Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 54600-AR Public Disclosure Authorized

PROJECT PAPER

ON A

PROPOSED SECOND ADDITIONAL LOAN

IN THE AMOUNT OF US$40.0 MILLION

TO THE Public Disclosure Authorized

REPUBLIC OF

FOR A

LIFELINE ROADS IMPROVEMENT PROJECT

June 18, 2010

Public Disclosure Authorized

Sustainable Development Department South Caucasus Country Unit Europe and Central Asia Region

Public Disclosure Authorized

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

CURRENCY EQUIVALENTS

(Exchange Rate Effective April 6, 2010)

Currency Unit = Armenian Dram (AMD) AMD 1 = US$0.0025 US$ 1 = AMD 400

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AADT Annual Average Daily Traffic AMD Armenian Dram ARD Armenian Roads Directorate CPS Country Partnership Strategy EMF Environmental Management Framework EMP Environmental Management Plan EIRR Economic Internal Rate of Return GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development IDA International Development Association IFRs Interim Financial Reports LRN Lifeline Road Network LRIP Lifeline Roads Improvement Project LRIP-AF1 Lifeline Roads Improvement Project Additional Financing LRIP-AF2 Lifeline Roads Improvement Project Second Additional Financing MoF Ministry of Finance MoTC Ministry of Transport and Communication NPV Net Present Value PDO Project Development Objective PIU Transport Project Implementation Unit

Vice President: Philippe H. Le Houerou Country Director: Asad Alam Sector Manager: Henry G. R. Kerali Task Team Leader: Olivier Le Ber Co-Task Team Leader: Satoshi Ishihara

ARMENIA LIFELINE ROADS IMPROVEMENT PROJECT – SECOND ADDITIONAL FINANCING

CONTENTS

I. Introduction 1 II. Background and Rationale for Second Additional Financing 1 III. Proposed Changes 4 IV. Consistency with Country Partnership Strategy 5 V. Appraisal of Scaled-Up Project Activities 5 VI. Expected Outcomes 10 VII. Benefits and Risks 11 VIII. Financial Terms and Conditions for the Additional Financing 12 Annex 1 Revised Arrangements for Results Monitoring 13 Map IBRD 37883

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

Project Paper Data Sheet Date: 06/18/2010 Team Leader: Olivier Le Ber Country: Armenia Sector Manager: Henry G. Kerali Project Name: Armenia Lifeline Country Director: Asad Alam Roads Improvement Project – Second Environmental Category: B Additional Financing Original Project ID: P115486 Second AF Project ID: P121287 Borrower: Republic of Armenia Responsible agency: Ministry of Transport and Communication (MoTC) Revised estimated disbursements (Bank FY/US$m) (Original Project + AF1 + AF2) FY 2009 2010 2011 2012 2013 Annual 7.5 42.5 25 21.6 5 Cumulative 7.5 50 75 96.6 101.6 Current closing date: 12/31/2011 Revised closing date: 12/31/2013 Does the project require any exceptions from Bank policies? ○ Yes ● No Have these been approved by Bank management? ○ Yes ○ No Is approval for any policy exception sought from the Board? ○ Yes ○ No Revised project development objectives/outcomes

The Project Development Objective is the same as under the original project, which is to upgrade selected sections of the Lifeline Road Network and create temporary employment in road construction.

The results framework and the monitoring indicators have been updated to monitor the additional rehabilitation of approximately 190km of the Lifeline Road Network and about 19,000 person-months of additional job created. Does the project trigger any new safeguard policies? No For Second Additional Financing [X] Loan [ ] Credit [ ] Grant For Loans/Credits/Grants: Total Bank financing (US$m.) US$ 40.0 million Proposed terms: Flexible Loan at 6-month LIBOR for US Dollar, plus variable spread, with 25 year maturity and 10 years of grace period with level repayment of principal. Financing Plan (US$m.) (AF2) Source Local Foreign Total Borrower/Recipient 9.98 0 9.98 IBRD 24.00 16.00 40.00 Others 0 0 0 Total 33.98 16.00 49.98 Financing Plan (US$m.) (Original project + AF1 + AF2) Source Local Foreign Total Borrower/Recipient 24.50 0 24.50 IBRD 45.90 30.70 76.60 IDA 25.00 0 25.00 Others 0 0 0 Total 95.40 30.70 126.10

I. Introduction

1. This Project Paper seeks the approval of the Executive Directors to provide an additional loan in the amount of US$40 million to the Republic of Armenia for the Lifeline Roads Improvement Project (LRIP) (Credit: IDA-4549-AM). The proposed Second Additional Financing (LRIP-AF2) Loan would finance the scaling up of the project activities through rehabilitating approximately 190km of the Lifeline Road Network1 (LRN) and helping further mitigate the impact of the financial crisis by creating temporary employment in road construction. It would also finance the design of project roads and future projects, supervision of works, procurement of data collection equipment, capacity development in pavement design and road safety, project operating costs, and financial and technical audits.

2. The Project Development Objective (PDO) would remain the same as in the original Project. The results framework and the monitoring indicators have been revised to reflect the increased scope of the Project. There are no changes to the implementation arrangements. There would be no co-financing from other donors as was the case in the original Project. The closing date is being extended by two years, from December 31, 2011 to December 31, 2013 to allow for all activities to be completed and fully cover the defect liability period of two years.

