Docmnentof

The World Bank Public Disclosure Authorized

Report No. 15636 LT

Public Disclosure Authorized STAFF APPRAISAL REPORT

REPUBLIC OF LITHUANIA

Highway Project

August 2, 1996 Public Disclosure Authorized

Infrastructure Division Country Deparment IV Public Disclosure Authorized Europe and Central Asia Region CURRENCY EQUIVALENT (as of April 1996)

Currency Unit - Litas

US$1 = 4.00 Litas

WEIGHTS AND MEASURES Metric System

ACRONYMS AND ABBREVIATIONS

ADT Average Daily Traffic DERS Department of Environmental Protection and Road Traffic Safety ERR Economic Rate of Return EIA Environmental Impact Assessment EBRD European Bank for Reconstruction and Development EU-Phare European Union Aid for Eastern Europe FSU Former Soviet Union ICB International Competitive Bidding LT Lithuanian Litas LRA Lithuanian Road Administration NCB National Competitive Bidding MT Ministry of Transport NPV Net Present Value PIU Project Implementation Unit PMS Pavement Management System RUR Russian Ruble SOE Statement of expenditures TRRI Transport and Road Research Institute VPD Vehicles per day

LITHUANIA FISCAL YEAR January 1-December 31 LITHUANIA

HIGHWAY PROJECT

TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ...... i

CHAPTER

I. ECONOMICBACKGROUND AND THE TRANSPORTSECTOR .... 1..... A. Economic Overview ...... 1 B. Overview of the Transport Sector ...... 1

HI. THE HIGHWAY SUB-SECTOR ...... 3 A. The Highway Network ...... 3 B. Road Safety ...... 5 C. Highway Organization ...... 6 D. Highway MaintenancePlanning and Budgeting ...... 8 E Road User Charges ...... 10 F. Design and Consruction ...... 11 G. EnvironmentalProcedures and Issues ...... 11

Eg. THE BANK'S EXPERIENCEAND STRATEGY ...... 13 A. Bank Lending to Lithuania ...... 13 B. Country AssistanceStrategy ...... 13 C. Lessons learned from Previous Bank Projects in the Highway Sector ...... 13 D. Highway Sector Strategy for Lithuania ...... 14 iV. THE PROJECT ...... 16 A. Project Objectives ...... 16 B. Project Description ...... 16 C. Detailed Project Description ...... 18 D. Cost Estimates and Financing ...... 19 E. Implementation ...... 22 F. Status of Cofmancing ...... 23 G. Procurement ...... 23 H. Disbursements ...... 25 I. Reporting, Accountingand Auditing ...... 26 J. Project Supervision ...... 27 K. EnvironmentalAspects ...... 27 L. Program Objective Categories ...... 27 M. Poverty Analysis ...... 28 N. Participatory Approach ...... 28

V. PROJECTBENEFITS, RISKS AND SUSTAINABILITY...... 29 A. Project Benefits ...... 29 B. Project Risks ...... 32 C. Project Sustainability ...... 32

VI. AGREEMENTSAND RECOMMENDATION ...... 33 ANNEXES

Annex A OrganizationChart of the LithuanianRoad Administration Annex B Project Cost Estimates and Detailed FinancingPlan Annex C Economic Analysesfor the Project Components Annex D Project ImplementationSchedule Annex E MonitorableIndicators Annex F ProcurementArrangements Annex G ProcurementPlan and Schedule Annex H Estimated Scheduleof Disbursements Annex I SupervisionPlan Annex J Technical Services to be Provided Annex K EnvironmentalReview

MAP IBRD 28033

Vice President: Johannes F. Limnn Director: Basil G. Kavalsky Division Chief: DominiqueLallement Staff: Anders Bonde, Task Manager Robert H. Nooter, Consultant Gerald Ollivier, Engineer Carmel Mckenna, Staff Assistant -1-

REPUBLICOF LITHUANIA

HighwayProject

Loan and Project Summary

Borrower: Republic of Lithuania

ImplementingAgencies: LithuanianRoad Administrationand the Municipalitiesof Vilnius and Kaunas

Beneficiaries: LithuanianRoad Administration,the Municipalitiesof Vilnius and Kaunas, and road users

Poverty Category: Not Applicable

Amount: US$19.0 million

Terms: Payable in seventeenyears, including five years of grace, at standard LIBOR-basedvariable interest rate for US dollar single currency loans.

CommitmentFee: 0.75 percent on undisbursed balances beginning 60 days after signing, less any waiver

OnlendingTerms: On-lendingterms to the Lithuanian Road Administrationand the Municipalitiesof Vilnius and Kaunas will be on the same basis as the terms paid by the Government

FinancingPlan: See Table 4.2

EconomicRate of Return: Overall EconomicRate of Return is approximately57 percent

Project ID Number: LT-PA-8551

Map: IBRD 28033

Economic Backgroundand the Transport Sector

LITHUANIA

HIGHWAY PROJECT

I. ECONOMIC BACKGROUND AND THE TRANSPORT SECTOR

A. EconomicOverview

1.1 Lithuania, with a population of 3.7 million people and GDP per capita of US$ 2050 in 1995, is the largest of the Baltic countries, with a territory of 65,200 square miles. Since its independence in March 1990, Lithuaniahas shown its commitmentto both stabilizationand structural reforms as the first independentrepublic of the Former Soviet Union (FSU). It has adopted policies such as monetary discipline and currency reform, decreasingenergy subsidies, privatization, and has initiated social assistance reform and financial sector restructuring. The benefits of previous and present policies are becomingvisible. Inflation has decreasedfrom an annual rate of over 1020 percent in 1992 to 410 percent in 1993, 65 percent in 1994, and 31 percent in 1995, while real GDP has grown slightly in 1994 and 1995.

1.2 The Bank's overall objective is to support Lithuania's efforts to accelerate structural reforms and to undertakeefficient investmentsin high priority sectors. This objective will be pursued through a combinationof lending operations, analytical sector work, and aid coordination. It is now appropriate for the Bank to support Lithuania's transport infrastructuresince the economy is at a stage in the transition process where substantial public investmentsare required to overcome the backlog of deferred maintenanceand to reorient the infrastructuresector to meet the new demands of private production and trade. Analyticalwork by the Bank has assistedthe Government in formulatingand implementinga sound public investment program, in which transport sector infrastructureand privatizationhave been identified as priority areas.

B. Overview of the Transport Sector

1.3 Overall, Lithuania has a relatively good road infrastructure, along with the physical infrastructure for the other parts of the transport system (maritime, railways, and aviation). The motorways are of high geometric standard but not always with a correspondingpavement standard. Substantialsections of main roads have narrow carriageways,requiring widening and strengtheningas the heavy weight traffic increases. The gravel roads often have a poor surface standardcaused by poor materials and insufficientmaintenance.

1.4 While Lithuania's transport infrastructureis basicallyadequate, it suffers from low levels of maintenance,primarily due to the constrainedfiscal resourcesavailable during recent years. The physical infrastructureis deteriorating and there is a growing backlog of deferred maintenance. Many sections of the road network are already in a critical stage and will fail unless they are given adequate maintenanceand strengthening. Many bridges suffer from no maintenance, some to the extent that their structural soundnessis in doubt. A similar situationexists in the cities of Vilnius and Kaunas, where due to the lack of funds, periodic maintenanceand rehabilitationof streets have been postponed for the last four to five years, and consequentlythe urban infrastructureis rapidly deteriorating. Major expenditureson maintenanceand rehabilitationare thus required to prevent further 2 EconomicBackground and the Transport Sector deteriorationof the capital stock, to avoid the need for costly reconstructionlater, and to keep vehicle operating costs at a reasonablelevel. Recognizingthe problem, the Government has already obtained a loan from EBRD for improvementsin the transport sector (see para. 2.17), but the project will only address a small part of the deferred maintenanceneeds of the road network. The Highway Sub-Sector 3

II. THE HIGHWAY SUB-SECTOR

A. The Highway Network

2.1 Public Roads. The total road network in Lithuania is about 45,000 km. The roads owned and maintainedby the national Government include 21,109 kmnof the main roads in the country, 10,493 km of which are paved. These national roads are divided into three categories: Highways (1,444 km), Regionalroads (3,408 kam),and District roads (16,257 kcm). The Highways include 376 km of European standard motorways serving the highest density routes (Vilnius-Kaunas-Klaipedaand Vilnius-Panevezys). The two main road corridors of internationalsignificance are Klaipeda-Kaunas- Vilnius-Minskand Tallinn-Riga-Kaunas-Warsaw,known as Via-Baltica. The system also includes 1477 bridges, 28 of which are wooden.

Table 2.1: National Road Network

Road Category Paved G eravl Total Highways (Magistraliniai) 1,444 0 1,444 RegionalRoads (Krasto) 3,292 116 3,408 District Roads (Rajoniniai) 5,757 10,500 16,257 Total 10,493 10,616 21,109

2.2 Paved Roads. The paved roads in the national road network have the following types of surfaces:

Asphalt-concrete 55% Asphalt-macadamn 44% Cement-concrete 1 %

2.3 Other roads. About 10,000 km of municipalroads and about 14,000 km of other roads are not includedin the national road network, most of which have gravel surfaces. The non-municipal roads used to be the responsibilityof state enterprises, farms, cooperatives, but most of them have now become the responsibilityof local governmentsthat in many cases lack the financial and technical capacity to maintainthem. The issues related to the maintenanceof these roads have not yet been addressed, and even the basic information regarding their location, lengths, and conditionsis not well established.

2.4 Urban Infrastructure. The poor condition of urban infrastructure is due primarily to the shortage of funds, althoughthe lack of quality control during constructionand outdated road maintenancemachinery also contribute to rapid deteriorationof the roads and increasingwear and tear on vehicles. The responsibilityfor planning, programmingand scheduling of maintenancefor urban roads lies with the Departnents of Civil Works at the City Municipalities,but most of the funds for urban infrastructurecome from the Central Govermment. At this time, a substantialpart of the municipal street network, for example about 60 percent in Vilnius, is in critical conditionand needs 4 The Highway Sub-Sector

periodic maintenanceor rehabilitation. The conditionof the infrastructure is having an adverse effect on the operatingcosts of vehicles, with a consequentincrease in the operatingcosts of both public and private transport.

2.5 Traffic. The average daily traffic for the main roads is based on continuoustraffic counts. In 1995 the ADT ranged from 10,500 vehicles per day near Vilnius, 13,300 vehiclesper day near Kaunas and 5,300 vehicles per day near Panevezys,with over 13,300 vehicles per day on some sections of the main roads. Traffic figures are generally lower for the rest of the national road network, and traffic is very light for most of the local roads. The 1995 ADT of 13,300 vehicles per day on the East-WestHighway near Kaunas compareswith an ADT of about 5,000 vehiclesper day for the same section in 1993, reflecting the apparent rapid increase in economic activity that is taking place in the country. Much of the increasein traffic is for trucking, in some cases with heavy axle loads for which the roads were not built.

2.6 Adequacyof the Road Network. The road density is 0.32 km/sq kIn, twice the density of Hungary and nearly four tirnes that of Poland. In relation to population, the density is 54 inhabitant/sqkm, which is about 50 to 75 percent that of the Nordic countries, but per capita car ownership is only about one-third as high despite quite rapid growth since 1989 (see Table 2.2). Therefore, the overall road density appears to be adequate.

Table 2.2: Number of Passenger Cars

Year~ ITotal(000) Per 1,000inhabitants 1989 438 118 1990 478 128 1991 511 136 1992 543 145 1993 592 159 1994 654 176 1995 704 189

2.7 Road Conditions. Under the Government's stringent stabilizationprogram aimed at reducing inflation, the LRA's 1994 budget was reduced in real terms to less than one-fourthof the 1988 level (see para. 2.22). Even the budgeted amount was not made available to the LRA until after the end of the fiscal year, since funds are only released on a monthlybasis depending upon actual revenue collections. Under these conditionsLRA had to cut back on its pavement maintenanceoperations in 1994 even more than in 1993. The strategy that LRA adopted was virtually to eliminate new constructionand paving operations, to cut back on surface overlays, and to maintain the maximnum possible surface dressings and spot repairs. This strategy has kept most pavement surfaces in reasonably good condition, but with an increase in roughness and the progression of rutting for the The Highway Sub-Sector 5 more heavily travelled parts of the road network. It has also built up a considerablebacklog of maintenancethat will need to be done in addition to the annual requirementsthat will accrue in each future year.

B. Road Safety

2.8 The road safety situation in Lithuania is poor by internationalstandards, with 1,094 fatalities in 1991 (2.9 per 10,000 population), falling to 779 in 1992 as traffic declined with the economic slowdown but rising again in 1993 as traffic increased. This level of fatalities is comparableto Estonia and Latvia, but is one and one-half to three times higher than in other countries with a comparable level of motorizationsuch as Malaysia, Greece, Ireland, Argentina, and Uruguay. The decline in the rate of fatalities in 1994 and 1995 is primarily the result of the Government's decision to make the use of seatbeltsmandatory. Road accidents will likely increase again as economic activity acceleratesunless road safety is radically improved.

