East–West Highway (Shorapani–Argveta Section) Improvement Project (RRP GEO 53178)

SECTOR ASSESSMENT (SUMMARY): TRANSPORT

A. Sector Road Map

1. Sector Performance, Problems, and Opportunities

1. ’s transport system—composed of road and rail networks, sea and air routes, and pipelines—interconnects its provinces, cities, towns, as well as connecting Georgia with neighboring countries. To improve these connections and to benefit from an efficient system for international travel and trade between Central Asia and Europe, Georgia has successfully implemented a series of transportation and logistics reforms and interventions since 2005.1

2. The country has modernized its transport infrastructure, improved border clearance procedures, and liberalized the provision of services in several key sectors to ensure better international connectivity with global markets. This has helped to draw private investment into aviation, maritime services, road transport, and pipelines. Georgian Railway underwent a substantial restructuring of its business model, wherein the freight business unit operates at a profit and is commercially based, leaving the road network as the only public sector physical asset owned and operated in a traditional manner.

3. During 2005–2011, freight handling at ports grew by 10% a year, but freight handling (expressed in tonnage) subsequently decreased during 2013–2017 at an average of 15% per year as a result of a decline in oil and gas transit from Azerbaijan by rail. Freight handling at ports (in terms of the number of containers) grew by 16% during 2016–2017. Freight transport by road increased 15% per year during 2005–2011, but annual growth subsequently slowed to 1%. Air freight is increasing but accounts for a very small percentage of total freight volume. Passenger movements at Georgian airports increased from 1.8 million in 2013 to 4.1 million in 2017, and international airport was expanded in 2017 to meet growing demand.

4. Georgia’s road network totals about 22,000 kilometers (km)—including 1,600 km of international, 5,300 km of secondary, and 15,000 km of local roads—and is the most significant component of the transport system. There are two major international corridors: (i) the East–West Corridor, which extends about 460 km from the Red Bridge at the Azerbaijan border to Sarpi at the Turkish border; and (ii) the North–South Corridor, which extends 220 km from Kazbegi at the border with the Russian Federation to Sadakhlo at the Armenian border.

5. The railway network is about 1,600 km in length and almost fully electrified. It connects to railway networks in Azerbaijan and Armenia, and accesses the Black Sea ports of , , and Kulevi. The main rail cargo artery is the East–West Corridor, and freight consists mostly of oil and gas products. Container traffic is still very limited. About 50% of the rail traffic is transit freight.

6. The private sector owns and operates Poti and Batumi ports. Poti Port has draft limitations (maximum of 9 meters) and is only served by container feeder vessels, with a maximum capacity of 1,500 twenty-foot equivalent units.2 In addition, Poti and Batumi ports are located close to

1 This summary is based on (i) ADB. 2014. Country Partnership Strategy: Georgia, 2014–2018. Manila; (ii) ADB. 2016. Support for Transportation Policy in Georgia. Consultant’s report. Manila (TA 8682-GEO); and (iii) ADB. 2014. Georgia Transport Sector Assessment, Strategy, and Road Map. Manila. 2 The draft determines the minimum depth of water a ship or boat can safely navigate.

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dense urban development, which limits expansion. Given the constraints faced by Poti and Batumi, the Government of Georgia decided to construct a deep-sea port (maximum of 16 meters draft) at to allow Panamax-type vessels.3 Construction has already commenced, and private investors are developing the port. This is a build–operate–transfer project, but financial closure has not yet been fully secured. The first expansion phase will increase port capacity to 8 million tons, including 600,000 twenty-foot equivalent units. The new port will significantly improve Georgia’s potential as a transit country.

7. Improving the quality of the road network is the largest challenge facing Georgia’s transport sector. Completing the upgrading of the East–West Highway (EWH) to international motorway standards is a high priority for the government. Georgia was admitted to the Central Asia Regional Economic Cooperation (CAREC) program in 2016, and the EWH is an integral part of the six key CAREC program corridors that provide the shortest transit link connecting Central Asia with Europe and East Asia.

