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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 identifiedas 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 Lithuaniais 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)