Table2.3: Traffic Accidentson Public Roads and Streets

Fatalities Fatalities per 10,000 I ______population 1989 942 2.5 1990 933 2.5 1991 1,093 2.9 1992 779 2.1 1993 883 2.4 1994 764 2.0 1995 671 1.8

2.9 Several road safety studies made in other countries have found that irnprovementsin road safety depend on the concerted actions of many agencies working together. With this objectivein mind, the Government in Lithuania establisheda Road Safety Commissionin July 1994, chaired by the Minister of Transport. The Comrnmissionmembers include the Deputy Ministers and other officials responsible for traffic safety within relevant ministries and municipalities,e.g. the Ministry of Internal Affairs, the Ministry of Education, and the cities of Vilnius and Kaunas. The Commissionreceives staff support from the Department of EnvironmentalProtection and Road Traffic Safety (DERS) in the Ministry of Transport, which has drawn up a draft NationalRoad Safety Plan and road safety legislationfor submissionto the Parliamnent.However, a lack of staff experienced in traffic safety issues, enforcementof traffic regulations, necessary equipmentand a critical lack of funds to implementphysical improvementspresently hampers all traffic safety activities. Another inhibition to improved road safety is a general lack of public awarenessabout the problem. 6 The Highway Sub-Sector

C. Highway Orgnization

2.10 The LithuanianRoad Administration(LRA), which has responsibilityfor the maintenanceand constructionfor the national road network, operates under the authority of the Ministry of Transport. After Independencein 1990, the LRA, which had consisted of an array of publicly owned design, maintenanceand constructioncompanies, went through a massive reduction in staff (from 12,000 to 6,000) under the pressures of a reduced budget and the privatizationof 12 of the road and bridge constructioncompanies and some of the design institutes. From 1993 until mid-1995, LRA was composed of a central administrativeoffice and 42 District Offices that were responsible for carrying out both routine and periodic road maintenance. The LRA central administrativeoffice was and still is responsible for the followingfunctions relating to the national road network:

i. overall planning for road constructionand maintenance; ii. road and bridge standardsand specifications;and iii. supervisionof road constructionand maintenance.

The present internal organization of LRA is shown in Annex A.

2.11 Each bistrict Office had an equipmentpool, a storage and spare parts depot and an equipment repair facility. Starting in mid-1995, LRA reduced the number of District Offices by combining38 of them into ten RegionalRoad Administrationsthat will handle the routine and winter maintenance for the ten Regions of the country and one Administrationthat is responsible for the routine and winter maintenanceof the major highways. The remainingfour District Offices will be reorganized into State Joint Stock Companiesthat will remain public corporations for the time being, but are expected to function as constructioncompanies without subsidiesand to obtain their revenues from work obtained on contract to public or private entities. These four companiesare to be privatized in 1997.

2.12 Eguipment. The LRA and its district offices had the following mnajorequipment in operating condition in 1994:

Asphalt plants 53 Pavers 40 Motor Graders 273 Bitumen Spreaders 42 Mobil Cranes 63 Bitumen Tanks 22 Bulldozers 154 Excavators 239 Lorries 471 Light Cars 126 Water Tanks 52 Rollers 213 Front End Loaders 87 Snow Blowers 21 The Highway Sub-Sector 7

Scrapers 5 Sand Spreaders 365 Tractors 430

Most of this equipment is old and of poor design, requiring extensivemaintenance and in some cases providing poor results. LRA has privatized about 70 percent of its asphalt mixing plants.

2.13 Personnel. Currently, LRA has 60 staff members in its headquartersin Vilnius, with the number of staff limitedby Executive Decree and by a budget that specifies the level for the LRA AdministrativeOffice separatelyfrom the rest of the LRA budget. There were about 100 to 150 employeesin each District Office before the reduction in the number of organizations responsible for routine and winter maintenanceas described in para. 2.11. The level of the staffs of the successor organizationshave been increasedto reflect the increasedsize of the road networks under their responsibility. The result of these various organizationalchanges has been a further reduction in the total staff of LRA to about 4200 persons.

2.14 LRA personnel appear to be competentlytrained in basic engineeringskills. However, the engineering staff has been isolatedfrom the advances in road techniquesdeveloped in the Western economiesover the past fifty years. Also, at the time of Independence,there was a general lack of awareness on the part of LRA's staff of the value of and techniquesfor using cost analysis as a basis for making choices regarding pavement managementstrategies, materials and equipment, although this is now changing through increasingcontact with Western road institutionsthrough aid-financed technical assistance, seminars and travel grants. For example, extensiveassistance has been provided by EU-Phare for a program of institutionalsupport includinga study of LRA's organizational structure. Support to develop a road data bank and a PavementManagement System (PMS) has been provided by Sweden. The Danish Government is providing assistance in procurementpractices, preparation of bidding documents, contract supervision, and bridge repair management.

2.15 Economic Evaluation. PavementResearch and Testing and EngineeringDesign. LRA has a close working relationship with the Transport and Road Research Istitute (TRR1),an independent state-ownedinstitution that carries out highway surveys, feasibility studies, and bridge inspections for LRA. TRRI relies entirely on fees and contracts from the work that it performs for its revenues. LRA also has a close working relationship with another state- owned institution called Problematica that performs testing on materials and pavementssamples, assists LRA in paveinent design, and carries out road pavement research. Problematicais paid by LRA on the basis of the work that it performs, and it also does testing on a fee basis for other state-ownedand private institutions and companies. It has establishedgood contacts with Western sources of information,and is current on the latest road pavement technology. A third organization, Kelprojektas,is a privatized former state design institute that carries out road design, including the preparationof specificationsand bidding documents for LRA on a fee basis. While TRRI, Problematicaand Kelprojektasall appear to be competent organizationsthat work closely with LRA, there appears to be a lack of coordination between the four organizations,which limits their effectivenessin establishingcost-effective pavement design strategies.

2.16 Performance Level. On the whole, LRA has performed competentlyin the past judging from the condition of the road networks as well as by its level of technical skills and knowledge, and appears to operate at a high level of professionalism. The constraints on its performance have been 8 The Highway Sub-Sector

those imposed by restrictive budgets during the past several years, by LRA's lack of access to modem highway maintenancetechnology, and by the need in the past to rely on raw materials and equipment that were generally of poor quality.

2.17 MunicipalRoad Organizations. The responsibilityfor planning, programming and scheduling of maintenancefor urban roads lies with the Departmentsof Civil Works at the city municipalities, with the physical work usually carried out by the municipalities'own staffs. Most of the funds for urban infrastructure,however, come from the Central Government. In 1995, approximately23 million Litas (US$6 million) was spent in Vilnius, Kaunas, and Siaulai. This amount representsonly about 25 to 50 percent of the budget required to maintainthe network at an appropriate service level. The staffs of the Departmentsof Civil Works include competentengineers who have successfully carried out the maintenanceof the city streets in the past on a force account basis. They have begun to use contracting proceduresfor some of their periodic maintenancerequirements during the last few years. However, they are not yet familiar with the use of economicanalysis for decidingwhich streets to repair and what level of repair to carry out, or with contractingbased on competitive bidding procedures, contractmanagement, and quality control of the contractors' work.

2.18 Relationshipwith EBRD Project Activities. There is an EBRDproject presently under implementationthat includes 800 km of surface dressing and 72 km of overlays as well as one municipalbypass, at a total project cost of US$12 million. Implementationof the project, originally scheduled to begin in 1994, was delayed because of cross-conditionalitywith a co-financier, but is now under way. This project will not meet all of Lithuania's deferred maintenancerequirements, but will help LRA become familiar with multi-lateralbank lending and procurement practices.

2.19 Another EBRD-supportedproject, to be co-financedby JEXIM and the European Investment Bank, is under preparation. It will finance improvementsof the part of the Lithuanian road network that is included in Via Baltica, a North-Southroute that links Helsinki with Poland and Germany through the Baltic countries. This project, at a total cost of US$ 64.2 million, is expectedto be processed on the same time schedule as the proposed Highway Project. There has been a careful assessmentof the timing, work program and financial requirementsof the two EBRD-financed projects to assure that they complementeach other and that the combinedimpact on the LRA budget and staff is manageable.

D. Highway Maintenance Planning and Budgeting

2.20 Planning and ExpenditureProcedures. Prior to independence,the predecessor organizationto the LRA obtained its budget from the central government in Moscow. Traditionally20 year road developmentprograms were prepared and updated every five years. Since independence,budgets are requested through the MT to the Ministry of Finance on an annual basis. Major projects are submitted with a separatejustification and reviewed in the context of an overall Public Expenditure Program. Once approved by the Parliament, the annual budget is released in quarterly (and sometimesmonthly) tranches based on the actual collectionof revenues during the year. This procedure is necessitatedby the fact that the value of the Lithuanian Lita (LT), which was introduced in June/July 1993, is controlledby a currency board arrangementunder which Litas are only issued against net inflows of hard currency. This system, which is excellentfor exercising fiscal and The Highway Sub-Sector 9 monetary discipline, neverthelessmakes it difficult for LRA to plan and execute its annual program since the actual resources availableto it are subject to change.

2.21 Another characteristicof the Lithuanian highwaymaintenance program is related to the weather conditions. The construction season during which bitumen products can be applied for surface dressings and overlays is generally limited to the May through Septemnberperiod because of the cold climate. Somewhatbalancing the sunmmerworkload, the winter season requires snow clearing and salt spreading in order to keep the roads safe and open to traffic. However, this work is irregular and difficult to plan because of the unpredictabilityof the snowfall and icing.

2.22 Budget Levels. As mentioned earlier, budgets have been substantiallyreduced from the anounts made availableprior to Independence. LRA's actual budget in constant prices for road naintenance and constructionsince 1988, as calculatedby LRA, has been as follows:

Table 2.4: LRA Annual Budjet

(million Litas) in 1993 prices 1988 1989 1990 1991 1992 1993 1994 199S l390 363 354 259 197 106.4 98 106

Thus inflation caused a reduction in LRA's 1994 budget when measured in constant prices to about 25 percent of the 1988 level. Some of this decrease was absorbed by a reduction in real average wages, with the average monthlypay for LRA employeesfalling to the equivalent of about US$120per month. During 1995, wages for LRA's employeeswere increasedsubstantially, to an average level of about USS250per month for professional staff, and the LRA budget was increased to 136 million litas. As of January 1, 1996, a new schedule of road user charges went into effect that is expectedto provide 220 million litas for LRA's budget in 1996. This is equal to about 0.72 percent of GDP comparedto the 1.0 to 1.2 percent of GDP that is considered as a norm for road maintenancecosts in Western countries.

2.23 The periodicmaintenance and rehabilitationaccomplished with the LRA budget allocationsin the past have been as follows: 10 The Highway Sub-Sector

Table 2.5: Work Performed

Surface Dressings, Overlays, and Rehabilitation (km) l 1990 1991 1992 1993 1994 1995 Surface dressing (& related 928 1015 1215 787 800 658 maintenance) l Overlays (inc. remixing & 92 146 76 80 45 118 rehabilitation) New asphalt pavement (new, or in 170 218 73 101 6 38 placeof gravel) Regraveling 1047 504 125 131 140 166

2.24 Comparisonsof past budget levels, work performed, and the need for future financing for maintenanceof the road network is made complicatedby the difficulty in adjusting the exchange rates on a realistic basis. Also, the relationshipbetween the budgets and the work accomplishedwas affectedby other factors that must be kept in mind when makingprojections of future costs and requirements. First, the real cost of equipmentwas minimalduring the years right after Independence since very little new equipmentwas purchased during this period. Second, bitumen, aggregate and fuel were importedfrom Russia at subsidizedprices prior to Independence,which makes comparisons difficult. Third, the compressionin wages during the post-Independenceperiod reduced the average cost of labor to a level that was not sustainableover the long run, and has since been substantially adjusted as noted in para. 2.21.

E. Road User Charges

2.25 After Independencethe Governmentestablished a Road Fund, financedby a tax on industry revenues and a portion of the excise taxes on petrol, diesel fuel and lubricants. However, revenues to the Fund went to the Ministry of Finance rather than to the road maintenanceorganizations, and the Ministry then made some portion of the incometo the Road Fund plus an allocation from general Government revenues availableto LRA and the larger municipalitiesas part of the annual budget process. In 1995, a new Road Fund Law was passed, and subsequentlyamended on March 28, 1996, that provides for increasedtax rates effective as of January 1, 1996, with 80 percent of the funds to be made availableto LRA and the other 20 percent to the eleven largest municipalities, for road and street maintenance. The income to the Road Fund now includes the industry tax as before, 15 percent of the fuel and lubricant excise taxes, truck licensing taxes, and a transit tax on truck traffic and on loads in excess of permissible limits. A provision also calls for the set-aside of 1 percent of the Road Fund income, to be taken from the LRA share, for a special Road Traffic Safety Fund, to be administeredby the Ministry of Transport. Finally, the Law also provides that the industry revenue tax will gradually be phased out over the next four years and will be replaced by an increasingshare The Highway Sub-Sector 11 of the revenues from the fuel excise taxes (from the present 15 percent to 50 percent).

2.26 The net effect of the new Law is to provide an imnmediateincrease in the funds availableto the LRA in 1996, from the 139 million Litas in 1995 to an estimated220 million Litas in 1996, and a comparable increase in the funds available to the Municipalitiesfor street maintenance. Further, the growth of the economy and the shift from the industry tax to a larger share of the fuel excise taxes is expected to provide for a significantincrease in the LRA and Municipalbudgets each year for the next five years. No exact estimates are availableat this time, but the tentative estimates that have been made are very encouragingas to the possible levels of incomethat will be available. Since the existing law could be changedat any timne,an agreement was reached during negotiationsthat provides for the possibilityof suspensionof disbursementsin the event of a change that adversely affects LRA's ability to fulfill its functions of maintaining the road network (see para. 6.1 (i)).