8. While most of Georgia’s international roads (88%) are in good or fair condition, some 40% of the secondary roads and 60% of the local roads are in poor condition. Many secondary and local roads link major agricultural hubs and tourist attractions. Given the significant regional disparities in Georgia, improving the road network collector and feeder links is essential to prevent further isolation of rural communities, strengthen domestic trade, and expand opportunities for more inclusive growth.

9. Preliminary estimates put the cost of completing the EWH at $3 billion. Most of these investments are being financed by international financing institutions such as the World Bank, the Asian Development Bank (ADB), the European Investment Bank (EIB), and the Japan International Cooperation Agency (JICA), largely through sovereign loans, resulting in an increase in public debt. Georgia’s public debt equaled 45% of gross domestic product (GDP) in 2017; it remains sustainable,4 but the government aims to decrease public debt to 43% of GDP by 2022. It is also considering introducing public–private partnership schemes in the road sector to alleviate public debt concerns.

2. Government’s Sector Strategy

10. The government aims to make Georgia an effective and efficient transit hub connecting Europe and Asia. Most of the international road corridors are targeted to be substantially complete by 2022. The first phase of the Anaklia port expansion is scheduled for completion by 2022, and Georgian Railway’s capacity expansion is expected to be completed by 2020. Customs processes have been greatly accelerated with the use of electronic submissions, but improvements could be made in transit control—e.g., by implementing an e-TIR transit system, as is used in Europe.5 The key to this strategy is to improve infrastructure and logistics services, develop the supply chain and cross-border management, and reduce restrictions on corridor development. Road network development is a top priority. The Roads Department is implementing a very ambitious program to address this challenge that will upgrade road corridors to international standards; feasibility studies, detailed design, and construction are underway on all major international corridors.

3 Panamax is a term used to define the size limit for ships traveling through the Panama Canal (capacity is generally 5,000 twenty-foot equivalent units). 4 The World Bank Group. 2018. Georgia Country Economic Update, February 2018. Washington, DC. 5 TIR—Transports Internationaux Routiers” (International Road Transport)—is an international customs transit system with a facility to move goods in sealed vehicles or containers from a departure country to destination country without requiring border checks at intermediate borders. 3

B. Major Development Partners: Strategic Foci and Key Activities

11. ADB, the European Bank for Reconstruction and Development (EBRD), the EIB, JICA, the Kuwait Fund for Arab Economic Development, the Millennium Challenge Corporation, and the World Bank are Georgia’s key development partners in road network development. The partnership has included support for main highways and secondary roads, and technical assistance (TA) for institutional strengthening and private sector development in areas such as project management, traffic safety, training, curriculum development, and road maintenance procurement.

12. ADB has financed the government’s international road development program since 2009. It has provided a $500 million Road Corridor Investment Program multitranche financing facility (MFF) to improve subregional roads, and built the Road Department’s capacity to manage road assets and improve road safety. ADB has also cofinanced, with the government, the rehabilitation of the – secondary road under tranche 1 of the Sustainable Urban Transport Investment Project MFF, while tranche 3 supported the development of the –Tbilisi road section, which is also part of the EWH. This project has been completed and closed. Most recently, ADB approved financing for the North–South Corridor (Kvesheti–Kobi) Road Project (2019), the East–West Highway (Khevi–Ubisa Section) Improvement Project (2018), the Secondary Road Improvement Project (2017), and the Batumi Bypass Project (2017).

13. The World Bank has financed four road improvement projects along the EWH since 1996, and a fifth project is ongoing, with recently approved additional financing. It has also provided financing for four secondary road rehabilitation packages, with a fifth ongoing project. The World Bank has provided $886 million in financing for Georgia’s road sector since 1996. The EIB’s engagement has increased, with some cofinancing with the World Bank, and its financing totals $859 million since 2012 (including recent approvals). JICA has contributed $237 million since 2009 to the development of the EWH. The Millennium Challenge Corporation provided $223 million financing for the rehabilitation of the Samtskhe–Javakheti road. Cofinancing has been significant in the sector in Georgia. Projects by major development partners are listed in the table.