3. The proposed LRIP-AF2 is being requested for "implementation of additional or expanded activities that scale up a project‘s impact and effectiveness", as described in OP/BP13.20. The ongoing LRIP meets the criteria and conditions of OP/BP13.20 for additional financing for Project scale-up.

II. Background and Rationale for Second Additional Financing

4. Original Project and first Additional Financing: The original Lifeline Roads Improvement Project (US$25 million equivalent IDA Credit) was prepared under the "IDA Financial Crisis Response Fast-Track Facility" utilizing OP 8.0, Rapid Response to Crisis and Emergencies, in order to mitigate the impact of the global financial crisis in Armenia. The LRIP was approved by the Board on February 24, 2009, and became effective on April 10, 2009. The Project Development Objective of the LRIP is ―to upgrade selected sections of the LRN and create temporary employment in road construction‖. On August 27, 2009, the Board approved the First Additional Financing2 (LRIP-AF1) in the amount of US$36.6 million (IBRD-7751- AM). The LRIP-AF1 aimed to scale up the project's activities through rehabilitating an additional 140km of the LRN and creating more temporary jobs in road construction. The LRIP- AF1 became effective on November 20, 2009. Overall, the original project aims to rehabilitate about 240 km of the LRN and create 17,650 person-months of jobs in road construction.

5. The implementation of the original project has progressed well. The Implementation Status and Results ratings for Implementation Progress/Development Objectives have been rated

1 The LRN roads are rural road links that connect rural communities in the country to an interstate road; they comprise some 3,014 kilometers of Armenia‘s 7,704 kilometers (39.1 percent) of nonurban roads. 2 This first Additional Financing was provided as an IBRD Loan.

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Satisfactory (S) for the past 12 months and the project is expected to fully achieve its Development Objectives. Below are the key achievements thus far:

a) About 153km of the LRN, including 35km under the LRIP-AF1, were rehabilitated within eight months of the project becoming effective, allowing the Government to swiftly mitigate the negative impact of the financial crisis. The original Credit outperformed the target by rehabilitating 118km of roads (i.e. 18 percent more than the original project length) thanks to the significant cost savings generated from the reduction in the cost of construction and the adoption of more cost effective design standards during the implementation.3 b) About 12,000 person-months of jobs have been created under the original Credit, 50 percent higher than the target value. 4 By hiring region-based contractors the Project helped local construction industries remain on business. On average, original Credit contracts accounted for about 25 percent of contractors‘ revenue during the period between June and December 2009, and for nine contractors, the original Credit contracts were the only contracts they had during the same period. c) Basic access to social services and livelihood opportunities has been improved by connecting rural poor to the main road network. Travel time was reduced on average by about 40 percent, which helped reduce income and non-income poverty among the rural population in Armenia.

6. By December 31, 2009, the original Credit had been fully disbursed. With regard to the LRIP-AF1, about US$20 million (54 percent of the IBRD loan) has already been disbursed within nine months since it was approved by the Board.5 It is expected that the LRIP-AF1 will be fully disbursed well before the current closing date of December 31, 2011.

7. Both the original project and the LRIP-AF1 were assigned environmental category B. The Environmental Monitoring Plan (EMP) was prepared for each road section in line with the Environmental Management Framework (EMF), and local communities and interested parties were consulted prior to the start of the works on the respective sections. No land acquisition has occurred under the project.

8. Rationale for the second Additional Financing: Armenia is experiencing one of the most severe economic crises since early 1990s. Although the Government prioritized expenditures that would save or create jobs in the short-term and protect the poor, the Gross Domestic Product (GDP) declined by 14.4 percent and the fiscal deficit increased to 7.5 percent of the GDP in 2009. As a result of the crisis, extreme poverty rose by 3.1 percent and official unemployment rose by 6.9 percent in 2009. The economic contraction was due to a fall in

3 The original project was prepared based on the detailed designs prepared in 2007 under the Millennium Challenge Account funding, which was updated during the early phase of project implementation not only against the existing pavement conditions but also in light of cost-effective design standards. Also, various job-creating technologies were introduced at the same time. This phased approach was necessary to prepare the original project as quickly as possible and swiftly mitigate the impact of the global financial crisis. 4 50 percent more jobs than the target value were created because significant cost savings allowed the rehabilitation of 18 percent more roads and also because of various job-creating technologies such as masonry parapets in place of steel guardrail. 5 The disbursement is expected to accelerate again in 2010 once the construction period starts.

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remittances (by about 35 percent), decline in exports (by about 34 percent) and the collapse in commodity prices. Construction activities – a key engine of growth over the past several years – fell significantly leading to major job losses. In real terms, construction declined by 42.3 percent accounting for about 1.6 percent of the overall economic decline.

