World Bank Document

Document of The World Bank

Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No: 56919-BY

PROJECT APPRAISAL DOCUMENT

ON A

Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF US$150.0 MILLION

TO THE

REPUBLIC OF BELARUS

FOR A

ROAD UPGRADING AND MODERNIZATION PROJECT

Public Disclosure Authorized October 13, 2010

Environmentally and Socially Sustainable Development Sector Unit Europe and Central Asia Region

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

CURRENCY EQUIVALENTS

(Exchange Rate Effective May 22, 2010)

Currency Unit = Belarusian Ruble (BYR) BYR 2,995 = US$1.00 US$1.537 = SDR1.00

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AADT Annual Average Daily Traffic IBRD International Bank for Reconstruction and Development AMF Accident Modification Factor IDA International Development Association BEEPS Business Environment and Enterprise IFI International Financial Institutions Performance Survey BP Bank Policy IFR Intermediate Financial Reports BELAVTODOR Department on Roads, Ministry of IMF International Monetary Fund Transport and Communications BELDORNII Belarus Road Research Institute KRU Control and Revision Department of the Ministry of Finance BELDORCENTER Belarus Road Center MA-C Minskavtodor-Center BELGIPRODOR Republican Unitary Enterprise for MoTC Ministry Of Transport and Civil Engineering Research and Communications Design of Highways, Airfields, and Bridgework CAS Country Assistance Strategy MNREP Ministry of Nature Resources and Environmental Protection CHP Combined Heat and Power NGO Non-Governmental Organization CIS Commonwealth of Independent States NIP National Implementation Plan CPS Country Partnership Strategy NPV Net Present Value DPL Development Policy Loan OP Operational Policy EA Environmental Assessment PDO Project Development Objective EBRD European Bank for Reconstruction PEFA Public Expenditure and Finance and Development Accountability EIA Environmental Impact Assessment PIT Project Implementation Team EIRR Economic Internal Rate of Return POM Project Operational Manual EMP Environmental Management Plan POPs Persistent Organic Pollutants ESM Environmentally Sound Management ROW Right of Way EU European Union RUE Republican Unitary Enterprise FDI Foreign Direct Investment SBD Standard Bidding Documents FM Financial Management SCC State Control Committee FSU Former Soviet Union SEE State Ecological Expertise GDP Gross Domestic Product SMA Stone Mastic Asphalt GEF Global Environmental Facility SOE State-Owned Enterprises GNI Gross National Income TCEP Technical Code of Excellent Practice HDM 4 Highway Development and TOR Terms of Reference Management Model HGV Heavy Goods Vehicle Vpd Vehicles per Day ICB International Competitive Bidding VSL Variable Spread Loan WB World Bank

Vice President: Philippe H. Le Houerou, ECAVP Country Director: Martin Raiser, ECCU2 Sector Manager: Henry G.R. Kerali, ECSSD Task Team Leader: Andreas Schliessler, ECSSD

BELARUS Road Upgrading and Modernization Project

CONTENTS

Page

I. STRATEGIC CONTEXT AND RATIONALE ...... 1 A. Country and sector issues...... 1 B. Rationale for Bank involvement ...... 6 C. Higher level objectives to which the project contributes ...... 6

II. PROJECT DESCRIPTION ...... 6 A. Lending instrument ...... 6 B. Project development objective and key indicators ...... 7 C. Project components ...... 7 D. Lessons learned and reflected in the project design ...... 8 E. Alternatives considered and reasons for rejection ...... 9

III. IMPLEMENTATION ...... 9 A. Institutional and implementation arrangements ...... 9 B. Monitoring and evaluation of outcomes/results ...... 10 C. Sustainability...... 10 D. Critical risks and possible controversial aspects ...... 10 E. Loan conditions and covenants ...... 13

IV. APPRAISAL SUMMARY ...... 13 A. Economic analysis ...... 14 B. Technical ...... 15 C. Fiduciary ...... 15 D. Social...... 16 E. Environment ...... 18 F. Safeguard policies ...... 19 G. Policy exceptions and readiness ...... 20

Annex 1: Country and Sector or Program Background ...... 21

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 29

Annex 3: Results Framework and Monitoring ...... 31

Annex 4: Detailed Project Description ...... 33

Annex 5: Project Costs ...... 41

Annex 6: Implementation Arrangements ...... 42

Annex 7: Financial Management and Disbursement Arrangements ...... 46

Annex 8: Procurement Arrangements ...... 54

Annex 9: Economic Analysis ...... 62

Annex 10: Safeguard Policy Issues ...... 69

Annex 11: Project Preparation and Supervision ...... 76

Annex 12: Documents in the Project File ...... 77

Annex 13: Statement of Loans and Credits ...... 78

Annex 14: Belarus at a Glance ...... 79

Annex 15: Map BLR37573 ...... 81

BELARUS

ROAD UPGRADING AND MODERNIZATION PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: October 13, 2010 Team Leader: Andreas Schliessler Country Director: Martin Raiser Sectors: Roads and highways (100%) Sector Manager/Director: Henry G. R. Kerali Themes: Regional integration (50%); Export development and competitiveness (50%) Project ID: P118375 Environmental category: Full Assessment Lending Instrument: Specific Investment Loan Joint IFC: No

Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 150.00 Proposed terms: Flexible Loan at 6 months Libor for US Dollars plus variable spread, with a 15 year maturity, including 5 year grace period, commitment linked and with level repayment pattern. Financing Plan (US$m) Source Local Foreign Total Borrower 00.00 0.00 00.00 International Bank for Reconstruction and 66.00 84.00 150.00 Development Total: 66.00 84.00 150.00

Borrower: Republic of Belarus

Responsible Agency: Minskavtodor-Center (MA-C) Minsk Belarus Tel: (+375) 17 259 8447 [email protected]

Estimated disbursements of proposed Loan (Bank FY/US$m) FY 2011 2012 2013 2014 Annual 15.00 60.00 55.00 20.00 Cumulative 15.00 75.00 130.00 150.00 Project implementation period: Start: February 28, 2011 End: June 30, 2014 Expected effectiveness date: February 28, 2011 Expected closing date: November 30, 2014

Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Ref. PAD I.C. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated “substantial” or “high”? [X]Yes [ ] No Ref. PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Ref. PAD IV.G.

Project development objective Ref. PAD II.C., Technical Annex 3 The development objective of the project is to reduce transport costs for road users on the upgraded sections of the M5 road, and introduce electronic tolling in Belarus as an efficient cost recovery mechanism. The project objective would be achieved mostly by improving the condition, quality and capacity of a road section, and by implementing the initial stage of an electronic road tolling system. Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4 Component 1 - Road upgrading (US$ 131 million). This component will include the upgrading from 2 to 4 lanes of a total of 53 km of the M5 road located between Minsk and Bobrujsk.

Component 2 # Modernization of Road Tolling System (US$ 18 million): This component will include the supply and installation of a modern electronic road tolling system based on microwave technology on a 109 km section (from km 22 to km 131) of the M5 road between Minsk and Bobrujsk.

Component 3 # Technical Assistance and Capacity Building (US$ 1 million): This component will be aimed at strengthening the institutional capacity of road sector institutions in Belarus and helping them to converge towards European standards and methods. It will include technical assistance, training and other activities

Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 The project has been assigned Environmental Category "B" in accordance with World Bank Operational Policy 4.01 on "Environmental Assessment". This classification was based on the fact that (i) the proposed road modernization works are mostly confined to the existing right-of- way, (ii) there is no resettlement of people or businesses and no land acquisition affiliated with the works, and (iii) any potential environmental impacts of the project are expected to be temporary and properly mitigated in line with agreed measures and consistent monitoring of impacts.

Significant, non-standard conditions, if any, for: Ref. PAD III.F. Board presentation: None.

Loan effectiveness: None.

Covenants applicable to project implementation:

 The Borrower shall maintain or cause to be maintained a financial management system in accordance with the provisions of Section 5.09 of the General Conditions.  The Borrower shall prepare and furnish to the Bank not later than forty five (45) days after the end of each calendar quarter, project reports and interim unaudited financial reports for the project covering the quarter, in form and substance satisfactory to the Bank.  The Borrower shall have its Financial Statements audited in accordance with the provisions of the General Conditions. Each audit of the Financial Statements shall cover the period of one fiscal year of the Borrower, commencing with the fiscal year in which the first withdrawal was made under the project. The audited Financial Statements for each such period shall be furnished to the Bank not later than six months after the end of such period.  The Borrower shall ensure that the project is carried out in accordance with the provisions of the Bank’s Anti-Corruption Guidelines.  At all times during Project implementation, the Borrower shall maintain the PIT with staff, resources, and terms of reference satisfactory to the Bank to carry out the day-to-day management and implementation of the Project, including procurement, financial management, Project monitoring and evaluation, and reporting arrangements, as well as management of environmental and social issues under the Project. The Borrower, through MoTC, shall assign a coordinator to provide technical and managerial assistance to PIT in the Project implementation.  The Borrower shall carry out the project in accordance with the POM and shall not assign, amend, abrogate or waive any provisions of the POM without prior written approval of the Bank.  The Borrower shall implement the Project in accordance with the EMP, and shall take all measures, including policy and administrative measures that are required to enforce and implement the EMP.  The Borrower shall ensure that transfer of land, which is required for the right of way of the M5 Road Section to be upgraded under Part A of the Project, shall have been completed between relevant agencies of the Borrower in accordance with applicable laws and regulations of the Borrower prior to commencement of any works on such land.

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. The Republic of Belarus, a country with a population of about 9.743 million, is highly urbanized – eighty percent of the population lives in 191 cities and urban settlements and only 20 percent live in 20,460 rural settlements. Most economic activity is managed and controlled by the State; the private sector accounts for just 30 percent of GDP. Belarus’ economic growth has faced increasing constraints due to the limited flexibility of its economy, low levels of technological innovation, and Russia’s policy of bringing the price of oil and gas supplied to Belarus to world market levels. In recognition of these constraints, in late 2007 Belarus began to liberalize its economy, a process that accelerated with the economic crisis of 2008/2009. The authorities’ recognition of economic vulnerabilities spurred reforms since late 2008, which are anchored in the IMF Stand-by Agreement of 2009 and the World Bank Development Policy Loan (DPL) of the same year.

2. Belarus GDP expanded by 0.2 percent in 2009. Growth is projected to strengthen again in 2010, but to levels below those preceding the crisis, as capital markets are likely to remain risk averse and as domestic investment is likely to grow at a more moderate pace. Lending by state owned banks continued at a high rate in the first half of 2009, but this was curtailed later in the year as credit policy was tightened. Net reserve targets under the IMF Stand-by Agreement for end-September 2009 were met. Under the aegis of its Development Policy Loan, the World Bank has been working with the authorities on measures in liberalizing prices, reducing entry barriers, hardening budget constraints, and enhancing social protection. Since the expiry of the IMF program in March 2010, monetary and fiscal policies have been loosened again and external imbalances have widened. To sustain ambitious growth targets, while ensuring macroeconomic stability, the authorities are working on a new liberalization and reform program. In particular, the aim is to attract significant Foreign Direct Investment and benefit from Belarus’ strategic location and membership in the customs union with Russia and Kazakhstan.

Transport sector issues

3. The World Bank has prepared a Transport Sector Policy Note for Belarus1 which focuses on road and rail transport, and freight logistics. It presents detailed information of the transport sector, parts of which are reflected in this Project Appraisal Document, in particular in Annex 1 (Country and Sector Background).

4. Contributing about 6 percent of GDP in 2008, transport is an important economic sector in Belarus. The sector generates significant revenues from transit services, facilitates trade and transportation, and contributes to the country’s balance of payments. In addition, the transport sector accounted for about 6 percent of total employment in Belarus in 2008, with the largest proportion of transport employment in roads (117,100 persons), followed by rail (70,400 persons). Belarus has been a net exporter of practically all modes of transport services. The main currency earner is pipeline transport, the transit fees of which exceeded US$1.2 billion in 2008. Road and rail transport are also significant net export sectors. Their net balance increased from

1 Belarus: Transport Sector Policy Note, Report No. 23473-ECA, The World Bank, June 2010 1

about US$300 million in 2006 to over US$400 million in 2008. Much of the road-based earnings stem from traffic with third countries. In general terms, Belarus has a well-developed and well- maintained network of transport infrastructure, and a well-functioning transport system. Despite unfavorable macroeconomic conditions, total freight traffic volumes increased slightly in 2008 to about 72 billion ton-km.

5. The rail transport mode accounts for the bulk of freight transport (about 70 percent) and a sizable portion of passenger transport (about 47 percent). The Belarusian Railways, a state- owned company under the control of the Ministry of Transport and Communications (MoTC) operates a rail network of 5,500 km length. Passenger rail transport – particularly for transit journeys between Russia and Kaliningrad – struggles to compete with air travel because of long journey times. Freight transport suffers from long loading and unloading times.

6. Belarus has around 85,000 kilometers of roads (including main and republican roads of about 15.000 km and a local road network of about 70,000 km), of which around 90 percent are paved. In general terms, the road network is mostly adequate for present traffic levels. More details about the road network are presented in Annex 1. In relative terms, freight traffic volumes by road are increasing by 3 percent each year, making up about 30 percent of total freight traffic in 2009. Relative to total passenger traffic volumes, which have decreased significantly since 2000, the share of passenger traffic on roads has remained steady at 45 percent. Aviation and inland waterway transport remain insignificant with respect to passenger and freight traffic volumes, despite the fact that aviation has seen some growth in the passenger market. In terms of transport infrastructure, the main challenge is the need to increase capacity on certain transport routes and corridors.

7. Belarus plays an important role as a transit country for international freight flows, both between East and West, but also between North and South. However, in this context, trade facilitation and transportation remains a major challenge, in particular in the last two years, when trade flows have been severely disrupted by the global economic and financial crisis. Nonetheless, the potential of Belarus as a transit and trade hub is presently far from fully exploited. The Government of Belarus has indicated its interest to take actions to further exploit this potential by modernizing different modes of transport, integrating them better, and thereby allowing Belarus to compete with alternative east-west and north-south routes (e.g. between the Baltic countries and Ukraine, including Black Sea ports). In order to tap into this potential and repeat the remarkable growth performance of recent years, it would be essential for Belarus to continue investing in trade-supporting infrastructure, to generate fiscal stimulus in the short term and to support improved competitiveness in the long term.

8. In terms of international trade, Belarus serves as a transit transport corridor between the European Union (EU) and Russia and potentially between the EU and Asia, via the Trans- Siberian Railway and through Central Asia. In 2008, the main export destinations for goods and services from Belarus were Russia (32 percent), Netherlands (16.8 percent), Ukraine (8.4 percent), and Latvia (6.6 percent). The main import origins were Russia (60.7 percent), Germany (7.2 percent), Ukraine (5.4 percent), and China (3.6 percent) according to UNCTAD data. Russia is the dominant trade partner for Belarus, and the newly established Customs Union of Belarus, Russia and Kazakhstan is expected to open new opportunities for regional trade. Europe is the

second most important trading region with 21.6 percent of imports and 43.9 percent of exports in 2008. The main EU export destinations after Netherlands are Latvia and Poland. The main EU countries of origin for imports are Germany, Poland and Italy.

9. The advantageous geographic position of Belarus, which serves as a bridge between the Russian Federation and Western Europe, has made the country an important partner in the provision and development of transportation infrastructure and services in Europe. The Trans- European Corridor II (Berlin – Warsaw – Minsk - Moscow) and Corridor IX (Black Sea – Kiev – Minsk - Baltic countries), which receive high priority from the Government, pass through the territory of Belarus. The M1/E30 highway is part of Corridor II, connecting the EU and Russia. Transit trade – largely by rail for goods and by pipeline for oil and gas – is therefore a significant part of the economy. However, significant investment in the transport infrastructure will be required to maintain and improve the contribution that transport makes to the economy.

10. While rail transport has a share of almost 70 percent of total freight volumes, road transport has been growing since 2000. This is generally due to the role of Belarus as a transit country in international trade between the EU and CIS countries, and specifically due to the requirement for speed and flexibility of modern producers in transporting perishables and high- value goods. In 2008, 68.1 percent of total freight volumes in ton-km was transported by rail (76.3 percent in 2000), while 31.6 percent was transported by road (23.6 percent in 2000). The share of inland waterway freight of total volumes was 0.2 percent (0.06 percent in 2000), whereas air transport took a 0.1 percent share (0.04 percent in 2000).

11. BELAVTODOR, the Roads Department of the MoTC, is in charge of road infrastructure policy, control and regulation, and of managing the implementation of the Government program "Roads of Belarus" for the period 2006-2015. The objective of the program is to create an "enabling environment for the development of the national economy, enhancement of safety and defence capacity, implementation of the government social policy and facilitation of private sector business initiative". The program includes the need to upgrade the M5 road, a section of which is proposed to be financed by this Project. Other activities in this program include the construction or reconstruction of 317 km of Republican roads and 989 km of local roads. Major repairs are to cover 4,341 km of public roads, including 1,715 km of Republican roads and 2,626 km of local roads.

12. To support road transport operations, the Government has initiated various schemes to help transport companies upgrade their vehicle fleet. In January 2009 the total Belarus truck fleet owned by organizations was 121,825 vehicles according to the MoTC. Truck import duties have been lowered, and duty free import made possible if combined with the purchase of domestic trucks. The purchase price of a Mercedes-Benz truck and a domestically produced MAZ truck are practically the same.

13. The Belarus truck fleet serving international transport is still comprised mainly of low class, high emission vehicles. In 2009, 38 percent of the total fleet for international transport (8,879 trucks), was of EURO 0 level2 or unspecified. The share of EURO 2 standard was 11 percent, EURO 3 was 32 percent, and EURO 4/5 at 6 and 13 percent, respectively. Since 2006

2 In accordance with EU Directive 70/220/EEC on vehicle emissions (and amendments) 3

the trend has been towards higher EURO class vehicles. Leasing of trucks has been increasing, providing a way to acquire an ecological, high EURO class truck usable in EU for transit transport. By law, however, Belarusian organizations are required to own one truck per two leased trucks. In the wake of the economic crisis and lower demand for services, many of the leased trucks have been confiscated and auctioned. 14. Because of the very high share of in-house logistics by Belarusian firms, the demand for transport and logistics services bought from the market is still modest. According to official statistics, in 2000-2008 only 23 to 25 percent of road freight transport was bought from the market, whereas the rest was produced in-house by shippers. In most EU countries, the share of in-house road freight is less than 20 percent. As a consequence in Belarus, the structure, capacity, and quality of logistics service provision as an industry is still at an early stage of development. This applies to the more developed forms of service provision, in particular contract logistics and/or third-party logistics services.

Road sector issues

15. Belarus has a good capacity to plan, manage and maintain its road infrastructure, with a very good track record over the past decades. The State operates several enterprises for road design, planning, research, standards, maintenance, and construction. The condition of the road network is generally good, which is due in large part to the adequate allocation of resources for road maintenance over the past decades. This is in sharp contrast to most other countries of the Former Soviet Union (FSU).

16. Despite the good track record in the past, sustainability of funding for roads is today one of the key issues to be addressed by the Government in the transport sector. The abolition of the National Road Fund in early 2010 and the continued effects of the global financial and economic crisis in 2008 and 2009 have exerted downward pressure on the Government’s fiscal space. In 2010, the total budget expenditures for the road sector are expected to be cut by 19 percent from the previous year. Of the total budget of BYR 1,600 billion (approx. US$ 545 million), 37 percent will be allocated to road upgrading and new construction. There is now a gap between expenditure needs and available resources, especially in road maintenance. While the Government is striving to meet capital investment targets for roads with external financing (including the loan for this project), the insufficient emphasis on road maintenance could potentially lead to premature deterioration of roads in the future. There is clearly a need for the Government to pay special attention to tackling the road maintenance backlog which is now starting to build up. While Belarus has in the past avoided the road network deterioration observed in other FSU countries, there is a risk that insufficient road maintenance could soon have a negative impact on the condition of the road network.

17. In general terms, the Government is now falling behind the long-term investment program for the road sector “Roads of Belarus 2006-2015”. The strategy combines national development targets for the transport sector with a list of projects prepared by technical experts at BELAVTODOR. The long-term program is annually revised to reflect any changes in maintenance or capital investment needs. These revisions can be seen as a combination of changes in priorities (or “subjective”) and technical (or “objective”) priorities for road sector projects. For example, the plan to construct four-lane motorways between Minsk and all five oblast capitals may have been

included in the strategy as a new national priority rather than to meet traffic demand based on a merely technical analysis. However, the basic problem is that investment planning is not tied to a medium-term expenditure framework. This can potentially result in over-planning, over- engineering and therefore non-feasible long-term programs as a result. A preliminary analysis undertaken by the World Bank in the context of the Belarus Transport Policy Note3 shows that the Government’s capacity to implement the road sector investment plan has deteriorated over the past two years. Up to 2008,4 the Government was still able to finance the spending plan to the full. In 2010, as a result of the economic and financial crisis, which continues to affect Belarus, the implementation ratio is expected to be only about 70 percent because of the Government’s reduced fiscal revenues.

18. Belarus introduced road tolling in 1996 when a manual and open tolling system started to operate on the M1/E30 road between Brest, Minsk and the border with the Russian Federation. The tolling system was introduced based on an earlier agreement with EBRD who funded the rehabilitation and upgrading of that road corridor. The amount collected from the users of that road is approximately US$35 million per year, which allows to fully cover the cost of maintenance and rehabilitation for that road, and the cost of operating and maintaining the tolling system (about 13 percent of the revenues collected).

19. Based on the positive experience with road tolling on the M1 motorway over the last decade, the Government sees road tolling as a future key source of funding for assuring the maintenance of the road network. It is planning to modernize the existing tolling facilities on the M1 motorway and gradually introduce modern electronic tolling on most main roads over the next decade. Initially, only trucks over 7.5 tons are to be tolled, while tolls for smaller vehicles would only be introduced at a later stage. The Government believes that the introduction of a new tolling system in Belarus on the basis of state-of-the-art technologies will help drastically raise efficiency and ensure a non-discriminatory tolling policy in relation to both domestic and foreign users according to the rate of utilization of the road network and in compliance with the EU directives. In addition, the tolling system will also help to raise the volume of financial revenues into the budget. It will also change the method of road toll accruals; tolls are to be calculated on the basis of the number of kilometers travelled and the weight or capacity of the vehicles. In future, the new electronic tolling technologies will also allow merging the separate systems of weight and dimensions control, weather monitoring and traffic management into a single system, which is to be integrated with other systems used in the neighboring countries.

