for the Subprojects are land acquisition or resettlement. with acquired or otherwise made available in a timely manner and (b) through MOTC, shall ensure that the Project is implemented in accordance with (i) the Resettlement Framework and each RP, as applicable and (ii) the IDPRD Framework and each IDPRD Plan, as applicable, (iii) all applicable domestic laws and regulations, and (iv) ADB’s Involuntary Resettlement Policy (1995). L.A. Schedule 5, para. 18 The Borrower, through MOTC, shall ensure None of the project road sections required Complied that (a) in the event there is any significant land acquisition or resettlement. with change in the design of a Subproject covered Appropriate information was incorporated by a RP and/or IDPRD Plan, or any into the civil works bidding documents. substantial changes in resettlement impacts,

32 Appendix 6

Covenant Status of Compliance Rating the relevant RP and/or IDPRD Plan, as the case may be, will be (i) updated based on a detailed measurement survey, (ii) disclosed to the affected persons and (iii) subsequently provided to ADB for its concurrence prior to commencement of any Works for the Subproject; and that (b) Works contractors’ specifications include requirements to comply with each RP and/or IDPRD Plan, as applicable.

L.A. Schedule 5, para. 19 The Borrower, through MOTC, shall ensure None of the project road sections required Complied that no Works contract is awarded for any land acquisition or resettlement. with Subproject requiring land acquisition until such Appropriate information was incorporated time as the land and/or rights-of-way required into the civil works bidding documents. for the execution of any Works for the Subproject have been obtained by MOTC, and subsequently provided to the contractor, in each case, free from any encumbrances and in compliance with the provisions of the Resettlement Framework and the IDPRD Framework.

L.A. Schedule 5, para. 20 The Borrower shall ensure that contractors are None of the project road sections require Complied mobilized for Works on specific Subprojects land acquisition or resettlement. with only after (i) the provisions of the Resettlement Appropriate information was incorporated Framework and any RP required for such into the civil works bidding documents. Subprojects and (ii) the provisions of the IDPRD Framework and any IDPRD Plan required for such Subprojects, have been complied with.

L.A. Schedule 5, para. 21 The Borrower, through MOTC, shall ensure Appropriate information was incorporated Complied that (a) Works contracts require contractors into the civil works bidding documents. with employed under a Subproject to incorporate applicable workplace occupational safety norms; that (b) Works contractors (i) comply with all applicable labor laws, (ii) do not employ child labor for construction and maintenance activities, (iii) do not differentiate wages between men and women for work of equal value, and (iv) disseminate information to their employees on the risks of socially and sexually transmitted diseases, including HIV/AIDS; and that (c) the appropriate entities disseminate information on the risks of socially and sexually transmitted diseases to members of the local community, particularly females, living in the communities surrounding a Subproject area.

Appendix 6 33

Covenant Status of Compliance Rating Environmental Covenants L.A. Schedule 5, para. 15 The Borrower, through MOTC, shall ensure Environmental Management Plans (EMPs) Complied that the Project is carried out in accordance were approved by ARD and were monitored with with, and that all Subprojects are designed, for compliance. ARD had an environment carried out, maintained and monitored in safeguard specialist in the PMU team. compliance with (a) all applicable environmental laws and regulations, including the Borrower’s 1995 Law on Environmental Assessment, (b) ADB’s Environment Policy (2002), and (c) the Environmental Framework and each EMP, as applicable, including the mitigation measures and monitoring requirements arising from the implementation of the environmental assessment and review procedures outlined in the relevant IEE. The Borrower shall ensure that the EMP prepared for any Subproject is (aa) incorporated into the design of the Subproject, (bb) implemented in accordance with its terms during the construction, operation and maintenance of the Subproject, and (cc) updated at such time when the detailed engineering design becomes available. L.A. Schedule 5, para. 16 The Borrower, through MOTC, shall ensure EMP compliance by contractors and Complied that (a) Works contractors’ specifications consultants was monitored and enforced. with include requirements to comply with the No issues were identified. environmental mitigation measures contained in each IEE and EMP; and (b) Works contractors are supervised to ensure compliance with the requirements of each IEE and EMP. Financial Covenants L.A. Section 4.03 The Borrower shall enable ADB, upon ADB's Audit reports for FY 2008, 2009 and 2010 Complied request, to discuss the Borrower's financial have been submitted timely and acceptable with statements for the Project and its financial to ADB. Audit report for FY 2011 will be affairs related to the Project with the auditors submitted by end January 2012. appointed by the Borrower pursuant to Section 4.02(a) above. L.A. Schedule 5, para. 5 The Borrower shall (a) make available all Sufficient counterpart funding for all Complied counterpart funds required for the Project on a components was made available. with timely basis, and (b) on an annual basis for each fiscal year, make adequate budgetary allocations as required. Other Covenants Established, staffed and operating PMU/ PIU. PIU was established in June 2008. Complied with Fielding of consultants. Complied with 9 months later than shown in Complied the project implementation schedule. with Consultant mobilized in October 2008.

