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Document of The World Bank Public Disclosure Authorized Report No: 20406 Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 29.9 MILLION US$ 40.0 MILLION EQUIVALENT TO THE Public Disclosure Authorized REPUBLIC OF ARMENIA FOR A TRANSPORT PROJECT May 15, 2000 Infrastructure Sector Unit Armenia, Georgia and Azerbaijan Country Unit Europe and Central Asia Region Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective March 2000) Currency Unit = Dram 1.0 = US$ 0.001818 US$ 1.0 = 550 Drams FISCALYEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ARD- Armenia Railway Department AR- Armenia Roads SS CC (formerly Armenia Road Directorate) CAS - Country Assistance Strategy ERR - Economic Rate of Retum EU - European Union ICR - Implementation Completion Report MOF - Ministry of Finance and Economy MOTC - Ministry of Transport and Communications NPV - Net Present Value PIU - Project Implementation Unit PMR - Project Management Reports SOE - Statement of Expenditures TA - Technical Assistance VOC - Vehicle Operating Cost Vice President: Johannes F. Linn, ECAVP Country Manager/Director: Judy M. O'Connor, ECCO3 Sector Director: Ricardo A. Halperin, ECSIN Sector Manager: Eva Molnar, ECSIN Task Team Leader/Task Manager: Anders Bonde, ECSIN ARMENIA TRANSPORTPROJECT CONTENTS A. ProjectDevelopment Objective Page 1. Projectdevelopment objective 2 2. Key performanceindicators 2 B. StrategicContext 1. Sector-relatedCountry Assistance Strategy (CAS) goal supportedby the project 2 2. Main sector issues and Governmentstrategy 3 -3. Sectorissues to be addressedby the project and strategicchoices 6 C. ProjectDescription Summary 1. Projectcomponents 9 2. Key policy and institutionalreforns supportedby the project 10 3. Benefitsand target population 11 4. Institutionaland implementationarrangements 12 D. ProjectRationale 1. Projectalternatives considered and reasons for rejection 13 2. Major related projects financedby the Bank and other developmentagencies 15 3. Lessonslearned and reflectedin proposedproject design 16 4. Indicationsof borrowercommitment and ownership 16 5. Value added of Bank support in this project 17 E. SummaryProject Analysis 1. Economic 17 2. Financial 18 3. Technical 21 4. Institutional 22 5. Environment 23 6. Social 23 7. SafeguardPolicies 24 F. Sustainabilityand Risks 1. Sustainability 25 2. Critical risks 25 3. Possible controversialaspects 26 G. Main Credit Conditions 1. EffectivenessCondition 26 2. Other 26 H. Readinessfor Implementation 27 I. Compliancewith Bank Policies 28 Annexes Annex 1: ProjectDesign Summary 29 Annex 2: ProjectDescription 32 Annex 3: EstimatedProject Costs 35 Annex 4: Cost Benefit AnalysisSummary, or Cost-EffectivenessAnalysis Summary 36 Annex5: Financial Summaryfor Revenue-EarningProject Entities,or Financial Summary 40 Annex 6: Procurementand DisbursementArrangements 46 Annex 7: ProjectProcessing Schedule 67 Annex 8: Documentsin the ProjectFile 68 Annex 9: Statementof Loans and Credits 69 Annex 10:Country at a Glance 71 MAP(S) IBRD No. 30837 ARMENIA Transport Project Project Appraisal Document Europe and Central Asia Region ECSIN Date: May 10, 2000 Team Leader: Anders H. G. Bonde CountryManager/Director: Judy M. O'Connor SectorManager/Director: Ricardo A. Halperin Project ID: P044829 Sector(s): TH - Highways LendingInstrument: SpecificInvestment Loan (SIL) Theme(s): Transport PovertyTargeted Intervention: N Project FinancingData OI Loan 3 Credit El Grant Oi Guarantee O Other (Specify) For Loans/CreditslOthers: Amount (US$m): 40.0 ProposedTerms: Standard Credit Grace period (years): 10 Years to maturity: 35 Commitmentfee: 0.5% Service charge:0.75% a Pln Soure Loca F GOVERNMENT 6.40 0.00 6.40 IDA 5.30 34.70 40.00 GRANT 0.10 0.50 0.60 Total: 11.80 35.20 47.00 Borrower:REPUBLIC OF ARMENIA Responsibleagency: MINISTRYOF TRANSPORT & COMMUNICATIONS Address: Zajian 10, 375015 Yerevan, Armenia Contact Person: Mr. Eduard Karapetyan, Head of the Department of Investment and Construction Tel: 3742-56-33-91 Fax: 3742-56-05-28 Email: None Estimateddisbursements ( Bank FY/US$M): - FY 2Q01 202 2003 2004 2005 Annual 7.0 8.0 10.0 10.0 5.0 Cumulative 7.0 15.0 25.0 35.0 40.0 Project implementationperiod: 4 years Expectedeffectiveness date: 07/01/2000 Expectedclosing date: 12/31/2004 UCS PAC-5,5 RW- Wd, 2500 A. Project DevelopmentObjective 1. Project development objective: (see Annex 1) The project has three objectives: (i) to improve the main road network, with commensuratereductions in total transport costs, to improveroad safety,and to increasethe operationalefficiency of ArmeniaRoads SSCC (AR); (ii) to improve the rail service between Yerevan and the Georgian border, and the financial and managerialperformance of the ArmeniaRailways Department(ARD); (iii) to strengthenthe planning capabilityof the Ministryof Transportand Communications,particularly in the use of economic analysis as a basis for setting priorities and making investment decisions in the transport sector,and in establishinga basis for improvementof urbantransport services in Yerevan. 