Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 39176 September 2007

Proposed Multitranche Financing Facility Republic of Azerbaijan: Road Network Development Program

CURRENCY EQUIVALENTS (as of 31 August 2007)

Currency Unit – Azerbaijan manat/s (AZN) AZN1.00 = $1.17 $1.00 = AZN0.85

ABBREVIATIONS

ADB – Asian Development Bank ARS – AzerRoadService Open Joint-Stock Company EBRD – European Bank for Reconstruction and Development EIA – environmental impact assessment EIRR – economic internal rate of return FFA – framework financing agreement GDP – gross domestic product HDM4 – highway design and maintenance 4 IRI – international roughness index IsDB – Islamic Development Bank LAR – land acquisition and resettlement LIBOR – London interbank offered rate MFF – multitranche financing facility OCR – ordinary capital resources PFR – periodic financing request PIU – project implementation unit PPMS – project performance management system ROW – right-of-way SEIA – summary environmental impact assessment SPPRED – State Program on Poverty Reduction and Economic Development

NOTES

(i) The fiscal year of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.

Vice President L. Jin, Operations Group 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director S. O’Sullivan, Infrastructure Division, CWRD

Team leader H. Wang, Principal Transport Economist, CWRD Team members C. Africa, Assistant Project Analyst, CWRD L. Blanchetti-Revelli, Social Development Specialist (Resettlement), CWRD H. Hong, Financial Specialist, CWRD F. Huseynbeyov, Project Officer, CWRD R. Ishenaliev, Transport Specialist, CWRD B. Konysbayev, Counsel, Office of the General Counsel L. Malazo, Associate Project Analyst, CWRD S. Tu, Environment Specialist, CWRD M. Villanueva, Administrative Assistant, CWRD

CONTENTS Page

PROGRAM SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED INVESTMENT PROGRAM 6 A. Impact and Outcome 6 B. Outputs 6 C. Special Features 8 D. Investment Plan 8 E. Financing Plan 9 F. Implementation Arrangements 10 IV. INVESTMENT PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 14 A. Benefits 14 B. Economic Analysis 14 C. Financial Management and Sustainability 15 D. Environmental Impact 15 E. Poverty and Social Impacts 16 F. Social Safeguards 16 G. Assumptions and Risks 17 VI. ASSURANCES 18 A. Specific Assurances 18 B. Conditions for Disbursement 20 VII. RECOMMENDATION 20

APPENDIXES 1. Design and Monitoring Framework 21 2. Road Subsector Analysis 23 3. Road Subsector Road Map and Investment Plan 30 4. External Assistance to the Road Subsector 36 5. Selection Criteria and Approval Process for Projects and Subprojects 37 6. Detailed Cost Estimates for Project 1 39 7. Program Management Organization Chart 41 8. Implementation Schedule 42 9. Procurement Plan 44 10. Economic Analysis of Project 1 46 11. Summary Poverty Reduction and Social Strategy 52 12. Summary Social Safeguards 55

SUPPLEMENTARY APPENDIXES (available on request) A. Terms of Reference for Consultants for Construction Supervision, Project Monitoring and Evaluation, and Preparation of Project 2 B. Terms of Reference for Consultants for Strengthening of Database for Secondary Roads C. Terms of Reference for Consultants for Development of Legal and Regulatory Framework and Operational Procedures for Toll Roads D. Resettlement Framework E. Resettlement Plan for Subproject A under Project 1 i

INVESTMENT PROGRAM SUMMARY

Borrower Republic of Azerbaijan

Classification Targeting classification: General intervention Sector: Transport and communications Subsector: Roads and highways Themes: Sustainable economic growth, regional cooperation, capacity development Subthemes: Fostering physical infrastructure development, crossborder infrastructure, and institutional development

Sector Investment The development of the road network is a high priority of the Program Description Government of Azerbaijan (the Government). As a major mode of passenger and freight transport, roads play a pivotal role in the national economy. They also enhance regional cooperation. However, the road subsector faces four main development challenges: (i) deteriorating infrastructure; (ii) poor safety record; (iii) inefficient crossborder and transit facilities; and (iv) limited institutional capacity at national, regional, and road agency levels.

The improvement of road infrastructure is one of the priorities in two state programs: (i) State Program on Poverty Reduction and Economic Development, and (ii) State Program on Socioeconomic Development of Regions. To implement these state programs, the Ministry of Transport has drafted a transport policy paper, followed by a transport sector development strategy. This work involved Asian Development Bank (ADB) assistance. The Transport Policy Paper and the ensuing Transport Sector Development Strategy paved the way for a road subsector road map. This highlights key problems and causes for the execution of investment and non- investment changes.

The Ministry of Transport developed a Road Network Development Program for 2006–2015 (the Program) in July 2006. The Program, which includes an investment component and a non-investment component, will pave the way for the development of an adequate, efficient, safe, and sustainable road network. The investment component will construct, upgrade, and rehabilitate about 9,500 kilometers (km) of 124 priority roads, comprising 3,570 km of 64 state roads and 5,928 km of 58 secondary roads. The non-investment component will focus on priority reforms, including development of regulations and operational procedures; encouragement of private sector participation in construction and maintenance; and capacity building for planning, monitoring, evaluation, and reporting. The overall investment reaches $3.4 billion over the next 10 years. Most of this will be financed from the Government’s budget. The Government has also sought external financing, with ADB and the World Bank as the main sources. ADB’s share of the Program is 15%.

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The first project (Project 1) of the Program has four components: (i) construction of about 59 km of a new expressway between Masalli and Astara on the southern corridor, (ii) rehabilitation of local roads in the project area, (iii) installation of a vehicle weighing station along the Masalli–Astara expressway and procurement of road maintenance equipment, and (iv) project support and capacity building for road network management.

Multitranche Financing The Government has requested ADB to help finance the Program Facility through a multitranche financing facility (MFF) in the amount up to the equivalent of $500 million. The financing will be provided primarily from ADB’s ordinary capital resources (OCR), supplemented by its Special Funds resources. The MFF will comprise multiple loans, subject to the submission of related periodic financing requests (PFR) by the Government and execution of related loan agreements and other warranties and representations.

The Government has entered into a Framework Financing Agreement (FFA) with ADB. In accordance with the FFA, the Government has submitted the first PFR for tranche 1 to ADB, requesting a blend of two loans in a total amount of $200 million, comprising an OCR loan of $190 million and a loan in various currencies equivalent to Special Drawing Rights 6,535,000 ($10 million equivalent) from the Special Funds resources, to help finance Project 1. The first PFR is presented to the Board together with this report and the FFA.

Rationale Connectivity, both domestically and internationally, is the key to sustainable development. However, about 70% of Azerbaijan’s road network is in poor condition, resulting in high transport costs, long delivery times, and traffic accidents. This constitutes an impediment to non-oil sector growth and poverty reduction. The road network needs to be developed. This requires new investments and improved maintenance. The subsector also needs improved safety measures and standards, and “soft” investments to facilitate crossborder trade and transit traffic.

The Government’s total investment plan for the road network is $350 million a year during 2006–2015. The financing plan for such investments relies mainly on allocation of the Government’s budget. Nevertheless, the Government has also opted for external financing. The World Bank and ADB are part of this financing plan. The Government is seeking money but also “best practice” ideas on project design, quality, standards, and reforms. As roads are identified as a strategically important area in ADB’s country strategy and program update for Azerbaijan, the Program warrants ADB support. The MFF modality will allow the Government (i) a greater degree of certainty on the financing plan, iii

and (ii) to borrow according to progress on project preparation. The MFF will also contribute to establishing a long-term partnership between ADB and Azerbaijan.

Impact and Outcome The Program will contribute to sustained economic and social development in Azerbaijan. It will create a better trade logistic corridor and, in this manner, enhance cooperation with neighboring countries. The principal outcome of the Program will be an adequate, efficient, safe, and sustainable road network, linking the country domestically and internationally. The successful implementation of the Program will result in (i) increased mobility and accessibility to markets, jobs, and social services; (ii) greater opportunities for private sector participation in business activities; (iii) lower transport costs; (iv) increased trade flows and competitiveness; and (v) improved governance in the road subsector.

Investment Plan The Program is estimated at $3.4 billion equivalent. The cost of Project 1, including taxes, duties, physical and price contingencies, interest, and other charges, is estimated at $249 million equivalent. Investment Program

Item Cost ($ million) A. Road Infrastructure Development 1. State Roads 2,670.4 2. Secondary Roads 680.7 B. Road Network Management Capacity 10.0 Development Total 3,361.1 Source: Asian Development Bank estimates.

Project 1

Item Cost ($ million) A. Base Cost 1. Construction of the Masalli–Astara Expressway 119.5 2. Rehabilitation of Local Roads 12.2 3. Vehicle Weighing Station and Road 2.0 Maintenance Equipment 4. Project Support and Capacity Building 7.7 5. Taxes and Duties 31.8 Subtotal (A) 173.2 B. Contingencies 64.5 C. Interest and other Charges 11.3 Total 249.0 Source: Asian Development Bank estimates.

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Financing Plan Investment Program

Source Amount % ($ million)

Asian Development Bank 500.0 15 Azerbaijan and Other External 2,861.1 85 Financiersa Total 3,361.1 100 a Includes the European Bank for Reconstruction and Development, Islamic Development Bank, and the World Bank. Source: Asian Development Bank estimates.

Project 1

Source Amount % ($ million) Asian Development Bank Ordinary Capital Resources 190.0 76 Special Funds Resources 10.0 4 Azerbaijan 49.0 20 Total 249.0 100 Source: Asian Development Bank estimates.

Multitranche Financing The maximum amount to be made available under the MFF is Facility–Amount and $500 million, comprising loans from both OCR and Special Funds Terms resources. The financing from OCR will follow the provisions of the ordinary operations loan regulations, subject to modifications that may be included under individual loan agreements. An OCR loan will have an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.35% per annum, and such other terms and conditions set forth in related loan agreements. The loan from the Special Funds resources will have a term of 32 years, including a grace period of 8 years, and interest of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the related loan agreement.

Period of Utilization Until 31 December 2014

Estimated Program 30 June 2014 Completion Date

Executing Agency Ministry of Transport

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Implementation The AzerRoadService Open Joint-Stock Company (ARS) under Arrangements the Ministry of Transport will be the Implementing Agency. The chairman of ARS will be responsible for overall supervision of the Program. The recently reorganized project implementation unit (PIU) in ARS—managing the projects supported by ADB, European Bank for Reconstruction and Development, and World Bank—will handle day-to-day implementation activities of the Program. The PIU will also undertake such functions as (i) preparation of PFRs, (ii) engagement and supervision of consultants and contractors, (iii) preparation of reports, and (iv) obtainment of approvals from ADB and the Government. The PIU is headed by the project director, who will report to the chairman of ARS. The PIU comprises ARS staff and a team of externally contracted qualified technical, safeguards, financial, and support staff to supplement resources in ARS.