2.27 The new law represents important progress toward a rational and appropriate form of road user charges. It eliminatesthe use of the general tax on corporaterevenues, which have no direct link to road use, with the principle dependenceon fuel taxes, which are expected to account for over half of the income to the Road Fund in the year 2000. The law could be improved, however, in a number of respects. First, there is no registration tax on personnel vehicles, since a provision to this effect was rejected by the Parliament, which could provide substantialadditional income to the Fund. Also, the penalty for overloadsdoes not adequately reflect the exponentiallyincreasing cost of damage that these loads inflict on the pavements as the loads are increased. Also, while the present law will generate substantiallygreater income than has been availableto the road maintenance organizationssince Independence,no careful study has been made of the projected income from the present tax provisions in the new law or the optimum amount of funds required for road maintenance, includingthe amounts needed to reduce the considerablebacklog of deferred maintenancethat has accumulatedduring the years of inadequate budgets (see paras. 4.8 and 4.15).

F. Design and Construcion

2.28 The design standards have been those used by the former Soviet Union, but after a recent review by the LRA, Lithuanianstandards based mainly on the German standards (DIN) have been established. The geometric standardsof the existing roads are generallyadequate although some roads have narrow carriagewaysthat will need to be widened and strengthenedwhen road traffic, especially heavy vehicles, increases. Much of the main and basic road network has gravel shoulders, which over time will need to be improved.

G. Environmental Procedur and Issues

2.29 The central environmentalauthority in Lithuania is the Ministry of EnvironmentalProtection. The Ministry sets limits for use of natural resources, determinesenvironmental standards and gives permits for the discharge of pollutants. It also establishesthe procedure for, organizes and implementsEnvironmental Impact Assessments,sets conditionsfor the approval of projects so that they will conform with enviromnentalrequirements, and monitors environmentalcompliance. Lithuania's environmentalstandards, which became effective in January 1992, establish limits for the discharge of pollutants. These standards apply to the operation of all private and public enterprises including the asphalt plants that serve the road constructionand maintenanceindustry. At the time of 12 The Highway Sub-Sector

Independence,most of LRA's asphalt plants were not equipped with efficient production and emission control systems, and disposalof waste materials from road construction operations was not carefully controlled. However, these operations are now expected to comply with the new rules and regulations. On the positive side, LRA's periodic maintenanceoperations contribute positivelyto the enviromnentsince this work applies to already existingstructures that do not generate new environmentalproblems, while the maintenanceworks result in reduced fuel consumptionand safer roads. The Bank's Experience and Strategy 13

III. THE BANK'S EXPERIENCEAND STRATEGY

A. Bank Lending to Lithuania

3.1 The first Bank lending operation with Lithuania since it joined the World Bank in 1991 was a RehabilitationLoan for US$60 million equivalent to finance imports of materials, spare parts and equipment, approved on October 22,1992 and recently completed. Loan processing and implementationproceeded expeditiously, and the loan proceeds were fully utilized. In addition, the Bank has approved a US$26.4 million Power RehabilitationLoan, a US$7.0 million Klaipeda Enviromnent Loan, a US$25 million Enterprise and Financial Sector Loan, a US$6.2 million Siauliai EnvironmentalLoan, a US$30million Private Agriculture DevelopmentLoan, a US$5.9 million KlaipedaGeothermal DemonstrationLoan and a US$10.0 million Energy Efficiency/HousingPilot Project.

B. CountryAssistance Strategy

3.2 The main objective of the Bank's strategy for Lithuania, as outlined in the Country Assistance Strategy document dated November 1, 1994, is to support Lithuania's accelerated economic transformationtoward a market system and the recovery of output and export growth and living standards through reforms in three key areas, includingthe policy and institutionalenvironment for private investment, strengtheningof financial institutions, and reorientationof the social safety net, public services, infrastructureand the energy sector. The Bank will support these efforts through its lending, economic and sector work. It has assisted the Governmentin formulatingand implementing a sound public investmentprogram that is consistent with this strategy through a Public Expenditure Review. The Bank is also assisting with aid coordination, includingthe mobilizationof cofinancing for Bank-financedinvestment projects.

3.3 Assistanceto maintain and upgrade Lithuania's infrastructuresuch as roads, airports, telecommunications,and ports is a critical factor in the encouragementof increased local and foreign private investment. While Lithuania's overall physical infrastructureis well developed, much of it is in urgent need of modernizationand repair. Since Independence,there has been a declining level of resources for maintenanceof the road network, with a consequentbuildup of deferred maintenance. Thus a high priority for the Government and the Bank is to channeladditional external resources to help meet the country's maintenancerequirements while the country's revenue base is being reestablished, in order to prevent the need for much more expensive reconstructionin the future.

C. Lessons Learnedfrom Previous Bank Projectsin the Highway Sector

3.4 The proposed project will be the Bank's first highway loan in Lithuania. However, the Bank has had considerable experiencein financinghighway projects in other parts of the world, including Eastern Europe, and specificallyin the Russian Federation, Estonia and Armenia during the past two years.

3.5 Much of the Bank's lending for highway operations in other parts of the world was for road constructionup to about 1980. However, the road building boom of the 1960's and 1970's created an 14 The Bank's Experience and Strategy infrastructurethat began to deteriorate rapidly in the late 1970's. Road networks had expanded much faster than the corresponding maintenance budgets and institutional capacity to maintain them. The serious magnitude of the problem was demonstratedin a policy study undertaken by the World Bank in 1987. The study determinedthat one quarter of the paved roads and one third of the unpaved roads required reconstruction, and another 40 percent of the paved roads required strengthening. If the countries did not improve the maintenanceof their roads, the eventual cost could easily increase by two or three times, with serious implicationsfor the cost to road users.

3.6 Concerned with this growing backlog of road maintenancein borrowing countries, the Bank adopted many of the recommendationsof the study in its sector and investmentwork. These included: (a) improvementin road planning and programming, includingmore reliable information and managementmethods and the applicationof economiccriteria, (b) strengtheningand reforn of institutional performance,particularly by contractingout more maintenanceactivities to the private sector, (c) reallocationof resources to balance constructionand maintenancewith increased allocation of expenditures to reduce the maintenancebacklog, and (d) improvingthe financing of roads, particularly by the adoption of rational road user charge systems. The situation in Lithuania parallels this worldwide experience, with a well developedroad network suffering from lack of maintenance, and these lessons have been applied in the design of the Highway Project.

D. Highway Sector Strategy for Lithuania

3.7 The documententitled "National Program for Transport Developmentof the Republicof Lithuania", issued by the Ministry of Transport in 1993, sets forth the Government's policies regarding the transport sector. The principal emphasis of this documentis on the need to integrate the Lithuanian transport system into the European transport networkon a flexible basis that is responsiveto the narket demands of an evolving economicsystem. Emphasis will also be placed on ensuring equal rights for all entrepreneurs,creating conditionsfor reasonablecompetition, and demonopolizingand privatizing the state-ownedtransport entities. For the highway sub-sector, the policy statement also recognizesthe necessity of allocatingthe major share of the availablefinancial resources to road maintenanceduring the next several years in view of the constrainedeconomic situation, and of improvingengineering design and constructiontechniques. In actual practice, the LRA has already made considerableprogress in utilizing the emerging private sector construction industry in its road maintenanceprogram, and at present all surface dressing and reconstructionwork is carried out on the basis of competitivebidding. As describedpreviously, the Governmenthas already establisheda Road Fund designedto provide the resources needed to finance highway maintenance,although the proceeds from this fund do not flow automaticallyto the road maintenance organizations.

3.8 The Government's policy for the transport sector and highway sub-sectorcontain many elements that are consistentwith the Bank's views as enumeratedin the study referred to in para. 3.6. The challenge for the Governmentnow is to translate its policy statement into an action program that provides an adequate level of resources for road maintenancein the short run, that establishes a reliable self-financingbasis for future road maintenancebased on appropriate user charges, that expandscompetitive bidding procedures in a way that leads to the developmentof a viable private sector construction industry, and that introduces modern and cost-effectiveplanning, design and materials into sector operations. The Bank's Experience and Strategy 15

3.9 The Bank's strategy for the highwaysub-sector is to assist the Governmentin meeting this challengethrough a lending operation that would include support for expanded maintenanceoperations for a limitedperiod of time and introducingimprovements in operational procedures and techniques. This lending operation would also be combined with the resourcesof several other donors who would join with the Bank in meeting these needs, which in turn would help to coordinatethe various donor activitiesin the sector. In the longer run, the Government is expected to be able to mobilize the resources necessary to meet its recurrent maintenancerequirements, and future Bank lending for road transport would be directed to road strengtheningand new construction. 16 The Project

IV. THE PROJECT

A. Project Objectives

4.1 The overall objectives of the Highway Project are to assist the Government of Lithuania in preserving its road network, and to improve the efficiencyof Lithuania's road maintenance operations. The specific objectives of the project are:

(i) To expand the level, quality and efficiencyof periodic maintenancefor roads and bridge repairs;

(ii) To reduce vehicle operating costs and improve the environment in five towns by completing bypasses, and to help preserve the urban infrastructure by financing an expandedprogram of street improvementsand maintenancefor the cities of Vilnius and Kaunas;

(iii) To facilitate road financingby encouragingan improved system of road user charges;

(iv) To encourage and support the developmentof private road constructionand engineeringindustries; and

(v) To improve road safety conditionsin Lithuania.

4.2 These objectives would be carried out within the context of an expandingmarket economy and within a policy frameworkdesigned to utilize Lithuania's strategic geographicalposition as a transport corridor between several major production centers in neighboring countries. They are consistent with the Bank's desire to support Lithuania's transition from a centrally planned economy to one based on market choices and private sector operations by providing critical infrastructure to meet the needs of the expandingprivate sector and through the developmentof the private constructionindustry.

B. Project Description

4.3 The Highway Project would include a three year program of activities at a total cost of US$45.0 million (net of duties and taxes) consisting of the following components:

(a) LithuanianRoad Administration(US$26.5 mnillion)

(i) Repaving of portions of the Regional Road Network includingthe Vilnius-KlaipedaEast-West Motorway, based on the results of detailed pavement surveys, strength and crack failure investigations(US$12.0 million).

(ii) Completion of partially constructedby-passes around five urban areas (US$5.6 million). The Project 17

(iii) Bridge repairs for the main road network (US$3.0 million).

(iv) A Road Safety Program consisting of technicalsupport for the DERS in the Ministry of Transport and for LRA, as well as financing for civil works required to eliminate accidentblack spots and to improve road markings, guard rails and other safety measures (US$5.0 million).

(iv) Technical servicesto assist LRA in identifyingthe most economic pavementdesign and maintenancestrategies and in improving LRA's managementsystems; assistance in procurement, supervision of contracts and project accounting; training for private road construction companies; a road network study; and a study of the existing Road Fund Law, includinga forecast of the optimumamount of financing required for the most economic maintenancelevel for the national road network and options for improvingits provisions to provide for self-sufficiencyin meeting Lithuania's road maintenance requirements(US$0.9 million).

(b) Municipalityof Vilnius (US$5.0).

(i) Repaving and reconstructionof high priority streets and bridge repairs.

(ii) Technical supportto assist the Municipalityto handle procurement, monitoring, project accounting and the supervision of the civil works included in the project.

(c) Municipalityof Kaunas (US$5.1 million).

(i) Repaving and upgrading of streets needed to provide an inner-cityby- pass through the southeastern part of the city so as to relieve the heavy flow of traffic through the city center.

(ii) Technicalsupport to assist the Municipalityto handle procurement, monitoring, project accounting and the supervisionof the civil works included in the project.

The project cost estimate also includes physical contingenciesas well as price contingenciescalculated on the basis of estimated worldwide inflation for the foreign costs and estimated domesticinflation for the local costs over the project period for a total of US$8.4 million. 18 The Project

C. Detailed Project Description

4.4 Repavingof portions of the Vilnius-KlaipedaEast West Motorway and the Regional Road Network would include an estimated 303 km of overlays or recycling in order to restore the pavementsto an acceptablelevel of roughnessand strength, at a total estimated cost of US$12.0 million. Road sections to be repaired have been selected on the basis of a review of the entire nationalroad network, taking into account the importance of different classes of roads based on traffic levels, as well as the periodic maintenancethat has already been completed or is planned for 1996 from financingprovided by the EBRD-supportedproject mentioned in para. 2.18 or from LRA's own budget. Road condition surveys and economicevaluations were then carried out on the roads most likely to need repairs, using the HDM-3 model to determine the pavement maintenancealternatives and road sections that would produce the highest economic rates of return and Net Present Values (NPVs). For each section of road, five differentpavement maintenancealternatives were tested (see Annex C). This evaluation was then used as a basis for selection of specific road sections for inclusionin the project. Surveys will be repeated each year and the economic evaluationswill be recalculatedto determine if the priorities have changed due to further road deterioration, which will be used for the selection of the road sections for that year's work program. The detailed pavement designs will be made based on a careful evaluation of the pavement conditionsand the use of the most economicpavement maintenancestrategies that are available.

4.5 Completionof partially completedbv-passes will include the by-passes at Turzenai, Vilkaviskis,Silute, Siauliai, and Daugai for an estimated total cost of US$5.6 million. These by- passes, to be financedby EBRD, were selected after an economic evaluation that determined that each had a satisfactoryEconomic kate of Retum and Net Present Value (NPV).

4.6 The Bridge component will includerepair of about 10 bridges on the main road network that are in critical need of maintenance,for an estimated cost of US$3.0 million. The economic rate of return was calculatedfor after an economicevaluation of 20 bridges in need of repair that were consideredby LRA as of most importanceto the road network, and those with the highest ERRs and NPVs were selected for inclusion in the project. An expanded bridge inspectionsystem is being installed during project preparation with assistance from Norway and Denmark. The work will be completedbefore project effectiveness.