34 STATUS OF UTILIZATION OF CONSULTANCY INPUTS

Appendix 7 7 Appendix Appraisala Contractb Actualc (person-month) (person-month) (person-month) Consultant International National International National International National Team Leader/ Civil Engineer 17 15.5 20.05 Pavement and Materials Engineer 12 10 10.7 Road Safety Specialist 1 1 Road Engineer/ Deputy Team Leader 38 23 20.6 Road Engineer 2 ... 14 14 Bridge/Structural engineer ... 15 12 Pavement/ Materials Engineer 1 ... 15 14 Pavement/ Materials Engineer 2 ... 15 13 Soil/ Geotechnical Engineer ... 15 15 Hydraulics/ Drainage Engineer ... 15 12 Road Safety Specialist 4 12 Quality Control Specialist 14 14 Environmental Specialist 5 2 Social Development/ Resettlement Specialist 5 3 Transport Economist 3 Not shown Laboratory and field technicians 4 Not shown Quantity and Quality Control Not shown Not shown 172 Specialists/ Site Supervisor (14)

Total 30 162 25.5 134 30.7 192.6 a According to the Report and Recommendation to the President, in which only outline terms of reference are available. b Initially signed contract with the winning firm— Egis BCEOM International (France). c Project completion review. Sources: Project Management Unit and the Asian Development Bank.

Appendix 8 35

ECONOMIC ANALYSIS

A. Introduction

1. The economic evaluation at project appraisal and following road improvement both used the Highway Development and Management Model (HDM4) software. At appraisal the analysis was based on preliminary cost estimates, projected traffic for the base year (in both without project and with project scenarios), and the model parameters appropriate to conditions in Armenia. At completion, final costs of subproject works and actual traffic volumes were used for the base year and values updated for other key variables.

2. At appraisal, the road improvements were expected to generate additional traffic and indirect induced benefits. Additional traffic was expected from (i) an increased propensity to use motorized travel resulting from shorter travel times and more reliable and comfortable riding quality, and (ii) increased economic activity.

3. Lower transport costs and reduced damage in transit are expected to produce higher value added at the point of sale for marketed goods, particularly fruit, leading to other benefits. Changes in the incidence and severity of traffic accidents were also expected. However, no benefits or costs resulting from these impacts were estimated.

B. Traffic

4. Traffic volumes vary widely over the subprojects, from under 400 vehicles per day (vpd) to over 1,800 vpd but are generally in the range of 350–800 vpd. Table A8.1 presents the pre- appraisal and recent estimates of total traffic volumes.

5. For the package 1 and package 2 roads, annual growth in traffic has been lower than projected at appraisal: between 2006 and 2009, declines were recorded in total traffic in some cases, and for the sample of roads subjected to traffic counts in September 2011 further declines were recorded in almost all cases. The earlier decline was mainly the result of declining road conditions before the project works were carried out, and the later decline was caused by a delay in the resurgence of traffic expected following the road improvements.

6. The later declines in total traffic mask a huge general change in the composition of traffic (see Tables A8.2 and A8.3). Private car travel continued to decline, whereas truck and bus traffic has increased significantly. Data are not available to explain these changes, but it may be reasonably argued that the advanced age of the private car fleet in rural areas combined with the higher frequency and reliability of public bus service caused a significant switch to the buses for personal transport.

7. The increase in truck traffic suggests strongly that the road improvements have positively affected economic activity in the project area. However, more detailed and prolonged monitoring of traffic is necessary to confirm these impacts and allow for other factors to be taken into account; such as day of the week and seasonal variations in traffic volumes: the 2009 counts were carried out in March, the high-activity post-winter period, and the 2011 counts in September, the postharvest period.