A steering committee will be established with representation from the Cabinet of Ministers’ Office, Ministry of Economic Development, Ministry of Finance, Ministry of Transport, ARS, and the PIU director among others. The steering committee will be chaired by a deputy minister of transport and will meet semiannually to ensure interagency coordination, review implementation progress, and provide approvals and guidance as necessary.

Procurement ADB-financed goods and services will be procured according to ADB’s Procurement Guidelines (2007, as amended from time to time). International competitive bidding procedures will be followed for contracts with an amount above $3 million for civil works, and at least $1 million for goods. The upper limit for a civil works contract to be procured through national competitive bidding procedures will be set at $3 million.

ADB approved advance contracting of civil works under Project 1 on 22 June 2007. The Government was advised that ADB approval of advance contracting does not commit ADB to finance any ensuing project(s) from the MFF.

Consulting Services Consulting services will be required for capacity development and project implementation support. Key tasks include (i) construction supervision, (ii) monitoring of project performance, (iii) preparation of subsequent projects, and (iv) capacity development. The capacity development component will involve the establishment of a management unit comprising long-term and short-term advisors. This team will define a detailed work plan; establish a modern and efficient management information system; and cater for planning, reforms, technical, fiduciary oversight, safeguards, and other matters connected with implementation—including reporting, monitoring, and evaluation. Project 1 will require a total of 860

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person-months (182 international and 678 national) of services from consulting firms. This comprises (i) 766 person-months (146 international and 620 national) for construction supervision, project monitoring and evaluation, and preparation of Project 2; (ii) 70 person-months (30 international and 40 national) for strengthening the database for secondary roads; and (iii) 24 person-months (6 international and 18 national) for developing legal and regulatory frameworks and operational procedures for toll roads. Additional consulting services, if necessary, will be procured under subsequent projects. The consulting services will be financed from ADB loans. ARS will select and engage the consultants in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time) using the quality- and cost-based selection method.

Environment Project 1 of the Program is classified category A. An Assessment environmental impact assessment (EIA) was undertaken, and the summary environmental impact assessment (SEIA) circulated to the Board and publicly disclosed through the ADB website on 16 January 2007. The environmental assessment and review framework for the Program is included in the SEIA.

Investment Program The Program will cut transport costs and bring benefits to road Benefits and users, road construction companies, traders, and other people Beneficiaries who derive income from expanded road traffic and trade in Azerbaijan. The direct benefits from the improved road network include (i) lower road transport and maintenance costs; (ii) faster and more reliable road transport services; (iii) reduced traffic accidents; (iv) improved access to markets and social services; and (v) jobs and income created during implementation (i.e., use of local labor and construction materials) and after completion (i.e., roadside business activities). The direct benefits will initially accrue to vehicle owners and operators and road construction companies, but will be gradually shared with passengers and freight customers through reduced bus fares and freight charges. While Azerbaijan is the major beneficiary, other countries in the region may also benefit from the Program through efficient movements of transit traffic via Azerbaijan. The indirect benefits of the Program, which are expected to become tangible after the completion of Project 1, include (i) improved road network management, and (ii) increased business activities and jobs that have forward or backward linkages to road network development.

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Risks and Assumptions The key assumptions underlying the Program are (i) continued political and macroeconomic stabilities in Azerbaijan, (ii) effective implementation of the State Program on Poverty Reduction and Economic Development, (iii) the Government’s continued commitment to regional cooperation, (iv) the Government’s commitment to implement the road map and the Program, and (v) adequate financing.

Risks to the Program include (i) limited coordination among government agencies during implementation, (ii) rapid deterioration of the road network caused by weak axle-load controls and insufficient funding for maintenance, (iii) delays in preparation and implementation of subsequent projects, and (iv) cost overruns caused by unexpected increases in prices of fuel and raw materials. The Government has taken the necessary measures to minimize these risks. The steering committee will coordinate work of the agencies to ensure that issues are resolved promptly and that these agencies extend concerted support for the Program. The Government is committed, through the Ministry of Transport, to enforce axle-load controls and further increase funding for road maintenance. ADB, together with its partners, will provide continued support to ARS to strengthen its capacity for road network management. Adequate consulting services are provided to help prepare subsequent projects and manage implementation, monitor performance, measure results, and report to ADB. Price contingency funds are included in the MFF to respond to unforeseen cost changes.

o o 46 00’E 50 00’E

REPUBLIC OF AZERBAIJAN Balaken R U S S I A N F E D E R A T I O N er ROAD NETWORK G E O R G I A iv Zagatala R Khudat ur m DEVELOPMENT PROGRAM Sa

Gusar Khachmaz Gakh

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R ive Bilasuvar i v R e az r Ar Kilometers Shahbuz Gubadly Neftchala Qivraq Jebrail NAKHCHIVAN National Capital Araz Reservoir AUTONOMOUS Jalilabad City/Town Nakhchivan REPUBLIC Zangilan Project Road Babek Masalli o o 39 00’N Julfa National Road 39 00’N Ordubad Other Road

Araz River Yardymly Railway Lenkaran River Lerik Provincial Boundary International Boundary I R A N 0 Boundaries are not necessarily authoritative. 7 Astara - 0 4 1 1

H o o 46 00’E 50 00’E R 1

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed multitranche financing facility (MFF) to the Republic of Azerbaijan for the Road Network Development Program. The design and monitoring framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

2. Azerbaijan’s transport sector plays an important role in the national economy, accounting for around 6% of the country’s gross domestic product (GDP) in 2005. It also enhances regional cooperation. The transport sector comprises railways, roads, civil aviation, maritime transport, and pipelines. Roads are the dominant mode of passenger transport (74% of total passengers in passenger kilometers [km]) and the second major mode of freight transport (28% of total freight volume in ton-km). While freight is mainly carried by railways, the volume carried by roads rose by 1,330% from 1995 to 2005, more rapidly than other modes of transport. With continued economic growth in Azerbaijan, the share of roads in total transport is projected to increase, enhancing the road subsector’s importance to the country’s development. Detailed analysis of the road subsector is in Appendix 2.

3. The road network comprises around 25,000 km of roads, including 4,498 km in the Nagorno-Karabakh area and 2,078 km in the Nakhchivan Autonomous area.1 It consists of 7,016 km of state roads and 17,997 km of municipal roads. The network is dominated by two major highways: (i) the east–west highway linking the country’s capital, Baku, to the Georgian border; and (ii) the north–south highway running from the Russian border to the Iranian border through Baku. About 51% of the roads are paved and 49% gravel. However, about 70% of the road network is in poor condition and requires rehabilitation.

4. The motorization rate is low by international standards. The vehicle fleet numbered about 612,000 in 2005, including 480,000 cars, 91,000 trucks, and 27,000 buses. This was equivalent to 73 vehicles per 1,000 people. About 70% of trucks and 50% of buses have been operating for over 10 years, with an inevitable effect on the level of service and costs of operation. The vehicle fleet grew rapidly at an annual rate of 10% in recent years, and this trend is projected to gain momentum with continued economic growth in the country.

5. After a gradual decline during 1994–2000, the number of road traffic accidents, fatalities, and injuries has risen sharply at an annual rate of 12.5% since 2001. There were 3,179 road traffic accidents in 2005, resulting in 1,065 fatalities and 3,668 injuries. The fatality rate in 2005 was 174 per 10,000 vehicles, much higher than that in European countries. Pedestrians accounted for around 60% of casualties in urban areas, while passengers made up about 50% of the casualties in rural areas.

6. The road transport service market is almost fully liberalized. The private sector plays a key role in provision of road transport services, accounting for more than 95% of freight and passenger traffic. The state-owned road transport operators were largely privatized and foreign road transport operators are allowed to set up business. Freight charges and bus fares for domestic road transport are determined based on market conditions, although the Government

1 Nakhchivan is separated from central Azerbaijan by Armenia. Central Azerbaijan and Nakhchivan are connected by air transport or road transport via Iran. 2 is setting up prices for urban passenger transport, and tariffs for crossborder and transit traffic. The Government has recently introduced vehicle licensing to enhance vehicle axle-load controls and improve road safety.

7. The transport sector is managed by the Ministry of Transport. The road network (excluding Nakhchivan)2 is under the responsibility of the AzerRoadService Open Joint-Stock Company (ARS) under the Ministry of Transport, which was reorganized from the Road Transport Service Department in March 2007. The Government made efforts to improve management in the road subsector. An amendment to the Road Law is being reviewed at the Cabinet of Ministers and a corporate plan for ARS was developed. ARS’s budget increased from $15.7 million in 2003 to $106.8 million in 2006. With the abolishment of the Road Fund in 2001, the road subsector was financed primarily from the Government’s budget. The Government decided to restore the Road Fund in January 2007, but it is too early to assess its performance. The overall institutional capacity in the road subsector is limited and needs strengthening.

B. Analysis of Key Problems and Opportunities

1. Challenges

8. Like other sectors in Azerbaijan, the road subsector is in transition from a centrally planned to a market-oriented system. The subsector faces four major development challenges: (i) deteriorating infrastructure, (ii) poor safety record, (iii) inefficient crossborder and transit facilities, and (iv) limited institutional capacity at national, regional, and road agency levels.

9. Road Network Infrastructure. The road network was primarily developed under the former Soviet Union, and does not meet adequately the need of the fast expanding economy. There are only 191 km of 4-lane highways, and most roads are in poor condition due to two reasons. First, despite an increase from $5.7 million in 2001 to $55.5 million in 2006, funding for road maintenance remains inadequate, accounting for less than 0.5% of GDP. As a result, a large part of the road network deteriorated rapidly and became non-maintainable. Second, due to weak enforcement of vehicle axle load regulations, vehicle axle overloading is prevalent, causing rapid pavement deterioration. Surveys showed that about 20% of 4-axle trucks, 5-axle trucks, and buses exceeded the axle-load limit. The poor road conditions results in high transport costs, long delivery times, and traffic accidents, thus constituting an impediment to non-oil sector growth and poverty reduction. The road network needs to be developed so as to spur growth of trade, investment, and tourism in Azerbaijan.