4.7 A Road Safety program will include technicalservices to strengthen the road safety work of the emerging road safety organizations, including(i) assisting DERS to develop a computerized vehicle and drivers license register and road accident reporting and analyzing system to be integrated with the corresponding systems operatedby the police and customs, (ii) assisting DERS in developing an accident location coding system for urban areas, (iii) assisting DERS and its counterpart departmentsin other Ministries to develop plans for and initiate educationfor school children, traffic safety information, driver training, review of legislation, and training of traffic police; (iv) assisting LRA and the municipalitiesof Lithuania to develop traffic safety design standards for road and street infrastructureincluding road signs and road markings; (v) providing training in the road safety aspects of road and street planning, design, constructionand maintenanceworks, and in executing road safety audits, (vi) assisting LRA in analyzingaccident black spots, and the subsequentprioritization and design of traffic safety measures. It will also include a civil works componentfor works to eliminate the most serious accident black spots, additional road markings, the improvement of road signs, and the additionor improvementof guard rails. The Road Safety Program will have a total estimated cost of US$5.0 million. The Project 19

4.8 TechnicalServices to LRA will includean organizationalreview to find improved means for coordinatingthe considerableknowledge and skills that are available in TRRI, Problemnatica,and Kelprojektasin the task of analyzing the pavementproblems, applying research results and economnic analysis, and incorporatingthe conclusionsinto pavement design specificationsand bidding documents providing the most economicsolutions for different road conditions. These services will also include practical assistance in the application of the World Bank procurement procedures, and in establishing appropriate contract supervision and quality control. Training will be provided to the construction industry to familiarize the contractors with the World Bank bidding procedures, contract documents and conditions, and to assist them in developingtheir skills and competitivenessas contractors. This componentwill include a study of the country's road network to determine what kinds of roads should be maintainedby LRA and what other arrangementscould be utilized for the maintenanceof smaller local roads, such as through the establishmentof road user associations. Another study, financedby the existing EBRD loan, is being carried out to determine possible improvementsin the structure of road user charges, as well as to determine what level of charges is required to optimize the maintenanceof the national road network (see para. 4.15). The total cost of this component,which is described more fully in Annex J, is US$0.9 million.

4.9 The Municipalityof Vilnius componentwill includethe repaving of streets that are in urgent need of attention as the result of several years of inadequatemaintenance. The streets to be repaved have been identifiedfrom a list establishedby visual inspectionto be most in need of repair and then selected through surveys and economic analysis carried out with the assistance of a foreign consultant. This componentwill also include technicalservices to assist the Municipalityto carry out the detailed design, to issue tenders in accordance with World Bank procedures, and to assure the quality of the work. All civil works will be carried out on a contract basis with the contractorsselected on the basis of competitivebidding.

4.10 The Municipalityof Kaunas componentwill include the constructionof a new link in the street network that will facilitate the passage of vehiclesover a route by-passing the city center, thus relieving the flow of traffic through the most congestedarea of the city. The work will include the constructionof the approach roads to a new bridge that is under construction, which will generate sizeable traffic benefits even before the completionof the bridge since these roads will coMect the new road link to a main thoroughfare. The total estimated cost of this componentis US$5.1 Imillion. Technical assistancewill be provided to assist the Municipalofficials to carry out the work in accordance with the requirements of the EBRD, which is providing financing for this component. All civil works will be carried out on a contract basis with the contractors selected on the basis of competitivebidding.

D. Cost Estimates and Financing

4.11 The estimated total cost of the project is US$45.0 million, net of taxes and duties, including physical and price contingencies, with a foreign componentof US$30.4 million, equivalentto 67.6 percent of project costs. Costs were estimated on the basis of December 1995 prices and include physical contingenciesof ten percent for materials, equipment and civil works, amountingto US$3.5 million. Price contingencies,amounting to US$4.9 million, are based on averageforecasts of 20 The Project inflation for foreign supplied componentsof 2.4 percent per annum and for local costs at the rate of 25 percent the first year, 15 percent the second year, and 10 percent the third year of the project. The detailed estimated cost of the project is given in Annex B and is sumrnarizedin Table 4.1.

Table 4.1: EstimatedProject Costs (net of duties and taxes) US$ million

Project Components Local | Foreign Total Foreign as % ______Ij (______~~of Total

Lithuanian Road Administration (a) Repaving 3.4 8.6 12.0 72% (b) By-Passes 1.6 4.0 5.6 71% (c) Bridge Repairs 0.9 2.1 3.0 70% (d) Road Safety Program 1.5 3.5 5.0 70% (e) TechnicalServices 0.9 0.9 100%

City of Vilnius 1.5 3.5 5.0 70%

City of Kaunas 1.3 3.8 5.1 75%

Total Base Cost (Dec 1995 10.2 26.4 36.6 72% prices)

Physical Contingencies 0.9 2.6 3.5 74% Price Contingencies 3.5 1.4 4.9 29%

TOTAL 14.6 30.4 45.0 68%

The World Bank would finance US$ 19.0 million or 42 percent of total project costs, the EBRD would financeUS$ 14.1 million, EU-Phare would finance US$ 1.2 million equivalent, other donors (Finland and Swedish, Norwegian and NetherlandsTrust Funds) would finance US$ 0.7 million and the Governmentof Lithuania would finance US$ 10.0 million and any duties and taxes that may apply to the project. EU-Phare, Finland and the Trust Funds would provide financing for the Road Safety Program, the technicalservices and training on a grant basis.

4.12 Loans from IBRD and EBRD would be made to the Governmentas representedby the Ministry of Finance. The Ministry would pass on the funds to the beneficiaries(the IBRD proceeds to the LRA and the Municipalityof Vilnius, and the EBRD proceeds to the LRA and the Municipality of Kaunas)through on-lending agreementsat the same terms and conditionsthat the Government receives from the IBRD and the EBRD. The IBRD would in turn enter into a Project Agreement with the Municipalityof Vilnius and the EBRD with the Municipalityof Kaunas that specify the terms and conditionsthat apply to each of them for their component of the project. The local contributions for the project would be the responsibilityof each Beneficiary, and could be taken from their share of The Project 21 the Road Fund or from their general budgets. Assurances were received at negotiationsthat the Govermnentand the Beneficiarieswould make availablethe level of resourcesneeded to finance their respectiveshares of the project (see para. 6.1 (ii)). The Ministry of Finance has stated that projects financedby InternationalAgencies are now exempt from the VAT. In any event, if any taxes and duties would apply, it would be the responsibilityof the Beneficiariesto provide the financing. The Beneficiarieswould also be obliged by the Governmentto repay the Ministry of Finance either from future Road Fund income or from their general budgets. Parliamentaryapproval is necessary after the Loan and Project Agreements have been signed before the loan can be effective.

4.13 Financial Analysis. There is no adverse fiscal impact on the Ministry of Finance from either the provision of counterpart funds for the project or from the repaymentsof the Bank loan, since both of these will be the responsibilityof the Benefiaries,as noted in para. 4.12. A review of the financial impact on the Beneficiariesindicates that in the case of the LRA, its contributionto the project would average the equivalent of US$2.8 million each year for three years, and interest and principal repaymentswould increase to a level of US$3.1 million in the fourth year. In no year would the total of the contributionsand repaymentsexceed 8 percent of the LRA's 1996 budget, which should be easily manageable, especially since the future budget levels are expected to increase by more than 10 percent per year as a result of the Road Fund Law passed this year (see paras. 2.25 and 2.26). Furthermore, the resources to be made availableby the LRA as counterpart funds are budget resourcesthat would have been used for the same purposes if the Loan did not exist (i.e. for periodic road maintenance)and therefore LRA would not be required to forego financingof other activities in order to participate in the project.

4.14 For the Municipalitiesof Vilrius and Kaunas, the situation is similar. The total of their contributionsto the project and the estimated interest charges and principal repaymentswould in no case exceed 38 percent of their estimnatedincome from the Road Fund in 1996, and their provision of counterpartfunds would come from resources that would in any event be used for street maintenance and rehabilitation. This percentage would be reduced in future years by the expectedincreases of the Municipalities' income from the Road Fund, so that the amounts should be manageablefor both Municipalities.

4.15 Road User Charges Study. The study of the existing Road Fund Law, the future requirements for road maintenance, and recommnendationsfor improvementsof the existing schedule of charges is being financed by EBRD. Assuranceswere received at negotiationsthat LRA will carry out a study of (a) the required level of financing needed to maintain Lithuania's public road network; and (b) the possible financing and collectionmechanisms for road maintenance, in accordancewith terms of reference already agreed with EBRD (and acceptableto the Bank); will, by December31, 1997, review the results and recommendationsof the study with the Bank, and by June 30, 1998, will implement recommendationsof the study agreed with the Bank and EBRD, includingpresentation to Parliament of any amendmentsto the Road Fund Law (para. 6.1 (iii)). 22 The Project

4.16 The proposed financingplan is as follows:

Table 4.2: FinancingPlan (net of duties and taxes) USS million

i____ _Local | Foreign Total World Bank 4.6 14.4 19.0 EBRD 0 14.1 14.1 EU-Phare 0 1.2 1.2 Other Donors 0 0.7 0.7 Govermment 10.0 0 10.0

TOTAL 14.6 30.4 45.0

E. Implementation

4.17 Project coordinationwould be the responsibilityof LRA, which has appointeda Project Coordinator, assistedby a small staff, to serve as the primary person responsible for assuring that the LRA componentsare implementedefficiently and on schedule, and for coordinatingthe inputs of the cofinancingpartners and the other Beneficiariesthrough the operation of a Project Implementation Unit (PIU) located in the LRA headquarters. The operatingcosts of the Project Coordinator and his staff, includingtelephone calls, office supplies and project-related travel would be financedfrom LRA's administrativebudget. Assurances were received at negotiationsthat the Borrower will maintain the PIU and shall operate it in accordancewith implementationarrangements agreed between the Borrower and the Bank (see para. 6.1 (iv)).

4.18 The Project Coordinator would be responsiblefor assuring that the ImplementingAgencies prepare annual work programs, financingplans and periodic reports of project progress. The annual financing plans would include the level of financingneeded for LRA and the Municipalitiesto finance their shares of the project activities, and a projection of the sources of this financing. He would arrange the training sessions for contractors, and arrange for audits of the project accounts. He would also serve as liaison to the Ministry of Transport and Ministry of Finance for project activities as well as to the Municipalitiesof Vilnius and Kaunas, and would be the central point of contact for all of the donors supporting the project. He would be responsible for assuring that LRA sets targets for the repaving program, and that LRA adheres to the IBRD procurement guidelines. Assurances were received at negotiationsthat the Borrower will cause the Municipalityof Vilnius and LRA, by November 1 and 15 respectively, to prepare annual work programs and financingplans for the next year and to review these plans with the Bank before implementingthem (see para. 6.1 (v)).

4.19 The project implementationschedule and performancemonitoring indicators are given in Annexes D and E. The schedule is based on the civil works being carried out in the 1997, 1998 and 1999 constructionseasons, with some disbursementscarrying over into 2000, and the training and technicalassistance components extending into 1999. The Project 23

4.20 LRA has stated that it intends to use economicanalysis as a basis for all of its investments during the life of the project, and would only undertake investmentswith a positive NPV. In order to be able to review LRA's evaluationprocess in this regard, assuranceswere received at negotiations that by November 15 of each year LRA would submit to the Bank the results of its economic evaluationsfor its proposed road maintenanceand rehabilitationprograms for the following year and for all of LRA's investment projects, based on the methodologiesestablished in the Lithuanian InvestmentManual and LRA's Pavementand Bridge ManagementSystems (see para. 6.1 (vi)), and that it will only undertake investmentswith a positive NPV based on a 10 percent opportunitycost of capital, and with priority given to investmentswith the highest ratios of NPV to investmentcosts (see para. 6.1 (vii)).

F. Status of Cofinancing

4.21 Cofunanciersidentified for the project include the EBRD, EU-Phare and Finland, plus support from the Swedish, Netherlands and NorwegianTrust Funds. The EBRD Board of Directors has already approved its financing. The EU-Pharefinancing would not be formally approved until early 1997, but there is verbal agreement between EU-Phare and the Governmentthat this component would receive priority treatment in the 1997 budget for Lithuania. The cofinancierswill be invited to participate in supervisionmissions during project implementation. Denmark is providing consultant services arranged as part of the preparation of the Highway Project but is being utilized in 1996 in support of the first EBRD project. The Danish assistance will terminate at the end of this year, but will neverthelessbe useful in preparing the LRA staff for implementationof the Highway Project.

G. Procurement

4.22 The procurement arrangementsover the project period are included in Annex F while Table 4.3 summarizesthe project elements, their estimatedcosts and proposed methods of procurement. The details of procurement arrangementsare set forth in the Procurement Plan and Schedule in Annex G. LRA will use the Bank's Standard BiddingDocuments, and procurement procedures for IBRD financed contractswill be in accordance with the January 1995 World Bank ProcurementGuidelines. 24 The Project

Table 4,3: Summaraof Proposed ProcurementArrangements (USSmillion)

ProcurementMethod |Project Element ICB NCB Other NBFt Total Cost 1. Civil Works a. overlays,recycling,reconstruction, 16.2 7.5 19.4 43.1 & bridges (12.7) (6.1) - (18.8) 2. Equipment, goods a. Road Signs 0.2' 0.2 (0.2) (0.2) 3. Consultanciesand Training 1.7 1.7

TOTAL 16.2 7.5 0.2 21.1 45.0 (12.7) (6.1) (0.2) (19.0)

Aol:untSRpamprnteses are fiac y te oanxx~ xm~ a/ Non-Bak Financed bl InternationalShopping

4.23 Goods. The procurementof goods would be limited to purchase of road signs and small items needed in support of the Road Safety Program, for a total estimated amount of US$ 200,000. These items or groups of items estimated to cost US$200,000 or less per contract, up to an aggregate amount of US$200,000, may be awarded under InternationalShopping.