20. Belarus’ road safety record is comparable to other middle income countries in the EU and Eastern Europe, but much better than in Russia, Ukraine and other FSU countries. Despite rapid motorization in the country (3.3-fold over the period between 1991 and 2009), the number of road traffic accidents decreased by about 2 percent over the past two years with a slight increase of road fatalities (4 percent). In order to further support positive trends in road safety, the Government initiated in 2008 a program which supports measures to mitigate the risks at the most critical and dangerous road sections, a so-called “traffic accident blackspot program”. As of January 2009, a total of 190 “blackspots” have been identified under the program which calls for various measures such as improvements in road markings, lighting of road sectors, replacement

3 Belarus: Transport Sector Policy Note (Draft Report of June 2010), The World Bank 4 In 2008, a loan from the Belarus Bank considerably increased spending in the road sector. 5

of road signs, and others. Much of the success of Belarus in the area of road safety is also credited to good enforcement of existing legislation on the use of seat belts, “drinking and driving”, and traffic rules in general.

B. Rationale for Bank involvement

21. The proposed Road Upgrading and Modernization Project is part of the overall lending pipeline, which has been identified in the 2009 Belarus Country Partnership Strategy (CPS) Progress Report.5 While the overarching objectives of the FY2008-11 CPS6 remain valid, adjustments were made in 2009 to respond to the Government’s request for broadening World Bank Group assistance in light of recent reform progress and the good track record established in the implementation of Bank Group supported activities to date. The authorities requested a DPL and lending to support their investment programs in the roads and railways sectors, and additional financing for the on-going Post-Chernobyl Recovery Project on top of support for investments originally planned in the CPS. With these adjustments, which include the Road Upgrading and Modernization Project, the planned World Bank lending for this project is consistent with the CPS and Belarus’ evolving development strategy.

22. The World Bank is well-placed to support Belarus in the road sector because of its extensive experience with road projects in the FSU and in the more recent EU member countries (Poland, Romania, Bulgaria, and Hungary). In the particular context of the proposed project, the Bank is also able to contribute its good knowledge in the area of road tolling (project Component 2). In view of the projected reduction in financing for roads from the budget, the government sees the introduction of tolls on the main road network as a potential major source of additional revenue for the maintenance and further upgrade of the road network in the country.

C. Higher level objectives to which the project contributes

23. The results framework of the CPS Progress Report clearly identifies the Road Upgrading and Modernization Project as a World Bank operation in support of Pillar 2 (Entry, Regulatory Reform, and Competitiveness). Within that Pillar, one of the higher-level objectives is to “Facilitate competitiveness of the transport sector by supporting modernization and upgrading of critical physical infrastructure in road and railway sectors” through investment operations such as this proposed project. The project is also in direct support of the Government’s objectives for the road sector that are expressed in its program “Roads of Belarus 2006 – 2015”.

II. PROJECT DESCRIPTION

A. Lending instrument

24. The project will be financed through a Specific Investment Loan (SIL) with a Flexible Loan at 6 months LIBOR for US Dollars plus variable spread, with a 15 year maturity, including 5 year grace period, commitment linked and with level repayment pattern. The loan will be offered under the current terms with no commitment fee and will be subject to a one-time front-

5 Belarus CAS Progress Report FY08-11, WB Report Number 50841-BY, dated Oct. 27, 2009 6 Belarus Country Assistance Strategy FY08-11, WB Report Number 40742-BY dated Nov. 7, 2007 6

end fee of 25 basis points, which will be financed from the loan. The Borrower will be the Republic of Belarus (“Borrower” or “Belarus”), and the representative of the Borrower will be the Ministry of Transport and Communications of the Republic of Belarus.

B. Project development objective and key indicators

25. The development objective of the project is to reduce transport costs for road users on the upgraded sections of the M5 road, and introduce electronic tolling in Belarus as an efficient cost recovery mechanism. The project objective will be achieved mostly by improving the condition, quality and capacity of a section of the M5 road, and by implementing the initial stages of an electronic road tolling system. The primary target group (beneficiaries) are road users in general, whose cost of operating their vehicles will be reduced.

26. There are two key indicators: (i) the reduction of road user costs after the completion of the works, measured by comparing road user costs before and after the road works carried out under the project. Existing evaluation software tools, including road user cost models such as the Highway Development and Management (HDM4) model, will be used to carry out the monitoring and analysis; and (ii) the successful implementation of the initial stage of an electronic tolling system.

27. The Government has asked the Bank to process the upgrading and modernization of the Minsk-Bobrujsk section of the M5 road (including the introduction of the electronic tolling system) as one single operation, with construction to start in early 2011. The tolling system is an integral part of the road modernization and needs to be fully operational at the time of the expected full opening of the upgraded motorway in 2013. The total project cost is estimated at US$150 million.

28. The project will be executed over a four-year period, to be completed on November 30, 2014. This includes the initial monitoring period of the new tolling system and the defects liability period for civil works.

C. Project components

29. Component 1 – Road Upgrading (US$131 million). This component will include the reconstruction of the existing two (2) lanes of a section of the M5 road and construction of two (2) additional lanes on the same M5 road section, including construction of about six (6) two- level interchanges, seven (7) overpasses, four (4) new bridges, and two (2) pedestrian underpasses. The section to be upgraded has a total length of 53 km and is located between the capital city of Minsk and the city of Bobrujsk. Bobrujsk is one of the largest cities in Belarus (population of 227,000) located at a distance of 131 km from Minsk. It has the biggest timber mill in Belarus and is also known for its wood-working, chemical, machine-building and metal- working industries. The existing road has traffic levels in the order of close to 9,000 vehicles per day, with traffic growth rates averaging 10 percent. This component will include: (i) reconstruction of the existing two lanes and the construction of two additional lanes to carry a design axle load of 11.5 tons; (ii) improvement of road safety features in line with EU road standards; (iii) construction of about six two-level interchanges, seven overpasses, four bridges, two pedestrian underpasses and bypasses at the village of Sosnovy (about 5.7 km long) and at the

7 village of Boyary (about 4.2 km), where the alignment will be shifted in order to increase the distance between the road and the nearest houses; and (iv) implementation of a number of environmental impact management features, such as protective noise barriers in the villages that are located near the alignment. The total cost for construction is estimated to be US$131 million (approximately US$2.5 million per kilometer on average) including contingencies. The works have been divided into 4 lots. Supervision of works will be funded by the Government and executed by specialized state agencies.

30. Component 2 – Modernization of Road Tolling System (US$18 million). This component will include supply and installation of a modern electronic road tolling system based on microwave technology on a 109 km section (from km 22 to km 131) of the M5 road between Minsk and Bobrujsk, including supply of equipment such as (i) on-road tolling equipment, (ii) specialized vehicles and equipment for control purposes, (iii) a centralized data processing center, (iv) software and computers, and (v) on-board devices for vehicles. The proposed technology should allow for a high-speed free flow tolling system with active radio-frequency identification tags of 5.8 GHz (European standard) and automatic determination of the vehicle class and the tariff to be applied. The tolling system should become operational at the time of opening of the road section to be upgraded under Component 1.

31. Component 3 – Technical Assistance and Capacity Building (US$1 million). This component will be aimed at strengthening of the institutional capacity of road sector institutions of the Borrower by providing technical assistance and training, including (i) training on the new electronic tolling system; (ii) support to BELGIPRODOR for updating its economic evaluation tools for road projects, including training on HDM4 and procurement of software licenses; (iii) support to improve the capacity of local institutions involved in supervision of road works at a level to carry out supervision under FIDIC rules; (iv) technical assistance to BELAVTODOR in carrying out benchmarking and harmonization of Belarusian road construction, repair and maintenance standards and expenditure levels against and in accordance with European and international standards; (v) support for carrying out the project audits; and (vi) other minor project-related technical assistance, training and/or goods to support capacity building and Government institutions in the road sector. The component will also help various road sector institutions in Belarus to converge towards European standards and methods. In addition, it will also include technical assistance by a specialized consultant firm for development and introduction of the new electronic tolling system in Belarus, which is to be compatible with EU norms and directives. The component may also include other technical assistance, training, consulting and other services and goods for which the need may arise during project implementation, to be agreed on a case-by-case basis between MA-C and the World Bank.

D. Lessons learned and reflected in the project design

32. The Bank’s involvement in the transport sector in many of the transition countries of the region for over 15 years has provided many lessons, a few of which have been highlighted below and reflected in the design of the proposed project.

33. Complexity: Experience has shown that projects in transition countries need to be simple in design as the Government is keen to deliver immediate and visible benefits to the population and less keen on being subjected to heavy reform agendas. Complex and reform-heavy project 8

designs have resulted in project initiatives not materializing. Accordingly, the proposed project is simple in design and is closely aligned with the Government’s national road sector investment program, which targets investments in the rehabilitation, upgrading and modernization of transport infrastructure.

34. Supporting Client Objectives: Bank experience in Belarus shows that technical capacity is generally high, and that implementation can proceed satisfactorily given the supportive governance environment. World Bank funded projects in Belarus have faced difficulties in achieving their objectives and scored low on sustainability if they included Bank-driven components, largely due to the inability and unwillingness to implement difficult reform conditions with uncertain outcomes. This project is closely aligned with the Government’s national road sector investment program and is not designed to push for any major reform of the road sector but rather to support the Government’s plan for the development of the sector.

E. Alternatives considered and reasons for rejection

35. During project identification and preparation, the Government and the World Bank team discussed possible alternatives for project design and execution. First, discussions centered on the choice of project – rail versus road – given that there were investment needs in both sub- sectors. In fact, preparation of a Railway Energy Efficiency Project to be funded by the World Bank was in the initial stages when the global financial crisis hit. The Government and the World Bank then agreed to postpone the Railway Energy Efficiency Project and replace it by a road investment project for two reasons: (i) under the railway project, the WB loan would fund to a high degree imported equipment, thus ultimately leading to a flow of an important share of the loan proceeds to equipment suppliers outside Belarus; (ii) under the roads project, most of the loan proceeds would stay in Belarus and also generate much employment and local economic activity, thus helping to overcome the crisis.

36. Options were also discussed relating to Component 2 of the project (road tolling). One option would have included a private concessionaire, who would have funded, installed and operated the road tolling system, thus collecting the road tolls for the Government. The concessionaire would have recovered his investment through a share of the toll collected. This option was finally rejected due to the uncertainty of private interest and capacity to mobilize private funding under the present global conditions in capital markets. It was noted that many privately funded infrastructure investment schemes were presently on hold. It was however not excluded that at a later stage, when conditions have changed, the concept of a private road tolling concessionaire in Belarus could be considered again for the further expansion of the tolling system in Belarus.

III. IMPLEMENTATION

A. Institutional and implementation arrangements

37. The MoTC through its Roads Department (BELAVTADOR) is the national authority in charge of road construction and maintenance in Belarus and will have the overall responsibility for the implementation of the proposed project. MoTC has formally delegated the responsibility for managing the day-to-day preparation and implementation of the proposed project to the

Republican Unitary Enterprise MINSKAVTODOR-Center (MA-C). MA-C is one of BELAVTODOR’s six regional operational subsidiaries in charge of the management and maintenance of a part of the country’s road network; it is located in Minsk.

38. Within MA-C, a Project Implementation Team (PIT) has been created, which consists of experienced officials from BELAVTADOR, MA-C, and other road sector agencies who have been assigned to work on the various aspects of project preparation and implementation. The initial team includes procurement and financial management specialists, a lawyer, an environmental specialist and a translator. The World Bank will support MA-C in the necessary training of those specialists on the use of World Bank guidelines and procedures for procurement, financial management, and environmental/social safeguards management. The project team will be expanded as needed during the project preparation and implementation, by adding additional specialists to cover the increasing workload and scope. A senior official from BELAVTODOR with the necessary technical and managerial expertise has been appointed to lead the Project Implementation Team. MA-C will thus be responsible for managing the project implementation, in coordination with BELAVTODOR and MoTC, and will be the World Bank’s interlocutor.

B. Monitoring and evaluation of outcomes/results

39. As described in the Operational Manual for the project, MA-C will be responsible for project monitoring and evaluation, and the reporting of outcomes and results to the Government and the World Bank. This will include the monitoring of the project performance indicators summarized in Annex 3 for the duration of the project. Indicators are critical to ensure project effectiveness and timely completion and to flag any delays. The data needed for monitoring the selected indicators is of the type that is normally collected by the Belarusian government departments and agencies. MA-C will prepare quarterly Project Progress Reports and submit these to the World Bank for review and comment. These reports will focus on activities and their results, as well as output and process-related information. In general terms, MA-C will monitor: (i) outputs of the project, such as length (km) of road rehabilitated, unit costs of road works, technical assistance activities completed, results of financial and technical audits, and verification that completed works comply with specifications; and (ii) outcomes of the project, such as lower vehicle operating costs for road users. Details of the monitoring and evaluation system are presented in Annex 3.

C. Sustainability

40. The Government is strongly committed to the project. Sustainability of the project is derived from the Government’s long and proven good track record for planning, designing, managing and funding road investments and maintenance. Belarus’ road sector is known to be the best-managed among the CIS states. Similarly, the Government has demonstrated over the past 14 years its ability to plan, implement and operate successfully the existing road tolling system on the M1 road corridor.

D. Critical risks and possible controversial aspects

41. The following risks, mitigation measures and remaining risk ratings have been identified:

Risk level Risk level Risks before Risk mitigation measures after mitigation mitigation To Project Development Objective Inadequate road network Low The project includes training and technical Low management could lead to a assistance to help BELAVTODOR to further premature deterioration of road improve its road network management capabilities. investments made under the project. However, Belarus’ road sector is known to be the best- managed among the CIS states. To Component Results Road design. There is a Low The technical design risk is very low since the Low hypothetical risk for delays in the detailed design is already complete. The review of design or insufficient quality. the design by WB staff has shown that the design is However, BELGIPRODOR Road of high quality. Design Institute has already completed the design for the road works to be funded under the project. Implementation Capacity. Moderate The Government has already appointed the Project Moderate Limited experience of Implementation Team which includes staff with BELAVTODOR with experience in an earlier EBRD-financed project. competitively bid construction The project includes TA on supervision of FIDIC- contracts executed by based contracts. international contractors could lead to implementation problems.

Potential cost overrun of construction works. Belarus has agreed to finance costs that cannot be covered by the Bank loan. Financial Management. Lack of Substantial Automated accounting and internal controls have Moderate practical experience in financial been installed and the FM procedures are management according to WB prescribed in the project POM. Regular fiduciary rules could potentially result in oversight will be done through the review of disbursement delays, inaccurate regular IFRs and the audit reports. FM supervision and unreliable reporting, by WB staff will be more frequent at the initial inefficient cash flow stages and adherence to agreed procedures would management, and misuse of be reviewed at that time. If necessary, additional funds. However, the client’s training to the project staff may be provided. Project Implementation Team includes well-experienced FM staff. Procurement. Limited knowledge Substantial Most procurement activities are well-advanced at Moderate of and experience with the WB the time of appraisal. It is expected that the large procurement guidelines and civil works contracts will be ready for signature by standard procurement documents the time of project effectiveness. could result in delays and other problems. However, the client’s Project Implementation Team includes experienced procurement staff, which was involved in the earlier EBRD-funded project.

There is a risk of delay due to the pending question of the eligibility In June 2010 the World Bank determined that the of SOE’s to bid for civil works SOE’s fulfill the WB criteria for eligibility. contracts under the project. Overall Risk (including Reputational Risks) Overall Risk Moderate

42. As far as GAC-related risks are concerned, according to the Bank’s internal assessment (2007 Corruption Vulnerability Scan), the vulnerability to corruption in Bank activities in Belarus is low as long as Bank procurement procedures are used and implementation is closely supervised. As part of the overall risk analysis, the project team looked at the existing anti- corruption legislation and practices in Belarus. The anti-corruption measures are based on the Constitution of the Republic of Belarus and include regulatory acts, Government Decrees, sectoral regulatory norms, and international treaties.

43. The Anti-Corruption law enacted in 2006 sets the legal framework for the State policy in the area of anti-corruption. It declares that its purpose is to protect the rights and freedoms of the citizens and public interest from the threat or consequences of corrupt activities. In the fight against corruption, the Government proceeds from the principles of the rule of law, justice, equality before the law, transparency, imminent liability, personal criminal liability, and humanism. The law defines corruption as (i) abuse of power or position by public officials, which results in accepting any form of payment in cash, in kind, in a form of a service, in a promise of an advantage or preferential treatment; and (ii) bribery of public officials by offering them any forms of payment with the purpose that this official would either take, or refrain from taking, certain actions while on official duty.

44. The State Anti-Corruption Program for 2007-2010 sets out such goals as reducing the number of corruption-related crimes, increasing the efficiency of law-enforcing agencies in the fight against corruption, strengthening state supervision and control over implementation of anti- corruption measures and creating an effective mechanism of corruption prevention. A new Anti- Corruption Program is presently being prepared by the Government.

45. The Law on Civil Service enacted in 2003 and amended in 2009 regulates the disclosure of information – all government officials must fill out income and property declarations with indication of the source of income. However, this information is treated as confidential and is not disclosed to the public.

46. Belarus is a party to such international conventions as the United Nations Convention against Corruption of October 31, 2003 (became effective for Belarus on December 14, 2005), the Council of Europe Criminal Law Convention on Corruption of 27 January 1999 (became effective for Belarus on March 1, 2008) and the Council of Europe Civil Law Convention on Corruption of November 4, 1999 (became effective for Belarus on July 1, 2006).

47. Implementation of Belarus anti-corruption law and regulations and the international legal acts ratified by Belarus has direct impact on the Bank-financed portfolio in a form of increased level of scrutiny and layers of control. The project will be implemented in accordance with the

Bank’s Anti-Corruption Guidelines.7 The Ministry of Economy is responsible for monitoring implementation of the capital budget. The Control and Revision Department (KRU) of the Ministry of Finance is responsible for internal audit and inspection of all central government entities and line ministry internal audit units. It mostly focuses on compliance issues. The external audit function is the responsibility of the State Control Committee (SCC). Its role is to ensure that any entity using budget funds or state property adheres to the regulations. As for the KRU, compliance with regulations is the main concern.

E. Loan conditions and covenants

48. The following loan conditions and covenants shall apply.

Implementation covenants

7 “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15, 2006. 13

APPRAISAL SUMMARY

F. Economic analysis

49. Economic analyses were carried out for project Components 1 (road investment) and 2 (tolling system).

50. Road investment. The analysis was carried out to assess: (i) the justification for the choice of the M5 road versus other roads; and (ii) the economic feasibility of this specific road investment project. After an analysis of traffic on the Belarusian road network, it became clear that the M5 road section selected for this project is presently a two-lane road with the highest traffic on the entire network and thus the prime candidate for upgrading to four lanes.

51. The economic cost-benefit analysis is based on a feasibility study prepared by BELGIPRODOR, and subsequently verified by the World Bank team using the HDM4 software package. The evaluation period used was 30 years from the planned start of construction in 2010 until 2039, using a discount rate of 12 percent. The total financial construction cost estimate for the 73.3 km section is US$164 million. The World Bank funded section of 52.7 km is expected to cost US$120 million including taxes, but excluding contingencies. Expected project benefits consist of: (i) savings in vehicle operating costs amounting to a discounted total value of US$186 million; (ii) reduced travel time costs at a discounted total value of US$52 million; and (iii) reduced road accident costs resulting in a discounted total saving of US$9.6 million. The economic return of the project is sufficiently high to justify the proposed project. The discounted net present value (NPV) of the World Bank financed section (52.7 km) is US$159 million with an economic internal rate of return (EIRR) of 21 percent. The table below shows a summary of the results of the economic analysis, including the sensitivity of the results to variations in initial investment costs and projected traffic growth rates. The project is more sensitive to changes in traffic growth rates than in construction costs. In all cases the NPV remains positive with a worst case EIRR of 13.8 percent. Details of the economic analysis are included in Annex 9.

Sensitivity analysis based on HDM-4 results (in US$ millions) Traffic -20% -10% Base NPV/EIRR +10% +20% $30 $81 $140 $202 $267 +20% 13.8% 16.4% 19.1% 22.1% 25.7% $39 $91 $149 $211 $276 +10 14.5% 17.2% 20.0% 23.3% 27.1%

$48 $100 $ 159 $221 $285 Base

Cost Cost 15.2% 18.1% 21.1% 24.6% 28.7%

$57 $109 $168 $230 $294 -10% 16.1% 19.2% 22.4% 26.1% 30.6% $67 $119 $177 $239 $304 -20% 17.2% 20.5% 23.9% 28.0.% 33.0%

52. Road tolling. The feasibility study for the introduction of electronic road tolling for trucks over 12 tons on Belarus’ main highways analyzed and compared eleven proposed combinations

of different tolling technologies and toll levels. For each of the eleven options the study looks at investment costs, annual operating and maintenance expenditures, and expected toll revenues. It recommends introducing a tolling system based on microwave technology, with retention and upgrade of the existing tolling system on the M1/E30 road.

G. Technical

53. Road design for Component 1. The detailed engineering design for the 53 km section to be upgraded with World Bank funding has been completed by BELGIPRODOR; it was fully funded from the state budget. The World Bank team reviewed the detailed design and the technical standards applied and was satisfied with the design parameters and methods. The bidding document has also been prepared. The bidding process is expected to start in July 2010, as soon as the prequalification of contractors is completed.

54. Electronic road tolling system – Component 2. The World Bank team collaborated with the PIT and the representatives of BELDORCENTER (Belarus Roads Center) who are responsible for the overall technical preparation of this component. The detailed feasibility study carried out by BELDORCENTER included an analysis of a broad range of systems and options for electronic tolling and the most appropriate technological option for Belarus was identified. The World Bank team, after a detailed review of that study, accepted BELDORCENTER’s choice of technology and the proposed overall concept of the new tolling system. Consequently, the project (under Component 3) includes more detailed technical and operational studies to prepare: (i) an action plan for the introduction of the new system in Belarus; (ii) technical and functional specifications; and (iii) bidding documents for supply and installation of the initial stage of the system, which is to be funded under Component 2. The TOR for the study has been developed and the procurement of a specialized consulting firm is underway. The procurement of the actual road tolling system will be done in 2011 through an international competitive bidding process with prequalification. In this way, only firms with demonstrated capacity and successful implementation of similar electronic tolling systems will be prequalified.