10. Road Safety. Road safety is an acute problem, reflected by a sharp rise in the number of traffic accidents, fatalities, and injuries since 2001. The current fatality rate is about 10 times that in the European countries, causing significant economic and human losses. While there are several causes of traffic accidents, the inadequacy of the road network with poor conditions is a primary cause. Curves and superelevation are inappropriately designed, pavements are deteriorating, and safety furniture is lacking on many roads. Other causes of road traffic accidents include weak enforcement of safety regulations, intoxicated driving, and inadequate driver education. With the rapid expansion of vehicle fleet, road traffic accidents are likely to increase in the future, unless remedial action is undertaken. Road safety should be improved through road network development and increased public safety awareness.

2 Nakhchivan has its own road agency, Nakhavtoyol. 3

11. Crossborder and Transit Transport. Azerbaijan’s geographic location in the southern Caucasus makes its road network crucial to regional transport and trade. The east–west and north–south highways form part of the Asian highway network3 connecting Iran and the Russian Federation, as well as Georgia and Turkey to Central Asia. Azerbaijan is a signatory to a number of international transport agreements and conventions. However, crossborder and transit road transport remains inefficient. Surveys showed that 80% of firms experienced delays of 1−3 days in crossing the borders of Azerbaijan. 4 The major causes include poor road conditions, inadequate crossborder facilities, and nonharmonized crossborder procedures with neighboring countries. These barriers severely hinder crossborder and transit traffic, which accounts only for around 5% of the total traffic on the east–west and southern highways. Development of an integrated and efficient road network will facilitate crossborder and transit traffic, and contribute to regional cooperation and integration.

12. Institutional Capacity. Despite some progress on policy and institutional reforms, institutional capacity in the road subsector remains limited. This is reflected by (i) lack of a legal and regulatory framework for managing the road network; (ii) weak enforcement of some existing regulations such as those relating to vehicle axle-load controls and road safety; (iii) weak financial management; (iv) lack of private sector participation in road maintenance; and (v) limited staff experience in management of road projects. ARS received World Bank assistance for institutional strengthening during 2003–2005. As the first step toward sound governance in the road subsector, World Bank assistance produced a number of recommendations. Further external assistance is needed to strengthen the institutional capacity in the subsector by supporting implementation of these recommendations.

2. Opportunities

13. An inadequate and inefficient road network is a bottleneck to sustained economic growth and rapid poverty reduction. Despite recent strong growth driven by the oil sector, oil output in Azerbaijan is projected to reach peak around 2015, unless new oil reserves can be found. Thus, non-oil sector development is crucial to the country. Good transport infrastructure contributes significantly to non-oil sector development. In recognition of this, the Government has set development of road infrastructure as one of the priorities in two state programs: (i) State Program on Poverty Reduction and Economic Development (SPPRED) for 2003−2005,5 and (ii) State Program on Socioeconomic Development of Regions for 2004–2008.6 The Government is now preparing a follow-up 10-year poverty reduction strategy, based on achievement of country- specific targets linked to the Millennium Development Goals. In support of implementing these programs, the Ministry of Transport drafted a transport policy paper, followed by a transport sector development strategy developed with Asian Development Bank (ADB) assistance.7 The draft Transport Policy Paper and the ensuing Transport Sector Development Strategy paved the way for a road subsector roadmap. This highlights key problems and causes for the execution of investment and non-investment changes. Both documents identified road network development as a high priority over the medium term. Specifically, the documents set the following major

3 The concept of the Asian highway network was developed with assistance of the United Nations Economic and Social Commission for Asia and the Pacific. Twenty-seven Asian countries including Azerbaijan have signed the Intergovernmental Agreement on the Asian Highway Network. 4 World Bank. 2002. Trade and Transport Facilitation in South Caucasus: Azerbaijan. Washington, DC. 5 Republic of Azerbaijan. 2003. State Program on Poverty Reduction and Economic Development, 2003–2005. Baku. 6 Republic of Azerbaijan. 2004. State Program on Socioeconomic Development of Regions for 2004−2008. Baku. 7 ADB. 2006. Republic of Azerbaijan: Transport Sector Development Strategy. Baku. (Technical Assistance Consultant Report).

4 tasks for the road subsector: (i) establishing legal and regulatory frameworks; (ii) developing and effectively maintaining road infrastructure, and completing reconstruction of the east–west and north–south highways; (iii) improving road safety; (iv) facilitating crossborder and transit traffic; (v) improving road transport services; and (iv) strengthening the institutional capacity.

14. The Ministry of Transport developed a Road Network Development Program for 2006– 2015 (the Program) in July 2006,8 with the objective of developing an adequate, efficient, safe, and sustainable road network in support of the country’s economic and social development. The Program includes an investment component and a non-investment component. The investment component will construct, upgrade, and rehabilitate approximately 9,500 km of 124 priority roads, comprising 3,570 km of 64 state roads and 5,928 km of 58 secondary roads. The non- investment component will focus on priority reforms, including the development of regulations and operational procedures; encouragement of private sector participation in construction and maintenance; and capacity building for planning, monitoring, evaluation, and reporting. The overall investment reaches $3.4 billion over the 10-year period. Most of this will be financed from the Government’s budget. The Government has also sought external financing, with ADB and the World Bank as the main sources. The road subsector road map and investment plan for 2006–2015 are in Appendix 3.

3. External Assistance

15. The road subsector has received external assistance since the mid-1990s. The major sources of external assistance are ADB, European Bank for Reconstruction and Development (EBRD), European Union, Islamic Development Bank (IsDB), and World Bank. Details of external assistance to the road subsector are in Appendix 4. In line with the Government’s priority, external assistance focused on improving the east–west and north–south highways. Civil works on the majority of the east–west highway were either completed or underway. The Alyat–Hajigabul section was improved in 2003 with funding from IsDB and the Kuwait Fund for Arab Economic Development, and the Ganja–Qazakh section was reconstructed with World Bank assistance in 2006. The sections expected to be improved by 2008 include (i) the Hajigabul–Kyurdamir section with EBRD assistance, and (ii) the Qazakh–Georgian border section and Ganja bypass with ADB assistance. EBRD and the Czech Export Bank are helping reconstruct the northern highway from Baku to the Russian border, while the World Bank and ADB will jointly develop the southern highway between Alyat and Astara. The World Bank, ADB, EBRD, and European Union have provided technical assistance for feasibility studies and capacity development.

4. ADB’s Strategy and Sector Operations

16. ADB’s assistance strategy for Azerbaijan 9 aims to reduce poverty and raise living standards in a sustainable manner. Given Azerbaijan’s geographic location, the latest country strategy and program update10 identifies roads as a priority area for ADB assistance. ADB assistance to roads focuses on improving the main highways connecting Azerbaijan to its neighboring countries, supporting policy reform, and promoting capacity development. The first lending project, approved in 2005, aimed to rehabilitate the Yevlakh–Ganja and Qazakh–

8 Republic of Azerbaijan. 2006. Public Investment Program in the Road Subsector, 2006–2015. Baku. 9 ADB. 2000. Economic Report and Interim Operational Strategy for Azerbaijan. Manila. 10 ADB. 2006. Country Strategy and Program Update (2006): Azerbaijan. Manila. 5

Georgian border sections of the east–west highway.11 The project is also strengthening the road network management capacity, especially planning for and financing of road maintenance. ADB assisted the Government in developing a transport sector development strategy during 2005– 2006,12 which will guide ADB’s future assistance to the transport sector. The Program, which was prepared with ADB technical assistance approved in November 2005,13 is consistent with ADB’s assistance strategy for Azerbaijan.

17. ADB has approved two loans and three TA projects to the transport sector, with a total amount of around $53.6 million. The portfolio performance in the transport sector is better than the country average. The East–West Highway Improvement Project is being implemented as scheduled. The detailed design has been completed and bidding documents have been issued. Of the two completed TA projects, the TA completion report for the Transport Sector Development Strategy14 has been prepared and the TA was rated fully satisfactory.

5. Lessons

18. ADB operations in Azerbaijan are relatively new—five loans have been approved to date.15 Thus, substantive lessons cannot be drawn from previous projects. Nevertheless, the Program was designed with careful consideration of the lessons learned from operations of ADB and development partners in Azerbaijan and similar ADB projects in other transition economies. The following five lessons need to be highlighted. First, each project and subproject financed under the MFF was, and will be, carefully evaluated based on in-depth technical, economic, environmental, and social (including land acquisition and resettlement) assessments to ensure quality at entry. Second, advance contracting was undertaken to expedite project implementation. Third, road infrastructure investments will be accompanied by support for policy reform and institutional strengthening to maximize the development impact and benefits of investment. Fourth, the Program will improve both road infrastructure and crossborder facilities, to the extent possible, to complement efforts for eliminating physical and nonphysical barriers to crossborder traffic. Fifth, the Program was designed in collaboration with development partners—particularly the World Bank, which is helping construct an expressway between Alyat and Masalli on the same southern corridor.

6. Rationale for ADB Support for the Program

19. Connectivity, both domestically and internationally, is the key to sustainable development in Azerbaijan. However, about 70% of the country’s road network is in poor condition, resulting in high transport costs, long delivery times, and traffic accidents. This

11 ADB. 2005. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the Republic of Azerbaijan for the East–West Highway Improvement Project. Manila (Loans 2205/2206-AZE, for $52 million, approved on 8 December). 12 ADB. 2005. Technical Assistance to the Republic of Azerbaijan for the Transport Sector Development Strategy. Manila. 13 ADB. 2005. Technical Assistance to the Republic of Azerbaijan for Preparing the Southern Road Corridor Improvement Project (Alyat–Astara Road). Manila. 14 ADB. 2007. Technical Assistance Completion Report on Technical Assistance to the Republic of Azerbaijan for Transport Sector Development Strategy. Manila. 15 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Republic of Azerbaijan for the Flood Mitigation Project. Manila (Loan 2068-AZE, for $22 million, approved on 19 December); ADB. 2004. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance Grant to the Republic of Azerbaijan for the Urban Water Supply and Sanitation Project. Manila (Loans 2119/2120-AZE, for $29.4 million, approved on 7 December); and footnote 11.

6 constitutes an impediment to non-oil sector growth and poverty reduction. The road network needs to be developed. This requires new investments and improved maintenance. The subsector also needs improved road safety measures and standards, and “soft” investments to facilitate crossborder trade and transit traffic.