Major Development Partners Development Amount Partner Project Name Duration ($ million)a ADB Road Corridor Investment Program–Tranche 1 2009–2017 118.0 ADB Road Corridor Investment Program–Tranche 3 2012–2017 140.0 ADB Sustainable Urban Transport Investment Program–Tranche 1 2010–2020 85.0 ADB Sustainable Urban Transport Investment Program–Tranche 2 2012–2020 64.9 ADB Sustainable Urban Transport Investment Program–Tranche 3 2013–2020 73.0 ADB Sustainable Urban Transport Investment Program–Tranche 4 2015–2020 20.0 ADB Sustainable Urban Transport Investment Program–Tranche 5 2018–2020 14.3 ADB Batumi Bypass Road 2017–2023 114.0 ADB Secondary Road Improvement Project 2017–2021 80.0 ADB East–West Highway (Khevi–Ubisa Section) Improvement 2018–2024 300.0 Project ADB North–South Corridor (Kvesheti–Kobi) Road Project 2019–2026 415.0 AIIB Batumi Bypass Road 2017–2023 114.0 EBRD North–South Corridor (Kvesheti–Kobi) Road Project 2019–2026 60.0 EIB East–West Highway Project 2012–2017 216.0 EIB East–West Highway Project 2013–2017 40.0 EIB East–West Highway Project 2 2016–2020 54.0 EIB Georgia Transport Connectivity 2016–2020 264.0 EIB Georgia Transport Connectivity 2017–2020 285.0 JICA East–West Highway Improvement Project 2009–2013 198.0 JICA East–West Highway Improvement Project 2016–2017 39.0 4

Development Amount Partner Project Name Duration ($ million)a Kuwait Fund Roads Rehabilitation 2000–2004 20.0 Kuwait Fund Roads Rehabilitation 2006–2009 14.7 Kuwait Fund Batumi– Road 2017–2020 27.2 MCC Samtshke–Javakheti Road Project 2009–2011 223.4 World Bank Transport Rehabilitation Project 1996–1999 12.0 World Bank Transport Ministry Restructuring Project 1998–2003 2.3 World Bank Roads Project 2000–2005 40.0 World Bank Secondary and Local Roads Project 2004–2012 90.0 World Bank First East–West Highway Improvement Project 2006–2013 47.0 World Bank Second East–West Highway Improvement Project 2007–2012 55.0 World Bank East–West Highway Improvement Project 3 2009–2016 147.0 World Bank Regional Roads Improvement Project 2009–2015 30.0 World Bank Second Secondary and Local Roads Project 2012–2019 70.0 World Bank Third East–West Highway Improvement Project 2012–2017 43.0 World Bank Fourth East–West Highway Improvement Project 2013–2018 75.0 World Bank Third Secondary and Local Roads Project 2014–2018 75.0 World Bank East–West Highway Corridor Improvement Project 2015–2020 140.0 World Bank Secondary Road Asset Management Project 2016–2021 40.0 World Bank East–West Highway Corridor Improvement Project Additional 2017–2023 19.8 Financing ADB = Asian Development Bank, AIIB = Asian Infrastructure Investment Bank; EBRD = European Bank for Reconstruction and Development; EIB = European Investment Bank, JICA = Japan International Cooperation Agency, MCC = Millennium Challenge Corporation. a Approvals in alternate currencies (e.g., euros and yen) are reflected here using average exchange rates at the time of approval. Sources: Government of Georgia, Roads Department; ADB; EIB; JICA; MCC; and the World Bank.

14. Roads carry more than 40% of the freight and 90% of the passengers in Georgia, and road infrastructure is essential to the nation’s economy. The completion of the EWH is one of Georgia’s highest priorities. Most of Georgia’s key development partners are collaborating to help the government achieve this priority goal. The North–South Corridor is a crucial connection for cargo between Georgia and the Russian Federation, Armenia, and Iran.