36 Appendix 8

Table A8.1: Total Traffic Volumes Before and After Road Improvement (AADT)

Pre-Improvement Post-Construction Package Lot Link AADT Date AADT Date AADT Date 1 1–1 11 236 Nov/Dec 2006 369 2009 1 1–2 13 245 Nov/Dec 2006 382 2009 1 2–1 18 360 Nov/Dec 2006 578 2009 335 Sep 2011 1 2–2 20 204 Nov/Dec 2006 425 2009 315 Sep 2011 1 3 10 464 Nov/Dec 2006 571 2009 1 4 12 286 Nov/Dec 2006 391 2009 1 5 17 276 Nov/Dec 2006 369 2009 416 Sep 2011 1 6 19 410 Nov/Dec 2006 526 2009 1 7 21 1,380 Nov/Dec 2006 1,845 2009 1,228 Sep 2011 1 8 23 752 Nov/Dec 2006 850 2009 1 9 23 752 Nov/Dec 2006 802 2009 1 10 30 840 Nov/Dec 2006 847 2009 553 Sep 2011 2 1–1 1 1,209 Nov/Dec 2006 1,219 2009 2 1–2 6 286 Nov/Dec 2006 371 2009 2 1–3 7 245 Nov/Dec 2006 322 2009 2 2 2 1,564 Nov/Dec 2006 502 2009 2 3 3 249 Nov/Dec 2006 351 2009 2 4 9 363 Nov/Dec 2006 467 2009 2 5 14 2,295 Nov/Dec 2006 1,679 2009 827 Sep 2011 2 6 27 420 Nov/Dec 2006 541 2009 341 Sep 2011 2 7 15 290 Nov/Dec 2006 372 2009 2 8 24 725 Nov/Dec 2006 987 2009 578 Sep 2011 2 9 26 535 Nov/Dec 2006 681 2009 431 Sep 2011 2 10–1 16 540 Nov/Dec 2006 689 2009 374 Sep 2011 2 10–2 25 595 Nov/Dec 2006 709 2009 3 1 31 50 Mar 2007 29 Mar 2011 155 Sep 2011 3 2 31 50 Mar 2007 26 Mar 2011 349 Sep 2011 3 3 31 50 Mar 2007 26 Mar 2011 594 Sep 2011 3 4 31 50 Mar 2007 39 Mar 2011 441 Sep 2011 3 5 31 50 Mar 2007 55 Mar 2011 257 Sep 2011 3 6 31 50 Mar 2007 55 Mar 2011 250 Sep 2011 AADT = annual average daily traffic. Source: Asian Development Bank estimates.

Appendix 8 37

Table A8.2: Traffic Composition Before and After Road Improvement (vehicle per day)

Pre-Improvement Post-Construction Package Lot Link Date Total Car Truck Bus Date Total Car Truck Bus 1 1–1 11 2009 236 182 36 18 1 1–2 13 2009 245 177 50 18 1 2–1 18 2009 360 300 30 30 Sep 2011 335 197 65 73 1 2–2 20 2009 204 144 36 24 Sep 2011 315 147 46 123 1 3 10 2009 464 391 55 18 1 4 12 2009 286 218 41 27 1 5 17 2009 276 192 48 36 Sep 2011 416 154 69 194 1 6 19 2009 410 370 20 20 1 7 21 2009 1,380 1,200 80 100 Sep 2011 1,228 683 185 261 1 8 23 2009 752 640 32 80 1 9 23 2009 752 640 32 80 1 10 30 2009 840 750 55 35 Sep 2011 553 336 111 107 2 1–1 1 2009 1,209 1,049 123 45 2 1–2 6 2009 286 214 45 27 2 1–3 7 2009 245 195 36 14 2 2 2 2009 1,564 1,223 200 141 2 3 3 2009 249 177 45 27 2 4 9 2009 363 209 95 59 2 5 14 2009 2,295 2,049 145 109 Sep 2011 827 342 275 211 2 6 27 2009 420 310 50 60 Sep 2011 341 216 37 89 2 7 15 2009 290 227 45 18 2 8 24 2009 725 550 125 50 Sep 2011 578 177 152 249 2 9 26 2009 535 450 75 10 Sep 2011 431 120 86 225 2 10–1 16 2009 540 436 86 18 Sep 2011 374 234 37 103 2 10–2 25 2009 595 480 95 20 3 1 31 Mar 50 8 13 8 Sep 2011 155 127 12 16 2007 3 2 31 Mar 50 7 10 9 Sep 2011 349 258 59 32 2007 3 3 31 Mar 50 7 10 9 Sep 2011 594 398 135 61 2007 3 4 31 Mar 50 12 19 8 Sep 2011 441 365 50 26 2007 3 5 31 Mar 50 18 26 11 Sep 2011 257 200 44 13 2007 3 6 31 Mar 50 18 26 11 Sep 2011 250 192 39 19 2007 Source: Asian Development Bank estimates.