20. The Government’s total investment plan for the road network is $350 million a year during 2006–2015. The financing plan for such investments relies mainly on allocation of the Government’s budget. Nevertheless, the Government has also opted for external financing. The World Bank and ADB are part of this financing plan. The Government is seeking money but also “best practice” ideas on project design, quality, standards, and reforms. As roads are identified as a strategically important area in ADB’s country strategy and program update for Azerbaijan, the Program warrants ADB support. The MFF modality will allow the Government (i) a greater degree of certainty on the financing plan, and (ii) to borrow according to progress on project preparation. The MFF will also contribute to establishing a long-term partnership between ADB and Azerbaijan.

III. THE PROPOSED INVESTMENT PROGRAM

A. Impact and Outcome

21. The Program will contribute to sustained economic and social development in Azerbaijan. It will create a better trade logistic corridor and, in this manner, enhance cooperation with neighboring countries. It is an integral part of Azerbaijan’s transport sector development strategy. The outcome of the Program will be an adequate, efficient, safe, and sustainable road network, linking Azerbaijan domestically and internationally. Successful implementation of the Program will result in (i) increased mobility and accessibility to markets, jobs, and social services; (ii) greater opportunities for private sector participation in business activities; (iii) lower transport costs; (iv) increased trade flows and competitiveness; and (v) improved governance in the road subsector.

B. Outputs

22. The outputs of the Program will be (i) an improved national road network; and (ii) effective and efficient management of the road network. The outputs will be achieved from two components: (i) road infrastructure development, and (ii) road network management capacity development. The road infrastructure development component will cover construction, upgrading, or rehabilitation of the priority roads. The roads to be financed under the MFF have been, or will be, selected based on Azerbaijan’s Transport Sector Development Strategy and economic, social, environmental, and technical assessments. The selection criteria and approval process for projects and subprojects to be financed under the MFF are in Appendix 5. The road network management capacity development component will focus on priority reforms, including the development of regulations and operational procedures; encouragement of private sector participation in building and maintenance; and capacity building for planning, monitoring, evaluation, and reporting.

1. Outputs for Project 1

23. The outputs of the first project (Project 1) of the Program will be (i) an improved southern road transport corridor, and (ii) enhanced management capacity in ARS. These will be achieved through four components: (i) construction of a new expressway between Masalli and Astara, (ii) rehabilitation of local roads in the project area, (iii) installation of a vehicle weighing station 7 along the Masalli–Astara expressway and procurement of road maintenance equipment, and (iv) project support and capacity building. Each of these components is briefed below.

24. Construction of the Masalli–Astara Expressway. Project 1 will construct about 59 km of a new 4-lane expressway between Masalli and Astara on the border with Iran on the southern corridor—the southern segment of the new expressway between Alyat and Astara. The expressway will comprise dual carriageways with a 10-meter-wide pavement on each carriageway and 3-meter outer shoulders, three interchanges, and 26 bridges. It conforms to Azerbaijan’s standards for a category I road, and is designed for a speed of 120 km per hour and with cumulative 13-ton vehicle axle loading. Activities comprise (i) civil works, and (ii) land acquisition and resettlement.

25. Rehabilitation of Local Roads. Project 1 will rehabilitate local roads totaling about 120 km in the project area to enhance access to the Masalli–Astara expressway for local communities. Each of the local roads conforms to Azerbaijan’s standards for a category III road, with two lanes of a 5–8 meter wide pavement. These local roads were selected in consultations with ARS and local stakeholders, and based on road conditions.

26. Installation of a Vehicle Weighing Station and Procurement of Road Maintenance Equipment. Project 1 will install a vehicle weighing station along the Masalli–Astara expressway and procure road maintenance equipment. This aims to increase the sustainability of investment in the expressway through the enforcement of vehicle axle-load controls and adequate maintenance.

27. Project Support and Capacity Building for Road Network Management. Project 1 will provide support for (i) implementation of Project 1, including construction supervision, project management, monitoring, and evaluation; (ii) preparation of Project 2 (e.g., feasibility studies and due diligence); and (iii) independent external financial auditing. This component will also help build the capacity of ARS for road network management, including (i) developing a database for secondary roads, 16 and (ii) developing legal and regulatory frameworks and operational procedures for toll roads. This non-investment component will be implemented primarily through consulting services.

28. Project 1 adopts a sector lending modality, comprising Subproject A—a core subproject covering the section km 0–km 22.1 of the Masalli–Astara expressway and 2 non-core subprojects: (i) Subproject B (section km 22.1–km 45.1 of the Masalli–Astara expressway), and (ii) Subproject C (section km 45.1–km 58.6 of the Masalli–Astara expressway). Under Subproject A the financing will also be provided for rehabilitation of local roads, procurement of road maintenance equipment, installation of a vehicle weighing station along the Masalli–Astara expressway, project support, and capacity building.

2. Outputs for Project 2

29. The outputs of Project 2 under the Program will be produced from three tentative components: (i) upgrading of a 2-lane road between Ganja and Qazakh on the east–west corridor to a 4-lane expressway (about 94 km), (ii) development of crossborder infrastructure and facilities in Astara (provided that the Government has decided the location of the new border crossing point), and (iii) project support and capacity building for road network

16 The World Bank is assisting ARS in strengthening the database for state roads.

8 management. The outputs and components for Project 2 will be finalized during the implementation of Project 1.

C. Special Features 30. Regional Cooperation and Integration. The Program will contribute to regional cooperation and integration by improving Azerbaijan’s segment of the trans-Caucasian road network and border facilities in Astara. The southern and east–west highways form part of the Asian highway network and have the potential to become important corridors for transit traffic between Asia and Europe. Successful implementation of the Program will connect Azerbaijan closely with neighboring countries, increasing regional traffic and trade.

31. Capacity Development. The Program includes a strong component on capacity development of road network management, which will address issues on road maintenance, road safety, vehicle axle load controls, and private sector participation. Given a lack of reliable road information, Project 1 will develop a database for secondary roads, which will help ARS to better plan and undertake road maintenance operations. Project 1 will also develop legal and regulatory frameworks and operational procedures for toll roads, which will create an enabling environment for private sector participation in road construction, operation, and maintenance. Capacity building assistance will continue under subsequent projects. This will supplement physical investments to achieve sustained development in the road subsector.

32. Aid Coordination. The Program was prepared, and will be implemented, in close coordination with the World Bank, which is also providing assistance to the road subsector and cofinancing, on a parallel basis, construction of an expressway between Alyat and Masalli—the northern section of the new expressway between Alyat and Astara. During project processing, ADB’s project team frequently consulted with World Bank counterparts on issues such as policy reforms and capacity development in the road subsector, road alignments, technical standards, traffic projection, safeguards, and project implementation. The ADB-funded project preparatory technical assistance consultant worked with the consultant engaged under the World Bank project. The recently reorganized project implementation unit (PIU) in ARS will manage implementation of the Program, together with the World Bank-assisted highway II project. The aid coordination during the design and implementation of the Program will improve the effectiveness of external assistance, mitigate the Government’s administrative resources constraints, and contribute to enhancing the capacity of ARS for project management.

D. Investment Plan 33. The total cost of the Program is estimated at around $3.4 billion equivalent. The total cost of Project 1—including taxes, duties, physical and price contingencies, interest, and other charges—is estimated at $249 million equivalent. The cost estimates are summarized in Table 1 and detailed in Appendix 6.

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Table 1: Program Investment Plan

Item Cost ($ million) Investment Programa A. Road Infrastructure Developmentb 1. State Roads 2,670.4 2. Secondary Roads 680.7 B. Road Network Management Capacity Development 10.0 Total 3,361.1

Project 1 A. Base Costa 1. Construction of the Masalli–Astara Expressway 119.5 2. Rehabilitation of Local Roads 12.2 3. Vehicle Weighing Station and Procurement of Road Maintenance Equipment 2.0 4. Project Support and Capacity Building for Road Network Management 7.7 5. Taxes and Duties 31.8 Subtotal (A) 173.2 B. Contingencies 64.5 C. Interest and Other Charges 11.3 Total 249.0 Note: Refer to the footnotes in Appendix 6 for assumptions. a In 2007 prices. b Includes civil works, social and environmental mitigation, resettlement, and consulting services for design and supervision. Source: Asian Development Bank estimates.

E. Financing Plan

34. The Government has requested ADB to help finance the Program through the MFF in the amount up to the equivalent of $500 million. The financing will be provided in accordance with ADB’s policy,17 primarily from ADB’s ordinary capital resources (OCR) and supplemented by its Special Funds resources. The MFF will comprise multiple loans, subject to the submission of related periodic financing requests (PFR) by the Government and execution of related loan agreements and other warranties and representations. The Government has entered into a framework financing agreement (FFA) with ADB. The maximum amount of financing from OCR will be $490 million equivalent and such financing will follow the provisions of the Ordinary Operations Loan Regulations applicable to a London interbank offered rate (LIBOR)-based loans, subject to modifications that may be included under individual loan agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility; and (ii) an undertaking that these choices were its own independent decision, and not made in reliance on any communication or advice from ADB. The maximum amount of financing from the Special Funds resources will be $10 million equivalent and such financing will follow the provisions of the Special Operations Loan Regulations, subject to modifications that may be included under individual loan agreements.

35. In accordance with the FFA, the Government has submitted the first PFR for tranche 1 to ADB, requesting a blend of two loans in a total amount of $200 million, comprising an OCR loan of $190 million and a loan in various currencies equivalent to Special Drawing Rights 6,535,000

17 ADB. 2005. Pilot Financing Instruments and Modalities. Manila.

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($10 million equivalent) from the Special Funds resources, to help finance Project 1. The first PFR is presented to the Board together with this report and the FFA. The ADB loans will finance 80% of the total cost of Project 1. The OCR loan will finance construction of the Masalli–Astara expressway, rehabilitation of local roads, installation of a vehicle weighing station, and procurement of road maintenance equipment. The loan from Special Funds resources will finance project support and capacity building for road network management. The OCR loan will have a 24-year term, including a grace period of 4 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.35% per annum, and such other terms and conditions set forth in the related draft Loan Agreement. The loan from Special Funds resources will have a term of 32 years, including a grace period of 8 years, and interest of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the related draft Loan Agreement. The Government will finance the remainder of the total project cost in an amount of $49 million including local taxes and duties. The proposed financing plan for the Program including Project 1 is summarized in Table 2 and detailed in Appendix 6.

