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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 ARMENIA 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. 1 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.