4.24 Civil Works. There would be ten ICB contracts at an average of US$1,620,000 for an accumulatedestimate of US$16,200,000,with four for repaving on RegionalRoads and East-West Highway, two for bridge rehabilitation,two for black spot improvementsand three for street repaving. Other civil works contracts of less than US$500,000 per contract for overlay works, bridge repairs, the improvement of accident black spots, and repaving of streets in the City of Vilnius would follow the NCB procedure using the Sample Bidding Documents-Bidding Documentsfor Procurementof Works-NationalCompetitive Bidding (NCB) dated January 1995. Sections of roads selected for overlays would be grouped into suitable contract packages. Each contract package would be kept within one constructionseason. There would be around 21 NCB civil works contracts financedjointly by IBRD and the ImplementingAgencies, each contract valued at an average of US$357,000for an accumulatedcost estimated at US$7.5 mnillion.

4.25 The introductionof competitivebidding procedures raises a number of issues that grow out of the restructuringof force-accountagencies and an infant industry. An anticipatedarea of difficulty is the perceived inability for the newly establishedprivate firms to meet financial criteria. The constructionfirms have their accounts audited for control purposes only, if at all. Their accounting methodologydoes not always include western type depreciationof assets, and it might be difficult to determine their credit-worthiness. The project would include training for the constructionfirms to update their accountingsystems and to facilitate internationalaudits. The eligibility of the contractors The Project 25 would be subject to their meeting the criteria outlinedunder clause 1.8(c) of the January 1995 World Bank ProcurementGuidelines. As described in para. 2.11, the Government is in the process of privatizing some of the District Offices. These companies, along with the road construction companiesthat have already been privatized, are expectedto become the principal local road contractors since they possess the equipment and expertiseto carry out the work.

4.26 Prior Review. Prior review would apply to all ICB contracts and to the first two NCB contracts for works for each implementingAgency, and is expected to include about 80 percent of the total value of IBRD financed contracts. This level of review should be adequateto assure good quality preparation.

4.27 LRA will have had experience in implementingthis type of project through its involvement with the first EBRD project. However, a limitedamount of technical support would still be required and will be provided under the project through grant financingfrom Finland and Sweden in such areas as preparation of World Bank Standard bidding documents and procurement, project managementand supervision. The Project Launch Workshop referred to in paragraph 4.33 will be held in October 1996to provide guidancefor the preparation of bidding documents for the first constructionseason. The General ProcurementNotice will be issued following appraisaland will be updated annuallythereafter.

4.28 Procurementinformation will be collectedby the PIU and reported to IBRD as follows:

(a) prompt reporting of bidding, bid evaluationresults and contract award infornation; and

(b) quarterly reports indicating:(i) project progress and problems; (ii) revised cost estimates for individual contracts and the total project, includingbest estirnatesfor physical and price contingencies;and (iii) revised schedules of procurementactions, including advertising, bidding, contract award, and completiontime for individual contracts.

H. Disbursements

4.29 Disbursementsare expected to be completed in four years. An estimated schedule of disbursementsis shown in Annex H. The expectedclosing date is December 31, 2000.

4.30 The expendituresfor contracts for goods valued at less than US$200,000and for works valued at less than US$350,000would be reimbursedon the basis of statements of expenditure (SOE) procedures. The supporting documentationfor these contracts would not be sent to IBRD, but would be retained by the borrower for inspectionby supervisionmissions and by external auditors. All other disbursementswould be fully documented. The minimum size of applicationsfor direct payment and for the issuance of Special Comnmitmentswould be 20 percent of the amnountof the deposit to the Special Account.

4.31 To facilitateproject implementation,the Borrower would establish SpecialAccounts in one of the major commercialbanks on terms and conditionssatisfactory to IBRD to cover IBRD's share of expenditures. The Authorized Allocationto the LRA Special Account would be US$1,300,000and the Municipalityof Vilnius Special Account wouldbe US$ 600,000, representing about one month of 26 The Project average expendituresmade through the Special Accountsduring the constructionseason. No initial lower levels have been specifiedfor the Special Accountssince these are the minimum amounts that will be needed in view of the concentrationof disbursementsthat are expectedto take place during the relatively short constructionseason. Applicationsfor replenishmentof the Special Accounts would be submittedmonthly or when one-third of the amount has been withdrawn,whichever occurs earlier. Documentationrequirements for replenishmentwould follow the standard Bank procedure as described in the DisbursementHandbook, Chapter 6. Monthly bank statements of the Special Accounts, which have been reconciledby the Borrower, would accompanyall replenishment applications.

4.32 The proceeds of the IBRD loan would be disbursed on the following basis:

Table 4.4: EstimatedDisbursements

Category ?Amount of Credit Percent of (US$ million) Expenditurea to be lFinanced

1. Civil works (a) LRA Repaving 6.5 75 %* (b) LRA Bridge Repairs 2.5 (c) Road Safety 3.5 (d) Municipalityof Vilnius 4.3

2. Equipment,materials & supplies 0.2 100% of foreign expenditures, 100% of local expenditures(ex- factory) and 75% of local expendituresfor other items procured locally

5. Unallocated 2.0

TOTAL 19.0 excludingVAT and other taxes and duties

I. Reporfing,Accounting and Auditing

4.33 The accountingfor all Special Account transactionsand for all other project-relatedaccounts will be maintainedin accordance with internationalaccounting standards. Annual financial statements of IBRD-financedcomponents and for LRA's overall operations will be prepared in a format acceptableto IBRD and audited in accordancewith InternationalAuditing Guidelinesby suitably qualified independentauditors acceptableto IBRD, and submittedto IBRD within six months of the close of LRA's fuiancial year. Audits will also be carried out at the same time, and for correspondingperiods, in accordance with IBRI) guidelines, for SOEs against which disbursements The Project 27 have been made or are due to be made out of the credit proceeds, and specific reference will be made in the audit reports accompanyingthe financial statements.

4.34 Quarterly progress reports covering all project componentswill be prepared by LRA and sent to IBRD within one month after the end of each quarter. These reports will include: (a) progress achievedagainst agreed implementationand disbursementschedules, and key performance indicators, includingnumber of contractsawarded and length of roads rehabilitated, maintained; (b) work programs and cost estimatesfor the coming quarter and for the total project; and (c) procurement information as specified in para. 4.26 (b). The main purpose of the reports will be to provide LRA timely and updated informationon implementationof project components, highlighting issues and problem areas, recommendingactions and commentingon progress in resolving previous recommendations. LRA will also prepare an ImplementationCompletion Report (ICR) in accordance with IBRD guidelines and submit it to IBRD promptly after completionof the project but in any event not later than six months after the credit closing date.

J. Project Supervision

4.35 Three Bank supervisionvisits to Lithuania each year, each staffed by a senior highway engineer and such specialistsas may be appropriate for each phase of the project (such as a procurement expert or traffic safety specialist), would be required over the life of the project, each of about one or two week duration. The total amount of supervisionenvisaged annuallywould be 18-24 staff weeks. A Project Launch Workshop would be held in October 1996 with instruction on Bank Procurement Guidelines,disbursement procedures and reporting requirements. Subsequentmissions would review both physical progress and to what extent the project is achieving its stated objectives. The PerformanceMonitoring Indicators shown in Annex E will be used to measure and report on both of these aspects. Cofinancierswould be invited to participate in all supervision missions. A schedule of supervision activitiesis included as Annex I. A mid-term review would be held not later than November 1, 1998, to assess the effectivenessof the project arrangements, to review the adequacyof road user charges, and for the reallocation of funds between project categoriesif necessary. Assuranceswere received at negotiationsto this effect ( pam. 6.1 (viii)).

K. Environmental Aspects

4.36 The periodic maintenanceoperations included in the project are not expected to generate any significant environmentalproblems since work would be done on existing roadways, utilizing existing quarries and asphalt plants. Since the environmentalrisks are limited, this project has been designated as Category B, indicatingthat a full EnvironmentalAssessment is not required. An environmentalreview was carried out during project preparationand the results confirmedthe above assumptions. The review found that emissions from the asphalt plants that would be used in the project are all within Lithuania's environmentalstandards. Environmentalreviews had already been carried out for the five By-Passes,and the minor mitigationmeasures recommendedin those reports have been included in the By-Passdesigns. The consultantrecommended that for road rehabilitation of roads located in close proximity to watercourses, special care should be taken during construction to avoid polluted run-off entering the water, which will be done. The project is expectedto have several positive environmentaleffects through reducing traffic congestion and pollution by comnpleting 28 The Project selected city bypasses and the inner-cityby-pass in Kaunas. The Executive Summary from the consultant's report has been attached as Annex K.

L. ProgramObjective Categories

4.37 The project would contribute directly to the sustainabledevelopment of Lithuania by preserving the road network, which is an importantpart of the country's essential infrastructure, and by making Lithuania more competitive in world markets by reducing road transport costs. It would also make a significantcontribution to the development of the private sector in Lithuania through the strengtheningof the road constructionindustry.

M. Poverty Analysis

4.38 The introductionof private contracting for periodic maintenancewould likely lead to higher levels of income for the work force carrying out the work. At the same time, the project may lead to lower levels of road maintenanceemployment overall than was the case before Independenceas the road maintenanceoperations become more efficient, but higher employment levels than in recent years when the nationalbudget was extremely restricted. The improved condition of the roads should have a positiveeffect on the ability of rural people and small businesses to bring their products to market, both by assuring access to markets and by reductions in transport costs. There will also be an indirect impact on the poor by supporting improvementsin the general economy through reduced vehicle operating costs.

N. Participatory Approach

4.39 During project preparation, the World Bank preparation missions consulted extensivelywith the managers and staff of LRA, TRRI, Problematica,contractors and the related Ministries in discussions of the project methodology,the concepts of privatizationand competitivebidding, and the requirements of a market-basedeconomic system. The project would continue the participatory approach begun during preparation involvingthe important stakeholdersin the road sector, the design and research institutes, the Traffic Police and the various Ministries involved in the sector during project implementation. The Government also consultedwith road users, including the operators of transport companies,when deciding gradually to phase out corporation revenue taxes while increasing the excise tax on fuel as the principal source of income for the Road Fund (see para. 2.25). Project Benefits, Risks and Sustainability 29

V. PROJECT BENEFITS, RISKS AND SUSTAINABILITY

A. Project Benefits

5.1 The project would expand the capacity of LRA and the Municipalityof Vilnius to carry out periodic road maintenanceof Lithuania's public road network during a three year period (1997-1999). This would prolong the life of the highway system and reduce road maintenancecosts by avoiding costly rehabilitationand reconstruction. It would also improve road conditions,thus reducing vehicle operating costs, which would in turn make Lithuania's productive sector more competitive. An additional project benefit would be the experiencethat would be gained by the private construction industry in carrying out road maintenancework on a competitivebasis and at a higher technical standard than in the past.

5.2 The bridge componentwould introduceproper repairs on Lithuania's bridges, where little maintenancehas been carried out since the bridges were constructed. The main benefit would be to retain in full service bridges where vehicle weight restrictions already have been or soon will be imposed, thereby avoiding the need to divert traffic to longer routes. The bridges selectedfor repair represent a variety of common bridge types with problems that are typical for Lithuania. The in- depth inspection, economic design of the repair, and the choice of construction materials will serve as demonstrationprojects for future repairs on other bridges. Some of the bridges are already damaged beyond economic repair, and the structures will be monitored to ensure safe traffic during their short remaining service life. The By-Pass componentwould provide better transit around municipal areas, thus reducing vehicle operating time as well as traffic congestion in the municipal areas.

5.3 The benefits of the Road Safety componentwill be to reduce the high accident rate in Lithuania, with a saving in human lives, hospital costs, vehicle repair costs, and reduced productivity. This will be achieved through the implementationof improved accident reporting systems, driver safety education programs, improved cooperationbetween the various Goverinent agencies with responsibilitiesfor road safety, improved traffic signs and road markings, and through removal of accidentblack spots. The activities have been selectedto give the optimum short term benefits in the form of reduced accidents at the same time as the long term activities are initiated at relatively low cost. All technical services and the equipmentprovided to DERS will be financedfrom the EU-Phare grant.

5.4 The Municipalityof Kaunas componentwould provide an inner-city bypass of the city center, thus reducing traffic congestion, and would also provide the approaches to a new bridge that is under construction(although the benefits from this componenthave been calculatedon the basis of the inner-city bypass only since the financing for completionof the new bridge is not yet certain). Economic benefits resulting from the Kaunas bypass were calculated to include time saving, reduction in vehicle operatingcosts, reduction in accidents,and environmentalbenefits.