C. Institutional Arrangements and Processes for Development Coordination

15. The Ministry of Finance synchronizes financial assistance from various partners, while the Roads Department, under the Ministry of Regional Development and Infrastructure, implements the projects. These ministries, together with the Ministry of Economy and Sustainable Development, serve as liaisons with development partners, and bring partners together periodically to discuss critical development issues and financing needs. The government’s Social- economic Development Strategy aims for well-developed transport and logistical infrastructure to realize Georgia’s full transit potential, and anchors development partner coordination efforts.6 Most in-depth coordination takes place at the project level. The ADB Georgia Resident Mission takes the lead in representing ADB in these coordination efforts.

16. The government endorsed a joint needs assessment prepared by the United Nations and the World Bank, with the participation of ADB, the EBRD, the European Commission, the EIB, and the International Finance Corporation.7 Development partners have used the joint needs assessment, with some updates, as the basis for assistance programming and cooperation. ADB is in close contact with all development partners, including the EBRD, the EIB, JICA, and the

6 Government of Georgia, Ministry of Regional Development and Infrastructure of Georgia. Georgia 2020: Social- economic Development Strategy of Georgia. Tbilisi. 7 United Nations and World Bank. 2008. Georgia: Summary of Joint Needs Assessment Findings. Brussels. 5

World Bank, to explore parallel collaboration arrangements to ensure operational coordination, especially on sector reforms and safeguards. The Roads Department is actively supporting these coordination efforts.

17. The size of ADB’s program in the transport sector, coupled with its leading role in CAREC’s transport program, has positioned ADB to support the government’s sector strategies, policies, and plans. ADB’s investments in the transport sector have improved transport infrastructure, introduced pilot projects on performance-based maintenance (PBM), raised awareness on road safety, and improved connectivity with neighboring countries.

18. A number of knowledge products have been developed through ADB regional and advisory TA, including the Georgia Transport Sector Assessment, Strategy, and Road Map (2014), which provides an additional sector-specific development coordination platform.8 The North–South Corridor (Kvesheti–Kobi) Road Project will support policy dialogue on road safety and road asset management, which will run in parallel with the improvement of the corridor, and will be closely coordinated with other development partners active in the transport sector.

D. ADB Experience and Assistance Program

19. ADB’s transport sector support. ADB has supported the government’s international road development program by providing a $500 million Road Corridor Investment Program MFF to improve subregional roads and build the Roads Department’s capacity to manage road assets and improve road safety.9 A 12 km section of the bypass (34 km in total) was funded by the MFF; it opened in 2013, and the remainder was operational (as of June 2018). The MFF experienced implementation delays because of protracted land acquisition issues resulting from unregistered land, and a major cost underestimation during the feasibility study.

20. In 2017, ADB approved a $114 million loan to finance (i) the construction of the 14 km Batumi bypass, as a continuation of the Kobuleti bypass; and (ii) routine and periodic maintenance using PBM contracts of about 150 km of international and secondary roads.10 The Asian Infrastructure Investment Bank is cofinancing the project with $114 million of financing. In addition, ADB is financing the designs for (i) the Batumi–Sarpi road under the Batumi Bypass Road Project (footnote 9); and (ii) the Tbilisi Bypass under the Road Corridor Investment Program MFF, with completion expected in 2020 (footnote 8). ADB approved (i) an $80 million loan in 2017 to finance the rehabilitation of the secondary road from Dzirula to Chumateleti, connecting the town of to the EWH;12 (ii) a $300 million loan in 2018 to finance the upgrade of the F2 section (Khevi–Ubisa) of the EWH,13 and (iii) a $415 million loan in 2019 to finance the construction of the North–South Corridor (Kvesheti–Kobi) Road Project, alongside $60 million in EBRD cofinancing.