9. To mitigate the impact of the crisis, the Government prioritized expenditures with the aim of saving or creating jobs in the short term and protecting the poor. With support from these countercyclical policies and the ongoing global recovery, economic activity in Armenia stabilized towards the end of 2009 and rebounded in the beginning of 2010. The GDP grew by 7.5 percent in the first four months of 2010 compared to the same period in 2009, a recovery stronger than initially expected, although from a very low base due to the sharp GDP decline in the first half of 2009. Growth was mainly driven by mining and services. Construction activity also revived, mainly reflecting capital spending by the Government, although private construction and real estate investment remain subdued. The economy is now projected to grow by 4.8 per cent for the year as a whole, a lower rate than at the beginning of the year as the favorable base effect will be fading out. Because private construction activity is not projected to revive soon, owing to scarcity of mortgage financing and uncertain flows of remittances, the public investment program—largely financed by donors—is expected to continue providing critical support to the economy in the remainder of the year.

10. Poverty is expected to increase by about 5.2 percent between 2008 and 2010. This means that more than 147,000 people fell below the poverty line in 2009 and another 25,000 will do so in 2010. The projected poverty incidence is expected to be about 28 percent in 2010, which is higher than the 2006 level of 26.5 percent, implying that the poverty reductions recorded between 2006 and 2008 would be more than fully offset by poverty increases due to the crisis. The increase in the poverty gap is becoming more pronounced as those already poor became poorer. A mild recovery is forecasted for 2010. Although the banking situation appears to have stabilized, the economy and job market are not expected to return back to the pre-project level, requiring the Government to continue with various crisis mitigation measures in order to protect the poor. However, the capacity of the Government to implement public works to create temporary jobs remains limited because, even though the Government managed to avoid sharp falls in total revenue and tax revenue in 2008 and 2009, spending levels increased and revenue decreased, adding pressure on the fiscal space.

11. The poor conditions of roads – the bulk of which are classified as the LRN – hamper the rural poor‘s ability to cope with the economic downturn. It is reported that rural communities lose over 40 percent of agricultural harvest because of difficulty getting produce to market, with losses as high as 80 percent in the worst served communities. 6 While precise data are not available, the poor condition of rural roads also constrains the rural poor‘s basic access to external markets and to social services not available locally. Rehabilitation of the LRN, which provides many rural poor‘s only access to social services and livelihood opportunities, will therefore not only help create temporary jobs and partially ameliorate the worsening job market but also reduce transport costs and support economic activities in rural Armenia.

6 World Bank, 2004, Rural Infrastructure in Armenia: Addressing Gaps in Service Delivery. Washington, D.C.

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12. In this context, on February 19, 2010, the Prime Minister requested the World Bank to provide a second Additional Financing to expand the implementation of the Project by rehabilitating a further 190km of the LRN, including some 178km for which civil works were started but terminated due to shortage in donor financing. Detailed designs have already been prepared for about 50km of road sections, allowing civil works to start in August 2010, and be completed within the current construction season. Supporting the proposed activities would contribute to the Government's continuing efforts to mitigate the impact of the financial crisis on rural poor by creating about 19,000 person-months of temporary jobs, reducing transport costs and supporting economic activities in rural Armenia.

III. Proposed Changes

13. The proposed LRIP-AF2 would mainly finance the rehabilitation of about 190km of the LRN. The results framework and the monitoring indicators have been updated to include the additional investments (Annex 1). Retroactive financing of up to US$8 million of the loan would be applied for selected contracts signed between June 2010 and August 2010 when the loan signing is expected to happen. The LRIP-AF2 would have two components.

14. Component 1: Rehabilitation of approximately 190km of selected sections of lifeline roads (US$45.8 million excluding contingencies, out of which the Bank finances US$36.6 million). About 190km of lifeline roads would be rehabilitated under the LRIP-AF2. This includes about 178km road sections for which rehabilitation works were suspended some two years ago due to a shortage in donor funding, and a 12km section of the H46 road up to the town of . This component comprises civil works for the rehabilitation of the roads; supervision of the works; technical auditing of rehabilitation works; and project implementation expenses including, but not limited to, funding technical and financial audits, monitoring and evaluation, and incremental operating costs. This operation will not require any land acquisition.

15. Component 2: Technical assistance (US$1.1 million, out of which the Bank finances US$0.9 million). This component would finance the development of new road geometric standards, feasibility studies and designs of future investments and the procurement of road data collection equipment.

Table 1: Cost Summary by Components7

Summary by components Bank Financing US$ Government Total Cost (Second Additional Financing only) (inclusive of tax) financing US$ US$ Civil works, design and supervision 36,640,000 9,160,000 45,800,000 Goods and technical assistance 880,000 220,000 1,100,000 Total activities 37,520,000 9,380,000 46,900,000 Contingencies 2,380,000 595,000 2,975,000 Front end fee* 100,000 100,000 Total for all Components 40,000,000 9,975,000 49,975,000 * IBRD portion only; reflects 0.25 percent of the total loan amount

7 Inclusive of Value Added Tax of US$8.98 million.

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16. Activities under the LRIP-AF2 would be implemented by the same Transport Project Implementation Unit (PIU) and the Armenian Roads Directorate (ARD) under the Ministry of Transport and Communication (MoTC) which are implementing the ongoing project. The PIU implemented the World Bank–financed Transport Project (2000-2004) and two Grants to prepare projects8, and has shown experience in implementing Bank-financed projects. The PIU would continue using the financial management systems and procurement and reporting mechanisms of the LRIP. The closing date would be extended by two years. The new closing date would be December 31, 2013.