5.5 The Net Present Value and Internal EconomicRate of Return. Shadow pricing was not considered necessary since the alternativeopportunity allocations of labor in the existing slow growth environment are not plentiful. Therefore, the current costs do not need to be adjusted to reflect alternative opportunitycosts. Road sections and bridges to be repaired were selected for inclusionin the project from the possible alternativesby the methods described in para. 4.4 and Annex C. The NPVs and ERRs for the various selectedcomponents are as follows: 30 Project Benefits, Risks and Sustainability

Table 5.1: Project Benefits

Project Component Cost (US$ million) NPV-10% cost of ERR l______capital (US$ million) (percent) J Repaving of the national road network:

East-West Highway 6.0 26.6 66.0

Regional Roads 6.0 7.4 38.2

By-Passes: Turzenai 0.8 1.6 34.6 Vilkaviskis 1.2 0.8 17.5 Silute 1.2 2.5 32.1 Siauliai 1.5 0.6 14.9 Daugai 0.4 0.6 22.8

Bridge Repairs 3.0 171.4 108.0

Road Safety Program 5.0 55.6

l Municipalityof Vilnius 5.0 22.0 56.0

Municipality of Kaunas 5.6 47.5 76.0

5.6 Sensitivity Analysis. Sensitivity analyses were carried out based on alternative vehicle traffic forecasts of high, medium and low projections of economic growth (or in some cases 4, 2 and 0 percent traffic growth) and on possible cost increases of 20 percent. The low traffic growth scenario is not considered very likely given the recent encouraging growth of the Lithuania economy and the perceived high rates of growth in vehicle traffic observed on some roads in the last two years. The possibility of cost increases for civil works is, on the other hand, quite possible in view of the continued increases in the cost of goods and services in Lithuania in recent years.

5.7 For the East-West Highway reRaving, if the cost of construction is increased by 20 percent, the ERR is decreased from 66.0 percent to 55.8 percent. The rates of return were calculated on the basis of a rate of traffic increase each year based on a projected medium rate of economic growth for the economy; if the economy grows only at a low rate, with corresponding reduced traffic growth, the rate of return on the East-West Highway repaving investment would be reduced from 66.0 percent to 60.1 percent. If both traffic increases at the low rate and the construction costs are increased by 20 percent, the ERR would be reduced from 66.0 percent to a still very acceptable 50.4 percent. NPVs Project Benefits, Risks and Sustainability 31

were calculatedfor the repaving component using an opportunitycost of capital of both 10 and 15 percent. The results on the basis of 15 percent were all positive but 31 percent lower than at 10 percent.

5.8 For the RegionalRoads repaving, if constructioncosts are increased by 20 percent, the ERR would be reduced from 38.2 percent to 30.2 percent, and if the traffic growth is only at the low rate, the ERR would be reduced to 34.3 percent. If both the constructioncosts are increased20 percent and the traffic growth is at the low rate of increase, the ERR would be a still very acceptable26.7 percent.

5.9 For the By-Passes, if the low growth scenario is used to make the economic evaluations, the ERRs for each of the By-Passeswould decrease by about 3.5 percent and the total NPV for this componentwould decrease from US$6.1 million to US$3.9 million. If construction costs were increasedby 20 percent, the total NPV for the componentwould be reduced from US$6.1 million to US$4.7 million. If both the traffic growth is reduced to the level of the low growth scenario and the cost of constructionis increasedby 20 percent, the overall NPV for the componentwould be reduced from US$6.1 million to US$2.5 million. In this last event, the NPVs for three of the by-passes (Vilkaviskis, Siauliai and Daugai) would be reduced to the break-evenpoint based on a 10 percent opportunitycost of capital. Therefore, the costs and traffic projections for these by-passeswill be carefully reevaluatedin the year when construction is to be carried out, and they will only be included in the work program if there is a favorable forecast for achieving a positive NPV.

5.10 For the Municipalityof Vilnius, the ERR and NPV were calculated on the basis of a traffic growth rate of 2 percent per year. If the traffic growth rate were 0 instead, the NPV would be reduced by about 20 percent, which would still be a very acceptablerate of return. For the Municipalityof Kaunas, the low traffic scenario would reduce the NPV of the investmentby 12 percent, which would also be very acceptable. No sensitivitycalculation was made for increased constructioncosts, but the ERRs are sufficientlyhigh that the results would still undoubtedlybe extremely favorable.

5.11 For the Bridge Repairs component, economicevaluation of 20 bridges considered most in need of repairs was carried out. The 10 bridges with the highest ERRs and NPVs were selected for inclusionin the project, for a total cost of US$ 7.8 million. The ERRs and NPVs were calculated on the basis of a traffic growth rate of 2 percent per year. With a traffic growth of 0 percent, the ERR would be reduced from 108 percent to 103 percent, and with an increase in constructioncosts of 20 percent, the ERR would be reduced from 108 percentto 101 percent, indicatingthat the componentis not very sensitive to changes in the assumptionson which the evaluation is based.

5.12 For the Road Safety component, an ERR was calculatedfrom similar kinds of works carried out in Finland, adjusted for costs and benefits at Lithuanian levels. The result, based on conservative expectations consideringthat virtually no road safety improvementshave been made in the past in Lithuania, showed an ERR of 55.6 percent. An increase in constructioncosts of 20 percent would decrease the ERR to 44.5 percent, and a change in the traffic projection would not affect the results since this was not a variable in the calculation of benefits.

5.13 In summary, the economic returns on the proposed investmentsare generally extremely favorable, and would not be much affected by possible moderate increases in constructioncosts or 32 Project Benefits, Risks and Sustainability decreases in traffic growth. In all likelihood, traffic growth would exceed the modest increases that were used in the base calculationsas the Lithuanianeconomy recovers from the unusuallysevere recession that followedthe breakup of the Soviet Union, producing even greater returns than forecast above.

B. Project Risks

5.14 Project risks are considered moderate for the project because of the competenceof the implementingagencies and the fact that LRA has had recent experiencewith the implementationof a foreign-financedproject similar to the proposed Highway Project. The risks that appear to remain are as follows:

Risk Proposed Mitigation

Possibledelays caused by the inexperienceof Technicalsupport and training for the the cities of Vilnius and Kaunas and the local implementinginstitutions and training for the constructionindustry with IBRD and EBRD construction industry have been included in the procurement guidelinesand competitive project, which should substantiallyreduce this bidding procedures. risk.

Possibledelays in the provision of the financial The amounts of the local contributionsare less contributionsof the participatinginstitutions. than the arnounts that are estimated to accrue to the Beneficiariesthrough the Road Fund, and therefore financing shouldbe assured.

Possible overload for LRA's staff, which is LRA is considering means by which it can limited to not more than 60 persons, because transfer some of its supervisionstaff to field of the very intensiveprogram of improvements offices that will not count against its 60 person included in the project. ceiling.

C. Project Sustainability

5.15 The Governmenthas already enacted the legal basis for providing an expanding level of resources for highwaymaintenance through the establishmentof the Road Fund, with users fees that will expand as the economy expands and the tax base increases, which would assure the sustainability of periodic maintenanceof the highway network. The efficiency improvementsexpected from the technical inputs and training included in the project are likely to have a sustained impact on LRA's future operations because LRA is a well-established,stable organizationthat can be expected to absorb the improved systems into its pernanent operatingprocedures. Also, the developmentof the private road constructionindustry is likely to have a lasting impact if LRA continues its present policy of utilizing private companiesfor carrying out the periodic maintenanceportion of its highway maintenanceprogram. Agreements& Recomnmendations 33

VI. AGREEMENTS & RECOMMENDATIONS

6.1 Agreements Reached During Negotiations. During negotiations, agreement was reached on the followingpoints:

(i) The Bank will have a right to suspend disbursements in the event that the Road Fund Law is repealed or amended so as to adversely affect the ability of LRA to effectivelyfulfill its functions of maintainingthe road network (see para 2.26).

(ii) The Borrower and the Beneficiarieswill make available each year during the life of the project the level of resources needed to finance their respective shares of project activities(see para. 4.12).

(iii) In order to assist in assuring an adequate and appropriate source of financing for the maintenanceof the road network, LRA will carry out a study of: (a) the required level of financingneeded to maintain Lithuania's public road network; and (b) the possible financingand collectionmechanisms for road maintenance, in accordancewith terms of reference agreed with EBRD; by December 31, 1997, LRA will review the results and reconmmendationsof the study with the Bank, and by June 30, 1998, will implementrecommendations of the study agreed with the Bank and EBRD including presentationto Parliament of any amendmentsto the Road Fund law (see para. 4.15).

(iv) LRA will maintain the Project ImplementationUnit and will operate it in accordance with the implementationarrangements agreed between LRA and IBRD (see para. 4.17).

(v) By November 1 and 15 of each year during execution of the project, the Municipalityof Vilnius and LRA, respectively, will prepare annual work programs and financingplans for the next calendar year for the work to be carried out under the project, and will reach agreement on these programs with IBRD before implementingthem. The annual financingplans will include financing needed for LRA and the Municipalityto finance their shares of project activities, and a projection of the sources of this financing(see para. 4.18).

(vi) By November 15 of each year during the executionof the project, LRA will report to the Bank the results of economic evaluationsof its proposed road maintenanceand rehabilitationprograms for the following year, including those not includedin the project, and for all of LRA's investmentprojects, based on the methodologiesestablished in the LithuanianInvestment Manual and LRA's Pavementand Bridge ManagementSystems (see para. 4.20).

(vii) LRA will only undertake projects with a positive Net Present Value based on an opportunitycost of capital of 10 percent, with priority given to investments with the highest ratios of NPV to investment costs (see para. 4.20). 34 Agremes & Recommendations

(viii) LRA and the Municipalityof Vilnius will: (a) maintain policies and procedures adequateto enable them to monitor and evaluate on an ongoing basis, in accordancewith indicators satisfactoryto EBRD,the carrying out of the project and the achievementof the objectivesthereof; and (b) review with IBRD, by November 1, 1998, the progress made in the implementationof the project; and will take all necessarymeasures to execute the actions identified and agreed upon between IBRD and the Sub-Borrowersduring such review. (see para. 4.35).

6.2 Other Conditions. Conditions of effectivenesswill be limited to the standard conditions. For the componentto be implementedby the Municipalityof Vilnius, a condition of disbursements will be the execution of an on-lending agreementwith the Ministry of Finance.

6.3 Recommendation. Subject to the above, the Project is suitable for a Bank loan of US$ 19.0 million at the standard LIBOR-basedvariable interest rate for US dollar single currency loans with a maturity of 17 years including5 years of grace. The Borrower would be the Republicof Lithuania. DIIIREC iOt(GENEUAI. GIPflI RAts STRI4UMliS

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E O P NVISERA T Ix,5uaniaBitIrrls c1l: 63871 D1 Annex B Page 1 of 2

LITHUANIA HIGHWAY PROJECT

Detailed Project Cost Estimate

._.______.USS Thousand Local Foreign Total 1. LRA a. Repaving of E.W. Highway and Regional Roads 3.4 8.6 12.0 b. By-passes 1.6 4.0 5.6 c. Bridge Repairs 0.9 2.1 3.0 d. Road Safety Program 1.5 3.5 5.0 e. Technical Services _ Q2Q 7.4 19.1 26.5 e. Contingencies 3A4 2 Sub Total 10.8 21.9 32.7

2. City of Vilnius a. Repaving of Streets 1.5 3.5 5.0 b. Contingencies O 5 6 11 Sub Total 2.0 4.1 6.1

3. City of Kaunas a. City Street Improvements 1.3 3.8 5.1 b. Contingencies 06 1 1 Sub Total 1.8 4.4 6.2

Total 14.6 30.4 45.0 32.4% 67.6% Annex B Page 2 of 2

LITHUANIAHIGHWAY PROJECT

Detailed Finanding Plan

US$ Million IBRD EBRD EU- Other' Gov't Total PHARE 1. LRA a. Re-paving 6.0 3.1 2.9 12.0 b. By-passes 4.0 1.6 5.6 c. Bridge Repairs 2.3 0.7 3.0 d. Road Safety 3.2 1.0 0.8 5.0 e. Technical Services 0.2 0.7 0.9 f. Contingencies 2A L a u Subtotal 14.1 9.2 1.2 0.7 7.5 32.7

2. City of Vilnius a. Repaving 4.0 1.0 5.0 b. Contingencies - 0 1-1 Subtotal 4.9 1.2 6.1

3. City of Kaunas a. City Street Imp. 3.8 1.3 5.1 b. Contingencies - Li1 1.- Subtotal 4.9 6.2

Total 19.0 14.1 1.2 0.7 10.0 45.0

1/ Finland (US$210,000), Swedish Trust Funds (US$210,000),Netherlands Trust Funds (US$150,000),and NorwegianTmst Funds (US$100,000)

I/Finland and Sweden AnnexC PageI oL2

LITHUANIA HIGHWAYPROJECT ECONOMIC ANALYSIS

NPV: Net Present Value IRR: Internal Rate of Return

1. BACKGROUND INFORMATION. The Highway Design and Maintenance Model (HDM III) was used for most of the analysis. The HDM has been created by the World Bank and used all over the world to perform economicanalysis on road maintenanceand design. This model requires as inputs the conditionof the road (roughness, cracking, potholing, ravelling, geometric parameters, history of the pavement),the level of traffic and its estimated growth broken down into five categories of vehicles, the cost of vehicle maintenance,the cost of passenger time and cargo holding, the depreciationof vehicles, and five different maintenancestrategies and their impact on road surface distress. The model calculatesthe road deterioration and the evolution of the roughness, and consequentlyestimates the vehicle operating costs under the various maintenancestrategies. The model determines the highest NPV and IRR by estimatingthe total economic costs and benefits for society for each of these strategies.

2. Rehabilitation of the East-West Highway. The model HDM III with Lithuania-adjusted deteriorationvalues was used to determine the stretches of the East-WestHighway and the pavement strategies with the highest NPV (at 10 and 15% discount rates) and IRR. The four maintenance strategies considered were remixing, a 10 cm overlay, a replacementof the asphalt concrete and a 5 cm overlay reinforced by steel wire nets (see Annex C- page 3/4 for the results of this analysis).