8. As Tables A8.1 and A8.2 show, counted traffic volumes for all types of traffic on the package 3 road sections increased rapidly between 2007 and 2011 on the completion of works: from about 50 vpd to between 150 and 600 vpd. Before the improvements, the poor road conditions are likely to have severely constrained traffic volumes or diverted traffic to other routes—traffic that, since the improvement, has been restored to these routes.

38 Appendix 8

Table A8.3: Traffic Composition Before and After Road Improvement (%) Pre-Improvement (%) Post-construction (%) Package Lot Link Car Truck Bus Car Truck Bus 1 1–1 11 77 15 8 1 1–2 13 72 20 6 1 2–1 18 83 8 7 59 19 22 1 2–2 20 71 18 12 47 14 39 1 3 10 84 12 4 1 4 12 76 14 9 1 5 17 70 17 13 37 17 47 1 6 19 90 5 5 1 7 21 87 6 7 56 15 21 1 8 23 85 4 11 1 9 23 85 4 11 1 10 30 89 7 4 61 20 19 2 1–1 1 86 10 4 2 1–2 6 75 16 9 2 1–3 7 80 15 6 2 2 2 78 13 9 2 3 3 71 18 11 2 4 9 58 26 16 2 5 14 89 6 5 41 33 25 2 6 27 74 12 14 63 11 26 2 7 15 78 16 6 2 8 24 76 17 7 31 26 43 2 9 26 84 14 2 28 20 52 2 10–1 16 81 16 3 63 10 28 2 10–2 25 81 16 3 3 1 31 28 45 28 82 8 10 3 2 31 27 38 35 74 17 9 3 3 31 27 38 35 67 23 10 3 4 31 31 49 21 83 11 6 3 5 31 33 47 20 78 17 5 3 6 31 33 47 20 77 16 8 Source: Asian Development Bank estimates.

9. There are wide variations in the composition of traffic. Before the road improvement, in general, over 80% of traffic was composed of cars, 15% trucks, and 5% buses. The traffic mix is now 40–60% cars, 10–30% trucks, and 10–30 % buses.

C. Cost – Appraisal versus Completion

10. At appraisal of the principal loan, the cost of the road improvement was $35 million, or an average cost of $157,100 per km. As realized during the fact finding mission for the

Appendix 8 39 supplementary loan, these costs would not support the implementation of about 220 km of road improvement because of increases in the costs of materials, labor, and oil, as well as the appreciation of the dram. By the time of the supplementary loan fact finding, the total cost for the same volume of works was revised to $61 million. After the supplementary loan became effective, the dram fell in value against the U.S. dollar, which enabled additional subprojects (33 km) to be incorporated into a third works package. The actual cost of the civil works aggregated by package, are presented in Table A8.4. The costs include taxes, which were excluded in the economic evaluations.

Table A8.4: Summary of Road Improvement Costs Final Cost Cost per kilometer km AMD (million) $ (million) AMD (million) $ (000) Package 1 109 7,762.86 18.85 71.04 172,47 Package 2 118 11,924.92 33.30 101.22 282,64 Package 3 33 3,412.38 9.79 105.26 292,38 Total 251 23,212.42 61.94 89.08 237,69 Source: Asian Development Bank estimates.

D. Vehicle Characteristics and Other Inputs to the Evaluation

11. The basic parameter values for the economic analysis are presented in Table A8.5.

Table A8.5: Vehicle Characteristics and Unit Costs Description Passenger Pickup Minibus Bus Big Trucks Trucks Trucks Car 1.5–3.0 Bus 2 axles 3 axles 4 axles tons Basic Characteristics Annual km ('000) 25 30 47 70 70 40 86 86 Vehicle life (years) 10 8 8 7 12 12 14 14 Unit Costs Economic Purchase Cost ($) 13,000 25,000 25,000 35,000 50,000 35,000 50,000 80,000 Fuel ($/liter) 1.15 1.15 0.7 0.7 1.15 1.15 1.15 1.15 Oil ($/liter) 333333 33 Tire replacement ($) 75 120 120 200 350 250 350 350 Maintenance labor ($/hr) 333333 33 Crew wages ($/hour) 444444 44 Number of passengers 2 3 12 25 40 0 0 0 Passenger working time ($/hour) 222222 22 Passenger non-working time ($/hour) 111111 11 Work-related trips (%) 75 10 75 90 95 0 0 0 Source: Asian Development Bank estimates.