IV. Consistency with Country Partnership Strategy

17. The proposed LRIP-AF2 is strategically aligned with the Country Partnership Strategy (CPS) for FY 2009-12 (Report No. 48222-AM). The CPS was prepared in the context of the global economic crisis and its impact on the country. Therefore, it focuses on the near term needs of addressing vulnerability and mitigating the adverse poverty effects of the crisis. The CPS emphasizes that ―the road network is of particular importance for a landlocked country with partly closed borders. Investment and operating costs are high, and strategic interests indicate investments in both transit transport corridors as well as in rural or lifeline roads‖. Accordingly, the proposed LRIP-AF2 is included in Results Area 5 ―Strengthening knowledge and competitiveness‖ under the Strategic Objective 2 ―Strengthening Competitiveness for Post-Crisis Growth‖.

V. Appraisal of Scaled-Up Project Activities

18. Economic and financial analysis: As with the original project, the proposed roads were selected with the primary objective of improving rural connectivity to alleviate income and non- income poverty and creating temporary jobs to ameliorate the negative impact of the current financial crisis in rural Armenia. Project roads were selected from among those LRN which serve large rural populations but for which the implementation of rehabilitation works had been stopped for a few years due to shortage in donor funding. Project roads were also selected to minimize the geographical overlap with the ongoing project.9

19. In order to ensure that all project roads generate sufficient economic benefits that warrant investments, a cost-benefit analysis was conducted for the first-year program that comprises about 50km of LRN roads, based on the traffic counts conducted in April 2010. The Highway Development and Management Model (HDM4) was used to compare the economic costs and benefits of the proposed investments with the ―without project‖ scenario, assuming that only minimum routine and periodic maintenance to preserve the roads current condition would be conducted. The quantified benefits comprise savings in vehicle operating costs and passengers

8 Policy and Human Resources Development Fund Grant (TF 057789) for the Preparation of Traffic Management and Safety Project (2007-08) and Policy and Human Resources Development Fund Grant (TF090313) for Preparation of Railway Restructuring Project (2008-09). 9 Please see the attached map.

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travel time due to the road improvements. The overall financial capital cost for the first year program is estimated at US$14.3 million. Conversion factor of 0.80 was applied to identify economic costs. As under the original project, conservative traffic forecasts were used with annual traffic growth of 0 percent in 2010, 1.65 percent in 2011, and 5.5 percent afterwards. The risk of price increase is considered minor, given the lower inflation expected for the next several years compared to the pre-crisis years.

20. The economic analysis shows that the proposed investments (Table 2) are economically sound and furthermore they would improve rural connectivity and create jobs. The overall economic return of the first year program would be 21.1 percent, and the net present value of the first year program is US$9.0 million. All road sections have Economic Internal Rate of Return (EIRR) above 12 percent, ranging from 17.1 percent to 42.5 percent. Sensitivity analysis shows that all project roads would be economically justified even if cost were 20 percent higher or if base traffic levels were 20 percent lower. The first year program would also improve access for about 68,400 people – or 4.8 people per US$1,000 of investment. The economic viability of the second year program, which has been identified based on the same principles as under the first year program, will be confirmed based on the same assumptions and methodology. Should the EIRR for any road in the second year program fall below 12 percent, designs would be revised to reduce costs and ensure that all investments supported under the LRIP-AF2 are economically viable.

Table 2: Economic analysis (Results for First Year Program)

Economic No. of Length Paveme 2010 EIRR NPV Srl. Roads Link cost Benefici (km) nt type AADT (%) ($ mil) (US$/km) aries 1 M2- Halidzor (H46) 12.0 a/c 631 300,000 19.0 1.870 3,200 M3-Paghaghbyur, km 0+000- 2 8.5 km8+534 a/c 537 220,000 21.9 1.541 4,800 T-4 -16 -, 3 2.1 km2+560-km4+700 a/c 578 220,000 21.7 0.397 28,500 M10-, km0+000- 4 1.7 km1+700 a/c 1,421 220,000 42.5 1.105 13,000 M4- km 6+800-km 5 8.5 15+300 a/c 752 220,000 25.3 2.256 6,800 M4-Sevaberd M4-Sevaberd 6 7.8 km15+300-km23+100 a/c 334 220,000 17.1 0.669 1,600 7 M9 Talin – Dashtadem 5.3 a/c 527 220,000 20.4 0.815 5,500 Agarak- 8 4.1 km0+000-km4+040 a/c 537 220,000 16.5 0.301 5,000 Total 49.1 21.1* 8.954 68,400 * Weighted average based on the cost of each section

21. Job creation impact: A survey conducted in January 2010,10 found that the original project created or saved about 12,000 person-months of jobs. About 1,000 to 1,300 of rural poor

10 Only those jobs created under the original project were assessed under the survey. All contractors hired under the original project were interviewed for the number of temporary workers they hired for road construction as well as

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were hired on a regular basis and gained about US$2.5 million as salary. Overall, local population received US$5.2 million, or about 20% of the cost of civil works under the original project in the form of remuneration. The relatively high labor content in the overall cost of civil works is due to the use of cost effective designs standards and job creating technologies.11

22. The civil works supported under the LRIP-AF2 are similar to those supported under the original project. Also, the same cost effective design standards and job creating technologies will be used under the LRIP-AF2. It is therefore estimated that a similar number of jobs would be created per a kilometer of road rehabilitated. Since about 12,000 person-months of jobs were created from rehabilitating 118km of LRN under the original project, it is estimated that about 19,000 person-months of jobs would be created from rehabilitating 190km of LRN under the LRIP-AF2.