21. ADB sector strategy. ADB will continue to support the government’s efforts to develop an efficient, reliable, safe, and sustainable transport system. It will finance improvements to international and national road links to enhance Georgia’s competitiveness and improve internal

8 ADB. 2014. Georgia Transport Sector Assessment, Strategy, and Road Map. Manila. 9 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to Georgia for the Road Corridor Investment Program. Manila. 10 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan to Georgia for the Batumi Bypass Road Project. Manila. 12 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Georgia for the Secondary Road Improvement Project. Manila. 13 ADB. 2018. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Georgia for the East–West Highway (Khevi–Ubisa Section) Improvement Project. Manila. 6

connectivity. ADB-financed TA will complete support to improve the physical transport network by strengthening sector policy and institutional capacities. ADB will support the remaining improvement works on the EWH and improvements to the North–South Corridor. To enhance internal connectivity and contribute to inclusive growth, ADB will also assist in linking international roads to local regional centers through secondary road improvements. This will increase the opportunities for domestic and international trade, and maximize the impact on women’s livelihoods and access to services. Priority will be accorded to areas where better connectivity is critical to unlock the growth potential of lagging areas.

22. Transport policy. ADB has provided TA to support the government in preparing the transportation policy (footnote 1[ii]). The policy will support the overall goal of strengthening the government’s role in areas related to economic and social development. The objective of the policy is to help the government ensure that (i) the coverage and capacity of transport infrastructure is sufficient to meet the demand; (ii) the quality and efficiency of transport services is being improved to increase the country’s competitiveness; (iii) value addition from infrastructure and transport services for transit cargo is maximized; and (iv) the safety and security of transport services and infrastructure is maintained at an acceptable level, and environmental impacts are minimized.

23. Sustainability of roads. The Roads Department carries out annual road condition surveys for the international and secondary road networks. The 2018 surveys revealed that more than 85% of international roads and 60% of secondary roads are in good or fair condition. Road maintenance expenditure—including rehabilitation, and periodic and routine maintenance— totaled about $149 million equivalent in 2018, which compares favorably with other countries in the region.14 The government has made continued efforts to improve road maintenance planning, budgeting, and efficiency through the development of a road asset management system, the pilot testing of PBM contracts, and the assessment of tolling options. The road asset management system informs a 5-year rolling planning and programming process. The Roads Department contracts all construction and maintenance activities to the private sector through open competitive bidding. One PBM contract is under implementation (Kakheti region) and two other PBM contracts are being prepared under ADB and World Bank financing. The government recently sought assistance from development partners to implement e-tolling on priority highway sections, including the project road.

24. Road safety. The road safety situation is improving, with some promising recent developments. The road traffic fatality rate declined from 16.8 fatalities per 100,000 people in 2010 to 12.3 fatalities per 100,000 people in 2018, but road safety remains a concern, and compares unfavorably with European Union countries (2016 road traffic fatality rates were 5.5 in France and 4.1 in Germany).15 In 2015, the government enacted the revised Law on Road Traffic, which included road safety-related amendments. The government approved a National Road Safety Strategy in 2016 and subsequently established an interagency Road Safety Commission. Road safety investment planning and performance-tracking systems are being developed following the International Road Assessment Programme’s approaches and methodologies. Systematic road safety audits and public awareness campaigns are needed to support the government’s efforts to reduce road traffic injuries and fatalities.

14 Economic and Financial Analysis (accessible from the list of linked documents in Appendix 2). 15 World Health Organization. 2018. Global Status Report on Road Safety, 2018. Geneva. 7

Problem Tree for Transport

Impact Constrained economic and social development

Limited access to markets and High cost of movement of goods Effects services, which and people disproportionally affect women

Travel through and within Georgia is Core Problem time-consuming, uncomfortable, and expensive

Road transport Road maintenance Road fatality rate Causes infrastructure needs needs more resources remains higher than improvement and better allocation in EU countries

Road network condition Asset management Public awareness

Road network capacity Budget allocation Safety engineering

Traffic discontinuity Truck overloading Vehicle standards

Cross-border facilities Design standards Post-crash response

Tackled through the proposed project.

Supported by the ADB (ongoing operations), the European Bank for Reconstruction and Development, the European Investment Bank, and the World Bank.

EU = European Union.