H. Fiduciary

Financial

55. An assessment to determine whether the financial management (FM) arrangements in BELAVTODOR and particularly in MA-C are acceptable was carried out in the period December 2009 to May 2010. The assessment concluded that the project FM capacity is sufficiently developed and satisfies the Bank’s requirements.

56. The project FM arrangements have been designed to place much reliance on existing institutional FM systems, i.e. by the existing departments of MA-C and using the existing institutional mechanisms of financial management. Specifically, project financial management will be primarily carried out by the existing departments of MA-C. Elements of the existing accounting and reporting as well as the system of internal controls of MA-C will be used for project financial management. Although direct payments and special commitments will be used under this project, designated and transit accounts will be opened for more efficient funds management for the remaining (smaller) project expenditures. Further, the accounting system

15 which is already available in MA-C has been modified to enable fully automated project accounting and reporting. Details of the FM arrangements are provided in Annex 7.

Procurement

57. Procurement under the project will be carried out by MA-C agency in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and Credits” dated May 2004, revised October 2006 and May 2010; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised October 2006 and May 2010, and provisions stipulated in the Loan Agreement. A procurement capacity assessment was carried out in February 2010 to assess the capacity of the PIT. The risk level of the environment of conducting procurement under the project (before mitigation measures) was assessed as “substantial”. A plan to mitigate the procurement risks and strengthen implementation capacity has been agreed with PIT and the MoTC. Intensive training will be conducted to help the PIT to improve its capacity in procurement under World Bank guidelines. All contracts will be subject to prior review by the World Bank. Frequent implementation reviews will be carried out by the World Bank project team that includes technical staff, a financial management specialist (FMS) and procurement accredited staff (PAS).

58. It is assumed that Component 1 of the project (road construction and rehabilitation) will attract some local state-owned construction companies who may wish to compete with foreign contractors for the road upgrading (civil works) contracts. These local firms are legally and financially autonomous and operate under commercial law. Until recently, they were managerially dependent on the Borrower as their boards of directors in most cases included specialists from BELAVTODOR – the Roads Department of the Ministry of Transport and Communications. To address this issue, MoTC has issued Order # 98-ц dated February 15, 2010, which has removed the representatives from BELAVTODOR from the corresponding boards of directors. The World Bank has determined that with this change, the firms now comply with the criteria for full managerial and financial independence, and are thus eligible to participate as bidders under World Bank funded projects.

59. By mid-July 2010, the prequalification of contractors for the four major civil works contracts to be funded from the loan was completed and the Bank has given its no-objection to the distribution of the bidding documents among the prequalified bidders. The bidding process was launched, with bid submission expected in late October 2010.

I. Social

60. A social assessment was undertaken to identify social issues relevant to project objectives and execution. Concerning the road upgrading works, it was found that the project will have mostly positive impacts on the living standards of the population of Belarus through its direct effects on employment and contribution to economic growth. The residents in the area of influence of the road will benefit from: (i) a reduction in transport costs and travel times; (ii) likely improvements in the quality of road passenger and cargo transport; (iii) a reduced number of accidents, and (iv) employment generation. It is expected that the project will create important employment opportunities during two years, mostly in the road construction industry.

61. As the proposed road will pass in the immediate southern vicinity of several small villages, the project could potentially cause negative impacts on the health of the local population. In order to estimate the magnitude of these impacts and to propose relevant mitigation measures, the potential impacts of traffic emissions and noise on people living along the road in those villages were assessed as part of the project design. Based on the field measurements and modeling of increased traffic, it was concluded that the expected air pollution due to the projected traffic increase will not exceed the existing national standards. In terms of noise, the field measurements and modeling showed an excess by 8-12 dBA of the permissible noise level of 55 dBA. Therefore, to reduce the potential noise as a result of the increased traffic, the EMP proposes building special anti-noise screens of 2-4 m height at several locations.

62. The physical road works as such will be implemented within the existing right-of-way of the road, except for the bypass of the village of Sosnovy (about 5.7 km long) and at the village of Boyary, where the road alignment will be moved by about 50 meters from the existing road in order to increase the distance between the road and the nearest houses. In both of these cases, the construction will be on land owned by the State and will not have any impact on community or private land use. No private land will need to be acquired, nor will any private business be affected in any way by the bypass at Sosnovy and the realignment at Boyary.

63. Even though the road works as such will be within the existing right-of way, land transfers from some Government agencies to the road agency will nevertheless be needed in order to widen the road’s right-of way and ensure the legally required minimum distance between the road and adjacent land of different use. However, acquisition of private land will not be needed, nor resettlement of people or businesses. The Environmental Impact Assessment (EIA) identifies the land plots to be transferred, including their size, and lists the State agencies and State enterprises presently owning the land. The Operational Manual for the project includes a description of the land transfer procedures to be applied under the project, which are the same as the normal legal procedures applicable in Belarus.

64. Road tolling. Local consultations were carried out in December 2009 with one of the main groups that will be affected by the introduction of the new electronic road tolling system in Belarus. This will be truck owners and operators, given that the road toll is to be collected from heavy vehicles only. The Association of International Road Carriers of Belarus (BAMAP) was established in 1992 and is member of the International Road Transport Union (IRU Switzerland). It includes more than 1,300 road carriers encompassing over 9,000 trucks involved in both domestic and international road transport. With regard to the new tolling system, the association was fully aware of it, because it participated in the working group formed in 2008 for the road network modernization. Their concern is mostly to avoid any incompatibility of payment modalities between the existing manual tolling system and the new system. There is no resistance in principle against the new system, given that tolling has been present for more than 14 years in Belarus. BAMAP also has a capacity to participate in the planned communication campaign related to the introduction of the new system through its central and regional offices with about 75 employees and through their website and transport newspaper. There is already regular communication with members about news on road tolling throughout Europe.

J. Environment

65. The project area as such is generally flat, with some hills on its north-western side and marshlands with a series of lakes and rivers towards the south-east. The proposed road section crosses a small river (Svisloch river, a local non-navigable river 327 km long) and two small streams, as well as the upstream end of the Osipovichi water reservoir (all within Belarus). Most of the area is cultivated with native and secondary forests. The soils are sandy and marshy with wetlands in the river valleys. The subsoil structure is mainly composed of sands. Forest dominates the landscape with limited areas of agricultural land. The road passes the southern side of five small villages (Podberezhye, Tepluhi, Sosnovy, Iasen’ and Boyary). The valley of the Osipovichi water reservoir with its meadow wetlands is the most significant ecosystem along the route. Forest represents the typical ecological typology on the road; only in few stream valleys does the ecological typology include meadow and wetland vegetation. In the immediate vicinity of the road there are no protected areas and/or valuable natural habitats.

66. The road will generally follow the existing alignment and only very minimal changes to the alignment are planned for leveling, horizontal contouring and correction of curves (the road is almost entirely straight). Only on one road segment a new embankment will be built to cross the existing railroad, with a maximum embankment height of about 6 to 7 meters. Terrain cuts are not needed. The upgraded road will mostly remain within the existing right-of-way (ROW), with the exception of (i) a bypass at the village of Sosnovy, about 5.7 km long which includes a new bridge over the Svisloch river, and (ii) a road section at the village of Boyary where the alignment will be shifted by about 50 meters for a section of about 4.2 km in order to increase the distance between the road and the nearest houses.

67. The widening of the road’s right-of way requires that a strip of forest, parallel to the road, of between 10 and 30 m in width, on one or the other side of the road, will have to be cut down and the corresponding land transferred between different state entities. All state entities involved are fully aware of this transfer, which is being carried out by the Government and which is to be completed before civil works commence on the land concerned. Also, some forest will need to be cut at the location of the two village bypasses at Sosnovy and Boyary. However, the percentage of forest to be cut for the purposes of the project is very small (about 0.0127 percent) in relation to the total area of forests in the project area. In addition, this loss of forest is more than offset by the Government’s large ongoing reforestation program which is adding 50,000 ha of new forests. The road works will use sand from four existing borrow pits located along the road alignment, which were used in earlier road construction works. The gravel for road construction will be taken from existing large licensed quarries located outside of the project area. Extraction procedures are well regulated under national environmental laws; rehabilitation is compulsory and noncompliance is prosecuted. The extraction of fill and aggregate materials will be restricted to non-river sources in the project area.

K. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) [ ] [X]

68. The project has been classified as Environmental Category "B" in accordance with World Bank Operational Policy 4.01, "Environmental Assessment", based on the fact that (i) construction works as such will essentially be confined to the existing right-of-way which is fully owned by the State, (ii) there is no resettlement of people or businesses; and land acquisition is limited to transfer of land between different State agencies, (iii) the potential environmental impacts of the project are not expected to be significant or only of a temporary nature. There are only two small segments of the road where any significant temporary environmental impacts are expected – at the location of the two bypasses and the new bridge. Expected impacts are typical for road construction activities and include the following: disruption of air quality, increased noise, loss of vegetation, disturbance of the fauna, communal wastes, use of bitumen, disposal of construction-related solid or hazardous waste, and labor camp management (although it is not certain that labor camps will be needed at all). All these effects are expected to be temporary with only minor and localized negative effects. As mentioned above, the project will require cutting of an area of about 120 ha of afforested state-owned land (a narrow strip of several meters along much of the road, on one side of the road only) to widen the right-of-way, and at the location of the two bypasses. The tree removal is regarded as non-critical, given the Government’s ongoing tree planting scheme of about 50,000 ha which will continue over the next few years. The project will temporarily affect the Svisloch water reservoir ecosystem during the construction of the bridge over the Svisloch river (a local, non-navigable river). The expected impacts on the river and the water reservoir are minor and will be managed during project implementation by applying a set of avoidance and mitigation measures which are described in the Environmental Management Plan (EMP).

69. As this project is categorized “B” it requires an EIA and an EMP for both construction and operation phases. These documents have been produced by the Borrower. The EIA includes: baseline data on the environmental characteristics of the project area; national and WB EA safeguard policies and procedures and institutional responsibilities; potential environmental impacts; analyzed project alternatives; and a detailed Environmental Management Plan. The main EMP provisions have been included in the Project Operational Manual and will be implemented by MA-C and road contractors. Furthermore, the key requirements of the EMP that concern contractors' responsibilities for civil works will be included in the works contract specifications, and the mitigation measures have been reflected in the engineering designs and bidding

documents for road construction. Per World Bank safeguards policies and procedures, the EIA document was discussed during consultations with potentially affected populations (in early June 2010) and disclosed in Belarus and in the WB Infoshop. A more detailed description of the EIA and EMP document, including a summary of potential environmental impacts, is included in Annex 10.

L. Policy exceptions and readiness

70. The project does not require any exceptions from World Bank policies. The project is ready for implementation: (i) road designs are complete, (ii) procurement for major project activities, including road works, is well underway and (iii) implementation and safeguard arrangements are complete and functional.

Annex 1: Country and Sector or Program Background BELARUS: Road Upgrading and Modernization Project

Country background

1. Belarus is a landlocked country with a total surface area of 20.8 million ha. It is bordered by the Russian Federation, Ukraine, Poland, Lithuania and Latvia. Belarus’ population numbers about 9.743 million inhabitants and is highly urbanized – eighty percent of the population lives in 191 cities and urban settlements and only 20 percent live in 20,460 rural settlements. Most economic activity is managed and controlled by the State; the private sector accounts for just 30 percent of GDP. Economic performance has been strong and stable between 2003 and 2008 with an average annual growth rate of 9 percent since 2003. During that period, the Government has succeeded in further improving equality and social welfare. The poverty rate dropped from about 25 percent in 2003 to 6 percent in 2008, and is among the lowest in the world.

2. With a Gross National Income (GNI) per capita of US$5,380,8 Belarus is an upper- middle income country that has delivered good results in many dimensions of its development agenda. Belarus has been the top performer within the Commonwealth of Independent States (CIS) in terms of economic growth, energy efficiency improvements and containment of the HIV/AIDS epidemic. According to the Business Environment and Enterprise Performance Survey (BEEPS),9 Belarus has low levels of state capture and administrative corruption. The state provides good public services with a high level of access by CIS standards.

3. However, Belarus’ cautious and slow approach to reform to date has limited Foreign Direct Investment (FDI) inflows as well as the support from International Financial Institutions (IFIs). Belarus ranks low on the transition index of the European Bank for Reconstruction and Development (EBRD), and state control over the economy remains pervasive. Exports remain highly dependent on CIS markets. Belarus’ economic growth has faced increasing constraints due to the limited flexibility of its economy, low levels of technological innovation, and Russia’s policy of bringing the price of oil and gas supplied to Belarus to world market levels. In recognition of these constraints, in late 2007 Belarus began to liberalize its economy, a process that has accelerated with the economic crisis.

4. Starting in 2007, financial pressures on the State began to mount due to an increase in energy prices and growing competition in export markets, culminating in 2008 with the onset of the global financial and economic crisis. The declining terms of trade that started due to hikes in energy prices worsened further with sharp declines in export prices and demand, as the crisis also hit Belarus’ major trading partners in 2008. External payment difficulties were exacerbated by limited access to financing that resulted from the crisis. The crisis clearly exposed Belarus’ structural vulnerabilities. The authorities’ recognition of these vulnerabilities spurred reforms since late 2008 which are anchored in the IMF Stand-by Agreement and the World Bank Development Policy Loan (DPL).

8 World Bank 2008, Atlas method, current USD. 9 BEEPS in Anticorruption in Transition Series 1-3. 21

5. While Belarus was able to show a 0.2 percent growth of GDP in 2009, this seemingly good result has been accomplished to a large extend through continued lending by state-owned banks. Belarus cushioned the potential crisis shocks on domestic demand initially at the expense of dwindling foreign currency reserves and subsequently by securing external bilateral and IFI financing. Growth is projected to resume in 2010 at levels below those preceding the crisis as capital markets are likely to remain risk averse and as domestic investment is likely to grow at only a moderate pace. Lending by state owned banks continued at a high rate in the first half of 2009, but this was curtailed later in the year as credit policy was tightened. Net reserve targets under the IMF Stand-by Agreement for end-September 2009 were met. Under the aegis of its Development Policy Loan, the World Bank has been working with the authorities on measures in liberalizing prices, reducing entry barriers, hardening budget constraints, and enhancing social protection. The authorities have expressed their desire for continued Bank support to further implement their reform agenda in the medium term.

Sector background

6. Contributing with about 6 percent of GDP in 2008, transport is an important economic sector in Belarus. The sector generates significant revenues from transit services, facilitates trade and transportation, and contributes to the country’s balance of payments. In addition, the transport sector has accounted for about 6 percent of total employment in Belarus. In 2008, the largest proportion of transport employment was in roads (117,100 persons), followed by rail (70,400 persons). Belarus has been a net exporter of practically all modes of transport services. The main currency earner is pipeline transport, the transit fees of which exceeded US$1.2 billion in 2008. Road and rail transport are also significant net export sectors. Their net balance increased from about US$300 million in 2006 to over US$400 million in 2008. Much of the road-based earnings stem from traffic with third countries. In general terms, Belarus has a well- developed and well-maintained network of transport infrastructure, and a well-functioning transport system. Despite unfavorable macroeconomic conditions, total freight traffic volumes increased slightly in 2008 to about 72 billion ton-km.

7. The rail transport mode accounts for the bulk of freight transport (about 70 percent) and a sizable portion of passenger transport (about 47 percent). Today, the Belarusian Railways, a state-owned company under the control of the Ministry of Transport and Communications (MoTC) operates a rail network of 5,500 km length. Passenger rail transport – particularly for transit journeys between Russia and Kaliningrad – struggles to compete with air travel because of long journey times. Freight transport suffers from long loading and unloading times.

8. Belarus has a public road network that is mostly adequate for current traffic levels. It comprises a relatively dense republican road network10 (including main roads and regional roads) of about 15,000 km and a local road network of about 70,000 km. The overall density of Belarus network of Category 1 roads (motorways) is 112 kilometers of network per 1 million people, which is far higher than the average motorway density in the EU-25 countries, but

10 Public roads are classified as republican roads (main and regional) and local roads with the distinction between the two being related to their functional purpose. Law of the Republic of Belarus on Roads and Road Works, December 2, 1994, No. 3434-XII, (as amended by the Laws from 22.07.2003 No. 228-З, from 20.07.2006 No. 162-З, from 07.05.2007 No. 212-З, from 09.07.2007 No. 247-З, from 08.07.2008 No. 367-З) 22

slightly below the average for EU-1511 countries, as shown in the figures below. As of 2009, 87 percent of the total length of its total road network (republican and local) was paved. About 58 percent of the paved network is in good or satisfactory condition (50 percent of the total network length). Whereas main roads are mostly in good or satisfactory condition (60 percent), only less than 20 percent of the regional roads are in good or satisfactory condition. Overall, only about 35 percent of the network of republican roads (main and regional roads combined) is in good or satisfactory condition, based on criteria set forth in the International Roughness Index (IRI). Motorway Network Density of Belarus and EU- Condition of the Road Network in Belarus 2008 15 Countries 2009 (km per one million people) (based on IRI)

Source: Eurostat and data reported by BELAVTODOR. Source: Data reported by BELAVTODOR.

9. The Law on Roads and Road Works12 defines the regulatory and management arrangements associated with public roads, including their classification, planning, design, development, and maintenance. As the central institution for roads, the MoTC: (i) defines and implements road development programs; (ii) manages various government organizations related to the roads sector; (iii) oversees road maintenance, repair, and construction; (iv) ensures safety; and (v) issues permits for the movement of heavy-weight and/or oversized vehicles on public roads.

10. BELAVTODOR, a department within MoTC, manages most of the republican road network; the Oblast Executive Committees with BELAVTODOR’s assistance manage the local road network. There is a variety of entities dealing with the management of republican and local roads; they are listed in the table below. Physical road works are executed on a contractual basis by construction firms of various ownership structures, most of them not controlled by MoTC or BELAVTODOR. Responsibilities of the Oblast Executive Committee include prioritizing maintenance, securing funds and managing local road networks. This reflects good international practice in decentralizing the responsibility for local road networks to local governments. To ensure good road management, however, such decentralization must include adequate local-level capacity building and financing opportunities.

11 EU-15 countries include Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal, Finland, Sweden, and United Kingdom. 12 Law of the Republic of Belarus on Roads and Road Works, December 2, 1994 No. 3434-XII, (as amended by the Laws from 22.07.2003 No. 228-З, from 20.07.2006 No. 162-З, from 07.05.2007 No. 212-З, from 09.07.2007 No. 247-З, from 08.07.2008 No. 367-З). 23

Organizational Structure of the Road Sector

Organization Mission and activities BELAVTODOR Central/national road managing entity with 51 managerial staff, in charge of the general strategy and supervision of all activities. Oblast Executive Regional entities (one per oblast) in charge of the strategy for local roads. Since the Committees dissolution of the Road Fund in 2010 they now supervise the collection of revenues at the local level and monitor current annual expenditures. Since 2010, they approve the budget for local roads at the regional (oblast) level. BELDORCENTER Technical organization in charge of setting standards, norms, and policies in the road sector and providing technical and financial expertise to the road administration entities (290 staff). BELGIPRODOR Leading design institute for road and airport infrastructure in Belarus for the past 78 years. Certified ISO 9001:2008. (450 staff). AVTODOR One in each of the six regions, managing and operating Republican roads. Each AVTODOR has about 1,100 staff on average and is in charge of about 2,000 to 3,800 km of the road network. OBLDORSTROY One in each of the six regions, managing and operating local roads. Each OBLDORSTROY has about 2,600 staff and is in charge of about 8,000 to 15,000 km of roads.

11. In relative terms, freight traffic volumes by road are increasing by 3 percent each year, making up about 30 percent of total freight traffic. Relative to total passenger traffic volumes which have decreased significantly since 2000, the share of passenger traffic on roads has remained steady at 45 percent. Aviation and inland waterway transport remain insignificant with respect to passenger and freight traffic volumes, despite the fact that aviation has seen some growth in the passenger market. In terms of transport infrastructure, the main challenge is the need to increase capacity on certain transport routes and corridors.

12. Belarus plays an important role as a transit country for international freight flows, both between East and West, but also between North and South. However, in this context, trade facilitation and transportation remains a major challenge, in particular in the current environment, in which trade flows have been severely disrupted by the global economic and financial crisis. Nonetheless, the potential of Belarus as a transit and trade hub is presently far from fully exploited. The Government of Belarus has indicated its interest to take actions to further exploit this potential by modernizing different modes of transport, integrating them better, and thereby allowing Belarus to compete with alternative east-west and north-south routes (e.g. between the Baltic countries and Ukraine, including Black Sea ports). In order to tap onto this potential and repeat the remarkable growth performance of recent years, it would be essential for Belarus to continue investing in trade-supporting infrastructure, to generate fiscal stimulus in the short term and to support improved competitiveness in the long term.

13. In terms of international trade, Belarus serves as a transit transport corridor between the EU and Russia and potentially between the EU and Asia, via the Trans-Siberian Railway. In 2008 the main export destinations for goods and services from Belarus were Russia (32 percent), Netherlands (16.8 percent), Ukraine (8.4 percent), and Latvia (6.6 percent). The main import origins were Russia (60.7 percent), Germany (7.2 percent), Ukraine (5.4 percent), and China (3.6 percent) according to UNCTAD data. Russia is obviously the dominant trade partner for Belarus, increasingly so with the newly established Customs Union of Belarus, Russia, and Kazakhstan. Europe is the second most important trading region with 21.6 percent of imports and 43.9

24 percent of exports in 2008. The main EU export destinations after Netherlands are Latvia and Poland. The main EU countries of origin for imports were Germany, Poland and Italy.

14. The advantageous geographic position of the Republic of Belarus, which serves as a bridge between the Russian Federation and Western Europe, has made the country an important partner in provision and development of transportation infrastructure and services in Europe. The Trans-European Corridor II (Berlin – Warsaw – Minsk - Moscow) and Corridor IX (Black Sea – Kiev – Minsk – Baltic countries), which receive high priority by the Government, pass through the territory of Belarus. The M1/E30 highway is part of the Corridor II, connecting the EU and Russia. Transit trade – largely by rail for goods and by pipeline for oil and gas – is therefore a significant part of the economy, despite the fact that the transport infrastructure has suffered from a lack of investment in recent years.