3. Repaving of Regional Roads. The model HDM III was used to compare the following maintenancestrategies: no action; patching 100% of potholes; 12 mm single surface treatment; 4 cm asphalt overlay at ICI 6+ patching; and 8cm overlay at ICI 4 + patching. The highest NPV and IRR were used to prioritize the sections and maintenancestrategies to be included (see Annex C- page 5/6 for the results of this analysis).

4. Vilnius City. Thirty two streets were selected based on engineeringjudgement and the age of the existing layers. The HDM III model was used to carry out an economic analysis based on two discount rates (10 and 15 %), three levels of traffic growth (0, 2 and 4 %) and two different periods (12 and 18 years). The cost benefit analysis led to a prioritizationexcluding sections with a rate of return inferior to 37% (see Annex C- page 7/8 for the results of this analysis).

5. Bridges. Twenty bridges were selected among the 50 considered in critical conditions,for further investigations. The remaining life span and the decrease in bearing capacity of these bridges have been assessed through a survey. The do-nothing alternativefor a bridge consists in doing no repair until its bearing capacityreaches a level which requires traffic diversion. The likely diversions and repair required on each bridge were identified. The benefits are derived from the savings in vehicle operating cost achievedwhen the diversion is avoided. A sensitivity analysis on traffic growth (0, 2 and 4%) and cost of construction(80, 100 and 120%) was performed. The Bridges with the highest NPV and IRR were selected to be financed under the project(see Annex C- page 9 for the results of this analysis).

6. Kaunas City. The cost benefit analysis was based on the comparison between the present Anne" Page 2 of 9 situation and the situation if the improvementsare implemented. This comparison includes the potential savings in accidents, time consumption,vehicle operating costs and pollution. The project was estimated to lower annuallythe number of accidentsby 13, the time spent in traffic by 0.7 million hours, the VehicleOperating Cost by 6 MLTL, and pollutionby 6 tonnes (10%). The unit cost were estimated at 20,00OLTL/accident,1.45 LTLlhour and 10,000LTL/tonnesof pollution and the NPV and ERR were calculatedon a 15 year period with a discount rate of 15 %. Various traffic schemes were assessed during the preparation of the project and the one with the best NPV was selected. A sensitivity analysis was carried out with the followingparameters: Traffic Volumes, Speed, Accident Rates, and ConstructionCosts.

7. Bypasses. Due to a lack of funding in recent years, the constructionof the five bypasses was stopped, leaving uncompletedstructures around the cities. The benefits achieved through the construction of these bypasses comes from time savings, from vehicle operating costs and from accident reduction. Environmentalbenefits were not assessed in monetary terms. Investmentand maintenancecost were included in the cost of the project. The evaluation criteria used for the project were the IRR and the NPV (for discount rates of 10 and 15 %).

8. Road Safety. The benefits achieved through the road safety componentare assessed in five steps: (i) compare the accident data for an accident black spot to the data obtained for a similar road segment (ie crossing, exit lane, etc...); (i) estimate the future accident rate by considering traffic growth and other parameters. (iii) predict the rate of accident to be achieved. (iv) decide the specific activities necessary to remedy to the black spot and determine the impact of each activity from a table based on past experience. (ex. 0,7 = 30% reduction of accidents). (v) determine the cost optimal activity. The value of one life has been estimated at a conservative120,000 USD. The cost of injury has been assessed at 12,000 USD per injured person. The NPV was calculatedat both 10 and 15 %. rabke 1.P*j - WeMHjghuy Pm'j;a~LSE of Slkded. Sadieu !4uabfftfufiexOpdeua I- ReuvdxigE,wa 7 rem,

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East-West Highway

Table 2: Summary of SensitivityAnabsis on OverallBasis

NPV,Lit'000 TableNo of Cost - BenefitAnalysis IRR to at discountrate of 10% 15%

Scenario Low

2.1.1 Decreased costs by 20 % 74.5 90367 64497 2.1.2 Nominal costs 60.1 84643 59280 2.1.3 Increased costs by 20 % 50.4 78919 54064

Scenario:Medium

.2.1 Decreased costs by 20 % 81.3 112194 79894 2.2.2 Nominal costs 66.0 106470 74678 2.2.3 Increased costs by 20 % 55.8 100746 69461

Scenanio: Hih

2.3.1 Decreased costs by 20 % 87.5 131641 93761 2.3.2 Nominal costs 71.3 125917 88545 2.3.3 Increased costs by 20 % 60.6 120193 83328 Regional Roads

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Consuls. FhHgami end lczagth, dyc liii AA- cIQ a1" 1vuwcd CdI P.Uilwa NO. Sedhio I rmn kni to kin Lnt | fIR#n| AA MOLD I n lOLO 1960.0 Diswunt Rai of km Lenglit.1996 1996 Pd% Psi-n. 1U3 PiiMi 10% IS% kmi unDUIJ WA

141 KIsuins-Juitbarkas-Silutc-KIDip 216.6 224.4 7.8 7.8 6.3 116.80 10259 I3O\.458 1215.94 1641.52 410.38 7553 5066 2 132 Ayltus- Scirijai - UltAlijli 2.5 4 1.5 9.3 7.3 71.10 5130 198.16.S 23.84 315.68 78.92 689 474 3 141Kaunas- Jurbalkas- Dilu[6- Klaip6da 6 10 4 13.3 10.4 61.80 3769 528.440 623.56 841.81 210.45 804 545 4 164Malcikini - PIlung6- TauraBe 58 63 5 18.3 9.1 57.30 3436 660.550 779.45 1052.26 263.06 1448 976 5 164 Malcikiai - Plinge - 'raurigt 72 75 3 21.3 8.9 55.80 3436 396.330 467.67 631.35 157.84 858 575 6 155Kurl6nai -Ma2cikiai 6 14 8 29,3 8.0 53.30 3039 1056.880 1247.12 1683.61 420.90 2228 1494 7 155Kou Fna i- Ma;cikia:i 32 37 5 34.3 7.5 52.10 3073 660.550 779.45 1052.26 263.06 1461 999 8 141Kaunas-Juibark:s-s.ilutc-Ilaip&l.a 202.4 207.2 4.8 3'9.1 8.3 51.20 3135 (634.128 748.27 1010.17 2S2.54 1501 977 9 156N.Akmcnc- Vcnla 16.1 16.5 0.4 39.5 9.4 50.20 2158 52.844 62.36 84.181 21.05 84 57 10 105Vilnius- Piicnai- Marijampolc 52 54 2 41.5 9.6 47.60 2633 264.220 311.78 420.90 105.23 436 295 I_ 127 flabriWkes- Varcna - Eiliikcs 1 5 4 45.5 10.3 45.80 2194 528.440 623.56 841.81 210.45 718 4,15 12 127llaIbrifkcs - Varcita - Eisikcs 39.8 44 4.2 49.7 8.5 40.8(1 2112 554.862 654.74 883.90 220.97 844 538 13 141Kausias - Judliakas-&iuc - KIlaipsda 16 41 25 74.7 8.8 40.50 3087 3302.750 3897.25 5261.29 1315.32 4848 3163 14 156N.Akmcn& -Venla 14.8 15.7 0.9 75.6 8.1 39.50 2184 I 18.899 140.3(0 189.41 47.35 207 128 IS 155KuStrnai - Mai.cikiai 5(l 52 2 77.6 6.2 37.80 3073 264.220 311.78 420.90 105.23 517 324 16 105Vilnius - I'ricnai - Marijampold 27.8 30 2.2 79.8 5.2 28.10 4075 290.642 342.96 462.99 115.75 462 251 17 15I6N.Aknn 6 -Vcenta 19.3 21.2 1.9 81.7 6.4 26.65 2042 2531.009 296.19 399.86 99.96 344 174 18 103Viln ius- Polockas 27 31 4 85.7 8.3 26.60 1674 528.440 623.56 841.81 210.45 430 246 19 154 giauliai- PakruoJis- Linkuva 2.0 8.0 6 125.0 5.7 17.10 1649 792.660 935.34 1262.71 315.68 430 97 25 129Anitakkainis-Jicsnas-AlyWus-Mcrkinc 16.7 20.6 3.9 128.9 7.1 1650 1241 515.229 607.97 820.76 205.19 212 35 26 129Antnkaini.s-Jicenas-Alytus-Mcrkinc 27.0 30.0 3 131.9 6.0 15.80 1467 396.330 467.67 631.35 157.84 152 17 27 154tiauIlii- Coru7Ai.iai- N.Abunenc 9.2 10.3 1.1 133.0 5.8 15.50 1309 145.321 171.48 23150 57.87 59 4

If viso 133.0 - - 17564.025 2072558 2797953 6994.88 29573 18337

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%s arLg x6 Cof 9 TABLEU.LS

Regional Roads

Tabk 2: SummaiY of Sensitiviy Analysis on Overall Basis

NPV, Liti '000 TableNo of Cost- Benefit Analysis IRR % at DiscountRate of 10% 15%

Scenario: Medium

2.1.1 ...2.1.2 Decreased costs by 20 % 50.9 33087 21849 2.2.1 ...2.2.2 Nominal costs 38.2 29574 18336 2.3.1 ...2.3.2 Increased costs by 20 % 30.2 26061 14823

Scenario: Low

2.4.1...2.4.2 Decreased costs by 20 9o 46.3 26104 17367 2.5.1 ...2.5.2 Nominal costs 34.3 22591 13854 2.6.1 ...2.6.2 Increased costs by 20 % 26.7 19078 10341 LITHUANIA Anne C HIGHWAYPROJECT Page 7 of 2 ECONOMIC ANALYSIS OF VILNIUS CITY RESURFACING PROGRAM

Shteet & Section (M2) (%) (000Litas) Area IRR Repair cost 1. Savanoriu 4. 18,900 56 662 5. 10,500 53 368 6. 10,500 38 368 7. 12,600 39 441 2. CelezinoVilko 16. 17,600 85 616 17. 10,400 50 364 18. 7,200 70 252 21. 5,700 128 200 22. 10,200 78 357 23. 5,700 136 200 24. 10,200 83 357 25. 9,800 64 343 26. 9,800 58 343 27. 3,400 39 119 3. Liepkaenio 91. 9,020 44 316 92. 6,560 34 230 93. 10,400 182 364 94. 10,875 34 381 95. 6,000 18 210 96. 7,875 28 276

4. Ullnerges 56. 19,680 64 689 60. 13,970 37 489 61. 11,275 37 395 57. 8,200 89 287 58. 11,480 50 402

5. Zinnunu 66. 21,000 31 735 67. 13,300 22 466 68. 6,300 35 221

6. Kariviu 69. 15,104 46 529 70. 16,256 59 569

l/Excluding VAT Annex C Pae 8 of 9 Street & Section _M __ (%) (000 Litas) Area IRR Repair cost 7. Kalvar4u 125. 6,880 60 241 126. 5,548 55 194 127. 9,344 35 327 128 8,580 56 300

8. A. Gostauto 145. 1,975 34 69 146. 16,575 66 580 147. 16,575 66 580

9. Sopeno 99. 2,480 53 87

10. Kauno 100. 11,040 36 386 101. 7,360 98 258 102. 2,944 61 103 11. T. Narbuto 118. 4,140 51 145 119. 5,980 36 209 120. 15,640 54 547 121. 5,520 48 193 122. 3,220 36 113 123. 6,440 51 225 124. 10,580 42 370

12.0. Milasiaus 71. 6,400 40 224 72. 6,400 49 224

13. Zvaigzdzio 55. 24,920 35 872

14. Arditektu 53. 14,300 41 500

15. Zalgirio 64. 19,680 35 689

16. V. Kudirkos 111. 8,160 67 286 112. 4,760 102 167

17. Svitrigailos 113. 4,836 60 169 114. 5,642 42 197 115. 6,448 54 226 116. 4,836 58 169

Total 565,638m 2 56% 20,199 THE WORLDBANK LITHUANIAHIGHWAY PROJECT .