23. Technical: The project will rehabilitate about 190km of LRN including 178km sections of the LRN for which civil works were suspended half way through in 2008. The designs need to be updated in light of the pavement deterioration that occurred after the civil works were suspended and reflect on the cost effective design standards and job creating technologies adopted for LRIP.

24. The project will mostly repair road pavements on existing alignments. Some structures may need to be repaired, and proper drainage and safety facilities will be installed. No technical difficulties are expected, and the ARD as well as many local construction industries have gained experience on the cost effective pavement designs and job creating technologies during the implementation of the project to date.

25. Detailed designs have been prepared for about 50 km of road sections for which civil works could start in August 2010. The designs have been reviewed and found adequate. The works should be completed within the current construction season. Rehabilitation of the remaining 140km of the lifeline roads will start at the beginning of the construction season in 2011 and be completed within the calendar year. There will be a 24 months defect liability period.

26. Procurement: Procurement for the LRIP-AF2 would be carried out in accordance with the World Bank‘s "Guidelines: Procurement under IBRD Loans and IDA Credits" published in May 2004 and revised in October 2006 and in May 2010 (Procurement Guidelines); "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" published in May 2004 and revised in October 2006 and in May 2010 (Consultants Guidelines); and the provisions stipulated in the Loan Agreement for the LRIP-AF2. The World Bank Guidelines on Preventing and Combating fraud and Corruption in Project Financed by IBRD Loans and IDA Credit and the number of regular staff they would have dismissed in the absence of the Project. Producers of construction materials were also interviewed for the size of labor inputs necessary to produce the amount of construction materials needed under the project. It was found that contractors in rural Armenia customarily hire all workers, including manual workers, on a full-time basis because employees without secure contracts often leave the job without prior notice for better paying jobs in foreign countries and make the completion of contracts on time at risk. This custom also contributes to relatively high labor contents in the overall cost of civil works. 11 The decision to use concrete sidewalks, masonry parapets and other job creating measures helped created 50 percent more jobs than was estimated during project preparation.

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Grants dated October 15, 2006, would also apply. The LRIP-AF2 would include the rehabilitation of roads, and procurement of data collection equipment. It will also support consultancy services for design and supervision of civil works, feasibility studies and designs of future projects, the preparation of EMPs,12 and the implementation of technical audits and new geometric standards for roads.

27. Similar to the LRIP-AF1, the LRIP-AF2 would follow the Bank‘s standard procurement procedures. 13 Given the positive track record under LRIP-AF1, the following streamlined procedures used under the LRIP-AF1 would continue to be used under LRIP-AF2: for National Competitive Bidding civil works contracts to be procured before the end of 2010, only the first three contracts would be prior reviewed and their bid submission time would be 21 days (3 weeks). Retroactive financing up to US$8 million would be allowed for selected contracts to permit contractors to mobilize quickly, and to create urgently needed temporary jobs. Contracts with retroactive financing would follow procurement procedures acceptable to the Bank. Procurement risk for Armenia is considered to be substantial. However, the mitigation measures in place under the original project would continue to be employed under the LRIP-AF2. The residual procurement risk is assessed to be ―Moderate‖.

28. Financial Management Arrangements: The same financial management arrangements that have functioned adequately to date would continue to be used under the LRIP-AF214. The Bank and the Government are in the process of reviewing the Treasury‘s preparedness for hosting the PIU accounts. The exercise, including piloting, will be completed by the end of 2010 and, if successful, all PIU accounts are expected to be transferred from Commercial banks to the Treasury as of the beginning of 2011. The financial management functions under the LRIP-AF2 including the budgeting and planning, accounting, internal control, funds flow, financial reporting and auditing, will be handled by the PIU. The financial management arrangements under the original LRIP have been found acceptable to the Bank. In addition, the last financial management supervision conducted in May 2010 reviewed quarterly Interim Unaudited Financial Reports (IFRs) of active projects and annual audit reports of closed grants implemented by PIU indicated that the financial management arrangements under the active projects are satisfactory. The PIU updated its Financial Management Manual and accounting software prior to the original project. The client is in compliance with the audit covenant: the audit reports for the original and LRIP-AF1 are not due yet, while the audit reports with clean (unqualified) opinions on the grants‘ financial statements under two Grant projects 15 were received by due dates and were acceptable to the Bank. The overall FM risk for the LRIP-AF2 is ―Low‖.

29. The project audit will be conducted by independent private auditors and on terms of reference acceptable to the Bank. The annual audited project financial statements, separate for

12 The EMPs of all roads will be prepared and disclosed prior to the commencement of civil works. 13 The original project was exempted from various policies as it was prepared under the Operational Policy 8.00. 14 The Bank and the Government are in the process of reviewing the Treasury‘s preparedness for hosting the PIU accounts. The exercise, including piloting, will be completed by the end of 2010 and, if successful, all PIU accounts are expected to be transferred from Commercial banks to the Treasury as of the beginning of 2011. 15 Policy and Human Resources Development Fund Grant (TF 057789) for the Preparation of Traffic Management and Safety Project (2007-08) and Policy and Human Resources Development Fund Grant (TF090313) for Preparation of Railway Restructuring Project (2008-09).