2. Key performanceindicators: (see Annex 1) Achievementswill be measuredby (i) a reductionin vehicle operatingcosts (VOC), the overall roughness of the main 800 km of the road networkimproved from an IRR of 4.67 to 4.00 by project completion,a reduction in road fatalities per 10,000vehicles, and an economicrate of return of 20 percent or higher for the road and bridge rehabilitationwork; (ii) reduced rail transit time between Yerevan and the Georgian border from 10 to 5 hours, and a reductionof ARD's working ratio (ratio of operatingexpenses excluding depreciationto operatingrevenues); and (iii) planned investmentsfor transport infrastructureare decided on the basis of soundeconomic evaluation methods. B. StrategicContext 1. Sector-related Country AssistanceStrategy (CAS) goal supportedby the project: (see Annex 1) Documentnumber: 16988-AM Dateof latestCAS discussion: 08/20/97 The main objectivesof the Bank's country strategy for Armenia are to foster the rapid developmentof the private sector and to support social sustainability and the alleviation of poverty. The CAS identified unreliable and low-quality infrastructure,especially in energy and transport, as a major barrier to the development of the private sector, exports and growth. Consequently,the Bank's strategy will be to support the private sector through: (i) improving the environmentfor the private sector by consolidating macro-economicstability, and strengtheningthe financial system and the legal and regulatoryframework, and (ii) alleviatingkey infrastructurebottlenecks, particularly in transportand energy. The proposed project is fully consistentwith the CAS as describedabove. It will assist in alleviatingthe key transportbottlenecks that restrain trade and reduce investmentprospects for the private sector.A more detailed analysisof the infrastructureand institutionalconstraints is describedbelow. -2 - 2. Main sectorissues and Governmentstrategy: The core of the Government's reform program since 1991 has been the stimulation of the private sector. Almostall agriculturalland was privatizedin 1991, making Armenia the first country to do so among the former Soviet Republics. Privatizationhas proceeded quickly, with 80 percent of small enterprisesand about 65 percent of medium and large enterprisesprivatized to date. Most restrictions on the emerging private sector have been dismantled,as have barriers to foreign investment. Prices have been liberalized,and most consumer subsidies have been removed. State trading arrangements have been eliminated, and the foreign exchangeand trade regime liberalized. As evidencedby these developments,Armenia has built an exceptionalrecord on reform and demonstratedits commitmentby moving forwarddespite very difficultexternal circumstances. The Government's record in the transport sector is not as impressive as in the macro-economicarea, however. While good progress has been made in the reform of road maintenanceoperations with the assistance of the IDA-financed Highway Project, change has been slower for inter-urban and urban transport operations, and the restructuringof the Armenia Railways Department started just last year. However,the Government'sreform agenda for the next three years seeks to build on the advancesof the first phase of reforms- macro-economic stability, open and competitive markets, improved financial discipline and an emerging private sector- while moving ahead on the difficult task of completing the transitionand buildingthe supportinginstitutions needed for a vibrantmarket economy. Specifically,it has begun to liberalize entry into the market for inter-urban and urban transport, and to privatize the inter-urbantransport companies. World Bank Supportfor the TransportSector The Armenianational road system consists of 7,788 km of roads, including 1,440 km of main roads, 2,621 km of secondary roads, and 3,727 km of rural roads. The Armenia Highway Project, approved on September14, 1995,was undertaken to assist the Governmentto preservethe main road network, thereby avoidingcostly rehabilitationand reconstruction,and to improve the operationsof Armenia Roads SSCC (AR). It is expectedthat the Credit will be fully disbursedby the end of the year 2000 constructionseason. Critical portions of the most heavily traveled part of the road network have been improved, but interventionshave mainly consisted of low cost preventativemaintenance and only short sectionshave been strengtheneddue to limitedfinancing.