15. While rail transport has a share of almost 70 percent of total freight volumes, road transport has been growing since 2000. This is generally due to the role of Belarus as a transit country in international trade between the EU and CIS countries, and specifically due to the requirement for speed and flexibility of modern producers in transporting perishables and high- value goods. In 2008, 68.1 percent of total freight volumes in ton-km was transported by rail (76.3 percent in 2000), while 31.6 percent was transported by road (23.6 percent in 2000). The share of inland waterway freight of total volumes was 0.2 percent (0.06 percent in 2000), whereas air transport took a 0.1 percent share (0.04 percent in 2000).

16. To support road transport operations, the Government has initiated various schemes to help transport companies upgrade their vehicle fleet. In January 2009 the total Belarus truck fleet owned by organizations was 121,825 vehicles (MoTC). Truck import duties have been lowered, and duty free import made possible if combined with the purchase of domestic trucks. The purchase price of a Mercedes-Benz and a domestically produced MAZ trucks are practically the same.

17. The Belarus truck fleet serving international transport is still comprised mainly of low class, high emission vehicles. In 2009, 38 percent of the total fleet for international transport (8,879 trucks), was of EURO 0 level or unspecified. The share of EURO 2 standard was 11 percent, EURO 3 was 32 percent, and EURO 4/5 at six and thirteen percent, respectively. Since 2006 the trend has been towards higher class vehicles. Leasing of trucks has been very popular, providing a way to acquire an ecological, high EURO class truck usable in EU transport. By law, however, Belarusian organizations are required to own one truck per two leased trucks. In the wake of the economic crisis and lower demand for services, many of the leased trucks have been confiscated and auctioned. 18. Because of the very high share of in-house logistics by Belarusian firms, the demand for transport and logistics services bought from the market is still modest. According to official statistics, in 2000-2008 only 23 to 25 percent of road freight transport was bought from the market, whereas the rest was produced in-house by shippers. In most EU countries, the share of in-house road freight is less than 20 percent. As a consequence in Belarus, the structure, capacity, and quality of logistics service provision as an industry is still at an early stage of development. This applies to the more developed forms of service provision, in particular contract logistics and/or third-party logistics services.

19. As mentioned above, BELAVTODOR, the Roads Department of the Belarus Ministry of Transport and Communications (MoTC), is in charge of road infrastructure policy, control and regulation. BELAVTODOR is also in charge of managing the implementation of the Government program "Roads of Belarus" for the period 2006-2015. The objective of the program is to create an "enabling environment for the development of the national economy, enhancement of safety and defence capacity, implementation of the government social policy and facilitation of private sector business initiative". The program includes the need to upgrade the M5 road, a section of which is proposed to be financed by this project. Other activities in this program include the construction/reconstruction of 317 km of republican roads and 989 km of local roads. Major repairs are to cover 4,341 km of public roads, including 1,715 km of republican roads and 2,626 km of local roads.

Road sector issues

20. Belarus has a good capacity to plan, manage and maintain its road infrastructure, and a very good track record over the past decades. The State operates numerous enterprises for road design, planning, research, standards, maintenance and construction. The condition of the road network is generally good, which is due in large part to the adequate allocation of resources for road maintenance over the past decades. This is in sharp contrast to most other countries of the former Soviet Union.

21. Despite the good track record in the past and the relatively good condition of the road network compared to other countries in the region, sustainability of funding for roads is today one of the key issues for the Government in the transport sector. The abolition of the National Road Fund in early 2010 and the continued effects of the global financial and economic crisis in 2008 and 2009 have exerted downward pressure on the Government’s fiscal space. In 2010, the

total budget allocation for the road sector is expected to be cut by 19 percent from the previous year. Of the total budget of BYR 1,600 million, 37 percent will be allocated to road upgrading and new construction. There is now a gap between expenditure needs and available resources, especially for the maintenance of the lower class roads. While the Government is striving to meet capital investment targets for roads with external financing (including the loan for this project), the insufficient emphasis on road maintenance could potentially lead to premature deterioration of roads in the future. There is clearly a need for the Government to pay special attention to tackling the road maintenance backlog which is now starting to build up. While Belarus has in the past avoided the road network deterioration observed in other FSU countries, there is a risk that insufficient road maintenance could soon have a negative impact on the condition of the road network.

22. In general terms, the Government is now falling behind the long-term investment program for the road sector “Roads of Belarus 2006-2015”. The strategy combines national development targets for the transport sector with a list of projects prepared by technical experts at BELAVTODOR. The long-term program is annually revised to reflect any changes in maintenance or capital investment needs. These revisions can be seen as a combination of political (or “subjective”) and technical (or “objective”) priorities for road sector projects. For example, the plan to construct four-lane motorways between Minsk and all five oblast capitals may have been included in the strategy as a national priority for political reasons rather than to meet traffic demand based on a merely technical analysis. However, political will alone is not sufficient to resolve the lack of financial resources. The basic problem is that investment planning is not tied to a medium-term expenditure framework. This can result in over-planning, over-engineering and therefore non-feasible long-term programs as a result. A preliminary analysis undertaken by the World Bank team in the context of the “Belarus Transport Policy Note” shows that the Government’s capacity to implement the road sector investment plan has deteriorated over the past two years. Until 200813, it was still able to finance the spending plan to the full. In 2010, as a result of the economic and financial crisis, which continues to affect Belarus, the implementation ratio is expected to be only about 70 percent because of the Government’s reduced fiscal revenues.

23. The Government sees road tolling as a future key source of funding for assuring the maintenance of the road network. It is planning to modernize existing tolling facilities on the M1 motorway and gradually introduce modern electronic tolling on most main roads over the next decade. Initially, only trucks over 7.5 tons are to be tolled while tolls for smaller vehicles would only be introduced at a later stage. The government believes that the introduction of a new tolling system in the Republic of Belarus on the basis of state-of-the-art technologies will help drastically raise efficiency and ensure a nondiscriminatory tolling policy in relation to both domestic and foreign users according to the rate of utilization of the road network and in compliance with the EU directives. In addition, the tolling system will also help to raise the volume of financial revenues into the budget. It will also change the method of road toll accruals; tolls are to be calculated on the basis of the number of kilometers travelled and the weight or capacity of the vehicles. In future, the new electronic tolling technologies will also allow merging the separate systems of weight and dimensions control, weather monitoring and

13 In 2008, a loan from the Belarus Bank considerably increased spending in the road sector. 27 traffic management into a single system, which is to be integrated with other neighboring countries.

24. Belarus’ road safety record is comparable to other middle income countries in the EU and Eastern Europe, but much better than in Russia, Ukraine and other FSU countries. Despite rapid motorization in the country (3.3-fold over the period between 1991 and 2009), the number of road traffic accidents decreased by about 2 percent over the past two years with a slight increase of road fatalities (4 percent). In order to further support positive trends in road safety, the Government initiated a program which supports measures to mitigate the risks at the most critical and dangerous road sections, a so-called “traffic accident blackspot program” in 2008. As of January 2009, a total of 190 “blackspots” have been identified under the program which call for various measures such as improvements in road markings, lighting of road sectors, replacement of road signs, and others. Much of the success of Belarus in the area of road safety is also credited to good enforcement of existing legislation on the use of seat belts, “drinking and driving”, and traffic rules in general.

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies BELARUS: Road Upgrading and Modernization Project

1. Transport sector projects. There are presently no externally funded transport sector projects in Belarus. This would be the first World Bank funded transport sector project in Belarus. In the late 1990’s and early 2000’s, EBRD did provide funding of US$50 million equivalent for the upgrading of the main East-West road transport corridor. The project was executed satisfactorily without any major problems.

2. The World Bank is presently the only IFI providing funding to the Government of Belarus for various types of infrastructure projects; these are described below.

a. The Belarus Social Infrastructure Retrofitting Project (Loan No. 7056-BY and additional financing Loan No. 4876-BY). The original loan for US$22.6 million for the Social Infrastructure Retrofitting Project was approved in June 2001; it became effective on December 26, 2001 and was closed on March 31, 2008. The additional financing for the project of US$15 million is under implementation. The project development objective is to improve the functional and health environments of social sector facilities, with particular emphasis on reducing energy consumption. The project is retrofitting social sector facilities to encourage a more effective use of resources, reducing operation and maintenance costs in schools, medical and other selected social facilities such as orphanages, and community homes for the elderly and the disabled. Project Implementation and Development Objective Ratings are satisfactory. b. The Belarus Post-Chernobyl Recovery Project (Loan No. 4821-BY, US$50 million). The project aims to provide the population residing in the area affected by the Chernobyl nuclear disaster with energy efficient and reliable heat and hot water services in order to improve their living environment. There are three project components. Component 1, the Energy Efficiency Component, improves energy efficiency through upgrading or replacement of heat production and distribution equipment, and improving thermal insulation and lighting in public buildings. Component 2, the Residential Gas Connection Component, provides household connections to the existing gas distribution network to improve heat supply and replace utilization of dirty fuels, including those that may be contaminated with radioactive material. Component 3, Project Implementation and Management Support, includes (a) design and supervision for project investments; (b) staffing, equipment, and training; (c) public information; and (d) auditing and other fiduciary or technical services. Project Implementation and Development Objective ratings are satisfactory. An additional loan for the project of US$30 million is under preparation. c. The Belarus Water Supply and Sanitation Project (Loan No. 7589-BY, US$60 million). The objective of the project is to improve the quality, efficiency and sustainability of water supply and wastewater treatment services in six oblasts. The project consists of three components. Component 1, Rehabilitation of Water Supply and Sanitation Systems, finances investments in improvements in the water supply networks, conversion from surface water supply to groundwater supplies, installation of iron removal stations and other water quality enhancement measures, as well as installation of water meters. In the wastewater area, investments are for the rehabilitation and reconstruction of wastewater treatment plants,

including the installation of pumping stations, sludge dewatering, collection networks, modern equipment for monitoring stations and small laboratories. Component 2, the Support to the Preparation and Sustainability of Investment, supports the feasibility studies and detailed designs for sub-projects. In addition, the component also finances the construction management and investment monitoring. Component 3, the Project Implementation and Management, supports strengthening the management capacity of the PCT to monitor and administer the project implementation, including training and financial audit. Project Implementation and Development Objective ratings are satisfactory. d. The Belarus Energy Efficiency Project (Loan No.7698-BY, US$125 million). The objective of the project is to improve energy efficiency in heat and power generation in selected towns of Belarus. The project consists of the following components: (1) Conversion of existing heat-only- boiler plants to combined heat and power plants; (2) Design and supervision consultancy; and (3) Project implementation and management. The project will convert existing heat-only-boiler plants to combined heat and power plants at 6 sites. All plants will use natural gas as the main fuel. The largest plant will be in Borisov with a combined heat and power (CHP) unit with an electricity capacity of about 65 MW. The other sites will be based on gas engine technology and are located in Mogilev (4 MW), Rechitsa (3 MW), Ruba (3 MW), Oshmiany (3 MW) and Borisov (1 MW). The introduction of combined heat and power generation will improve efficiency of the plants and thus reduce gas consumption. e. The Belarus Integrated Solid Waste Management Project (Loan No.7932-BY, US$42.5 million). The development objective of the Project is to (i) improve environmental benefits of integrated solid waste management in Grodno through recovery and reuse of recyclable materials in line with good international standards; and (ii) strengthen national capacity to manage hazardous wastes associated with persistent organic pollutants (POPs). The project will consist of 4 components. Component I: Mechanical Waste Separation Treatment Facility in the City of Grodno. The estimated cost of the component is about US$ 37 million which is to be financed by the Bank’s loan. Funds will finance the construction of a 120,000 ton/year modern mechanical separation plant for household and commercial waste in order to recover recyclable materials. The objectives of this component are to: (a) reduce the amount of deposited waste; (b) recycle, extract and reuse valuable materials (plastics, waste paper, metals, glass, and possibly other materials); and (c) increase landfill service life. Component II: Waste Separation at Source Program Improvements. The estimated cost of this component is $4.0 million to be financed by the Government. The objective of this program is to ensure the timely improvements in source separation of waste to feed into and develop the mechanical solid waste separation facility to process better quality dry input material. Component III: Persistent Organic Pollutants (POPs) Stockpile Management. The estimated cost of this component is US$26.7 million of which $5.5 million will be financed by a GEF Grant, and $20.6 million is financed from government and enterprise resources. The objective of this component is to ensure environmentally sound management of POPs consistent with Belarus’s obligations under the Stockholm Convention and implementation of the priority actions under the NIP. The management of POPs stockpiles will be addressed through the capture and secure storage of POPs stockpiles and waste, including removal of priority POPs (DDT) from a major burial site, the ESM disposal of priority POPs, initiating action on POPs contaminated sites, and support to the development of institutional, technical and infrastructure capacity to manage POPs aspects in future.

Annex 3: Results Framework and Monitoring BELARUS: Road Upgrading and Modernization Project

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information Reduce transport costs for Reduced vehicle operating Assessing road transport costs road users on the upgraded costs on the upgraded section will result in better planning, sections of the M5 road, and of the M5 road. maintenance and overall introduce electronic tolling in decision-making in the road Belarus as an efficient cost sector. recovery mechanism. Electronic road tolling system Cost recovery from road users introduced in Belarus on a enhances sustainability of road section of the M5 road. investments. Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Upgrading of 52.7 km of the Length of the M5 road Inability to achieve physical M5 road (km 65-93 and km sections upgraded. outcomes would indicate need 106-131 from a 2-lane for management reforms. (Category 2) road to a 4-lane (Category 1B) motorway. Improvement in the riding IRI (International Roughness Inability to achieve desired quality on the upgraded Index) reduced on the IRI would indicate need for sections of the M5 road. upgraded section of the M5 better quality management and road. works supervision. Increase in road safety on the Number of fatalities on the If negative, investigate reasons upgraded sections of the M5 upgraded sections of the M5 and redesign future road safety road. road reduced. actions. Introduction of a modern Modern electronic road toll If negative, analyze reasons electronic road tolling system system is installed and and redesign future actions. on the section from km 22 to operational on the section km 131 of the M5 road. from km 22 to km 131 of the M5 road Improved local capacity for Local institutions have good If negative, further capacity supervision of FIDIC-based capacity to supervise FIDIC- building measures will be road construction contracts. based road works. needed.

Arrangements for results monitoring

Target Values Data Collection and Reporting Project Outcome Indicators Baseline 2012 2014 Frequency and Data Collection Responsibility for Data (2010) Reports Instruments Collection Reduced vehicle operating costs on the 100% - 94% End of Project BELAVTODOR progress BELAVTODOR upgraded section of the M5 road (opening of road reports and World Bank after works are implementation reviews complete) Electronic road tolling system introduced in No - Yes End of Project BELAVTODOR progress BELAVTODOR Belarus on a section of the M5 road. reports and World Bank implementation reviews Intermediate Outcome Indicators Length of the M5 road sections upgraded 0 20 52.7 Annual BELAVTODOR progress BELAVTODOR (km). reports and World Bank implementation reviews aide-memoires IRI (International Roughness Index) reduced 3.2 - <2 End of Project BELAVTODOR progress BELAVTODOR on the upgraded section of the M5 road reports and World Bank implementation reviews aide-memoires Number of fatalities on the upgraded sections 12/year - 5/year End of Project BELAVTODOR progress BELAVTODOR of the M5 road reduced reports and World Bank Ministry of Interior implementation reviews aide-memoires Modern electronic road toll system is No - Yes End of Project BELAVTODOR progress BELAVTODOR installed and operational on the section from reports and World Bank km 22 to km 131 of the M5 road implementation reviews aide-memoires Local institutions have good capacity to No Yes Yes Annual Assessment by WB World Bank and TA supervise FIDIC-based road works. technical staff and TA consultant consultant.

32 Annex 4: Detailed Project Description BELARUS: Road Upgrading and Modernization Project

Component 1 – Road Upgrading (US$ 131 million)

1. The road upgrading works that are proposed to be funded through the World Bank loan are located on the main M5 road between the capital of Minsk and the border with Ukraine to the south-east (on the way to the Ukrainian capital Kiev). Given the steady increase of traffic in the past, especially near Minsk, the Government has already upgraded the first 65 km near Minsk from a 2-lane (Category 2) road to a 4-lane (Category 1B) motorway. The Government now wishes to continue the upgrading on the road up to the city of Bobrujsk, from km 65 to km 131 (66 km length). Bobrujsk is one of Belarus’ largest cities (pop. of 227,000) located at a distance of 131 km from Minsk. It has the biggest timber mill in Belarus, and is also known for its wood- working, chemical, machine-building and metal-working industries. The map in Annex 15 shows the location of the road. The Government had originally planned to fund the works from its own resources and already started construction works on the intermediate sub-section between km 93 and km 106. The Government will complete this sub-section using its own resources, while the World Bank loan will fund the remaining two sub-sections, as described below.

2. This project component would fund the upgrading of a total of 53 km of the M5 road, composed of two sections (from km 65 to km 93, and from km 106 to km 131), located between Minsk and Bobrujsk. The upgrading will alleviate existing traffic congestion and meet projected traffic growth. The actual observed and forecast traffic growth would justify the proposed upgrade. In the period 2000-2005, the annual traffic growth on the whole section ranged between 7.6 and 8.9 percent. Traffic growth increased to 12.5 and 14.6 percent in the period 2005-2008. A traffic survey conducted in August 2009 measured a traffic growth rate of 9 percent per year. The existing traffic levels and the actual observed traffic growth rates seem to justify per se the road upgrading to 4 lanes, this is confirmed by the economic analysis (see Annex 9).

3. The project includes the construction of six two-level interchanges, seven overpasses, four new bridges, and two pedestrian underpasses. The design envisages the reconstruction of the exiting two lanes and the construction of two additional lanes, for an axle load of 11.5 tons and including multiple road safety features in line with EU road standards. The project also includes a number of environmental impact management features, such as construction of protective noise screens in the three villages that are located near the alignment and two short village bypasses.

4. The detailed design for the 53 km section was completed in May 2010. The widening of the road will be carried out almost exclusively within the existing right of way, as the proposed road follows the alignment of the existing two-lane road, with the exception of the bypass at Sosnovy (about 5.7 km long) and at the village of Boyary, where the alignment will be shifted by about 50 meters (for a section of about 4.2 km) in order to increase the distance between the road and the nearest houses. No major technical issues are expected during the construction, given the

33 flat terrain and well-known soil conditions. Nevertheless, some sections of the road require the removal of peat and other unsuitable materials up to several meters depth. This, combined with the high water table in those areas, require specific equipment and capacities of the contractors. The total cost for construction is estimated to be US$131 million (equivalent to about US$2.5 million per kilometer on average), including local taxes and contingencies. The construction works have been divided in four sub-sections (or lots). Lots 2 and 4 are above the average construction cost per kilometer as they include the Sosnovy bypass and the Boyary village section, as well as bridges and 2-level interchanges, as detailed below.

5. The procurement of contracts for Lots 1-4 of road upgrading was launched in July 2010 and is expected to be completed in December 2010, so that contracts can be signed immediately after project effectiveness and works can start in the spring of 2011.

Table: Road Sub-Sections (Construction Lots) Description Length (km) Section 1: Building additional 2 lanes from km 65.18 to km 82.6 17.42 Section 2: Building additional 2 lanes from km 82.6 to km 93 and the bypass 10.4 of Sosnovy (5.7km) Section 3: Building additional 2 lanes from km 106.1 to km 122.6 16.5 Section 4: Building additional 2 lanes from km 122.6 to km 131 and the new 8.4 alignment at Boyary (4.2km)

6. The road will follow the geometric standards of Category I-B in line with national standards as follows:

Cross Profile Parameter Standard Specifications Road Category I-B Type of Road National Roads, 1st class access roads to airports and rings around cities Traffic level threshold Over 10,000 veh/day Speed Limit 100 km/h Number of lanes 4 Lane width 3.5 Carriageway width 7x2 Shoulder width 3 Minimum Median width At least 2 meters, equipped with metal guardrails Total roadway width 22+ s

34 7. The pavement design is based on the use of Stone Mastic Asphalt (SMA) which provides a deformation resistant and durable surfacing material, suitable for heavily travelled roads. SMA has a high coarse aggregate content that interlocks to form a stone skeleton that resists permanent deformation, including deformation caused by large temperature variations such as those present in Belarus. SMA is an efficient solution for Belarus and its climate and has already been used extensively in the country. The greatest technical challenge will be the construction of the largest of the 4 new bridges which is across the Svisloch River, in Section 2 within the Sosnovy village bypass. The bridge has a length of about 180 meters and will require specific site preparation measures, piling, and soil excavation techniques that are described in the EMP. The other three bridges to be built are very minor. There are also 7 overpasses and 2 pedestrian underpasses that should not present any particular technical nor environmental issues. The four (4) sand borrow pits to be used for the works have already been determined; they are located within short distances from the road alignment and will be indicated in the bidding document. Each of them would provide about one (1) million cubic meters of materials, which does not represent a substantial volume for such works. In addition, the access roads to the borrow pit areas are already existing.

8. Road safety issues are addressed both through sound engineering design and the implementation of a detailed traffic management plan during construction. The upgrading of the road from 2 lanes to 4 lanes will provide the alignment with a median, which has very positive effects on safety, given that most fatalities on that road are caused by head-on collisions. Studies and experience show that the reduction of crashes and fatalities after project completion may be between 20 and 55 percent. Placement of metal guardrails will all but eliminate cross-median head-on crashes while mitigating median-related crashes through adequate shock absorption. The choice of wider medians and shoulders has been made, because this has shown the potential to further improve safety as they have a greater Accident Modification Factor (AMF). Several multi-level interchanges will provide a safe environment for crossings of the M5 road. Speed limits will be adjusted along the alignment at the remaining level crossings. Pedestrian connections, including underpasses, will facilitate safe connections between left and right hand sides of the road. Road lighting will be included at several sections of the alignment in order to increase visibility and facilitate pedestrian movements and safety. A traffic management plan, that will be reviewed and certified by the State Motor Vehicle Inspection Department, will include diversion roads, temporary signs and markings.

9. Design is being carried out by the national design institute BELGIPRODOR, which was founded in 1932. Design has been developed according to Belarusian standards that are a further development from norms of the former Soviet Union, with adaptation to European axle loads. BELGIPRODOR, the leading design organization of Belarus in the field of engineering, research and design of roads, bridges and airfields has about 450 staff members including a technical and engineering department, and is certified ISO 9001:2008. BELGIPRODOR has actively participated in many major road project designs and supervision in Belarus, including more recently the reconstruction of the Minsk ring road (I category, 6 lanes), the modernization of the road M1/E-30 Brest-Minsk (I category), the M2 Minsk-National airport road, the reconstruction

35 and repair of roads in a 50-kilometer zone of Minsk in line with I-B category, and the reconstruction of the road R-20 Vitebsk-Polotsk-Latvia (II category). All these projects have demonstrated sound design, including modern road safety features, and their actual condition is generally good; i.e. none of these roads shows premature fatigue or deformation. During project preparation, the World Bank team had in-depth collaboration with BELGIPRODOR and is confident on the good quality of the designs, drawings and technical specifications produced. The World Bank was engaged in the review of draft technical documentation and ensured consistency, homogeneity, and quality of the final technical specifications and detailed design before the launching of the bidding process which is scheduled for July 2010.