Table 2: Financing Plan

Source Total ($ million) % Investment Program Asian Development Bank 500.0 15 Azerbaijan and Other External Financiersa 2,861.1 85 Total 3,361.1 100

Project 1 Asian Development Bank Ordinary Capital Resources 190.0 76 Special Funds Resources 10.0 4 Azerbaijanb 49.0 20 Total 249.0 100 a Includes the European Bank for Reconstruction and Development, Islamic Development Bank, and World Bank. b Includes taxes and duties. Source: Asian Development Bank estimates.

F. Implementation Arrangements

1. Program and Project Management

36. The Ministry of Transport will be the Executing Agency and ARS will be the Implementing Agency. ARS has been implementing the ADB-funded East–West Highway Improvement Project and has developed required capacity to manage the implementation of the Program with support of ADB and other partners. The chairman of ARS will be responsible for overall supervision of the Program. The recently reorganized PIU in ARS—managing implementation of road projects supported by ADB, EBRD, and World Bank—will handle day-to- day implementation activities of the Program. The PIU will also undertake periodic functions such as (i) preparation of PFRs, (ii) engagement and supervision of consultants and contractors, (iii) preparation of reports, and (iv) obtainment of approvals from ADB and the Government. The PIU is headed by the project director, who will report to the chairman of ARS. The PIU comprises ARS staff and a team of externally contracted qualified technical, safeguards, financial, and support staff to supplement resources in ARS.

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37. A steering committee will be established with representation from the Cabinet of Ministers’ Office, Ministry of Economic Development, Ministry of Finance, Ministry of Transport, ARS, and the PIU director among others. The steering committee will be chaired by a deputy minister of transport and will meet at least semiannually to ensure interagency coordination, review implementation progress, and provide approvals and guidance as necessary. A program and project management organization chart is in Appendix 7.

38. ADB will finance staff, equipment, and operating expenses in the PIU for implementing the Program from Special Funds resources. Specifically, ADB will finance the salaries of a highway engineer, procurement specialist, financial specialist, and administrative assistant, as well as related office equipment and supplies. ADB financing for PIU costs is justifiable because (i) limited capacity of ARS for project implementation needs to be complemented, and (ii) this is an integral part of ADB’s support for capacity development in the road subsector. The Government has given assurance that, upon completion of the Program, PIU staff will be integrated into ARS to implement future projects.

2. Project Preparation and Appraisal

39. The Program will follow MFF implementation procedures. For Project 1, pre-construction activities have been completed, and resettlement activities will be completed prior to the commencement of civil works. For subsequent projects, ARS, with the assistance of the program support consultants, will prepare (i) the project report, including technical, economic, environmental, and social assessments; and (ii) a PFR for each project. The project report will be prepared in accordance with the criteria and procedures stated in Schedule 4 of the FFA, and other related requirements of the Government and ADB. After appraising each project for technical and economic feasibility and compliance with safeguard requirements, ARS will submit to ADB, through the Ministry of Transport, a summary appraisal report in the format specified in the Program administration memorandum, and the draft PFR. ADB will then undertake due diligence in accordance with its relevant policies and procedures, and approve ARS’s appraisal, subject to any amendments. If required by ADB, ARS will amend the PFR and submit it to ADB for approval on or before the due date of the PFR. Meanwhile, ARS will make advance contracting as approved by ADB to expedite project implementation.

3. Implementation Period

40. The Program will be implemented over 7 years, to be completed at the end of 2014. Project 1 will be implemented over 3 years, with estimated completion by 31 December 2009. ARS will prepare detailed implementation schedules for subsequent projects. An indicative implementation schedule for the Program and a detailed implementation schedule for Project 1 are in Appendix 8.

4. Procurement

41. ADB-financed goods and services will be procured according to ADB’s Procurement Guidelines (2007, as amended from time to time). International competitive bidding procedures will be followed for contracts with an amount above $3 million for civil works and at least $1 million for goods. The upper limit for a civil works contract to be procured through national competitive bidding procedures will be set at $3 million. National competitive bidding will be conducted under Azerbaijan’s legislation on state procurement, subject to modification and clarification set forth in the individual loan agreements. A procurement plan for the Program is in Appendix 9.

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42. ADB approved advance contracting of civil works under Project 1 on 22 June 2007. The Government was advised that ADB approval of advance contracting does not commit ADB to finance any ensuing project(s) from the MFF.

5. Consulting Services

43. Consulting services will be required for capacity development and project implementation support. Key tasks include (i) construction supervision, (ii) monitoring of project performance, (iii) preparation of subsequent projects, and (iv) capacity development. The capacity development component will involve the establishment of a management unit comprising long-term and short-term advisors. This team will define a detailed work plan; establish a modern and efficient management information system; and cater for planning, reforms, technical, fiduciary oversight, safeguards, and other matters connected with implementation—including reporting, monitoring, and evaluation.

44. Project 1 will require a total of 860 person-months (182 international and 678 national) of services from consulting firms. This comprises (i) 766 person-months (146 international and 620 national) for construction supervision, project monitoring and evaluation, and preparation of Project 2; (ii) 70 person-months (30 international and 40 national) for strengthening the database for secondary roads; and (iii) 24 person-months (6 international and 18 national) for developing legal and regulatory frameworks and operational procedures for toll roads. Outline terms of reference for consultants are in Supplementary Appendixes A, B, and C. Additional consulting services, if necessary, will be procured under subsequent projects. The consulting services will be financed from ADB loans. ARS will select and engage the consultants in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time) using the quality- and cost-based selection method.

6. Anticorruption Policy

45. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the project(s) under the Program. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and bidding documents for the Program. In particular, all contracts financed by ADB in connection with the Program shall include provisions specifying the right of ADB to audit and examine the records and accounts of ARS and all contractors, suppliers, consultants, and other service providers as they relate to the Program.

46. The Government and ARS agreed to take additional measures to improve governance, accountability, and transparency under the MFF. These measures include (i) independent external auditing of contracts, project accounts, and financial statements; (ii) decisions of all procurement-related matters by the Tendering Committee, which comprises representatives of the Ministry of Economic Development, Ministry of Finance, Ministry of Transport, and the State Procurement Agency (as observer) in accordance with ADB’s Procurement Guidelines; (iii) verification of contractors’ payment claims by the supervision consultant in accordance with contract specifications; and (iv) timely disclosure of information on selection of consultants and contractors through local newspapers.

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7. Disbursement Arrangements

47. The loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). The last disbursements under the MFF will be made by 31 December 2014. To reduce cash flow difficulties in ARS and facilitate project implementation, the imprest account procedures described in ADB’s Loan Disbursement Handbook will be followed. An imprest account will be established at the central bank or a commercial bank in Azerbaijan acceptable to ADB after the loan effectiveness, and will be liquidated and replenished in accordance with ADB’s Loan Disbursement Handbook. The total advance will not exceed ADB’s estimated share of eligible project expenditures to be financed through the imprest account for the next 6 months, or 10% of the amount of the loan from Special Funds resources, whichever is lower. For simplified documentation, the statement of expenditure procedures, as described in the Loan Disbursement Handbook, will be followed to reimburse expenditures and liquidate the imprest account for any individual payment transaction of $100,000 equivalent and below.

8. Accounting, Auditing, and Reporting

48. The Ministry of Transport and ARS agreed to adhere to sound financial management requirements during implementation of the Program. The Ministry of Transport and ARS will maintain separate project records and accounts adequate to identify the (i) goods and services financed from the loan proceeds, (ii) financing resources received, (iii) expenses incurred on the components of each project, and (iv) use of counterpart funds. ARS will engage independent external auditors acceptable to ADB to audit project accounts and financial statements annually, and will arrange a periodic or annual audit of statement of expenditure transactions. ARS will submit to ADB certified copies of audited annual project accounts and related financial statements as well as the auditor’s report in English within 6 months of the end of each fiscal year during implementation. ARS was advised of ADB’s requirement for timely submission of audited annual project accounts and financial statements, and the suspension of disbursements of ADB loans in case of noncompliance with the requirement.

49. ARS will prepare and submit to ADB quarterly progress reports for individual projects, which will include (i) a narrative description of progress made during the reporting period, (ii) changes in the implementation schedule, (iii) problems or difficulties encountered, and (iv) activities to be undertaken in the next reporting period. ARS will prepare and submit to ADB a project completion report within 3 months of the completion of each project, and a program completion report after completion of all projects under the Program.

9. Performance Monitoring and Evaluation

50. A set of targets and indicators for monitoring and evaluation of program performance were discussed with the Government during fact-finding (key performance targets and indicators are provided in Appendix 1). ARS will (i) engage consultants for monitoring and evaluation by December 2007; (ii) collect additional data from relevant agencies, including local governments and statistics bureaus, to measure the performance indicators at inception, completion, and 3 years after completion of each project and the Program; and (iii) report to ADB key findings on a quarterly basis. ARS, with the assistance of the PIU and the supervision consultant, will monitor and evaluate program impacts to ensure that the program facilities are managed effectively and the program benefits maximized. ADB Management will prepare periodic reports to inform the Board of overall progress. A Board information report will be submitted annually, and progress reports will be submitted to inform the Board of the approval of loans for subsequent projects.

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10. Reviews

51. ADB will field an inception mission within 3 months of the loan approval for each project, and a review mission annually. The Government and ADB will jointly undertake a midterm review of Project 1 in 2008 and a midterm review of the Program in 2010. The timing of midterm reviews of subsequent projects will be agreed during the appraisal of each project. The midterm reviews will focus on (i) program impacts; (ii) implementation progress; (iii) road subsector reform and performance; (iv) performance of consultants and contractors; (v) status of compliance with the covenants stipulated in the FFA and individual loan agreements; and (vi) the need for any midcourse changes in the scope or schedule of the Program to ensure full achievement of its impact.

IV. INVESTMENT PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Benefits

52. The Program will bring benefits to road users, road construction companies, traders, and other people who derive income from expanded road traffic and trade in Azerbaijan. The direct benefits from the improved road network include (i) lower road transport and maintenance costs, (ii) faster and more reliable road transport services, (iii) reduced traffic accidents, (iv) improved access to markets and social services, and (v) jobs and income created during implementation (i.e., use of local labor and construction materials) and after completion (i.e., roadside business activities). The direct benefits will initially accrue to vehicle owners and operators and road construction companies, but will be gradually shared with passengers and freight customers through reduced bus fares and freight charges. While Azerbaijan is the major beneficiary, other countries in the region may also benefit from the Program through efficient movements of transit traffic via Azerbaijan. The indirect benefits of the Program, which are expected to become tangible after the completion of Project 1, include (i) improved road network management, and (ii) increased business activities and jobs that have forward or backward linkages to road network development.