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the original project, first and second additional financing, will be submitted to the Bank within six months of the end of each fiscal year and also at the closing of the project. Existing formats of the project management-oriented IFRs will be used for the monitoring and supervision of the LRIP-AF2, and a full set of IFRs will be submitted to the Bank every quarter throughout the life of the project no later than 45 days after the calendar quarter end.

30. Disbursements: The disbursement period is expected to be about three years. The disbursement procedures used for the original project and LRIP-AF1 will continue to be used for the LRIP-AF2. A designated account for the LRIP-AF2 will be opened at HSBC bank in Armenia and the ceiling of the advance will be US$7.5 million. Prior to the project implementation, the Borrower will open a Project Account and deposit a contribution of 20 percent of project costs. The Operational Manual has been amended to incorporate changes introduced under the LRIP-AF2. Details regarding the minimum size of applications and the documentation to be submitted for disbursement purposes are provided in the Disbursement Letters.

Table 3: Expenditure Categories

Expenditure Category Amount in US$ Financing Percentage Works, goods, consultancy services and 39,900,000 80% incremental operating costs Front-end Fee (IBRD) 100,000 Total 40,000,000

31. Disbursements from the loan account will be made only for eligible project expenditures, in accordance with the terms of the loan agreement. Retroactive financing will not exceed an aggregate amount of US$8 million for eligible expenditures incurred between June 10, 2010 and the signing date of the project. These expenditures will be claimed for reimbursement once the loan becomes effective. All expenditures incurred during the retroactive financing period will follow standard procurement and disbursement procedures, as approved for the additional financing.

32. Social: The proposed LRIP-AF2 will have positive impact on the livelihood of local population. The original project created about 12,000 person/ months of temporary jobs, which was highly appreciated by local population. The original project also helped local construction industries weather the economic crisis – on average, LRIP contracts accounted for 25 percent of revenues for contractors during the 2009 construction season, and for some contractors, LRIP offered the only contracts. It is expected that about 19,000 person/ months of jobs would be created under the LRIP-AF2, which will provide the rural poor important sources of livelihood. The LRIP-AF2 would also continue to support the ―safe village program‖ through supporting small road safety civil works combined with awareness campaigns at the community level.16

16 The implementation of ―safe village program‖ under the LRIP-AF1could not start as planned due to a delay in establishment of Road Safety Secretariat, availability of grant funds for its support and the delays in mobilization of the road safety consultant. Now the implementation is on track. The village Gyuladarak was selected for the demonstration project to improve road safety near a local school. It combines small civil works (to improve pedestrian crossings, speed management and proper horizontal and vertical signage) with an education campaign at the school and public awareness campaigns in the local community. The pilot is implemented with active

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33. All civil works under the LRIP-AF2 would be conducted within the existing Right-of- Way and would not require land acquisition or result in any other impact that would trigger the Bank‘s Social Safeguard Policy (OP 4.12). The supervision consultant would nevertheless be required to monitor compliance with OP 4.12 throughout the project implementation. The complaint monitoring program using SMS messaging system would be implemented on a pilot basis under the LRIP-AF2.17

34. Environment: The LRIP-AF2 is classified as Environmental Category B. Expected impacts on human health and the natural environment are minor. The EMF, first developed under the original project and then updated for LRIP-AF1, has been further improved through minor revisions and disclosed in country and through the Bank‘s InfoShop. A stakeholder consultation meeting on the initial EMF was held on January 22, 2009, and no additional consultations on the updated EMF are required. An LRIP supervision mission conducted in March 2010 found that the Environmental Management Plans (EMPs) of the ongoing activities are being complied with in a satisfactory manner. Earlier supervision of the original project and the LRIP-AF1 noted minor environmental issues related to the disposal of construction wastes. The ARD and the PIU swiftly implemented remedial measures based on the recommendations from the task team. While positive changes in the management of environmental impacts are visible on ground, the task team will continue to monitor environmental compliance issues throughout project implementation. Site-specific EMPs will be prepared for each road section under LRIP-AF2. All EMPs will be completed prior to the beginning of works and disclosed to, and discussed with, local stakeholders. The EMPs will be included as part of the bidding documents to ensure that contractors are aware of their responsibilities.

35. A qualified firm has been hired to supervise contractors, including their compliance with EMPs, which helps ensure that environmental impacts have been adequately addressed. The updated EMF offers a streamlined format for reporting on EMP implementation for the convenience of supervision contractors. The ARD‘s experience and competence in ensuring good environmental performance of contractors and a quality environmental oversight by supervision consultants have significantly improved during the project implementation.