10. Supervision of works will be conducted by BELGIPRODOR and BELDORCENTER, in coordination with the Project Implementation Team at MA-C. It will be fully funded by the Government, in line with normal practice in Belarus. BELGIPRODOR includes two material laboratories, including a mobile laboratory, and sufficient experienced and skilled staff to conduct site supervision, management and control. The Project will include under Component 3 technical support and training by an international consultant for the local institutions involved in works supervision, to improve their capacity in supervising international contractors under FIDIC conditions.

Component 2 – Modernization of Road Tolling System (US$ 18 million)

Description 11. Component 2 consists of supply and installation of a modern electronic road tolling system based on microwave technology on the 109 km section (from km 22 to km 131) of the M5 road between Minsk and Bobrujsk. This will be the initial stage of the new electronic road tolling system for Belarus. The World Bank loan will fund supply and installation of the new tolling system based on microwave technology. This technology will allow for a high-speed free-flow tolling with active radio-frequency identification tags of the 5.8 GHz European Standard and with automatic determination of the vehicle class and tariff to be applied. The tolling system should be procured in the second year of project execution and become operational at the time of the full opening of the road section to be upgraded under Component 1.

Background information on tolling system

12. Belarus introduced road tolling in 1996 when a manual and open tolling system started to operate on the M1/E30 road between Brest, Minsk and the border with the Russian Federation. The tolling system was introduced based on an earlier agreement with EBRD who funded the rehabilitation and upgrading of that road corridor. The amount collected from the users of that road is approximately US$35 million per year, which allows to fully cover the cost of maintenance and rehabilitation for that road, and the cost of operating and maintaining the tolling system (about 13 percent of the revenues collected).

13. The Government of Belarus is planning to modernize the existing tolling system on the M1/E30 road corridor, which has existed since 1994, and also to gradually introduce a new modern electronic road tolling system on most main roads over the next decade. This endeavor is part of the Government’s overall plan to ensure long-term stable funding for roads and in particular for the maintenance of existing road infrastructure. The Government believes that the introduction and development of a new road tolling system in Belarus on the basis of state-of- the-art technologies will raise the efficiency of cost recovery from road users and ensure a nondiscriminatory tolling policy for both domestic and foreign users, according to the rate of actual utilization of the road network and in line with the EU directives for road user charging.

14. The new tolling system will change the method of road toll collection. Tolls will be calculated on the basis of the actual distance travelled by each vehicle and, for cargo vehicles, the distance and weight of hauled cargo. In future, the new technologies to be introduced will allow merging the systems of weight and dimensions control, weather monitoring and traffic management into a single system which can also be integrated with systems of neighboring countries.

15. The state-owned firm BELDORCENTER has developed a comprehensive study that investigates the feasibility of different tolling options and rates. The study included a detailed examination of domestic and foreign experience in the field of road toll collection. It carried out an assessment of the possible financial amounts of toll collection under various options of implementation of the new tolling system. The study carried out by BELDORCENTER suggests (i) the retention and further modernization of the current system of collection of charges at the M1/E30 road and (ii) the phased introduction of the microwave tolling technology on the entire main road network. The intention is eventually to collect tolls from trucks with a gross weight over 7.5 tons on the entire main road network, while along the M-1/E30 road (where tolls have existed for several years) the tolls will be collected from all types of vehicles.

16. During the first years of the new microwave tolling system, tolls will be introduced gradually for trucks over 7.5 tons on certain sections of the M2, M3, M4, M5, M6, P1, P23 and P28 roads with a total length of 310 km. During the same period the existing tolling system at the M1/E30 road corridor will be retained and upgraded in order to collect tolls from all vehicle owners/users. The upgrade of the existing system will consist of the construction of free-flow lanes and the application of microwave technology. In the medium term, tolling will be introduced on an additional length of 1,986 km of roads. In the final stage, a further 1,505 km of roads will be included in the tolled road network. The technology to be applied will allow application of different toll rates according to the vehicle category and flexibly change toll rates for different hours of the day, thus introducing the possibility to achieve transport policy objectives (such as promotion of environmentally friendly vehicles and congestion avoidance.

17. At present, the tolling system in Belarus is limited to toll collection for travel on the M1/E30 motorway road. It is based mainly on the Resolution of the Ministry of Transport of the

37 Republic of Belarus of 08.08.2003, No.40 concerning Toll Rates for Transit on the M1/E30 road Brest (Kozlovichi) – Minsk – Border with the Russian Federation (Redki). There is also the Presidential Decree No. 536 dated August 28, 2006 on “Toll collection from motor vehicles of foreign countries”, according to which foreign freight haulers with a permit of the European Conference of Ministers of Transport are exempt from tolling, as well as Belarusian haulers performing foreign transportation. The Presidential Decree "On Permissible Weight and Dimensions of Vehicles Traveling on Public Access Roads of the Republic of Belarus, and Toll Rates for Heavy and Large Vehicles" of July 17, 2006, No. 462, defines that payment for travel of heavy and large vehicles on roads of the Republic of Belarus should be collected according to the excessive weight and dimensions, as well as the distance traveled. In addition, several other legal documents regulate toll collection in Belarus: (i) Law of the Republic of Belarus "On Road Funds in the Republic of Belarus" of December 23, 1991; (ii) Resolution of the Cabinet of Ministers of the Republic of Belarus No. 127, March 9, 1995, "On the Procedure of Utilization of Toll Roads in the Republic of Belarus"; (iii) Resolution of the Cabinet of Ministers of the Republic of Belarus, No. 432, July 1, 1996, "On Toll Collection for Transit on the M-1/E30 road "Brest (Kozlovichi) – Minsk – Border with the Russian Federation (Redki)".

18. Tolls are collected by the Toll Collection Department of BELAVTOSTRADA RUE. Tolls for travel on the M1/E30 road "Brest (Kozlovichi) –Minsk – Border with the Russian Federation (Redki)" are collected from vehicle owners/users regardless of the travel direction, at the four toll collection points (Fedkovichi (km 35) , Kolosovo (km 295), Krupki (km 468) and Redki (km 609). Toll rates are approved by the Ministry of Transport and Communications in coordination with the Ministry of Finance.

19. Under the existing tolling system, toll collection can be made in various ways: (i) cash, in US$, EUR, RUR and BYR, (ii) through cashless corporate settlement systems (electronic plastic cards of the RUE “Belavtostrada”, BERLIO, ROUTEX e-cards, etc.) and (iii) bank cards (MASTERCARD, MAESTRO, VISA, VISA ELECTRON, etc.). Card-accepting booths are marked with the relevant card logos. The vehicle owner/user makes payment in the collection center in a single currency. Foreign vehicles can pay either in domestic or in foreign currency (USD, EUR, RUR).

20. There are certain vehicles exempted from the existing M-1/E30 toll collection, mainly those operated by organizations that maintain the road or control road maintenance, and vehicle owners/users whose vehicles are used for the purposes of defense, law enforcement, mitigation of emergencies, medical aid, as well as for transportation of humanitarian aid. In addition, zero rate temporarily applies to operators of buses carrying out regular suburban and inter-city passenger transportation, transportation of students to schools, as well as owners/users of trucks or special vehicles delivering milk, bread and bakery products included into the lists approved by the Brest, Vitebsk and Minsk Oblast Executive Committees in coordination with the Ministry of Transport and Communications. Moreover, every year from August 1 through November 30, zero rate is set for owners/users of vehicles (residents of the Republic of Belarus) engaged in

38 delivery of grain and root crops. The vehicles, which owners/users are exempt from tolling, are allowed to pass on the condition of demonstration of confirming documents and privilege cards.

21. Besides the existing tolling operation on Corridor 2 (M-1/E30) road between Brest and the border with Russia, the M5 road section between Minsk and Bobrujsk will be the next road where tolling is to be applied, and the first one where electronic tolling is to be introduced. This is the subject of Component 2 of this project. The tolling system should become operational at the same time of the opening of the road sections to be upgraded under Component 1 of the project.

22. The feasibility study on the introduction of electronic tolling in Belarus prepared by the Government (as described earlier) has served as the starting point for the detailed preparation of project Component 2. The study includes a benchmarking analysis of foreign best practices in toll collection as well as a review of the existing tolling technologies. The study develops an economic and financial analysis of (i) 7 technological and operational options (vignette, electronic vignette, vignette for HGVs only, (ii) free-flow microwave technology with 2 different tolling rate patterns, and (iii) GSM technology with 2 different tolling rate patterns. The conclusion of the study emphasizes the overall demonstrated cost-efficiency of microwave technology and proposes the introduction of the system in phases, leading to a progressive yet comprehensive tolling approach. Following the recommendation from the study, the Government decided in favor of the phased approach and the introduction of microwave technology.

23. The World Bank team, after a detailed review of the study and the specific conditions in Belarus, has accepted the study carried out by BELDORCENTER in 2008 as the basis for the conceptual definition and preparation of Component 2. The detailed design of the system to be procured under this component will be part of the broader technical assistance activities included in Component 3.

Component 3: Technical Assistance and Capacity Building (US$ 1 million)

24. This component will be aimed at strengthening the institutional capacity of various road sector institutions in Belarus and helping them to converge towards European standards and methods. It will include technical assistance, training and other activities as listed below: i. Technical assistance by a specialized consultant firm for the development and introduction of the new electronic tolling system in Belarus which is to be compatible with EU norms and directives. This will ensure the interoperability of the new tolling system with those of other countries in Europe. ii. Support to BELGIPRODOR for updating their economic evaluation tools for road projects, including training in HDM4 (ver. 2.05) and procurement of software licenses. Presently BELGIPRODOR owns and uses an outdated version of HDM for economic appraisal of road projects.

39 iii. Technical support and training to local institutions involved in works supervision to improve their capacity in supervising international contractors on FIDIC-based contracts. This will become increasingly important in Belarus since the market is being opened for international contractors, under funding provided by international financial institutions. iv. Technical assistance to BELAVTODOR related to benchmarking and harmonization of the Belarusian road construction, repair and maintenance standards and expenditure levels to European and international standards; v. Financial audits of project accounts; vi. Other technical assistance, training, consulting and other services, and goods for which the need may arise during project implementation, to be agreed on a case-by-case basis between MA-C and the World Bank.

40 Annex 5: Project Costs BELARUS: Road Upgrading and Modernization Project

Local Foreign Total Estimated Project Cost by Component US $million US $million US $million Component 1: Road Upgrading 60.000 71.000 131.000

Component 2: Modernization of Road Tolling System 6.000 12.000 18.000

Component 3: Technical Assistance and Capacity Building 0.000 1.000 1.000

Total Baseline Cost 66.000 84.000 150.000 Price / Physical Contingencies included in above amounts

Total Project Costs 66.000 84.000 150.000

Total Financing Required 66.000 84.000 150.000

41 Annex 6: Implementation Arrangements BELARUS: Road Upgrading and Modernization Project

1. MoTC through its Roads Department BELAVTODOR is the national authority in charge of road construction and maintenance in Belarus and will have the overall responsibility for the implementation of the proposed project. BELAVTODOR has delegated the responsibility for managing the day-to-day preparation and implementation of the proposed project to the Republican Unitary Enterprise MINSKAVTODOR-Center (MA-C). MA-C is one of BELAVTODOR’s six regional operational subsidiaries in charge of the management and maintenance of a part of the country’s road network; it is located in Minsk. BELAVTODOR’s decision to appoint MA-C as project implementing agency is based on the good operational capacity of MA-C, while BELAVTODOR itself is more focused on strategic planning and monitoring. BELAVTODOR will provide general Government oversight. Several other Government agencies are also involved in project preparation and implementation (see the table at the end of this Annex).

2. Within MA-C, a Project Implementation Team (PIT) has been created which consists of experienced officials from BELAVTODOR, MA-C, and other road sector agencies who have been assigned to work on the various aspects of project preparation and implementation. The initial team includes procurement and financial management specialists, a lawyer, an environmental specialist and a translator. The World Bank will support the necessary training of those specialists in World Bank guidelines and procedures for procurement, financial management and environmental/social safeguards management. The PIT will be expanded as needed during project implementation, by adding additional specialists to cover the increasing workload and scope. A senior official from BELAVTODOR with the necessary technical and managerial expertise has been appointed to lead the project team.

3. In the period 1993 to 1997 BELAVTODOR successfully prepared and implemented an EBRD-funded project for the upgrade of road between Brest, Minsk and the border with Russia. The amount of the EBRD loan was USD 30 million and DM 36.5 million. The same key staff that were responsible for the project (formerly employed at the Republican Production Enterprise BELAVTOSTRADA) are now the core Project Implementation Team for the proposed World Bank funded project. The EBRD project focused on the upgrade of the 234 km long Category 1 road and included the following activities:  project management,  prequalification and procurement of works under two lots,  procurement of the road maintenance equipment,  selection of consultancy services for the technical supervision,  selection of consultancy services for design and introduction of the tolling system,  financial management, and  reporting.

42 The upgraded road and its tolling system were implemented without major problems and were commissioned in 1996; they have been in operation ever since. The loan and the interest were fully repaid in 2007.

4. MA-C was established by the MoTC in 2005 by merging two existing sector enterprises. MA-C is one of the six regional operational branches of BELAVTODOR and is presently responsible for rehabilitation and maintenance of republican roads in Minsk Oblast and of the М1/Е30 corridor road (Brest-Minsk-Russian border). MA-C has experienced staff in the areas of engineering, procurement, project management and financial management.

5. MA-C will thus be responsible for managing the project implementation, under the general oversight of BELAVTODOR and MoTC, and will be the World Bank’s interlocutor. It will ensure that the World Bank’s fiduciary, social and environmental requirements are well known to all parties involved in project execution and that these are adhered to throughout the project period. The PIT will be responsible for preparing bidding documents and carrying out the procurement process. It will also be responsible for record keeping, disbursement, financial management and financial flows of the project, including managing the Designated Account. The PIT will also prepare the project interim financial reports and progress reports, and facilitate the World Bank’s visiting teams. The PIT has prepared a Project Operations Manual detailing the processes of project implementation.

6. The composition of the initial PIT within MA-C is shown below.

Composition of initial Project Implementation Team Belarus Road Upgrading and Modernization Project

Team Leader

Senior Senior Planning Environmental Procurement Specialist Management Specialist Specialist

Financial Legal Operations Procurement Specialist Specialist Specialist

Translator

43 Team Leader Controls and co-ordinates operations, ensures interaction with the World Bank, BELAVTODOR Department, Ministry of Transport and Communications, other engaged ministries, state and public organizations, general public; ensures co-ordination and opportune accomplishment of activities; bears responsibility for appropriate task accomplishment by the PIT members according to their functional duties; ensures compliance with the requirements of the World Bank and the legislation of the Republic of Belarus.

Senior Procurement Provides assistance with development of the procurement plan; interacts Specialist with the World Bank on the issues of acquisitions; ensures control over the PIT procurement of goods, work and services; ensures compliance of procurement actions with the requirements of the World Bank and the legislation of the Republic of Belarus; ensures control over development of bidding documentation and bid evaluation; co-ordinates technical aspects of all project components; ensures monitoring of contractors’ performance; bears responsibility for relations with contractors; attends monthly meetings.

Senior Planning Plans, develops and bears responsibility for preparation of documents related Specialist with the project in accordance with the requirements of the World Bank, Ministry of Economy, Ministry of Finance, and other relevant government agencies within the bounds of the legislation of the Republic of Belarus. Procurement Develops and updates the procurement plan; ensures compliance of Specialist procurement actions with the requirements of the World Bank and the legislation of the Republic of Belarus; takes part in development of bidding documents and bid evaluation.

Legal Specialist Coordinates legal aspects of the project implementations; ensures completion of work on development and conclusion of contracts with bid winners.

Financial Specialist Arranges and ensures operation of the system of the project financial management; ensures control over the targeted use of the loan funds; maintains the project accounts in line with the agreed standards; prepares regular reports, maintains an automated accounting and reporting system, prepares all payment requests, ensures annual audits of the financial statements of the MA-C and of the Project.

Environmental Co-ordinates environmental aspects of the project development and Management implementation. Specialist

Translator Provides translation of the project documentation.

Other Government agencies are also involved in the preparation and implementation of the project. The complete listing of the agencies and their respective roles is shown below.

Belarus transport sector agencies involved in the Road Upgrading and Modernization Project

Agency Role in the Project Accountability Ministry of Transport and Overall responsibility for the Council of Ministers of Communications (MoTC) implementation of the project. the Republic of Belarus

Roads Department Organization of the project Ministry of Transport BELAVTODOR of the MoTC implementation process. and Communications Day-to-day preparation and implementation of the project Republican Unitary Enterprise including such aspects as MINSKAVTODOR-Center procurement, contract supervision, Roads Department (MA-C) financial management and reporting, BELAVTODOR implementation progress monitoring, and preparation of progress reports. Arranging land transfer for the sections of the road on the territory Republican Unitary Enterprise Roads Department of Mogilev oblast, obtaining work MOGILEVAVTODOR BELAVTODOR permits, and supervising works in Mogilev oblast. Development of design and tender Public Enterprise Roads Department documents (technical part) for road BELGIPRODOR BELAVTODOR upgrade. Supervision of road works. Technical supervision of works, and Republican Unitary Enterprise Roads Department preparation of consultant’s selection BELDOR-Center BELAVTODOR documents, for Components 2 and 3 Supervision of the EMP Republican Unitary Public Enterprise implementation and monitoring of Enterprise BELDOR- BELDORNII the environmental impact of the Center project.

45 Annex 7: Financial Management and Disbursement Arrangements BELARUS: Road Upgrading and Modernization Project

Country Financial Management Issues

1. The findings of the April 2009 Public Expenditure and Financial Accountability (PEFA) report (Report No 48239 – BY) indicate that Belarus has an effective and well functioning fiscal and budget management system. The strongest elements of the country’s public financial management system are the budget management and the treasury systems. The public sector internal audit function has been highly concentrated on compliance rather than audit of the effective use of public resources and this function could benefit from upgrades in methodology, scope and skills. Internal controls are effective in Belarus as expenditures by any government level are subject to detailed rules for processing and recording transactions. Public sector financial reporting is based on national accounting standards, which are not consistent with international accounting standards – though this difference is not considered to pose a significant risk to traditional investment projects implemented by central government ministries. Public procurement and the external audit function are in need to significant reform and modernization in order to align with good international standards and practices. The Government has indicated interest to reform several Public Financial Management (PFM) functions, possibly including implementation of several second-generation PFM reforms.

Existing FM arrangements at MA-C

2. Structure and divisions. The Division of Budgeting is responsible for planning and budgeting. Payments under each construction contract are planned in accordance with the stages of construction and payment terms as specified in the construction contracts. Other tasks of the Division of Budgeting include the preparation of business plans, analysis and calculations of cost of sales, and analysis of various financial and operational ratios. The Division of Accounting manages all accounting and reporting functions in MA-C and also processes all payments to and from the Treasury and bank accounts. The acts of acceptance and payments requests from construction companies are initially received and verified by the Division of Construction and then reviewed by the Division of Budgeting before the payment is processed by the Division of Accounting.

3. Staffing. The existing staff of MA-C in the Division of Accounting and in the Division of Budgeting has been appointed to be responsible to carry out the FM functions under the project. The staff is well-qualified. MA-C will appoint specific staff from the Division of Accounting to carry out routine work related to processing and accounting for the project-related transactions, including disbursement.

4. Budgeting. Road works expenditures have to be budgeted for each upcoming year. The specific road sections where construction and capital repair works are to be carried out during the

46 following year are determined by the Division of Construction, while initial data on maintenance is determined by BelDorCenter. Data on the construction, capital repair and maintenance needs are then transferred to the Division of Budgeting. The Division of Budgeting prepares the list of construction sites which is to be endorsed by BELAVTODOR, and later approved by Ministry of Economy and Counsel of Ministers. This division also prepares detailed calculations for construction and capital repair and maintenance works. Expenditures of MA-C have to be included in the State Budget. Generally, if the planned expenditures are included in the State Budget, then the funds are made available for payment from the treasury account upon request of the entity, without major delays. The loan funds do not need to be included in the State Budget.

5. Bank accounts. MA-C operates an account in the State Treasury and an account in Belinvest Bank. The State Treasury account is used for receipt of the budget funds and to execute payments to contractors for construction and capital repair and maintenance works. Generally, the payments though the State Treasury go smoothly, although processing a payment may take some time due to thorough review and reconciliation of documents, including comparison of the contract terms and amounts to all individual payments requested under these contracts. The account in Belinvestbank is mainly used to transfer funds to the accounts of the eleven branches of MA-C, who in turn have accounts opened in Belarussian commercial banks. Funds are transferred to these accounts, and are subsequently used for payments of salary and operational costs of the branch offices. The Belinvestbank Bank account is also used to make payments for MA-C maintenance expenditures and administrative costs.

6. Accounting and IT systems. The Division of Accounting maintains accounting records of MA-C and also receives and consolidates data from its branches. The MA-C Division of Accounting uses an automated accounting system (“Galaktika”) which has been adequately customized to suit the needs of MA-C; it can be further modified as required to meet any additional needs of this project. MA-C’s accounting policy (including the structure of the chart of accounts and accounting standards) complies with national accounting policies and standards. National standards are primarily concerned with accounting entries and bookkeeping issues rather than financial reporting and disclosure requirements. Although MA-C is a unitary enterprise (state-owned enterprise), international accounting and financial reporting standards (IFRs) are not applied. At the same time, the Division of Budgeting also maintains records related to each construction contract, including contract execution and payments. This may represent certain duplication of data; however, periodic reconciliation of data between the two Departments represents an additional control.