ASSUMPTIONS Traffic growth 102 % Discount rate 15% Works cost 100 % Estimates used for repair costs: - site-costs 10,0 % - design and managementcosts 15,0 % - marginsand reserves 0,0 %

Int. bridge Name of the Bridge Cost of Year of NPV IRR RNPV no repair repair USD 1.02 Viesu Viaduct 227 409 1999 836 585 41 % 2.61 1.03 Vievio Viaduct 342 562 1997 3 505 384 77 % 8.63 1.04 Bridge over Kulpe 426 195 2004 3 639 107 131 % 19,41 1.05 Bridge overNemuna at Prienai 139 150 1999 5 041 184 52 % 5,14 1.07 Bridge over Minlja 228 990 1999 9 774 268 92 % 23,66 1.08 Vidukles Viaduct 269 698 1998 1 963 938 67 % 5,77 1.13 Garliavos Viaduct 754 793 2003 2 763 892 81 % 7.00 1.14 BridgeoverPenta 177606 1998 5308977 83% 11,35 1.17 Bridge over Leveni 254 265 1998 1 640 727 65 % 6,49 1.24 Bridge over Kruona- Both bridges 1 646 992 1998 52 410 850 138 % 32,08 2.03 PaparciuViaduct 352 846 1997 4 102 316 109 % 9,57 3.01 Bridge overSalanta 213 254 1999 3 304 848 60 % 8,10 3.02 Bridge over Virvyte 230 167 1999 2 745 690 80 % 10,05 3.09 Bridge over Nemuna at Alytus 255 517 1999 803 867 29 % 2,02 4.05 Bridge over Sesuvis 237 694 1999 2 177 066 53 % 5,96 4.06 Bridge over Seteksna 138 834 1998 1 975 859 70 % 7,77 4.07 Bridge over Venta 230 483 1997 2 691 864 64 % 6,44 4.10 Meskupo(Jonavos) Gatves Viaduct 353 466 1999 542 484 31 % 1,34 1.0911.10 Viaducts at Seduva and Baisogala 457 494 1997 17 462 222 119 % 12,44 1.24 Bridge over Kruona/First half 915 379 1998 52 964 054 175 % 53,10

(Dt x

SUMMARY.XLS 0 05.07.96-19:1C I '.0 Annex D Page I of S

Project ImDlenentation Schedule

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Performance Monitoring Indicators

Monitorable Targets Units At Start Dec Dec Dec At project 1997 1998 1999 completion

Repaving Design % 30 65 100 100 Construction % 30 65 100 100

Bridges Design % 40 100 100 Repairs % 40 100 100

Road Safety TechnicalAssistance % 20 40 80 100 100 Black SpotImprovements % 0 20 60 100 100

JslniusStredt Design % 25 55 100 100 Construction % 0 25 55 100 100

TrainingProgramme for % 0 70 100 100 Contractors

QualityRequirements Contractsmeeting quality % 80 85 95 95 95 specifications

Amountof Periodic Index 100 110 121 140 140 Maintenanceand New ConstructionPerformed by Private Contractors

Budgetfor Maintenance Index 100 110 121 140 140

Cost of 5 cm Overlay $/M2

Cost BenefitAnalysis for % 45 60 80 100 100 New Constructionand PeriodicMaintenance of Main and RegionalRoads

AccidentRate Indexof 100 95 87 80 80 fatalities per10,000 veh ANNEX E Page 2 of 2

OBJECTIVES MONITORABLE MEANSOF ASSUMPTIONS INDICATORS VERIFICATION

Help preserve the Increase in LRA budget LRA, Ministry The budget from the Lithuanian road network for maintenance of Transport road fund will by expanding the level increase as forecast. of maintenanceover a Index 100 = 1996 four year period

Encouragethe Amountof periodic LRA, Ministry The budget from the developmentof private maintenanceand new of Transport road fund will road constructionand constructionperformed increaseas forecast. engineering companies. by privatecontractors

Index 100=1996

Trainingprogramme for Contractors local contractorsand engineeringcompanies

Improve the cost Cost of a 5 cm overlay LRA This cost will be efficiency of the local in $/m2(no drainage, monitored and contractors no levellinglayer) reviewed every year, but no specific targets can be set because the cost is very sensitive to changes in material costs.

Allocate LRA budget in Percentageof funds LRA a cost efficient way allocatedfor main and regionalroads new constructionor periodic maintenancefollowing a cost-benefitanalysis.

Improve road safety Decrease in the number Statistics from The Parliament will of fatalitiesfor 10,000 TRRI enforce new laws to vehicles (13.1 in 1994) improve road safety. Index 100 = 1996 ,~~~~~~~~~~~~~~~~~~~~~~~ ANNEX F

REPUBLICOF LITHUANIA

HIGHWAYPROJECT

Procurement Arransements

I ______Calendar Year (US million) Project Element 1997 1998 1999 Total 1. Civil Works 1.1. ICB a. East-West Highway and 0.0 1.6 2.7 4.3 Regional Road Repaving b. Repair of Bridges 1.1 1.2 0.0 2.3 c. Black Spot Improvements 0.0 0.9 1.0 1.9 d. Vilnius Street Repairing 1.1 1.2 1.9 4.2 1.2. NCB a. East-West Highway and 2.1 0.9 0.0 3.0 Regional Road Repaving b. Repair of Bridges 0.2 0.3 0.0 0.5 c. Black Spot Improvements 1.0 0.6 0.3 1.9 d. Vilnius Street Repaving 0.3 0.4 0.7 2. Equipment, Goods (IS) 0.2 0.2 a. Road Signs TOTAL 5.8 7.3 5.9 19.0 Reflects IBRD contribution only ANNEX G

Procurement Plan & Schedulel

_ ~ .- Naure of Pacage ToWl Method Major Activities Schedule

Cost Issue of Submission of Award of Completionof Estimate Doc. Bidstprop Contract Padcage Uss000 Signing

Civil Wouks Regivna Roedr and Eust ICBi/NCB West gY4woy Repaving ,LII,.11997 3x250 NCB 1/6/97 2/24/97 3/28/97 9s26/97 RepavingIV,V,VLVI1 4x350 NCB 2/5/97 4/3/97 5/17/97 9/01/97 1997

Repaving Ln 1998 20450 NCB 1/6/99 2n24/98 3/2s/9s 9s26/9 Repsving HI 1998 1,600 NCB 2/5/98 4/2/98 5nn39 10/1/98

RepavingI 1999 1,400 ICB 1/6/99 254/99 3/28 1/26/99 Repaving11 1999 1,200 ICB 2/5/97 3/09 4 /1197 80/1/97

Rehabilitation1 1997 1,200 ICB 2/23/97 4/12/97 5/13/97 7/30/97 Rehabilitation19 1997 200 NCB 3/23/97 5/79/97 6/23/97 11/10/97

Rehabilitation 1 1998 300 NCB 1/23/98 4/10/98 5/13/98 10/1/98 Rehacilitotionvm1998 1,200 ICB 3/23/98 5/17/98 6/1231/9s 7/0/98

RoadSaf1

Black Spot inprovenents 300 NCB 1/19/97 3/10/97 4/11/97 8/1/97 LB 1997 Black Spot Improvements 3x200 NCB 2/19/97 4/17/97 51121/97 7/30/97 II1 IVV 1997

Black Spot Improveigen19 200 NCB 1/19/98 3/10/97 4/11/97 3/1/97

Black Spot Ie provegnen 1,000 ICB 1/19/98 3/17/98 4/11/92 7nos/9s HI 1"99

Blact Spot Improvegents I 300 NCB 1/19/99 3/10/98 4111/99 9/1299 1999 BlackStree Re1Spot Improvementsig1197 i,002099 ICB 2/19/99/79 4/17/9912742/9 s31/2s 7n30/99/29 n 1999

StreetRepaving 1 1997 1,200 ICB 1/17/97 3/10/97 4/11/97 8129/97 Stree RepavingII 1997 250 NCB 1/17/97 3n/28/7 4/25/97 9/12n97

Street Repaving1 1998 1,200 Ica 1/17/98 3/10/98 4/11/99 =9/98 Street Repaving11 1998 300 NCB 1/17/98 3/24/s 4125/s 9/12/99

StreetRepaving I 1999 1,800 ICB 1/17/99 3/10/99 4/119 s09gg 99s

Goods Road Signs 200 Is 3/23/98 5/19/98 6/23/9 11/10/92

'Net of contingencies ANNEX H

REPUBLIC OF LITHIUANIA

HIGHWAY PROJECT

Estimated Schedule of Disbursements

Disbursements(US$ million) Cumulative% IBRD FY Semester Semester Cumulative Disbursement

FY 97 December96 0.0 0.0 0 June 97 1.0 1.0 5 FY 98 December97 3.0 4.0 21 June 98 3.0 7.0 37 FY 99 December98 4.0 11.0 58 June 99 3.0 14.0 74 FY 2000 December99 3.0 17.0 89 June 2000 1.5 18.5 97 FY 2001 December2000 0.5 19.0 100 ANNEX-I

REPUBUC OF LITHUANIA

HIGHWAYPROJECT

SuPrvfion Plan

The schedulebelow is in additionto the regular needs for the review of procurementdocuments, progress reports, and correspondence,estimated to require 6 staff weeks per year for four years.

ApproximateDates Activity Expected SkUIl Staff Weekm ______Requirem ent FY 96__ _ __ 10/96 Supervision (project Engineer, Road Safety 8 launch) Spec., Procurementand DisbursementSpec.

2/97 Supervision Engineer, Economist 4

6/97 Supervision Engineer, Road Safety 4 Subtotal 16 EY98 10/97 Supervision Engineer, Road Safety, Economist 6

2/98 Supervision Engineer, Economist 4

6/98 Supervision Engineer, Economist, Road Safety Subtotal 16 EY-22 10/98 Supervision Engineer, Economist 4

3/99 Supervision Engineer, Procurement 4

6/99 Supervision Engineer, Economist A Subtotal 12 FY 2000 10/99 Supervision Engineer 2

3/2000 Supervision Engineer, Economist 4

6/2000 Supervision Engineer, Economist 4 Subtotal 10 EXI-01 9/2000 Supervision, and PCR Engineer, Economist, 6 Preparation Fin. Analyst LBRDStaff Only - - _ Annex J Page 1 of 2

LITHUANIAHIGHWAY PROJECT

TechnicalServices

Design, Contract Assist LRA with the detailed design, preparation of EU- PHARE Management, bid documents and procurementprocedures. $200,000 Supervision, Assist the Municipalityof Vilnius and the LRA with Procurement, contract management,and quantity and quality control, Pavement includingsupport to site management. Review of Research/ Org. LRA/TRRI/Problematica/Kelprojectwork and Review cooperationpractices regarding investigationsand design of new pavementsand pavement repair and strengthening. Set up a research program and assist in identifyingoptimum design and maintenancestrategies with particular attention to the specific Lithuania road problems, the introduction of increasedEU legal axle loads and higher tire pressures. Local services to be paid by local funds.

Design and Assist the Municipalityof Vilnius with the detailed SwedishTrust Preparation of design, the preparation of bidding documents for the Fund Bidding 1997 constructionseason, procurementprocedures $60,000 Documents for the and training to ensure that MV staff will be able to Municipalityof perform these tasks for the followingconstruction Vilnius seasons.

Design and Assist LRA with the detailed design and preparation of NorwegianTrust Preparation of bidding documents for the bridge component. Fund Bidding $100,000 Documentsfor Bridges

Training of Train contractors, consultants and client staff with the NetherlandsTrust Contractors and aim of enhancingcost-effectiveness and quality of Fund Client Staff in work, to make local contractorsmore competitive and $150,000 Business Practices to enhancethe client managementcapabilities. Identificationof contractor weaknesses,training in preparation of business plans, enterprise management, accounting, financial analysis, cost estimating,work planning, contract management,quality control, marketing, communication,and human resource management. Annex J Page 2 of 2

Road Safety Develop for DERS a computerizedvehicle and driver EU-Phare (1997) license register and road accident reporting and $1,000,000 analyzingsystem to be integrated with the police and customs correspondingsystems. Provide international experts to assist DERS in developingan accident location coding system for urban areas, educationfor school children, traffic safety information,driver training, review of legislation,and training of traffic police .

Prepare for LRA and the cities traffic safety design standardsfor road/street infrastructureincluding road signs and road mnarking,and provide training in road/street planning, design, constructionand maintenanceconsidering road safety and safe road works, and in road safety audits.

Prepare detailed design and bid documentsfor Finland remedial actions to improve accidentblack spots $210,000

Road Network Review the organizationand managementof county Swedish Trust and minor roads including the possible introductionof Fund Private Road Associations $150,000

Road User Charges Study the existing Road Fund law, the future EBRD and Road Fund requirementsfor road maintenanceand propose Study imnprovementsof the existing schedule of charges. Annex K LithuaniaHighway Project

Environmental Review

This report is an environmentalassessment of the Lithuanian Highway Project, financed by the World Bank and European Bank for Reconstructionand Development. The project has seven componentsas follows:

i. Repaving of highways and regional roads ii. Completionof 5 bypasses iii. Bridge repairs iv. Road safety program v. Technicalservices vi. City of Vilnius vii. City of Kaunas

Constructionwork on the bypasses and part of the City of Kaunas componenthas started, while the extent of rehabilitationwork on roads and bridges has not yet been decided.

The Transport and Road Research Institute in Kaunashave already completed EnvironmentalImpact Assessmentsfor the bypasses. A summary of these reports is includedhere.

It is not believedthat the rehabilitationof the highways and regional roads will have significant impacts on the environment. However, care must be taken to protect natural watercoursesduring constructionworks.

It is not believed that the bridge component will have significant impactson the environment, but it is important to protect nearby watercoursesfrom pollution during the rehabilitationworks.

The road safety program includes technicalservices and minor civil works that will not have any negative environmenteffects, and will have positiveeffects if it successfullyreduces the number of accidents.

The City of Vilnius component involves rehabilitationof streets in Vilnius. No significant environmentalimpacts are expected to arise from this component.

The City of Kaunas component, in additionto rehabilitationof some roads, include the construction of a new section of road along the river. The new road layout will result in less emissions from vehicle exhaust and less noise in populatedareas. One building will have to be demolished, and an alley of trees will have to be cut down. One of the most positive features of this project is the constructionof a bicycle lane along the river Nemunas.

It is not believedthat any of the project componentswill have significant negativeeffects, and based on environmentalconsiderations, there are no reasons to abandon any part of the project.

Norplan May 15, 1996 ConcordanceTable

LithuaniaHighway Project SAR No. 15636 - LT

Agreementsto be Reached CorrespondingSection of Legal Documents 6.1 (i) L.A. 5.01 (c) 6.1 (ii) L.A. 3.01 (a) and P.A. 2.01 (a) 6.1 (iii) L.A., Schedule 5, para.5 6.1 (iv) L.A., Schedule 5, para.1 6.1 (v) L.A., Schedule 5, para.3 and P.A. Schedule 2, para. 1 6.1 (vi) L.A., Schedule 5, para.4 6.1 (vii) L.A., Schedule 5, para.2 6.1 (viii) L.A., Schedule 5, para.6 6.2 L.A., Schedule 1, para.3

MAP SECTION

BI~D28033

L A T V I A

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Report No: 15636 LT Type: SAR