12. In the post-completion appraisals, the growth rate of 5.5% per year that was applied at appraisal was retained and applied to the post-completion traffic volumes.

13. The assumption at appraisal that 20% more traffic than normal would be generated starting in the first year after completion appears to be unrealistic. Until and unless post- improvement monitoring of traffic levels is carried out over an extended period (e.g., a minimum of 5 years) on a sample of rural roads, the volume, composition, and elapsed time to maturity of generated traffic cannot be estimated reliably.

40 Appendix 8

14. The subprojects were evaluated over the period of improvement plus a 20-year economic life following improvement with no salvage value. Routine maintenance costs were assumed to be equal in the base case (without improvement) to those with improvement, and the surface condition was adjusted accordingly in both cases, subject to the roughness reaching a maximum of 16 m/km in the base case.

E. Economic Internal Rate of Return

15. The economic internal rate of return (EIRR) was calculated for each subproject based on a 20-year economic life. As the results show, all subprojects achieved an EIRR in excess of 12%. The distribution of the results is presented in Table A8.6.

Table A8.6: Distribution of EIRRs by Contract Lot and Road Length EIRR range Number of Financial Cost Length of Road Works (%) Contract Lots ($) (km) 12–15 5 10,113,162 34.8 15–20 7 11,916,521 37.4 20–25 5 11,626,650 53.5 25–30 2 2,023,580 11.5 30–40 9 17,242,516 82.5 Over 40 3 5,547,048 38.9 Total 31 58,469,479 256.8 EIRR = economic internal rate of return. Source: Asian Development Bank estimates.

16. The overall EIRR is estimated at 27% and the net present value (NPV) at 12% ($50.8 million) (Table A8.7). For each package grouping, the corresponding totals are as follows:

Package 1: EIRR = 32% and NPV = $30.3 million Package 2: EIRR = 19%, and NPV = $17.3 million Package 3: EIRR = 23% and NPV = $ 3.2 million

Appendix 8 41

Table A8.7: Calculation of Overall Economic Internal Rate of Return ($ million) Agency Net Costs Road User Savings Year Capital Maintenance VOC Time Net Benefits 2008 7.245 (0.452) 0.000 0.000 (6.793) 2009 25.800 (0.919) 0.000 0.000 (24.881) 2010 8.474 (0.676) 4.094 0.490 (3.214) 2011 8.587 (2.491) 8.280 1.093 3.277 2012 0.000 (2.434) 9.017 1.225 12.676 2013 0.000 (2.434) 9.482 1.310 13.226 2014 0.000 (2.434) 9.866 1.371 13.670 2015 0.000 (2.434) 10.257 1.432 14.123 2016 0.000 (2.434) 10.640 1.497 14.571 2017 0.000 (2.433) 11.123 1.566 15.122 2018 0.000 (2.421) 11.781 1.629 15.831 2019 0.000 (2.433) 12.632 1.711 16.777 2020 0.000 (2.434) 13.356 1.799 17.589 2021 0.000 (2.415) 13.862 1.889 18.166 2022 0.000 (2.432) 14.338 1.979 18.748 2023 0.000 (2.419) 15.353 2.077 19.850 2024 0.000 (2.419) 16.217 2.172 20.808 2025 0.000 (2.424) 17.316 2.305 22.045 2026 0.000 (2.427) 17.965 2.419 22.811 2027 0.000 (2.409) 18.630 2.537 23.576 2028 0.000 (2.409) 18.621 2.534 23.563 2029 0.000 (2.409) 18.610 2.530 23.550 2030 (10.175) (2.421) 19.976 2.659 35.231 EIRR 27% EIRR = economic internal rate of return. VOC = vehicle operating cost. Source: Asian Development Bank estimates.

F. Sensitivity Analysis

17. A sensitivity analysis has tested the project’s robustness with respect to variations in vehicle operating costs and time savings, individually and in combination. As the results in Table A8.8 show, the project remains economically sound in all cases, with EIRR remaining in excess of 12%.

Table A8.8: Sensitivity Analysis Results NPV at 12% EIRR Discount Rate (%) ($ million) Low High Low High Variable Range Range Range Range 20% variation in vehicle operating cost savings 23 30 37.8 63.8 20% variation in time savings benefits 26 27 49.0 52.6 20% variation in both kinds of savings 23 34 36.0 81.2 Source: Asian Development Bank estimates.