7. Internal controls. The accounting records of the Division of Accounting and the Division of Budgeting are periodically reconciled, at minimum at the time of preparation of reports. The State Treasury provides strong control over processing payments to contractors in accordance with the budget allocation and signed contracts. Reconciliations of transactions and balances are performed on a quarterly basis with all suppliers. However, the differences in the accounts payable/receivable are usually not investigated; some of the differences are due to different timing in acceptance of works, however other differences are not verified. Acts of acceptance are

47 received by the Division of Technical Control. The acts are also reviewed by the Division of Budgeting, Division of Construction, Division of Accounting, and finally signed by the chief engineer (the first deputy of the General Director). Compliance audits and technical audits are described in the sections below. The Division of Construction is responsible for planning the road construction and capital repair works, holding respective tenders, preparation of contracts, and overseeing the construction process.

8. Reporting. MA-C reports to BELAVTODOR, the Statistics Committee and the tax authorities. Reports to BELAVTODOR are comprehensive and include numerical data as well as an analysis of MA-C activities during the reporting period. The reports are produced monthly and quarterly, and they include a consolidated balance sheet, an income statement and various details, including road works by the type of works performed (i.e. construction, capital construction or maintenance) and also by segment of road which is being reconstructed. One of the detailed reports also includes a comparison of the budgeted and actual expenditure data on construction work per each contractor. The reports to the Statistics Committee are submitted monthly and reports to the Tax Inspection are prepared on a monthly and quarterly basis.

9. Compliance Audits of the entity. MA-C undergoes bi-annual reviews which are carried out by the State Control Committee (SCC, nominally the Supreme Audit Institution). The focus of such reviews is to determine the eligibility of use of budget funds, i.e. financing of all road construction and reconstruction works. The review is compliance-based, and the focus is not on the validity of the financial statements, but on the legitimacy and efficiency of use of the budget funds. The last review was completed in July 2009, and covered operations of MA-C during 2009. Based on the review, the SCC noted some payments that were not eligible to be funded from the State Budget; however, the effect of such deviation was not significant. Given that the purpose and the content of such reviews undertaken by SCC are significantly different from financial audits, the SCC compliance audit reports would not be suitable to meet the Bank’s project audit requirement.

10. Financial audits. Additionally, MA-C hires a private licensed audit company to audit the balances and operations of MA-C excluding those related to road works. The 2008 MA-C financial statements prepared under the national accounting standards were audited, and the audit was carried out in accordance with the national auditing standards by a locally licensed audit company (BelRosAudit). The auditor has issued an unqualified audit report on the 2008 financial statements of the MA-C but no separate management letter was issued.

11. Technical audit. Road construction and capital repair activities are carried out by contractors selected by MA-C, and quality of such works is overseen by the Division of Technical Control. The quality control/supervision of road maintenance done by the branches of MA-C is carried out by the entity “BelDorCenter”, a separate legal entity also subordinated to BELAVTODOR.

48 Financial Risk Analysis

12. Financial Risk Analysis: The overall residual FM risk is acceptable after mitigation. The table summarizing financial risks is provided below. Residual FM Risk Risk Mitigating Measures Risk

INHERENT RISKS

Entity level. First time experience of MA-C S Intensive Bank supervision particularly at the M with the rules and procedures of IBRD. initial stages of project implementation. FM Lack of proper coordination between training to MA-C’s FM staff, particularly on departments could potentially lead to delays the disbursement procedures. in implementation. Overall Inherent Risk S M CONTROL RISKS Staffing – MA-C limited experience with S Additional training will be provided to FM M IBRD procedures may result in the need for staff as necessary. further training, particularly at the initial stages of project implementation.

Funds Flow – risk of delays in S All payments will be reviewed and authorized M disbursements due to the need to become by MA-C director/deputy director. Large familiar with disbursement procedures of payments will be executed via direct the Bank. payments and the Designated Account will be utilized to manage smaller payments. Internal Controls and Accounting – MA-C S The project auditors will review internal M may not perform in accordance with control operations and report any findings in established procedures. their management letter. MA-C will address any weaknesses that would be noted by auditors or by the Bank during the test of controls performed as part of regular FM supervision. Accounting System – low quality accounting H By appraisal, the automated accounting S for use of loan fund; low reliability of the system has been modified to allow full accounting system. automation of accounting and reporting for the project. Project accounting records will be segregated from other accounts managed by MA-C. Financial Reporting – IFRs may not be S Timeliness and quality of the IFRs will be M prepared correctly or submitted with delays; reviewed by the Bank on a regular basis. incorrect reports may be basis for inefficient decision-making.

Auditing – Project and entity audits may not S Project/entity appointment process will be M be delivered on time and be acceptable; the started in October/November of the year audits may not reveal all inadequacies. which is to be audited. The selected auditor shall be from the pre-qualified list and therefore have sufficient capacity to perform quality audits and deliver reports on time.

49 Residual FM Risk Risk Mitigating Measures Risk S M OVERALL CONTROL RISK

S M OVERALL FM RISK

13. Risk Mitigation Measures. The following measures are incorporated in the internal control framework for this project to minimize the risk of misuse of project funds: - Direct payments to contractors and special committments – Applications above the Minimum Limit, as specified in the Disbursement Letter, will be used for via direct payments and special commitments, upon provision of full set of supporting documents to the Bank. - Control over Designated Accounts and transit accounts – Designated and transit accounts will be opened in Belinvestbank or another commercial bank acceptable to the World Bank. All payments orders for these accounts will be authorized by the MA-C. - Regular monitoring visits of the Bank – The Bank FM supervision (implementation support) will be carried out at least two times per year during initial stages of project implementation. The implementation support/supervision will include review of all FM aspects at MA-C. - Building of capacity at MA-C – Additional training will be provided to MA-C financial staff on Bank disbursement and FM procedures, including use of the Bank’s Client Connection system. Project staff will participate in Bank training courses and “just-in-time” training will also be provided by Bank staff during project implementation.

Plan for periodic monitoring visits

14. The minimum number of FM monitoring visits is to be at least three times per year during the initial stages of project implementation, which may be decreased to two times per year during later stages. During project implementation, the Bank will monitor the project financial management arrangements as follows: (i) review interim unaudited financial reports (IFRs), annual audited financial statements, and auditor’s management letters; (ii) review financial management, disbursement arrangements, and control environment, to ensure continuing compliance with Bank’s minimum financial management requirements.

Details of Financial Management Arrangements

Funds flow 15. A Designated Account in US$ with a ceiling of US$ 10 million will be opened in Belinvestbank or another local commercial bank acceptable to the World Bank. Further, an

50 account in BYR for payments in BYR will also be established in the same commercial bank. The treasury system will not be used for making project-related payments as currently the Treasury account is only used for executing payments for central government budget program/activities. Project funds will not managed as part of the state budget (MA-C is a state-owned enterprise and falls outside the central government systems).

16. Loan funds will be disbursed via: (i) Direct payments to suppliers or issuance of a Special Commitment and (ii) Advances to the Designated Account. Large payments (above the threshold specified in the Disbursement Letter) will be executed directly from the Loan account to the supplier or contractor account. Staffing 17. MA-C has appointed specific staff who will be responsible for project implementation. The following divisions will be mainly involved in the project implementation and financial management: Divisions of Budgeting and Accounting, Divisions of Construction and Technical Control. MA-C has issued an internal instruction appointing existing staff in each of these departments and making them responsible for all activities related to implementation of the loan- financed contracts. These activities will be performed as part of the regular tasks of these employees.

18. One of the existing staff in the Division of Accounting has experience from implementation of the EBRD-funded project in late 1990’s, and it is envisaged that this staff will primarily work on processing and accounting for the Loan-related transactions. One additional accountant may be hired by MA-C during project implementation. Budgeting 19. The responsibility for preparation and periodic revision of project budgets will be with MA-C, specifically with the Divisions of Budgeting and Accounting. The project budgets will be prepared based on the procurement plan agreed with the Bank, and will include an annual and quarterly projection of payments. The quarterly budgets will be included in the quarterly IFRs. Project budgets are not included in the State budget as MA-C is a state-owned enterprise falls outside the central government. Accounting Policies and Procedures 20. Project accounting will be carried out by the Division of Accounting, and will be done on cash basis with additional information provided for commitments on signed contracts. Accounting records will be maintained using a segregated set of accounts, expenditures will be recorded in both US$ and local currency. Accounting and expenditure records will provide sufficient project information by component, and will include information on services provided, payments executed, and balances due. The accounting system will also record balances and transactions to and from the Designated and transit accounts.

51 21. The accounting policies and procedures for the project have been established and prescribed in detail in the draft POM, including method of accounting, chart of accounts and operational responsibilities. The accounting policies and procedures envisage internal controls including access to Client Connection system and regular reconciliation of disbursement data.

22. Project accounting and reporting will be done in the existing “Galaktika” accounting system. The system has been modified to allow full automated accounting and reporting for the project. Reporting 23. Financial reporting (IFRs) for the project is the responsibility of the Division of Accounting. The IFRs sample format has been developed, and will be agreed at Negotiations. Quarterly IFRs will be provided to the Bank within 45 days after end of each calendar quarter. The sample IFRs includes the following reports: (i) sources and uses of funds (ii) uses of funds by components (iii) designated and transit accounts statement. Additionally, MA-C would also submit all project reports to government authorities as required by the national legislation. Internal controls 24. MA-C has established and will maintain an FM system acceptable to the Bank, including the system of internal controls. Elements of the internal controls system have been described above in relevant sections. In addition, the procedures for regular reconciliation of the project records with the Client Connection, to bank statements, regular SOE reconciliations will be established.

25. MA-C will follow the regular established procedures for making payments to suppliers/contractors after acceptance of goods/services by responsible technical departments and authorization of the acts of acceptance by the director/deputy director of the MA-C.

26. MA-C has prepared a draft POM which will need to be agreed and approved prior to Loan Negotiations. The POM includes details on FM and disbursement procedures, internal controls, including review, authorizations, regular reconciliations, segregation of duties, and acceptance procedures. The POM will be a detailed practical guidance document to the staff of MA-C during implementation and will be a living document which is to be reviewed and updated on a regular basis. External audit 27. Project audit: The audit of project financial statements will be performed annually by independent auditors acceptable to the Bank. Audit reports will include opinions on project financial statements (including statements of expenditures - SOEs) and the Designated Account. The annual audit reports will also include the auditors’ management letter, which is to include any significant internal control findings or weaknesses. The annual audited financial statements and audit report thereon will be: (a) provided to the Bank within six months after the end of each fiscal year and (b) made publicly available in a timely fashion and in a manner acceptable to the Bank. The details of how the audited financial statements will be made publicly available by the

52 Borrower will be agreed during Negotiations, In addition, following the Bank’s formal receipt of these statements from the borrower, the Bank will make them available to the public in accordance with The World Bank Policy on Access to Information.

28. Entity audit: The audit of MA-C consolidated financial statements (prepared under requirements of National Accounting Standards) will also be performed annually by private independent auditors. The audit will be carried out in accordance with acceptable auditing standards, and the audit TORs as well as the short list of auditors are to be agreed with the Bank. The annual financial audits will provide additional assurance as to reliability of MA-C financial statements, which would be used for determining the financial viability of MA-C as well as its ability to repay loans.

29. TORs for project audit and entity audit shall be finalized during project negotiations and will be included in the project POM. The annual audited financial statements and audit report thereon will be provided to the Bank within six months after the end of each fiscal year and made publicly available in a timely fashion and in a manner acceptable to the Bank. Disbursement Arrangements 30. Bank funds would be disbursed under the Bank’s transactional procedures including direct payments from the loan account, issuance of Special Commitments and disbursements through the designated account using full documentation. Full documentation will be used against contracts of US$500,000 equivalent or more for goods, US$5,000,000 equivalent or more for works, US$100,000 equivalent or more for consulting firms and US$50,000 equivalent or more for individual consultants. Statements of Expenditures (SOEs) will be used for expenditures incurred against contracts below the full documentation limit. Supporting documentation for SOEs including completion reports and certificates would be retained by the Borrower and made available to the Bank during project supervision visits. This documentation would be retained for at least one year after receipt by the World Bank of the audit report for the year in which the last disbursement was made. Designated Account 31. A Designated Account (DA) may be opened and managed at Belinvestbank or another commercial bank acceptable to the World Bank, including appropriate protection against set-off, seizure and attachment. The maximum allocation for the Designated Account related to the Loan will be US$10,000,000. The frequency of reporting eligible expenditures paid from the Designated Accounts would be on a quarterly basis, supported by necessary documentation as stated in the Disbursement Letter and along with the DA bank statement and a reconciliation of the DA bank statement.

53 Annex 8: Procurement Arrangements BELARUS: Road Upgrading and Modernization Project

A. General

1. Procurement under the Belarus Road Upgrading and Modernization Project will be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" published in May 2004 and revised in October 2006 and May 2010 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" published in May 2004 and revised in October 2006 and May 2010 (Consultant Guidelines) and the provisions stipulated in the Loan Agreement (LA). The various procurement actions under different expenditure categories are described in general below. For each contract to be financed from the Loan, the various procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) was published in February 2010 in UNDB on-line and in its printed version, as well as in dgMarket online. Specific Procurement Notices (SPN) and Requests for expression of interest (REI) will be published for all ICB procurement and consulting contracts as per World Bank Guidelines as the corresponding bidding documents and RFPs become ready and available.

2. Procurement of Works: Works contracts will include upgrading of a 53 km section of the M5 road between Minsk and Bobrujsk and will be procured through the ICB procedures. These large civil works divided into four (4) contracts require pre-qualification of contractors; the prequalification process was started in February 2010 and completed in July 2010. All bidding documents and contracts include measures to minimize or mitigate environmental impact and follow recommendations of the Environmental Management Plan (EMP). Possible savings in this procurement may be used for smaller works contracts for reconstruction and rehabilitation of roads to be procured through NCB or shopping for works.

3. In order to ensure economy, efficiency, transparency and broad consistency with the provisions of Section I of the Guidelines, the following criteria shall be followed in procurement under National Competitive Bidding procedures:

i. there shall be no eligibility restrictions based on nationality of bidder and/or origin of goods; ii. pre-qualification shall not be used for simple goods and works procurement and shall be conducted only for large works projects; iii. entities in which the State or a State official owns a shareholding of whatever size shall not be invited to participate in tenders for the Government, unless they are and can be shown to be legally and financially autonomous and they operate under commercial law;

54 iv. no national preferences may be applied on the basis of the origin of products or labor; v. joint venture partners shall be jointly and severally liable for their obligations; vi. no “participation fee” shall be required of bidders for the purchase of bidding documents. The only charge shall be equivalent to the cost of producing (copying) the bidding documents; vii. bids may be rejected where bid prices are substantially higher than the existing budget, in accordance with paragraphs 2.61-2.63 of the Guidelines; viii. rebidding shall not be carried out without prior approval of the Bank; ix. works contracts of more than eighteen (18) months’ duration shall include appropriate price adjustment provisions; x. prior approval of the Bank shall be required for any modification in the contract scope and conditions during implementation; xi. the Bank shall declare a firm or individual ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Bank, if it at any time determines that the firm or individual has, directly or through an agent, engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in competing for, or in executing, a contract financed by the Bank; and xii. each bidding document and contract financed from the proceeds of the Loan shall include a provision requiring bidders, suppliers, contractors and sub-contractors to permit the Bank, at its request, to inspect their accounts and records relating to the bid submission and performance of the contract and to have said accounts and records audited by auditors appointed by the Bank. The deliberate and material violation by the bidder, supplier, or contractor or subcontractor of such provision may amount to obstructive practice.

4. Procurement of Goods: Goods contracts will include the provision and installation of a modern electronic road tolling system on a section from km 22 to km 131 of the M5 road between Minsk and Bobrujsk. It will be procured through 1- or 2-stage ICB procedures for Supply and Installation of Plant and Equipment with prequalification. Similarly, savings (if any) could be used for procurement of related equipment through NCB or shopping for goods depending on the size of the contract and availability on the local market. NCB documents shall meet the above mentioned requirements.

5. Procurement of non-consulting services: not required under this project.

6. In accordance with the general recommendations for Belarus, the following thresholds are being established for different procurement methods under the project: Goods > US$500,000 will be procured through ICB Goods < US$500,000 will be procured through NCB Works > US$5,000,000 will be procured through ICB Works < US$5,000,000 will be procured through NCB Goods and works < US$100,000 will be procured through Shopping

55 7. Selection of Consultants: Consultant services required under this Project will include inter alia: development of the conceptual and technical part of the new electronic tolling system to be introduced in Belarus, training of road specialists, support to the supervision of road works and annual financial audit. Not all consultant contracts are identified at the moment and other consultant services may be included in the project. Consulting services will be procured by using various methods for selection of consultants including Quality and Cost Based Selections (QCBS), Least Cost Selection (LCS), Selection Based on Consultants’ Qualification (CQS) and Individual Consultants (IC). Short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

8. Operating Costs: will not be financed from the Loan proceeds.

9. Other Issues. The first component of the project (road construction and rehabilitation) does attract local State-owned construction companies who wish to compete with foreign contractors for the road upgrading (civil works) contracts. These local firms are legally and financially autonomous and operate under commercial law. Until recently, they were managerially dependent on the Borrower as their boards of directors in most cases included specialists from BELAVTODOR – a structure of the Ministry of Transport and Communications. To address this issue, MoTC has issued Order # 98-ц dated February 15, 2010, which removes the representatives from BELAVTODOR from the corresponding boards of directors. This change resulted in the establishment of full managerial independence of these firms; several of them have been prequalified to participate as bidders. Each case of participation of local State-owned contractors in the procurement under the project has been reviewed separately by the project team in consultation with the World Bank’s Regional Procurement Manager’s office and the World Bank’s Operational Procurement Review Committee (OPRC).

B. Assessment of the agency’s capacity to implement procurement

10. Procurement activities will be carried out by the Republic Unitary Enterprise MINSKAVTODOR-Center created by BELAVTODOR, which itself is the roads department of the Ministry of Transport and Communication of Belarus. The agency is staffed by a Senior Manager, a Senior Planning Specialist, a Financial Management Specialist, an Environmental Protections Specialist and a Legal Specialist. The procurement function is staffed by a Senior Procurement Specialist and a Procurement Specialist.

11. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Alexander Rukavishnikov, ECSC2 on February 15-19, 2010. The key issues and risks concerning procurement for implementation of the project have been identified and the corrective measures which have been agreed are given below:

56 Risk Rating Mitigation Rating 1. The PIT staff has limited capacity S All contracts will be subject to prior review by the M to undertake the proposed World Bank. procurement work under the Project, A procurement consultant, experienced in the particularly regarding international Bank’s procurement has been used to train PIT staff procurement under World Bank and support the preparation of bidding documents guidelines. This may delay project for works. implementation. Training in procurement under World Bank guidelines will be provided by Bank staff. Project Launch Workshop will be conducted. 2. Evaluation committee members S The POM incorporating a detailed Procurement M are not familiar with international Manual has been prepared. The POM includes: (a) procurement procedures, and may sample TOR and qualification requirements for delay the procurement process, procurement staff and for evaluation committee especially the evaluation of bids and members; (b) conflict of interest disclosure forms proposals. which should be signed by all evaluation committee members. S= Substantial, M=Moderate

12. The overall project risk for procurement (before mitigation measures) is rated as substantial. After mitigation measures, the projected risk level is reduced to moderate.

C. Procurement Plan

13. The PIT, at pre-appraisal, has developed an initial Procurement Plan (PP) for the entire project scope consistent with the implementation plan, which provides information on procurement packages, methods and Bank review. Since this would cover the entire project completion period it will be reviewed periodically, particularly when progress reports are submitted. However, a firm procurement plan for the first 18 months of project implementation will be prepared and agreed upon between the Borrower and the Bank project team at negotiations, and will be available at the implementing agency’s project database and on the World Bank’s external website. The PP will be updated in agreement with the World Bank project team annually or as required to reflect the actual project implementation needs and the improvements in the implementing agency’s institutional capacity.

D. Frequency of Procurement Supervision

14. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended supervision visits every six months.

E. Details of the Procurement Arrangements Involving International Competition

15. Goods, Works, and Non Consulting Services

(a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 8 9

Ref. Contract Estimated Procurement P- Domestic Review Expected Comments No. (Description) Cost Method Q Preference by Bid- US$x1000 (yes/no) Bank Opening (Prior / Date Post) Contract 1 Upgrading of 17.42 km road 1 43,125 ICB Yes No Yes 10/2010 section (from km 65.18 to km 82.60) Contract 2 Upgrading of 10.4 2 km road 25,700 ICB Yes No Yes 10/2010 section(from km 82.6 to km 93.0 Contract 3 Upgrading of 16.59 km road 3 41,000 ICB Yes No Yes 10/2010 section (from km 106.01 to km 122.60) Contract 4 Upgrading of 8.4 4 km road section 20,800 ICB Yes No Yes 10/2010 (from km 122.60 to km 131.00) Contract 5 1-stage Supply and SIPE with 5 Installation of the 17,500 ICB Yes No Yes 12/2011 PQ or 2- electronic road stage SIPE tolling system

(b) ICB contracts regardless of the cost above per contract and all direct contracting will be subject to prior review by the Bank.

16. Consulting Services

(a) List of consulting assignments with short-listing of international firms.

1 2 3 4 5 6 7

Ref. Description of Estimated Selection Review Expected Comments No. Assignment Cost Method by Bank Proposals US$x1000 (Prior / Submission Post) Date Consultancy support to develop technical and functional 1 specifications for 500 QCBS Yes 10/2010 tolling system, and bidding documents

(b) Consultancy services, regardless of the cost, will be subject to prior review by the Bank.

(c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than USD 100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

59 Initial Procurement Plan Dated September 2009 Belarus: Road Upgrading and Modernization Project a) Works and Goods

Expected Contract Description/ Location Bid- Start Package No. Award Cost Date Opening Date Date Packages

Method Method Date (US$) /m Invitation Estimated Date Completion Procurement (PRIOR / Post) / Post) (PRIOR Review By Bank No. of

A B C D E F G H I K

Upgrading of 53 km road section, including road, March 1. WORKS 130.6 1 ICB Prior July 2010 Oct. 2010 Nov. 2010 Oct. 2013 bridge and ancillary works, 2011 4 lots

Total 1. for works 130.6

2. GOODS Installation of the electronic road tolling 17.5 1 ICB Prior June 2011 Sept.2011 May. 2012 Sept.2012 Oct.2014 system

17.5 Total 2. for goods

In case of savings some additional procurement of road reconstruction or supply of related equipment

may be conducted under NCB and shopping procedures

Legend: International Competitive Bidding (in accordance with section 2 of the Guidelines) For works contracts valued at or more than $5 million ICB = For goods contracts valued at or more than $500,000

National Competitive Bidding (in accordance with section 3.3 of the Guidelines) For works contracts valued less than $ 5million NCB = For goods contracts valued less than $500,000

DC= Direct Contracting (in accordance with section 3.6 of the Guidelines) Shopping (in accordance with section 3.5 of the Guidelines) SH = For works contracts valued at or less than $100,000 For goods contracts valued at or less than $100,000

[NBF]= Non-Bank Financed Prior review All contracts regardless the price.