B. Economic Analysis

53. Economic analysis of all projects financed under the MFF will be conducted in accordance with ADB’s Guidelines for the Economic Analysis of Projects.18 The economic analysis for Project 1 is in Appendix 10. It was based on a comparison of with- and without- project cases and covers a period of 20 years (2008–2027), comprising 2 years of construction and 18 years of operation. On the basis of projected growth of GDP per capita and population, as well as the estimated income elasticity of demand in Azerbaijan, traffic on the new expressway between Masalli and Astara was projected to grow at 8.3% annually, with average daily traffic increasing from about 4,000 vehicles in 2008 to 20,300 vehicles in 2027.

54. The major benefits of Project 1 are savings on vehicle operating costs and travel time, and reduced traffic accidents caused by improved road conditions and the shorter length of the new expressway after project completion. The new expressway will have an average international roughness index (IRI) value of 2.5, compared with the IRI value of 11.0 for the existing road between Masalli and Astara in 2006. Savings on vehicle operating costs and travel time were calculated using the highway design and maintenance 4 (HDM4) model, which shows

18 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila. 15 that Project 1 will lead to savings on vehicle operating costs per km of 11% for cars, 14% for heavy trucks, and around 20% for articulated trucks. Project 1 will also result in savings on travel time between Masalli and Astara of about 60% for all types of vehicles, and contribute to reducing the number of road traffic accidents by half.

55. The economic analysis shows that Project 1 is economically viable, with an estimated economic internal rate of return (EIRR) of 12.8% and an estimated net present value of $7.0 million at a 12% discount rate. A sensitivity analysis confirms the economic viability of Project 1, with the EIRR higher than 12% when operation and maintenance costs increase by 20%. The EIRR figures are marginally lower than 12% when (i) project implementation extends by 1 year, (ii) capital costs increase by 10%, (iii) traffic growth decrease by 10%, and (iv) project benefits decrease by 10%. However, these figures are deemed within an acceptable range. The risk analysis shows that Project 1 has 93% probability of having an EIRR higher than 12% and a positive net present value.

C. Financial Management and Sustainability

56. Financial analysis will be conducted for projects financed under the MFF, if necessary, in accordance with ADB’s Financial Management and Analysis of Projects.19 Project 1 is not a revenue-earning project and does not require a financial analysis. A financial management assessment of ARS was undertaken based on questionnaires and field interviews to assess its ability to fulfill ADB's fiduciary requirements for the Program. ARS’s financial management was found acceptable, although further improvement is needed. ARS received World Bank assistance in developing a corporate plan and financial reporting and procedures manual, and EBRD assistance in implementing the corporate plan. With external assistance, ARS has improved its capacity of managing implementation of aid-funded projects. Under Project 1, external independent auditing of contracts, accounts, and financial statements will be undertaken to ensure fiduciary oversight.

57. Analysis was undertaken to assess the Government’s counterpart funding for, and debt repayment from, Project 1. The Government is committed to timely provision of the required counterpart funding during implementation of Project 1. Azerbaijan’s external debt situation remains moderate and its debt repayment capacity is strong. At the end of 2006, the total stock of public and publicly guaranteed external debt amounted to $1.9 billion (15% of GDP) and the debt service ratio accounted for 1.1% of exports of goods and services. Fitch Ratings upgraded Azerbaijan’s sovereign rating to “BB+” from “BB” for long-term foreign currency and local currency credit in February 2007. With Azerbaijan’s strong medium-term macroeconomic outlook, the MFF is expected to have a limited impact on the debt situation in the country.

D. Environmental Impact

58. Environmental assessment will be conduced for all projects financed under the MFF in accordance with the Environmental Assessment and Review Framework prepared by the Government and agreed with ADB in compliance with ADB’s Environment Policy (2002) as well as relevant laws and regulations in Azerbaijan. Project 1 is classified category A. An environmental impact assessment (EIA) of Project 1 was undertaken, and is being approved by the Ministry of Ecology and Natural Resources. The SEIA was circulated to the Board and publicly disclosed through the ADB website on 16 January 2007. The environmental assessment and review framework for the Program is included in the SEIA. The EIA concludes

19 ADB. 2005. Financial Management and Analysis of Projects. Manila.

16 that the overall environmental impacts of Project 1 will be insignificant and can be minimized by adequate mitigation measures included in the environmental management plan.

59. Project 1 is located far from the protected areas—Hirkan National Park and Astara Chay Important Bird Area—and is thus expected to have no impacts on them. It will neither block any known animal migration trails, nor intersect any known protected species of flora or fauna along the alignment. Bridge contractors will avoid substructure (foundation) work during any known spawning season for the rivers that the project expressway traverses. No historical, cultural, or archaeological sites are within or near the project area. Although some trees will be cut from the secondary growth Moscow Forest, civil works contracts will be mandated to replant trees. If the expressway noise exceeds local standards, linear sound barriers and insulated windows will be used to mitigate the noise impacts. Complete fencing on both sides of the expressway between Masalli and Astara, coupled with improved signage and controlled access, will substantially improve safety for local residents. The overall risks on the environment under Project 1 are considered manageable.

E. Poverty and Social Impacts

60. Poverty and social analysis will be conducted for all projects financed under the MFF in accordance with ADB’s Handbook for Integrating Poverty Impact Assessment in the Economic Analysis of Projects.20 A summary poverty reduction and social strategy for Project 1 is in Appendix 11. The project expressway will traverse three rayons (districts)—Masalli, Lenkaran, and Astara—with a total population of 790,700. About 70% of the households in the project area lived below the poverty line in 2006, compared with the official poverty rate of about 20% for the country. While the direct benefits of the project expressway for the poor are relatively small, Project 1 will create an enabling environment for poverty reduction, which will generate substantially indirect benefits for the poor. The overall (both direct and indirect) poverty reduction impacts of Project 1 include (i) reduced prices of transport services, food, and other daily necessities because of lower transport costs; (ii) jobs and income generated from construction and maintenance of the project expressway; and (iii) improved access to markets and social services.

61. The Program will have a positive impact on gender, because the civil works contracts will include provisions to encourage employment of women during implementation, and women will be encouraged to participate in activities to monitor program impacts. The PIU will develop and implement a gender plan, with the assistance of the supervision consultants.

62. All projects financed under the MFF will include appropriate measures to mitigate the potential risk of HIV/AIDS and other sexually transmitted infections, as well as drug and human trafficking. These measures include raising public awareness of the risks of HIV/AIDS and other sexually transmitted infections, as well as drug and human trafficking. Civil works contracts will include provisions requiring contractors to take measures to protect construction workers from the risks of HIV/AIDS and other sexually transmitted infections, and giving construction workers time to be tested or receive treatment.

F. Social Safeguards

63. The impact on land acquisition and resettlement will be assessed for all projects financed under the MFF in accordance with the resettlement framework prepared by the

20 ADB. 2001. Handbook for Integrating Poverty Impact Assessment in the Economic Analysis of Projects. Manila. 17

Government and agreed with ADB in compliance with ADB’s Involuntary Resettlement Policy (1995) and relevant laws and regulations in Azerbaijan. Substantial land acquisition and resettlement impacts are expected for the projects that will involve construction of new roads. The resettlement framework was prepared, which specifies compensation provisions and procedures on preparation and implementation of resettlement plans for the projects financed under the MFF. The resettlement framework is summarized in Appendix 12 and provided in Supplementary Appendix D.

64. Project 1 is classified category A, because construction of the new expressway between Masalli and Astara entails significant land acquisition. The Resettlement Plan for the core subproject—Section A of the Masalli–Astara expressway (km 0–km 22.1)—was prepared and is in Supplementary Appendix E. The drafts of the resettlement framework and the Resettlement Plan for Section A of Project 1 are found satisfactory. The Ministry of Transport endorsed these two draft resettlement documents and disclosed them to affected persons on 11 June 2007. The resettlement plans for all non-core subprojects with land acquisition and resettlement impacts (i.e., sections B and C of the Masalli–Astara expressway) are being prepared in accordance with the resettlement framework, and will be submitted to ADB for approval and fully implemented before the awards of concerned civil works contracts. Appraisal of the subsequent projects financed under the MFF will require reviewing the resettlement framework and preparing resettlement plans for those projects with land acquisition and resettlement impacts. Implementation of the resettlement plans will be a condition for commencement of civil works under the relevant projects.

65. An assessment of impact on indigenous peoples was undertaken in accordance with ADB’s Policy on Indigenous Peoples (1998). The Program will primarily affect Azeri people, though some scattered members of other ethnic groups—particularly Talysh—may be affected. As Talysh people have the same rights as other Azerbaijan groups and have been fully integrated into institutional, cultural, and economic processes in the country, they do not display sufficient features to classify them indigenous peoples. The Program is classified category C.

G. Assumptions and Risks

66. The Program was designed based on the following key assumptions: (i) continued political and macroeconomic stabilities in Azerbaijan, (ii) effective implementation of the State Program on Poverty Reduction and Economic Development, (iii) the Government’s continued commitment to regional cooperation, (iv) the Government’s commitment to implement the road map and the Program, and (v) adequate financing.

67. Risks to the Program include (i) limited coordination among government agencies during implementation, (ii) rapid deterioration of the road network caused by weak axle-load controls and insufficient funding for maintenance, (iii) delays in preparation and implementation of subsequent projects, and (iv) cost overruns caused by unexpected increases in prices of fuel and raw materials. The Government has taken the necessary measures to minimize these risks. The steering committee will coordinate work of the agencies to ensure that issues are resolved promptly and that these agencies extend concerted support for the Program. The Government is committed, through the Ministry of Transport, to enforce axle-load controls and further increase funding for road maintenance. ADB, together with its partners, will provide continued support to ARS to strengthen its capacity for road network management. Adequate consulting services are provided to help prepare subsequent projects, manage implementation, monitor performance, and report to ADB. Price contingency funds are included in the MFF to respond to unforeseen cost changes.

18

V. ASSURANCES

A. Specific Assurances

68. In addition to the standard assurances, the Government and ARS have given the following assurances, and assurances agreed to in the FFA, which will be incorporated in the legal documents:

(i) Construction Quality. The Ministry of Transport will ensure that the projects and subprojects financed under the MFF comply with technical specifications of the design. The Ministry of Transport, through ARS, will ensure that construction supervision, quality control, and project management are performed according to internationally accepted standards and practices.