VI. Expected Outcomes

36. The proposed LRIP-AF2 would scale up the original project by rehabilitating additional road sections. These would be measured with the indicators in the Table 4.

participation of the community members with coordination by the Road Safety Secretariat. Similar road safety activities will be implemented to improve safety for vulnerable road users in other villages with proven commitments to road safety. 17 A system has been developed that will allow people to report complaints or grievances through the SMS messaging system or emails. The system will categorize complaints according to types and severity, and automatically notify and update responsible persons in the ARD, PIU and the Bank task team since the submission of complaints till their resolution. Local population will be notified how to send complaints through the system and how to monitor progress in resolution.

10

Table 4: Revised Results Framework for LRIP-AF2

Project Development Objectives Project Outcome Indicators Use of Project Outcome Information The PDO is:

(i) to upgrade selected sections of the Travel time reductions on project The information will be used by lifeline road network roads. MoF and MoTC to refine fiscal stimulus and to develop road sector Transport cost reductions on project policy roads.

(ii) to create temporary employment in Number of person-months of local road construction jobs created Intermediate Outcomes Intermediate Outcome Use of Intermediate Outcome Indicators Monitoring Component 1 Component 1 Component 1 Rehabilitation of approximately 190 Number of km improved The information will be used by km of lifeline road network MoTC for the improvement of lifeline and other roads.

Roads in good or fair conditions as Used by the ARD to keep track of a share of total classified roads the LRN improvement measured

Share of rural population with Used by the ARD to keep track of access to an all-season road the LRN improvement measured.

Component 2 Component 2 Component 2

Strengthening of road sector New road geometric design Used by ARD for better cost standards developed effective designs

Establishment of a data collection unit in ARD

VII. Benefits and Risks

37. No significant risks have been identified. The risk of cost increases is low because inflation has decreased to 4.2 percent in 2009 compared to 9.0 percent in 2008 and is expected to remain low over the life of the LRIP-AF2. Risks related to safeguards policies are minor, as only Category B activities without land acquisition would be financed.

38. Overall fiduciary risks for Armenia are considered to be significant. However, it is mitigated by project design, implementation arrangements and Transport PIU‘s good track record in previous projects. The residual risk is rated Low to Moderate.

39. There is a risk that the provision of the counterpart funding would be delayed due to fiscal shortfall. This risk is considered moderate and would be mitigated by a dated covenant included in the legal agreement which requires the Government to deposit 20 percent of the

11

counterpart funding within four weeks after the ratification of the Loan Agreement. The requirement by the Government to clear all contracts above $1 million is a potential risk of delay in project implementation. However, the risk is considered low given that the Government promptly cleared all contracts that required its clearance under the original project and the LRIP- AF1.

40. Project benefits would include reduced travel time and transport costs for road users connecting to the inter-state roads, reduced transport bottlenecks to regional socioeconomic development, and about 19,000 person-months of employment created.

VIII. Financial Terms and Conditions for the Additional Financing

41. The client selected an IBRD Flexible Loan in US Dollars with an interest rate equal to 6 months LIBOR, plus variable spread, with a final maturity of 25 years including a grace period of 10 years.

42. There are no additional conditions of effectiveness for this Additional Financing.

43. The project is ready for implementation. The detailed designs and EMPs have been updated in May 2010, to ensure that some civil works can be completed in 2010. The Bidding Documents for the first year program are ready or under finalization and some tenders have already started.

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Annex 1: Revised Arrangements for Results Monitoring (Combined for the original LRIP, LRIP-AF1 and LRIP-AF2)

Target Value (cumulative value) Data Collection and Reporting Baseline Responsibility Frequency and Data Collection Value 2009 2010 2011 2012 for data Reports Instruments Project Outcome Indicators Collection Travel time improvement to drive the Construction 20% 20% 20% 20% Upon completion Travel time length of the section over current 0 Supervision Reduction18 Reduction Reduction Reduction of each section survey situation consultant Project Transport cost reductions on project 20% 20% 20% 20% Upon completion 0 Monitoring ARD roads Reduction19 Reduction Reduction Reduction of each section Reports Construction Number of person-months of jobs Supervision 0 10,650 22,650 34,650 36,650 periodic Supervision created consultant report consultant One Pilot of ‗safe villages‘ program Project NRSC

implemented Yes periodic Monitoring Secretariat/

Reports PIU Intermediate Outcome Indicators

Component 1 Number of km upgraded 0 153 290 400 430 Quarterly until Supervision Construction 1stQ 2011 consultant supervision Roads in good or fair conditions as a monitoring consultant share of total classified roads measured Yes Yes Yes Upon completion Project ARD Share of rural population with access to Yes Yes Monitoring an all-season road measured Yes Upon completion Reports ARD Component 2 Project

Upon completion Monitoring PIU Road Safety Audit Manual is developed Yes Reports Establishment of a data collection unit in Upon completion ARD Yes ARD

New road geometric design standards Yes Upon completion ARD

developed

18 Overall 20% reduction for all road sections after rehabilitation is completed. 19 Overall 20% average reduction for cars for all road sections after rehabilitation is completed.