60 b) Consultants’ Services

Review Adverti- Expected Contract Comple- Estimated by Bank sement Proposal Start Package No. Award tion Description of Assignment/ Location Cost Prior / for EOI Submission Date

Method Method Date Date (US$) / m Selection Post Date Date

A B C D E F G H I J

3. CONSULTANTS' SERVICES

Consultancy support to develop technical April 0.5 QCBS Prior Sep 2010 Nov 2010 Nov 2010 Nov 2011 and functional specifications and bidding 2010 documents (Road Tolling System) Training of personnel 0.05 IC Prior Annual financial audits 0.25 QCBS Prior Oct 2010 Nov 2010 Dec 2010 Jan 2011 July 2013

QCBS = Quality and Cost-based Selection (in accordance with sections 2.1 - 2.28 of the Consultant’s Guidelines)

QBS= Quality Based Selection (in accordance with section 3.2 the Consultant’s Guidelines)

CQ= Consultants Qualifications (in accordance with section 3.7-8 of the Consultant’s Guidelines)

LCS = Least-Cost Selection (in accordance with section 3.6 of the Consultant’s Guidelines)

SSS= Single source Selection (in accordance with section 3.9-13 of the Consultant’s Guidelines)

IC = Individual Consultant (in accordance with section V of the Consultant’s Guidelines)

Prior All contracts Review

61 Annex 9: Economic Analysis BELARUS: Road Upgrading and Modernization Project

Part 1: Road Upgrading – Component 1

1. The World Bank team analyzed (i) the reasoning for the choice of this road versus other roads, and (ii) the economic feasibility of this specific road investment project. Concerning the first point, after an analysis of traffic on the Belarusian road network, it became clear that the road section selected for this project is presently the two-lane road with the highest traffic on the entire network and thus the prime candidate for upgrading to four lanes.

A. Assumptions for Economic Analysis

2. Background. The upgrading and modernization of a 53 km section of the M-5/E271 road from a two-lane to a four-lane road is part of the Government’s road sector investment plan until 2015 (“Roads of Belarus”). The section to be upgraded is located between Minsk and Bobrujsk and is part of the 508 km long Belarusian section of the Trans-European Transport Corridor IXb linking Baltic Sea and Black Sea ports, between Klaipeda – Vilnius – Minsk – Kiev and Odessa. It is the section with the highest traffic on a two lane road on the Belarusian road network. For the Government, the proposed project is the most important section to be upgraded, as highlighted in the “Roads of Belarus” road network development program. The Government initially planned to finance the project from its own resources, but turned to the World Bank in the current, challenging fiscal environment. The proposed project would benefit road users in general as it aims to reduce road transport costs and facilitate transit by removing obstacles to future traffic growth. The project also includes a component to finance the design and installation of a modern electronic road tolling system on the section between km 22 and km 131 of the M5, which will help the Government’s cost recovery in the road sector. The present economic analysis is limited to the road upgrading part (civil works) of the project.

3. Methodology. The economic cost-benefit analysis is based on a feasibility study prepared by BELGIPRODOR, the state design institute, and project analysis conducted with the HDM4 software package by the World Bank team. While the World Bank is expected to fund the subsections between km 65 to km 93, and km 106.1 to km 131, the feasibility study prepared by BELGIPRODOR covers the whole section of the M5 road between Pukhovichi and Bobrujsk (km 57.3 to km 131) of a total length of 73.7 km. The HDM4 analysis carried out by the World Bank team, however, was only performed on the section to be funded by the World Bank (52.7 km length). The evaluation period is 30 years from the planned start of construction in 2010 until 2039. The economic evaluation compares the economic costs and benefits of the “Project Scenario” with those of the “Base Case Scenario”, which assumes that no major capital investment takes place on the road (maintenance only). The economic benefits are derived from lower maintenance and repair costs of the upgraded section, lower road user costs, travel time savings and accident rate reduction. The total financial construction cost estimate for the 73.3 km

62 section is US$164 million. The World Bank funded section of 52.7 km is expected to cost US$120 million including local and environmental taxes. The estimated construction period is two years (2011-2013).

4. Traffic Forecast. Present traffic levels on the project road vary between different sub- section, with an average of about 8,400 vehicles per day. In the period 2000-2005, the annual traffic growth on the whole section ranged between 7.6 and 8.9 percent. Traffic growth increased to 12.5 and 14.6 percent in the period 2005-2008. A traffic survey conducted in August 2009 measured a traffic growth of 9 percent for 2009. The high growth on the proposed section has been driven by several factors, such as the general increase in vehicle ownership in Belarus, rising incomes, population growth and strong economic growth in the large urban and industrial areas of Minsk, Gomel, Bobrujsk and Zhlobin. As the growth in vehicle ownership is expected to stabilize by 2015, average annual traffic growth is expected to be approximately 5 percent for light vehicles and 3 percent for trucks and buses over the period 2010-2039. Applying these growth assumptions, the World Bank forecast in the Project Scenario for annual average daily traffic (AADT) is 30,956 by 2039, growing from 8,380 in 200914. The traffic forecast clearly exceeds the national threshold of 10,000 vpd for the upgrading of roads to a 4-lane Category IB road.

5. Transit Traffic. Another key factor driving traffic growth is transit traffic between Ukraine and the Baltic countries, as the road section lies on the strategically significant Pan- European Transport Corridor IXb linking Klaipeda-Vilnius-Minsk-Kyiv-Odessa. Upgrading the proposed section to Category I-B is expected to increase the attractiveness of Corridor IXb to transit traffic. In 2008 transit traffic between Zhlobin and the Ukrainian border grew by 10 percent. The proposed project would create the necessary road capacity to allow transit traffic to increase to more than 13,500 vehicles per day (vpd) by 2039.

B. Project Costs and Benefits

6. Investment Costs. The upgrading of the whole 73.7 km section between Pukhovichi and Bobrujsk from a two-lane to a four-lane road is estimated to cost US$ 164 million. The proposed section was selected for upgrading because it currently has insufficient traffic capacity, leading to congestion at certain times and unsafe traffic conditions and head-on collisions due to frequent overpassing of the slower trucks by faster passenger vehicles. A large number of cargo trucks pass through the villages along the road which results in low pdestrian safety and increased air and noise pollution.

7. Maintenance Costs. Regarding maintenance costs, the two tables below illustrate the financial and economic unit costs of the basic maintenance carried out in the Base Case Scenario,

14 BELGIPRODOR estimates that by 2039, traffic is expected to grow from the current daily traffic of 7,437-9,012 vpd (depending on the sub-section) to a maximum of 33,500 vpd along the most travelled road section near Bobrujsk (km 128.1 – km 131.5) and to 27,500 vpd along the road section near Osipovichi (km 99.6 – km 104).

63 and the maintenance costs of the Project Scenario over the 2010-2039 forecast period15. Costs are expected to increase because of doubling the number of lanes to be maintained.

Table: Unit Costs for Maintenance in Base Case Scenario

Description of works Unit Economic Financial Cost (US$) Cost (US$) Milling (3 cm), application of upper m2 15.48 18.58 asphalt-concrete cover (4 cm) with establishment of a leveling course One-layer surface treatment with m2 7.82 9.38 establishment of a leveling course Patchwork m2 9.05 10.86 Other maintenance works Km 9,137 10,964

Table 1: Unit Costs for Maintenance in Project Scenario

Description of works Unit Economic Financial Cost (US$) Cost (US$) Milling (3 cm), application of upper m2 15.89 19.07 asphalt-concrete cover (4 cm) with establishment of a leveling course One-layer surface treatment with m2 8.03 9.64 establishment of a leveling course Patchwork m2 9.05 10.86 Other maintenance works Km 11,990 14,387

8. Vehicle Operating Costs and time savings. The HDM4 model requires a set of inputs including unit costs for labor, value of time, and costs of purchasing, operating and maintaining a vehicle. The table below illustrates all operating characteristics used as inputs for the HDM4. For example, the driver’s hourly cost of time varies as a function of vehicle size, increasing from a small passenger vehicle (US$0.73/hr) through a truck to a medium bus (US$0.95/hr). Vehicle maintenance costs were calculated assuming an average financial cost of US$1.22/hr and economic hourly cost of US$1.06. This value is applied for to all vehicles types (passenger cars, minibuses, small trucks and heavy vehicles).

15 Routine current and major repairs have been estimated in accordance with Belarusian regulation TCEP 45-3.03- 112-2008 (Motor Roads, Non-rigid road pavements). On the basis of this schedule, total maintenance costs were then summed up using July 2009 prices.

Table: Operating Cost items for vehicle fleet (in US$)16

Economic/financial costs by vehicle types Volkswagen GAZEL 2 AXLE 3 AXLE IVECO IKARUS PAZ Unit Passat 1.9 2705 ZIL KAMAZ EUROTEC 250 (medium (passenger (light 433362 5320 MP440E42 (medium bus) car) truck) (medium (heavy (articulated bus) truck) truck) truck) New vehicle item 16279 12751 40698 80930 166047 165581 106047 price 17395 15586 40698 80930 166047 165581 106047 Tire price item 54,8 92,7 99,0 182,1 286,8 133,2 84,2 65,2 101,4 104,4 192,0 302,4 140,4 88,8 Fuel price liter 0,50 0,50 0,39 0,43 0,43 0,43 0,39 0,99 0,99 0,78 0,79 0,79 0,79 0,78 Lubricants liter 8,4 4,8 5,9 5,9 5,9 5,9 5,9 price 8,4 4,8 5,9 5,9 5,9 5,9 5,9 Vehicle maint. hour costs 1,06 1,06 1,06 1,06 1,06 1,06 1,06 1,22 1,22 1,22 1,22 1,22 1,22 1,22 Driver’s wage hour 0,73 0,74 0,80 0,84 0,91 1,04 0,95 0,83 0,85 0,92 0,96 1,04 1,18 1,09 Annual bank % 12 12 12 12 12 12 12 interest 12 12 12 12 12 12 12 Overheads US$ 3000 4500 10000 10500 10500 3000 4550 10000 10500 10500 Cost of time: hour passengers during 1,49 1,49 1,49 1,49 1,49 1,49 1,49 working hours ------passengers hour 0,75 0,75 0,75 0,75 0,75 0,75 0,75 during off- hours ------Cost of time: hour cargo 0.1 0.1 0.1 0.1 0.1 0.1 0.1 transportation ------

16 These assumptions were adapted from BELGIPRODOR’s feasibility study with some changes made by the World Bank team.

65 9. Project Benefits. Benefit calculations follow the standard methodology of comparing, over the project evaluation period, the Base Case Scenario and the Project Scenario. The benefits consist of (i) vehicle operating cost savings between the two scenarios, (ii) travel time savings for occupants of both passenger and freight vehicles, (iii) the residual value of the road investment, and (iv) the reduction in the number of traffic accidents.

10. Road Safety. The project will include several measures to improve traffic safety. Between 2006 and 2008, a total of 82 road accidents (35 fatalities, 81 injured) were registered along the section km 57.4 – km 131.5 of the M-5/E-271 Minsk-Gomel road17. Most road accidents on the section consist of head-on collisions (38 percent of total), automobile-pedestrian accidents (26 percent) and “overturning” (18 percent)18. In order to address these safety problems, the project will include a number of measures to improve road safety, such as separating the opposing lanes by a median several meters wide, installing a metal fence between opposing traffic flows, improving safety of junctions, interchanges and pedestrian crossings, and eliminating other types of “black spots”. As a result, the number of head-on collisions, typically representing the most serious accidents, is expected to decrease to almost zero. This would consequently reduce the fatality rate very significantly. The total net benefits from improved road safety are expected to be US$ 9.6 million19.

11. Results of Economic Analysis. The economic analysis carried out by the World Bank team shows that the economic return of the project would be sufficiently high to justify the proposed project. The discounted net present value (NPV) of the World Bank financed section (52.7 km) is US$ 159 million with an economic internal rate of return (EIRR) of 21.1 percent. The total financial cost of the project is US$ 120 million. As noted above, the main benefits of the whole project are derived from savings in vehicle operating costs (discounted total of US$ 186 million) and reduced travel time costs (discounted total of US$ 52 million). The high travel time cost savings is due to the heavy congestion the road would experience without the widening to four lanes. The discounted benefit from a reduced accident rate is estimated at US$ 9.6 million. The table below shows a summary of the economic analysis with sensitivities. The project is more sensitive to changes in traffic than in construction costs, but in all cases the NPV remains positive with a worst case EIRR of 13.8 percent.

17 State Road Inspection of the Republic of Belarus, as cited in Belgiprodor’s feasibility study (section 7) 18 Ibid. 19 It was assumed the value of lost life is US$ 436,000, cost of injury is US$ 32,770, and cost of damage is US$ 1,680.

Table: Results and sensitivity analysis based on HDM-4 analysis20

Traffic -20% -10% Base +10% +20% 30 mln 81 mln 140 mln 202 mln 267 mln +20% 13.8% 16.4% 19.1% 22.1% 25.7% 39 mln 91 mln 149 mln 211 mln 276 mln +10 14.5% 17.2% 20.0% 23.3% 27.1% NPV=US$ 159 48 mln 100 mln 221 mln 285 mln Base mln

Cost Cost 15.2% 18.1% 24.6% 28.7% EIRR=21.1% 57 mln 109 mln 168 mln 230 mln 294 mln -10% 16.1% 19.2% 22.4% 26.1% 30.6% 67 mln 119 mln 177 mln 239 mln 304 mln -20% 17.2% 20.5% 23.9% 28.0.% 33.0%

Part 2: Economic analysis for Road Tolling System – Component 2

12. A feasibility study for the introduction of electronic road tolling in Belarus for trucks above 12 tons was prepared by BELDORCENTER. It includes a comparative financial analysis of different tolling options, with the main objective of selecting the most suitable tolling technology for Belarus. The analysis was made for 11 combinations of different tolling technologies and toll levels. The feasibility study recommends introducing a system based on microwave technology, with retention and upgrade of the existing tolling systems at the M-1/E30 road.

13. The broad introduction of tolling for trucks on all main roads in Belarus is a road sector policy decision that has been taken by the Government and which is supported by the Bank. It aims at the gradual replacement of general taxes as the main source of funding for roads by road user charges and especially road tolls. The investment funded by the Bank under Component 2 of this project is not a stand-alone investment, but rather the initial stage of a large new system. This is especially true for the data processing center now to be implemented, which will be large enough to process the data for a nationwide electronic road tolling system. A classic economic cost-benefit analysis of this initial investment now to be funded by the Bank would not be appropriate since it would not capture the benefits of the larger system. Instead, there was a need to carry out a comparative technical and financial analysis of different technological options. Such an analysis was prepared by BELDORCENTER and it provides a good justification for the

20 Traffic sensitivity was tested by changing the starting assumption for traffic, AADT in 2009 of 8,380, by ±10% and ±20% and then using the same traffic growth assumptions as in the base case, i.e. passenger car traffic grows by 5 percent, while bus and truck traffic grows by 3 percent. The cost sensitivity was applied to the total financial cost of US$ 120 million. Note that here “base case” refers to the assumptions used in the default Project Scenario.

67 choice of technology. Component 2 of the project consists of the design and installation of the road tolling system on a 109 km long section of the M5-E-271 road, and it should be seen as the first necessary step of the much broader tolling modernization process which consists of three phases. The feasibility study describes that during the first phase of the modernization process, tolls will be introduced gradually to a total of 310 km of roads. In the second phase, the selected technology will be extended to another 1,986 km of roads and, finally, in the third phase, to a further 1,505 km. The analysis presented in the feasibility study covers all three phases to show the expected financial costs and benefits over 10 years. It would not be meaningful to separately analyze the economic costs and benefits of Component 2, which is an integral and necessary part of the modernization process.

68 Annex 10: Safeguard Policy Issues BELARUS: Road Upgrading and Modernization Project

1. Introduction. The development objective of the proposed project is to reduce transport costs for road users on the upgraded sections of the M5 road, and introduce an efficient cost recovery mechanism in Belarus road sector through electronic tolling. By far the largest part of the project funding (about 88 percent) will be used for civil works to upgrade a section of the M5 road between Minsk and Bobrujsk (project Component 1); this will include the widening of the road section from 2 to 4 lanes. The remaining part of the project loan will be used for the supply and installation of a modern electronic road tolling system along the same road section, and some technical assistance. Safeguard policy issues related to this project are thus linked exclusively to the civil works to be executed under Component 1 of the project. The Environmental Impact Assessment (EIA) study and Environmental Management Plan (EMP) which have been prepared by the Government provide an assessment of potential environmental and social impacts of the project, along with the necessary measures to avoid and/or mitigate those.

2. Terms of reference and methodology of the study. The main scope of the Environmental Impact Assessment study was to: (a) ensure that environmental issues are being taken into account during the design and implementation of the project; (b) determine the potential environmental and social impacts of the project; (c) to specify the mitigation and monitoring measures to be undertaken during road construction works. The study was conducted based on (i) an analysis of the existing national EIA study (ii) various legal documents, regulations and guidelines relating to road construction in Belarus; (iii) EIA reports prepared for similar World Bank funded projects in other countries, which were used as samples; (iv) World Bank safeguard policies, as well as guidance materials issued by the World Bank; (v) field investigations on the project baseline conditions, including on the status of the geological and hydrological conditions, biodiversity, socio and economic situation, etc; (vi) measurements and modeling of traffic- related air and noise emissions; and (vii) results of consultations with the representatives from all stakeholders and interested parties. The draft TORs for the study were widely disseminated and consulted with all interested stakeholders.

3. Project environmental category. The project has been assigned Environmental Category "B" in accordance with World Bank Operational Policy 4.01, "Environmental Assessment". This classification was based on the fact that (i) construction works as such will essentially be confined to the existing right-of-way which is fully owned by the State, (ii) there is no resettlement of people or businesses; and land acquisition is limited to transfer of land between different State agencies, (iii) any significant potential environmental impacts of the project are only of a temporary nature; these are limited to two small segments of the road where village bypasses and a new bridge are to be built. For a category B project it is necessary to conduct a site specific EIA study and prepare an EMP for both the construction and operation phases. Furthermore, the EIA and EMP have to be disclosed and consulted with all interested parties,

69 including potentially affected people in the country, as well as in the World Bank Infoshop. All of these steps have been completed for this project.

4. National EIA requirements. Belarus has a well established EIA process involving the performance of EIA and its review through staff of the State Environmental Expertise (SEE). This is part of the overall approval cycle for all Belarusian investment projects. The Ministry of Environment and Natural Resources (MENR) is the main responsible institution for this area. It has maintained a high level of expertise related to environmental assessment and continues to further develop its methods using experience from the EU. The EIA rules and procedures for Belarus are described in detail in a series of regulatory documents: (a) Law on Environmental Protection (2002); (b) Law on State Ecological Expertise (2000); (c) Instruction on the State Ecological Expertise (2001); (d) Regulation on EIA (2005); and (e) Regulation on State Ecological Expertise of the land planning documents. As per these documents, the proposed project is qualified in Belarus as a project which does not have significant environmental impacts and is not subject to a full EIA study, but instead only to a partial environmental assessment including a environmental protection section in the road design document. Furthermore, as per the last modifications to the Belarusian laws on environmental assessment, the project is not subject to an individual review by the State Ecological Expertise (SEE) and its environmental review should be done according to the State Construction Review process.

5. Location of the road and its environmental characteristics. The project area is generally flat, with some low hills on its north-western side and marshlands with a series of lakes and rivers towards the south-east. The proposed road section crosses a small river (Svisloch river, a local non-navigable river 327 km long) and two small streams, as well as the upstream end of the Osipovichi water reservoir. Most of the area is planted with native and secondary forests. The soils are sandy and marshy with wetlands in the river valleys. The subsoil structure is mainly composed of sands. The project area is mostly planted with trees, with only limited areas of agricultural land. The road passes the southern side of five small villages (Podberezhie, Tepluhi, Sosnovy, Iasen and Boyary). The valley of the Osipovichi water reservoir with its meadow wetlands is the most significant ecosystem along the route. Planted forest represents the typical ecological typology on the road; only close to the rivers and streams does the ecological typology include meadow and wetland vegetation. In the broader area of the road there are no protected areas and/or valuable natural habitats. The road will generally follow the existing alignment. The road alignment is almost entirely straight with only very minor curves. Only very minimal changes to the general road alignment are planned for leveling, horizontal contouring and correction of curves. Only on one road segment a new embankment will be built in order to cross the existing railroad, with the maximum embankment height of about 6 to 7 meters. Terrain cuts are not needed.

6. Land acquisition. The road will follow the existing right-of-way (ROW) with the exception of the village of Sosnovy where a short bypass of 5.7 km length and a bridge (about 180 meters long) over the river is to be constructed. Also, in the village of Boyary, the road alignment will be moved by about 50 meters to protect inhabitants by increasing the distance

70 between the road and the nearest houses. While the actual road works will take place almost entirely within the existing ROW, the ROW along most of the road will have to be widened to accommodate the "buffer zone" required by Belarusian road standards between the road lanes and other land uses. For this purpose a strip of forest, parallel to the road and on one side only, of between 10 and 30 m in width will have to be cut down. The total area of planted trees to be removed for the project is about 120 ha; this volume of tree removal is regarded as non-critical since it represents only about 0.0127 percent of the total area of forests in the project area, and given the Government’s ongoing tree planting scheme of about 50,000 ha over the next few years. The corresponding land is to be transferred to the road agency from other State entities. Such transfers will be simple administrative acts. There will not be any need for acquisition of land from private landowners nor will any private businesses be relocated or affected by the project. The land transfer procedures have been comprehensively reviewed and are reflected in the Project Operational Manual; they are fully consistent with prevailing laws and regulations in Belarus. The land transfer process is currently being carried out; it is well advanced and is expected to be completed in good time to allow for the anticipated project implementation schedule.

7. Borrow pits. The road works will need sand to be extracted from four borrow pits located along the road alignment. Extraction procedures are well regulated under national environmental laws. Rehabilitation of borrow pits is compulsory and noncompliance is prosecuted. The extraction of gravel materials needed for road works will be restricted to non-river sources in the project area (existing licensed quarries).