(ii) Road Maintenance. The Ministry of Transport will cause ARS to develop in consultation with ADB and approve a road maintenance plan for 2008–2015 by 30 September 2008, which will (i) establish a system for efficient planning and prioritization of road maintenance works; (ii) provide funding modalities to finance the maintenance of relevant roads acceptable to ADB, (iii) develop or adopt adequate road maintenance standards and prepare relevant road maintenance planning and operational manuals; and (iv) provide training to strengthen the capacity of local maintenance units. The Ministry of Transport will ensure that the road maintenance plan is implemented. The Ministry of Transport will use its best efforts to enter in 2009 into a maintenance concession with a private sector entity for at least 20 km of the local roads financed under tranche 1 of the MFF. The Ministry of Transport will cause ARS to submit the bidding documents and the concession framework to ADB by the end of 2008.

(iii) Road Safety. At least 6 months prior to the start of operation of the expressway financed under tranche 1 of the MFF, (i) the Ministry of Transport will develop and implement a plan, acceptable to ADB, for ensuring safe operation of road infrastructure facilities; and (ii) Azerbaijan acting through relevant government agencies will ensure that traffic police patrols the road and enforces the national laws and regulations. ARS will ensure monitoring of the accident rate and traffic volume after commencement of the operation of the roads financed under the MFF and institute appropriate safety enforcement measures. Azerbaijan acting through relevant government agencies will ensure strict border control to prevent trafficking of humans and illegal substances on the roads financed under the MFF.

(iv) Axle Loads. The Ministry of Transport will ensure that ARS establishes vehicle weighing station(s) within the expressway financed under tranche 1 of the MFF to control axle overloading and institute appropriate procedures and regulations to enforce axle load controls by the completion of the relevant project or subproject.

(v) Tolling. At least 6 months prior to the start of operation of the expressway financed under tranche 1 of the MFF, ARS will provide ADB with the Ministry of Transport- endorsed framework and definitive plan for establishing tolling roads along any expressway road financed under the MFF. By mid 2010, ARS will review and inform ADB of any significant difficulties in establishing tolls on expressways under Azerbaijan’s laws and regulations. 19

(vi) Change in Ownership and Operation. In the event that (i) any change in ownership of the road, road facility, or structure financed under the MFF; (ii) any sale, transfer, or assignment of interest or control in the road, road facility, or structure financed under the MFF; or (iii) any lease or other contract or modification of the functions and authority of the Ministry of Transport or ARS over operation and maintenance of any road, road facility, or structure financed under the MFF, is anticipated, the Ministry of Transport will ensure that ADB’s consent is obtained at least 6 months prior to the implementation of such a plan. The Ministry of Transport will ensure that any such changes will be carried out in a legal and transparent manner.

(vii) Vehicle Emissions. At least 6 months prior to the start of operation of the Masalli– Astara expressway financed under tranche 1 of the MFF, ARS, jointly with concerned government agencies, will provide to ADB Azerbaijan’s emission standards and the penalties for infringement of such standards. Azerbaijan will ensure that through the relevant agencies the said vehicle emission standards are enforced.

(viii) Policy Dialogue. The Ministry of Transport and ARS will ensure that ADB is kept informed of Azerbaijan’s policies and programs related to the road subsector that will materially affect the economic viability of each project, subproject, or component financed under the MFF.

(ix) Environment. The Ministry of Transport will ensure that (i) all roads or road facilities and structures financed under the MFF are designed, constructed, and operated in accordance with Azerbaijan’s applicable laws and regulations, ADB’s Environment Policy and the EIA; (ii) any adverse environmental impacts are minimized by the mitigating measures and monitoring program detailed in the environmental management plan (EMP) in the EIA; (iii) implementation of the EMP and any violation of environmental standards are reported to ADB semiannually in accordance with the specifications set forth in the EIA; and (iv) the EMP is incorporated in bidding documents and bills of quantities of the civil work contracts.

(x) Land Acquisition and Resettlement. The Ministry of Finance, assisted by the Ministry of Transport, will ensure that land acquisition and resettlement are carried out promptly and efficiently in a legal and transparent manner following the resettlement framework and resettlement plans agreed with ADB and in accordance with Azerbaijan’s laws and regulations and ADB’s Involuntary Resettlement Policy. ARS will ensure that implementation of the resettlement plans is monitored, evaluated, and reported to ADB as required in the resettlement plans.

(xi) Labor, Social, Gender and Development, Health. The Ministry of Transport, through ARS, will ensure compliance with ADB’s Policy on Gender and Development (1998) during implementation of the Program and will take necessary steps to encourage women living in the area of MFF-financed projects to participate in such project implementation, including causing the contractors to maximize employment of women. The Ministry of Transport will ensure an independent monitoring of the social impacts throughout implementation of the MFF, in consultation with local governments and beneficiaries. In this respect, the Ministry of Transport will ensure that all civil works contractors (i) comply with all applicable labor laws; (ii) use its best efforts to employ women and local people, including disadvantaged people, living in the vicinity of the project/subproject financed under the MFF; (iii) disseminate

20

information at worksites on the risks of sexually transmitted infections for those employed during construction; (iv) provide equal pay to men and women for work of equal type; (v) provide safe working conditions for male and female workers; and (vi) abstain from child labor. Contracts for all projects/subprojects financed under the MFF must include specific clauses on these undertakings, and compliance will be strictly monitored during implementation. The Ministry of Transport will ensure that compliance with these provisions is monitored by the PIU.

B. Conditions for Disbursement

1. Conditions under Tranche 1

69. No OCR loan proceeds shall be disbursed for civil works for construction of the expressway between Masalli and Astara until ADB has received government certification, in form and substance satisfactory to ADB, that (i) the Government has allocated adequate funds to a project account for land acquisition and resettlement activities, and (ii) the land and rights- of-way required for Project 1 expressway are free and clear from the rights or claims of third parties and any other encumbrances.

VI. RECOMMENDATION

70. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $500,000,000 equivalent to the Republic of Azerbaijan for the Road Network Development Program comprising:

(i) the loans not exceeding $490,000,000 from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; and

(ii) the loan in various currencies equivalent to Special Drawing Rights 6,535,000 from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years;

and such other terms and conditions as are substantially in accordance with those set forth in the Framework Financing Agreement presented to the Board.

Haruhiko Kuroda President

5 September 2007 Appendix 1 21

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Data Sources/Reporting Assumptions Targets/Indicators Mechanisms and Risks Impact Assumptions Sustained economic Growth of gross National economic and ƒ Continued political and development in domestic product on a trade statistics macroeconomic stability in Azerbaijan and its sustainable basis, from Azerbaijan cooperation with AZN20.6 billion in 2006 neighboring counties ƒ Implementation of the Tangible progress on State Program on Poverty trade with neighboring Reduction and Economic Development as planned countries, from $2.2 billion in 2006 ƒ Continued government commitment to regional cooperation Outcome Assumptions An adequate, efficient, Increased share of MFF progress and ƒ Government’s safe, and sustainable roads in good and fair completion reports commitment to implement road network in condition in Azerbaijan the road map and the Azerbaijan, connecting from 10% in 2006 to ARS surveys Road Network the country 50% in 2015 Development Program domestically and Road subsector budget internationally 50% increase in freight and expenditure records ƒ Adequate financing traffic by 2015 from 7,536 million ton-km in ADB review missions Risks 2005 ƒ Rapid deterioration of the road network caused by 30% increase in weak axle-load controls passenger traffic by and insufficient funding for 2015 from 10,892 maintenance million passenger-km in 2005 ƒ Limited coordination among government Increased funding for agencies during road maintenance from implementation of the $55 million in 2006 to at Road Network least $250 million in Development Program 2015

10% reduction in road traffic accidents by 2015 from 3,179 in 2005 Outputs Assumptions A 4-lane expressway Project 1 expressway MFF progress and ƒ Support from local between Masalli and (about 59 km) completion reports governments and Astara on the southern completed by 2009 communities corridor built, with ARS surveys access roads IRI value for the ƒ Disputes among rehabilitated (Project 1) Masalli–Astara ADB review missions contractors, supervision expressway maintained consultants, and ARS at no higher than 3.0 avoided or promptly within 5 years after resolved project completion,

22 Appendix 1

Design Summary Performance Data Sources/Reporting Assumptions Targets/Indicators Mechanisms and Risks compared with the Risks average IRI value of ƒ Delays in preparation and 11.0 in 2006 implementation of subsequent projects About 120 km of local roads linking the ƒ Cost overruns caused by Masalli–Astara unexpected increases in expressway prices of fuel and raw rehabilitated by 2009 materials

A 2-lane road between About 94 km of the Ganja and Qazakh on Ganja–Qazakh road the east–west corridor upgraded 3 years after upgraded to a 4-lane ADB approval of expressway (Project 2) tranche 2

Road network Database on secondary Consultant’s reports management capacity roads established by strengthened 2009 (throughout the MFF) Legal and regulatory frameworks and operational procedures for toll roads developed by 2009

Activities with Milestones Inputs 1. Periodic financing request for tranche 1 submitted by the Government and Investment Program approved by ADB in September 2007. ƒ ADB: $500 million 2. Consultants for construction supervision and project monitoring of project 1 ƒ Azerbaijan and other and preparation of project 2 recruited by November 2007. external financiers: 3. Civil works contracts under Project 1 awarded by January 2008. $2,861.1 million 4. Construction under project 1 starts in January 2008 and completed by December 2009. Project 1 5. Consultants for road network management capacity development recruited ƒ ADB: $200 million ($190 by May 2008 and work completed by December 2009. million from ordinary 6. Feasibility study of project 2 completed by June 2009. capital resources and $10 million equivalent from Special Fund resources) ƒ Azerbaijan: $49 million

ADB = Asian Development Bank, ARS = AzerRoadService Open Joint-Stock Company, AZN = Azerbaijan manat, IRI = international roughness index, km = kilometer, MFF = multitranche financing facility.

Sean M. O’Sullivan Juan Miranda Director, CWID Director General, CWRD

Appendix 2 23

ROAD SUBSECTOR ANALYSIS

A. Overview of the Transport Sector

1. The transport sector plays an important role in Azerbaijan’s growing economy, accounting for around 6% of the country’s gross domestic product (GDP) in 2005. As Azerbaijan is located in the southeastern part of the Caucasus between Iran and the Russian Federation, the transport sector contributes significantly to regional cooperation, and facilitates the development of international trade and transit traffic. The transport sector is also crucial to the domestic economy as it links the rural population to urban and international markets.