13 IBRD 37883 To Shulaveri 45° 44° 46° 47° GEORGIA To Dmanisi BagrateshenBagrateshen

To Bagdanovka ARMENIA DzoramutDzoramut NoyemberianNoyemberian BavraBavra 1 TashirTashir LIFELINE ROADS IMPROVEMENT PROJECT ZorakertZorakert TavshutTavshut AlaverdiAlaverdi To Kazakh AshotskAshotsk SECOND ADDITIONAL FINANCING 41° 41° SHIRAKS H I R A K Step'anavanStep'anavan 3.11 LRIP SECOND ADDITIONAL FUNDING AmasiyaAmasiya VerdaghbiurVerdaghbiur ToumanianToumanian ROADS FINANCED UNDER THE ORIGINAL LIFELINE ROADS IMPROVEMENT PROJECT LORRIL O R R I 3.12 BerdBerd IjevanIjevan 3.13 SpitakSpitak 3.13 LRIP ADDITIONAL FUNDING GyumriGyumri 2.14 VanadzorVanadzor TAVUSHT A V U S H 5 2.14 3.1 18 To Kars DilijanDilijan No. ROAD SECTION AkhuritAkhurit LRIP SECOND ADDITIONAL FUNDING 1 M3-Metsavan, km 0+000-km8+534 TsakhkahovitTsakhkahovit ArtikArtik 3.14 ArtsvashenArtsvashen 2 M5-Amasia-Nalbandyan- 15 Krasnosel'skKrasnosel'sk 2 Janfida- MaralikMaralik AparanAparan SevanSevan 3 -Noravan--Khanjyan km0+000-km6+600 12,13 TsakhkadzorTsakhkadzor 2.13 4 M5--Shenavan-Getashen km0+000-km6+700 AragatsAragats 16 5 Chinari-Aygedzor HrazdanHrazdan ’ 5 Aygedzor-Artsvaberd

KOTAYK’K 6 5 Artsvaberd-Verin Karmir Aghbyur A VerinVerin TalinTalin O k ARAGATSOTNARAGATSOTN 5 Verin Karmir Aghbyur-Berd h 9 LAKE u T 3.7 5 Berd-Verin Karmir Aghbyur r AragatsAragats 11 GavarGavar i 20 11 YegvardYegvard A a 6 T- 4 -16 Gavar-Noratus, km2+560-km4+700 n Y SEVAN AshtarakAshtarak R 7,8 14 7 and 8 M1--Mayakovski-Aramus-Katnaghbyur--Zar-Sevaberd km 6+800- km 23+100 . 1.1; 3.10 K 3.6 9 Mayakovski--Kotayk- 3 AbovianAbovian ’ MetsMets GEGHARK’UNIK’G E G H A R K ’ U N I K ’ 9 Kaputan--Zovashen MazraMazra EchmiadzinEchmiadzin YEREVANYEREVAN 10 10 Aramus--Geghashen-Saranist km0+000-km6+300 OktemberjanOktemberjan 2.12 3.9 3.8 3.9 11 M1 - Agarak-Byuarakan- km0+000-km8+650 GarniGarni VardenisVardenis BagaranBagaran 2 12 and 13 -Dzoragyugh--Garnahovit km 2+000--km 11+240 ARMAVIRA R M A V I R YEREVANYEREVAN MartuniMartuni ArmavirArmavir DzhraratDzhrarat 19 14 Artsvakar district-Gavar MarkaraMarkara 14 Gavar- 40° KarakalaKarakala MassisMassis 15 -Zovaber-, km6+555-km12+093 4 40° ArtashatArtashat ARARATA R A R A T 16 M10-Lchashen, km0+000-km1+700

A 17 Agarak-Karchevan km0+000-km4+040 ra VediVedi k 18 s Berd-Navur-Itsakar TURKEY R . VAYOTS’V A Y O T S ’ 18 Navur-Itsakar AraratArarat JermukJermuk 19 M10-Nerkin Getashen- PRIMARY ROADS (DUAL CARRIAGEWAYS) DZORD Z O R 19 Verin Getashen-Madina YeraskhYeraskh 20 Talin-Dashtadem PRIMARY ROADS (OTHER) YegegnadzorYegegnadzor 21 -Halidzor RAILROADS GetapGetap

NATIONAL CAPITAL VaikVaik MARZ (PROVINCE) CAPITALS To Shusha To Shakhtakhty 1.2 3.3 AngekhakotAngekhakot MAIN TOWNS/VILLAGES Araks R. 2.11 ZabukhZabukh SisianSisian GorisGoris INTERNATIONAL BOUNDARIES Vorot AZERBAIJAN 1.3 2.1 an MARZ (PROVINCE) BOUNDARIES To Nakhichevan R. 3.2 A TatevTatev 21 ZE 21 ISLAMIC RB A 3.4 ’S Y U N I K ’ IJ REPUBLIC AN 2.2; 3.5 OF IRAN KapanKapan KadzhKadzh ARMENIA To Zangelan KajaranKajaran 2.7 This map was produced by the 39° Map Design Unit of The World Bank. 2.3 The boundaries, colors, denominations and any 2.5 39° other information shown on this map do not 0102030 40 Miles imply, on the part of The World Bank Group, any 2.9 ToTo ZangelanZangelan judgment on the legal status of any territory, or MegriMegri 2.4 any endorsement or acceptance of such To Ordubad 0 1020304050 60 Kilometers 17 boundaries. Ara 2.8; 2.10 ks R. 44° 45° 46° 2.6 47° MAY 2010