8. Potential environmental impacts. The potential negative project impacts and environmental issues are typical for road construction activities and include the following: disruption of air quality, increased noise, loss of vegetation, disturbance of the fauna, communal wastes, use of bitumen, disposal of construction solid or hazardous waste, and potentially labor camp management (although it is not certain if a labor camp will be needed at all, since the construction site can easily be reached within a short time from Minsk or the nearby villages). All these effects will be temporary, minor and local. As mentioned above, the project will require cutting of a strip of planted forest along the ROW, on one side only, and at the location of the two bypasses, totaling an area of about 120 ha of planted forest lands. The project will also affect the Osipovichi water reservoir ecosystem during the construction of the bridge over the Svisloch river. These impacts are expected to be minor and can be managed during project implementation by applying the avoidance and mitigation measures outlined in the Environmental Management Plan.

9. Potential social impacts. As the proposed road will pass the immediate southern vicinity of the five small villages mentioned above, the project could potentially cause negative impacts on the health of the local population. In order to estimate the magnitude of these impacts and to propose relevant mitigation measures, the potential impacts of traffic emissions and noise on people living along the road in those villages were assessed during project design. Based on the field measurements and the modeling of increased traffic it was concluded that in terms of air

71 pollution caused by the projected traffic increase, its level will not exceed the existing national health standards. Air pollution may also be reduced due to more constant travel speeds on the upgraded road. In terms of traffic noise, the field measurements conducted and the modeling showed that projected traffic levels could cause an excess by 8-12 dBA above the permissible noise level of 55 dBA at a few locations. To reduce the potential noise as the result of increased traffic, the EMP includes the construction of noise barriers between 2 and 4 m height at those places. At the village of Boyary the road alignment is being shifted by 50 meters to reduce potential negative effects on the local population. At the same time, the project will bring a series of positive social impacts, including increased economic opportunities along the road, better connectivity and the resulting further economic and social development of communities located along the road.

10. Traffic Safety. Major injuries and death are today resulting mostly from head-on collisions along the existing two-lane road. The project will separate opposing traffic onto separate lanes, divided by several meters of space and also crash barriers. It is expected that this will entirely eliminate head-on collisions which are the major cause of traffic injuries and deaths on that road section. The project will thus have a positive impact on human health and road safety through decreased number of accidents.

11. Environmental Management Plan. The borrower prepared a detailed EMP which contains: (a) necessary mitigation measures; (b) a monitoring plan; (c) implementing arrangements. Proposed mitigation measures include actions to be undertaken for all project stages, – design, construction and operation. The EMP emphasizes the need to incorporate, during the road design stage, the appropriate requirements to minimize the effects on environment that may result from the planned construction activities, as well as to avoid social and health impacts. To minimize potential construction-related negative impacts during the construction phase, a combination of preventive actions and monitoring is necessary to be implemented, including: (i) proper management of construction waste; (ii) control measures for waste fuel, oil and lubricants, and other hazardous substances; (iii) provisions for protection of vegetation and fauna, (iv) actions to reduce noise and dust levels; (v) soil erosion control and water quality protection, (vi) rehabilitation of areas used for construction camps, asphalt- concrete plants and temporarily storage of building materials, once the project is completed, as well as (vii) the provision of adequate crosswalks for children and the local population in general. The road design is such that villages along the road will not be cut by the road, thus largely avoiding the need for crossing the road by the local population. In order to minimize potential noise impacts, as mentioned above, the project will build noise barriers within villages. These mitigating measures would constitute an integral part of project implementation. Appropriate clauses will be included in the road works contracts, binding the contractors to carry out the environmental protection measures during road construction works. Among the most important provisions to be provided to the contractors are the following: (a) provisions on spill prevention and cleanup, dust and noise control, traffic management during construction, safety enhancement, construction site cleanup and rehabilitation; and, (b) provisions governing the sources of construction materials. Materials (e.g., asphalt, stone, sand, etc.) would be supplied

72 only from sources with approved licenses, permits, and/or approvals for environment and worker safety. Any equipment used during construction would meet internationally recognized standards for environment and worker health and safety. The Bank will review the contracts for roads construction and/or rehabilitation works in each road subproject to ensure that these clauses and measures are incorporated as proposed.

12. Monitoring Plan. The construction supervision will include the tracking of the effectiveness of the EMP. It will also identify the environmental indicators to be monitored, the monitoring methods and frequency, and reporting procedures. Monitoring of implementation of environmental mitigation measures will be the responsibility of: (a) construction Contractors; (b) the environmental specialist of the Belarus Roads Research Institute (BELDORNII); (c) the supervising consultant; and (c) Rayon ecological inspectors. Mitigation measures related to biodiversity conservation will also be monitored by the specialized institutions from the National Academy of Science. The findings of the relevant monitoring activities will be reflected in quarterly and annual progress reports. The progress reports will be prepared by the environmental specialist of BELDORNII. The reports will cover the implementation of the proposed EMP activities, as well as the description of the extent of environmental impacts (if any). Furthermore, the Environmental Specialist will also develop the reporting requirements and procedures to ensure compliance of the contractors. The construction supervisors will inspect, along with the construction sites as such, the borrowing pits and dumping areas, and other potentially affected areas. During the construction phase, the Environment Specialist and the environmental inspectors will ensure that measures specified in the EMP are followed by the contractors who have contractual responsibility towards these actions. In case of noncompliance, project management will take the necessary actions in accordance with the works contract. During the operations phase the main responsibility concerning monitoring activities will be of the local road enterprises that carry out road maintenance.

13. Implementing arrangements and institutional capacities to perform environmental safeguards. Direct responsibility for project implementation would rest with the project implementing agency MINSKAVTODOR-Center, a subsidiary of the national road agency BELAVTODOR. Its responsibilities include: procurement, financial management, contract management, project and program monitoring and evaluation, reporting, as well as ensuring implementation of environmental safeguards. Responsibilities for project environmental safeguards are assigned to Belarus Roads Institute (BELDORNII). The Institute is a leading research organization in Belarus in the area of building, repair and maintenance roads and bridges. The quality management system of the Institute was certified for compliance with the standards ISO 9001. The Institute is well equipped and has relevant computing machinery as well as highly qualified staff. Among major Institute’s tasks are environment protection activities in the road sector, including conducting Environment Impact Assessment, monitoring of traffic emissions and noise, as well as labor safety in the sector. For the purpose of EMP implementation BELDORNII will appoint a special Environment Specialist in charge of coordination of all environmental aspects of the project development and implementation. The primary tasks of the environmental specialist are: (a) integration of environmental requirements

73 in contracts for road works; (b) ensuring adequate implementation of the EMP provisions and especially of the stipulated mitigation measures; (c) monitoring and supervision; and (d) reporting. The EA institutional capacity of BELDORNII was assessed during project preparation. It was concluded it has adequate capacities to perform duties concerning the enforcement of the EMP provisions. Within BELDORNII”s main departments highly qualified staff is available as well as analytical equipment to perform needed analyses of environmental issues. Furthermore, this institution has previous experience in dealing with environmental safeguards while implementing other similar projects in the country, both under domestic and IFI (EBRD) funding.

14. EIA disclosure and consultation. In accordance with World Bank requirements, the project Implementing Agency MINSKAVTODOR-Center disclosed and consulted in the country the EIA documents at both stages, - scoping for discussing the TORs for the EIA study, as well as at the stage of the full draft of the EIA and EMP document. Consultations on the draft TORs were held on November 3, 2009 in Osipovichi, in the premises of the district roads enterprise (DEU 73). Earlier, in October 2009, BELAVTODOR had posted the draft TORs and a short preliminary Environmental Assessment memo on its web page (www.BELAVTODOR.belhost.by), informing all interested parties about the consultation. Furthermore, special announcements concerning this consultation were made in the national newspaper "Republic" (on October 3, 2009); in the sectoral newspaper "Roads of Belarus" (on October 29, 2009) as well as in the Osipovichi local newspaper "Osipovichi Land" on October 10, 2009. The meeting was very well attended with more than 30 participants, including representatives from Mogilev Oblast, District governments, village councils, environmental and traffic police authorities, NGO, media, and design institutes. The representatives from BELGIPRODOR presented the project goal and objectives, as well as its potential impacts and benefits. The main scope and objectives of the EIA study were discussed as well as potential environmental impacts of the project and mitigation approaches. Participants raised questions related to potential impacts of the increased traffic on air pollution and noise levels within the vicinity of the settlements. The project itself, as well as the TORs, was accepted by all participants.

15. Consultations on full draft of the EIA and EMP document were held on June 9, 2010 in Osipovichi in the offices of DEU-73. Prior to that the document was disclosed on the web-sites of BELAVTODOR (www.BELAVTODOR.belhost.by) and BELGIPRODOR (www.belgiprodor.by) so that all the interested parties could get knowledge of the project, its environmental and social impacts and benefits, environmental mitigation measures and plans for their implementation and monitoring. Special notifications about the time and venue of the consultations were published in the sectoral newspaper "Roads of Belarus" as well as in the Osipovichi local newspaper "Osipovichi Land". Besides, individual invitations for the consultations were sent to the relevant bodies, agencies and companies. The meeting was attended by representatives from Mogilev Oblast, village councils, environmental and traffic police authorities, medical specialists, NGO, media, road maintenance units. The Chief Project Design Engineer from BELGIRPODOR presented the brief project description, its goal and

74 objectives, technical issues, potential impacts and benefits. The biodiversity expert from the National Academy of Sciences presented results of the recently performed field studies of the project site and proposed measures relating to conservation of flora and fauna. The environmental expert from BELDORNII presented results of noise and air polluting emissions measurements. Participants raised questions on potential environmental impacts during performance of civil works, operation of construction plant, machinery and equipment, development and maintenance of pit quarries located along the road, measures of wildlife conservation and populations of beavers, in particular. Also questions relating to traffic safety and arrangement of bus stops were raised. Detailed responses on raised questions were given. The project itself and the draft EIA&EMP were accepted by all participants.

75 Annex 11: Project Preparation and Supervision BELARUS: Road Upgrading and Modernization Project

Planned Actual PCN review 10/29/09 Initial PID to PIC 11/03/09 Initial ISDS to PIC 11/03/09 Appraisal 09/03/10 Negotiations 09/28/10 Board/RVP approval 11/11/10 Planned date of effectiveness 02/28/11 Planned date of mid-term review 05/15/12 Planned closing date 11/30/14

Key institutions responsible for preparation of the project: MoTC – BELAVTODOR MINSKAVTODOR-Center BELGIPRODOR

Bank staff and consultants who worked on the project included: Name Title Unit Andreas Schliessler Lead Transport Specialist / TTL ECSSD Elena Klochan Senior Country Program Officer ECCBY Dmytro Kryshchenko Projects Officer ECSSD Romain Pison Road Engineer ECSSD Jukka-Pekka Strand Economist ECSSD Arcadie Capcelea Environmental Specialist ECSSD Bekim Imeri Social Specialist ECSSD Alexander Rukavishnikov Procurement Specialist ECSC2 Svetlana Vukanovic Road Tolling Specialist ECSSD Irina Babich Financial Management Specialist ECSC3 Irina Trukhan Project Assistant ECCBY Elena Lukyanchikova Program Assistant ECSSD

Bank funds expended to date on project preparation: 1. Bank resources: US$ 195.000 2. Trust funds: 0 3. Total: US$ 195.000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$ 10.000 2. Estimated annual supervision cost: US$ 110.000

76 Annex 12: Documents in the Project File BELARUS: Road Upgrading and Modernization Project

1. Electronic Tolling Concept prepared by BELDORCENTER, September 2009 (Russian and English Translation). 2. Feasibility Study for Introduction of Electronic Tolling System, 2008 (Russian and English Translation). 3. Feasibility Study for M-5 Road Upgrading and Modernization prepared by BELGIPRODOR (English translation), 2009. 4. Terms of Reference for Environmental Impact Assessment, September 2009 (Russian and English Translation). 5. Terms of Reference for Introduction of Electronic Tolling System prepared by BELDORCENTER, February 2010 (Russian and English Translation). 6. Management Letters, Aide-Memoires, Back-to-Office Reports 7. Environmental Impact Assessment and Management Plan 8. Project Operational Manual

77 Annex 13: Statement of Loans and Credits BELARUS: Road Upgrading and Modernization Project

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d P115700 2010 Belarus Development Policy Loan 200.00 0.00 0.00 0.00 0.00 199.50 0.00 0.00 P101190 2009 WATER SUPPLY AND SANITATION 60.00 0.00 0.00 0.00 0.00 59.85 3.33 0.00 P108023 2009 Energy Efficiency 125.00 0.00 0.00 0.00 0.00 124.69 0.00 0.00 P095115 2006 POST-CHERNOBYL RECOVERY 50.00 0.00 0.00 0.00 0.00 21.88 11.13 0.00 P044748 2001 SOC INF RETROFIT 37.60 0.00 0.00 0.00 0.00 10.55 -4.41 5.67 Total: 472.60 0.00 0.00 0.00 0.00 416.47 10.05 5.67

BELARUS STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 BelgazBank 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 DBBC 9.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00 2004 DBBC 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 2006 DBBC 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.00 Priorbank 20.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2003 Priorbank 9.33 0.00 0.00 0.00 9.33 0.00 0.00 0.00 2004 Priorbank 18.18 0.00 0.00 0.00 18.18 0.00 0.00 0.00 Total portfolio: 61.51 3.52 0.00 0.00 54.51 3.52 0.00 0.00

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

78 Annex 14: Belarus at a Glance BELARUS: Road Upgrading and Modernization Project

Belarus at a glance 9/24/08

Europe & Upper- POVERTY and SOCIAL Central middle- Development diamond* Belarus Asia income 2007 Population, mid-year (millions) 9.7 445 823 Life expectancy GNI per capita (Atlas method, US$) 4,220 6,052 6,987 GNI (Atlas method, US$ billions) 40.9 2,694 5,750

Average annual growth, 2001-07 Population (%) -0.5 0.0 0.7 Labor force (%) -0.1 0.5 1.3 GNI Gross per primary M ost recent estimate (latest year available, 2001-07) capita enrollment Poverty (% of population below national poverty line) 19 .. .. Urban population (% of total population) 73 64 75 Life expectancy at birth (years) 69 69 71 Infant mortality (per 1,000 live births) 12 2 3 2 2 Child malnutrition (% of children under 5) 1.... Access to improved water source Access to an improved water source (% of population) 10 0 9 5 9 5 Literacy (% of population age 15+) .. 97 93 Gross primary enrollment (% of school-age population) 9 6 9 7 111 Belarus M ale 97 98 112 Upper-middle-income group Female 95 96 109

KEY ECONOM IC RATIOS and LONG-TERM TRENDS 1987 1997 2006 2007 Economic ratios* GDP (US$ billions) .. 14.1 36.9 44.8 Gross capital formation/GDP .. 26.8 30.4 28.0 Exports of goods and services/GDP .. 59.9 59.9 57.3 Trade Gross domestic savings/GDP .. 21.0 26.1 18.9 Gross national savings/GDP .. 21.0 26.3 18.8

Current account balance/GDP .. -6.1 -4.1 -7.5 Interest payments/GDP .. 0.4 0.2 .. Domestic Capital savings formation To tal debt/GDP .. 14.7 16.6 .. Total debt service/exports .. 2.4 3.3 .. P resent value o f debt/GDP .. .. 14.2 .. Present value of debt/exports .. .. 23.3 .. Indebtedness 1987-97 1997-07 2006 2007 2007-11 (average annual growth) GDP -5.8 7.2 10.0 8.2 5.8 Belarus GDP per capita -5.7 7.6 10.5 8.5 6.3 Upper-middle-income group Exports of goods and services -11.1 8.0 9.9 8.2 8.1

STRUCTURE of the ECONOM Y 1987 1997 2006 2007 (% of GDP) Agriculture .. 15.4 9.3 8.8 Industry .. 41.2 42.0 39.9 M anufacturing .. 34.8 32.8 31.1 Services .. 43.4 48.7 51.3

Household final consumption expenditure .. 58.6 53.9 61.6 General gov't final consumption expenditure .. 20.3 19.9 19.5 Imports of goods and services .. 65.7 64.2 66.4

1987-97 1997-07 2006 2007 (average annual growth) Agriculture -5.1 4.5 9.9 0.0 Industry -7.5 9.6 9.9 0.0 M anufacturing -6.2 9.9 9.9 0.0 Services -4.9 7.0 10.1 20.2

Household final consumption expenditure -5.1 8.6 10.0 3.4 General gov't final consumption expenditure -6.2 2.8 9.9 6.6 Gross capital formation -12.1 10.0 9.9 2.1 Imports of goods and services -16.3 9.2 9.9 1.3

Note: 2007 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

79 Belarus

PRICES and GOVERNMENT FINANCE 1987 1997 2006 2007 Domestic prices (% change) Consumer prices .. 63.8 7.0 8.1 Implicit GDP deflator .. 71.6 10.7 12.1

Government finance (% of GDP, includes current grants) Current revenue .. 43.2 48.2 46.8 Current budget balance .. 7.7 11.1 7.8 Overall surplus/deficit .. -1.3 1.4 -0.6

TRADE 1987 1997 2006 2007 (US$ millions) Total exports (fob) .. 7,301 19,739 21,633 Food and agricultural raw materials .. 605 1,438 .. M ineral products .. 668 7,667 .. M anufactures .. 5,160 8,711 9,086 Total imports (cif) .. 8,689 22,323 27,389 Fo o d .. 920 1,468 .. Fuel and energy .. 2,242 7,395 .. Capital go o ds .. 1,474 2,413 2,587

Export price index (2000=100) . . 10 3 16 8 17 4 Import price index (2000=100) .. 99 135 164 Terms of trade (2000=100) . . 10 4 12 4 10 6

BALANCE of PAYMENTS 1987 1997 2006 2007 (US$ millions) Exports of goods and services .. 7,838 22,137 25,032 Imports of goods and services .. 8,691 23,723 29,028 Resource balance .. -853 -1,586 -3,996 Net income .. -85 -107 231 Net current transfers .. 78 182 395 Current account balance .. -859 -1,512 -3,369 Financing items (net) .. 784 1,510 4,053 Changes in net reserves .. 75 1 -683

Memo: Reserves including gold (US$ millions) .. 394 1,383 2,066 Conversion rate (DEC, local/US$) .. 26.0 2,144.6 2,146.1

EXTERNAL DEBT and RESOURCE FLOWS 1987 1997 2006 2007 (US$ millions) Total debt outstanding and disbursed .. 2,083 6,124 .. IB RD .. 124 50 42 IDA .. 0 0 0

Total debt service .. 191 733 .. IB RD .. 8 18 19 IDA .. 0 0 0

Composition of net resource flows Official grants .. 40 42 .. Official credito rs .. 43 1 .. Private creditors .. -28 264 .. Fo reign direct investment (net inflo ws) .. 352 354 .. Portfolio equity (net inflows) .. 0 -1 .. World Bank program Commitments .. 0 50 0 Disbursements .. 13 5 7 Principal repayments .. 0 15 16 Net flows .. 13 -10 -9 Interest payments .. 8 3 3 Net transfers .. 6 -13 -12

Note: This table was produced from the Development Economics LDB database. 9/24/08

80 Annex 15: Map BELARUS: Road Upgrading and Modernization Project

81 26°E 28°ETo 30°E 32°E BELARUS Rezekne ROAD UPGRADING AND LATVIAL A T V I A To To MODERNIZATION PROJECT Daugavpils Nevel COMPONENT 1: ROAD UPGRADING (53 km) BELARUS COMPONENT 2: MODERNIZATION BraslauBraslau OF ROAD TOLLING SYSTEM NavapolackNavapolack PoloyskPoloysk (From km 22 to km 131)

a in CITIES AND TOWNS zv LITHUANIAL I T H U A N I A ava D doy OBLAST CAPITALS To ho VitebskVitebsk VITEBSKV I T E B S K ak Utena PostavyPostavy Z NATIONAL CAPITAL To HlybokaeHlybokae Vilnius MAIN ROADS LepelLepel To TRANS-EUROPEAN CORRIDOR 2 CasnikiCasniki Smolensk TRANS-EUROPEAN CORRIDOR 9

To iya TRANS-EUROPEAN CORRIDOR 9b Vilnius Vil RUSSIANR U S S I A N RUSSIANRUSSIAN FFED.ED. OrshaOrsha RAILROADS VilejkaVilejka OBLAST BOUNDARIES MolodechnoMolodechno TalacynTalacyn FEDERATIONF E D E R AT I O N INTERNATIONAL BOUNDARIESTo BorisovBorisov GorkyGorky 54°N Alytus B er 54°N ez in a To 24°E MogilevMogilev Roslavl LidaLida N em a MINSKMINSK BerazinoBerazino n GrodnoGrodno MINSKM I N S K KrichevKrichev 53 km Section MOGILEVM O G I L E V

GRODNOG R O D N O From 2 Lanes zh So to 4 Lanes SlavharadSlavharad KascjukovicyKascjukovicy To 109 km Section Bialystok VolkovyskVolkovysk Road Tolling OsipovichiOsipovichi Modernization BobruyskBobruysk SlonimSlonim BaranovichiBaranovichi DovskDovsk SlutskSlutsk To POLANDP O L A N D Klintsy To ZlobinZlobin ZabalocceZabalocce Bialystok D IvattsevichiIvattsevichi SoligorskSoligorsk n e p r

BjarozaBjaroza SvetlahorskSvetlahorsk To Gomel'Gomel' Klintsy RechitsaRechitsa BRESTB R E S T GOMELG O M E L DobrusDobrus KobrinKobrin LuninetsLuninets MicasevicyMicasevicy KalinkavicyKalinkavicy 52°N at BrestBrest ipy PinskPinsk Pr 52°N To Biala Dneprovsko- MozyrMozyr Podlaska Bugskiy Canal TurovTurov To HojnikiHojniki Chernigov StolinStolin To To Sarny UKRAINEU K R A I N E Kovel' To To Chelm Sarny To FEBRUARY 2010 0 25 50 75 100 Kilometers Chernihiv This map was produced by the Map Design Unit of The World Bank. IBRD 37573 To The boundaries, colors, denominations and any other information Ovruch To Chernobyl shown on this map do not imply, on the part of The World Bank UKRAINEU K R A I N E Group, any judgment on the legal status of any territory, or any 0 25 50 75 Miles endorsement or acceptance of such boundaries.

22°E 24°E 26°E 28°E 30°E 32°E