2. The transport sector comprises railways, roads, civil aviation, maritime transport, and pipelines. Roads are the dominant mode of passenger transport, carrying 74% of passengers in passenger-kilometers (km) (Table A2.1). Civil aviation accounts for 11%, urban transport for 9%, and railways for 6%. Freight is mainly carried by railways (36% of the total volume in ton- km), followed equally by roads and maritime transport (28%). Although the freight volume carried by railways is larger than by roads, the volume carried by roads increased more rapidly than other modes of transport. While the total volume of freight increased by 218% from 1995 to 2005, the volume carried by roads increased by 1,330% during the same period.

Table A2.1: Freight and Passenger Transport by Mode

Transport Mode 1990 1995 2000 2003 2004 2005 Freight Transport (million ton-km) Railways 37,076 2,409 5,770 7,719 7,536 9,628 Roads 3,287 527 3,513 6,241 6,965 7,536 Maritime 5,778 4,325 5,192 6,555 6,771 7,521 Air 47 57 102 204 315 310 Pipelines 3,353 1,013 1,371 1,572 1,696 1,539 Total 49,541 8,331 15,948 22,291 23,283 26,534 Passenger Transport (million passenger-km) Railways 1,827 791 493 654 789 878 Roads 7,480 4,664 9,153 9,861 9,603 10,892 Maritime 68 24 6 6 7 7 Air 4,869 1,733 798 1,113 1,450 1,588 Urban Transporta 1,721 1,401 917 954 1,965 1,382 Total 15,965 8,613 11,367 12,588 13,814 14,747 km = kilometer. a Including tram, trolley, and subway. Source: State Statistical Committee of the Republic of Azerbaijan. 2006. Transport Statistical Yearbook. Baku.

3. With the breakup of the former Soviet Union in the early 1990s and the subsequent disruption in interlinked transport operations across the region, transport volumes fell significantly in Azerbaijan. Traffic volumes have recovered over the last 10 years, but they remain below those in the 1980s. With the continued economic growth, transport volumes are projected to further revive over the medium term, increasing the transport sector’s importance to the development in the country.

4. Like other sectors in Azerbaijan, the transport sector is in transition from a centrally planned to a market-based system, and faces a number of challenges. With Asian Development Bank (ADB) assistance, the Ministry of Transport prepared a transport sector development

24 Appendix 2 strategy in response to the challenges in June 2006.1 The strategy identified five strategic priorities for transport sector development for the medium term: (i) development of a regulatory framework, (ii) development of transport infrastructure, (iii) development of the transport service markets, (iv) improvement of transport safety, and (v) facilitation of transit traffic.

B. Road Infrastructure

5. The road network comprises 25,013 km of roads, of which 4,498 km are in the Nagorno- Karabakh area and 2,078 km are in the Nakhchivan Autonomous area (Table A2.2). The road network is dominated by two major highways: the east–west highway linking the country’s capital, Baku, to the Georgian border; and the north–south highway running from the Russian border to the Iranian border through Baku. In terms of ownership, the roads are divided into state and municipal roads. The state roads consist of 1,531 km of M-roads (main roads and their feeders) and 5,485 km of A-roads (access roads and their feeders), while the total length of municipal roads is 17,997 km. Only 191 km are four-lane highways. Approximately 51% of the roads (including all M-roads) are paved and 49% gravel.

Table A2.2: Summary of the Road Network, 2005 (kilometers)

Area State Road Municipal Total Percent of M-road A-road Road Total Azerbaijan (main) 1,531 3,563 13,343 18,437 74 Naknchivan 0 857 1,221 2,078 8 Nagorno-Karabakh area 0 1,065 3,433 4,498 18 Total 1,531 5,485 17,997 25,013 100 % 6 22 72 100 Source: AzerRoadService Open Joint-Stock Company, Ministry of Transport.

6. The road network was primarily developed under the former Soviet Union. Because of insufficient funding for road maintenance, about 75% of the road network is in poor to bad condition. Based on the road condition data available, the major highways have an international roughness index (IRI) of 6–10, and about 70% of A-roads require rehabilitation. Many roads have to be first reconstructed or rehabilitated so that they can be maintainable. The poor road conditions resulted in high transport costs and low safety levels.

7. In recognition of this, the Government has set improvement of road infrastructure as one of the priorities in the State Program on Poverty Reduction and Economic Development (SPPRED) for 2003−20052 and embarked on a transport development program (2005–2014), which starts with improvement of the east–west and north–south highways. The majority of the east–west highway has been or is being improved with external assistance. The Ganja–Qazakh section was improved with World Bank assistance in November 2006. The sections that are expected to be improved by 2008 include (i) the Hajigabul–Kyurdamir section with assistance of the European Bank of Reconstruction and Development (EBRD), and (ii) the Qazakh–Georgian border section and Ganja Bypass with ADB assistance. The World Bank and ADB are jointly helping develop the southern highway, while EBRD and the Czech Export Bank are assisting in

1 ADB Technical Assistance Consultant Report. 2006. Republic of Azerbaijan: Transport Sector Development Strategy. Baku. 2 Republic of Azerbaijan. 2003. State Program on Poverty Reduction and Economic Development, 2003–2005. Baku.

Appendix 2 25 improving the northern highway. The Government is also finalizing a program for improving secondary roads.

8. Most technical standards and specifications for road design, construction, and maintenance date from the Soviet era. Although the standards are based on sound technical principles, they contain rigid criteria for upgrading road capacity that are based on traffic volumes and do not consider the level of services or economic viability. The inappropriateness of such standards for a market-based economy is widely recognized; they need updated to match the needs and economic resource base in the country.

C. Vehicle Fleet

9. The motorization rate in Azerbaijan is low by international standards. The vehicle fleet numbered about 612,000 in 2005, including around 480,000 cars, 91,000 trucks, and 27,000 buses (Table A2.3). This was equivalent to 73 vehicles per 1,000 people. About 70% of trucks and 50% of buses have been operating for over 10 years, with an inevitable effect on the level of service and the costs of operation. The vehicle fleet has recently grown rapidly at an annual rate of 10%. This trend is projected to gain further momentum with continued strong economic growth in the country. The rapid increase in vehicle fleet will require development or improvement of road infrastructure. Vehicle ownership varies regionally, with a national average of 26 vehicles per 100 families compared with nearly 35 vehicles in Baku.

Table A2.3: Vehicle Fleet (‘000 units)

Vehicle Type 1990 1995 2000 2003 2004 2005 Cars 260.2 278.3 332.0 400.4 439.0 479.4 Buses 14.0 12.8 16.8 18.8 21.0 26.7 Trucks 99.5 79.7 78.6 79.0 80.9 90.9 Other 25.0 21.4 13.3 13.2 13.1 15.0 Total 398.7 392.2 440.7 511.4 554.0 612.0 Source: State Statistical Committee of the Republic of Azerbaijan. 2006. Transport Statistical Yearbook. Baku.

D. Institutions

10. Presidential Decree No. 299 issued in March 2000 on the application of the Law of Roads of December 1999 lays the legal, technical, economic, and institutional basis for management of the road subsector, including design, construction, operation, and maintenance of roads. The decree also outlines the basic relations between stakeholders in the road subsector.

11. Prior to 2003, Azeravtoyol, a state company, managed the road subsector. As Azeravtoyol was modeled on centralized decision-making processes, bureaucracy, and administration procedures inherited from the former Soviet Union, it could not perform functions properly. As a result, the Government dissolved Azeravtoyol and established the Ministry of Transport to assume overall responsibility for policy, regulations, and administration of the transport sector in 2003. The road network (excluding Nakhchivan)3 is under the responsibility of the AzerRoadService Open Joint-Stock Company (ARS) under the Ministry of Transport, which was reorganized from the Road Transport Service Department in March 2007. ARS has headquarters in Baku with 90 staff, and 61 rayon (district)-based units with approximately 3,000 staff. An organization chart of ARS headquarters is in Figure A2.

3 Nakhchivan has its own road agency, Nakhavtoyol.

26 Appendix 2

Figure A2: Organization Chart of the AzerRoadService Open Joint-Stock Company (Headquarters)

Chair

Deputy Administration Division Chair - Human resources - Legal - Households - Financial - Reporting

Road Maintenance Technical Division Ecology and Safety Land Acquisition Investment Division Division - Project cost estimates Division Division - Investment planning - Road structure - Project examination - Project management - Traffic regulations - Technical standards - Foreign relations

Source: AzerRoadService Open Joint-Stock Company, Ministry of Transport.

12. While the creation of ARS to replace Azeravtoyol was a major achievement, the institutional capacity in the road subsector remains limited. ARS received assistance from the World Bank for institutional strengthening during 2003–2005. The assistance covered 11 areas, with the major components including (i) developing a corporate plan, (ii) reviewing road user charges, (iii) establishing a pavement management system, (iv) formulating a financial management system, (v) developing a multiyear rolling budget and a multiyear road investment program, and (vi) preparing a traffic safety plan. As the first step toward sound governance in the road subsector, the World Bank assistance produced a number of recommendations. Further external assistance is needed to strengthen the institutional capacity in the subsector by supporting implementation of these recommendations.

13. The Government has recently taken further measures to enhance the institutional capacity in the road subsector. A Motor Law was drafted and is currently being discussed at the Cabinet of Ministers. A corporate plan was developed, which includes establishing a “client- supplier” relationship between the Ministry of Transport and ARS. This relationship will be formulated through a service agreement supported under the EBRD-assisted project. A Road Advisory Board will be established to enhance subsector governance.

E. Financing

14. With the abolishment of the Road Fund in 2001, the road subsector was financed primarily from the Government’s budget, while all revenues from taxes related to roads were credited to the Government’s budgets. The Government decided to restore the Road Fund in January 2007, but it is too early to assess its performance. ARS’s budget increased from $15.7 million in 2003 to $106.8 million in 2006. The 2006 budget comprised $45.2 million for capital investment (42.3% of the total), $55.5 million for road maintenance (52.0%), $3.9 million for administration (3.6%), and $2.2 million for planning and design (2.1%) (Table A2.4). The

Appendix 2 27

Azerbaijan Accounting Chamber, the Government's audit office, conducted an audit of ARS in June 2006, and the results were generally satisfactory.

15. ARS’s financial management capacity is limited because of the scarcity of experienced human resources, inadequate staff training, and lack of a computer-based management information system. The World Bank assisted ARS in developing a computerized accounting system. Although equipment was purchased and staff training provided, ARS has yet to receive the approval of the Ministry of Transport to implement the computerized accounting system. The World Bank also prepared a manual on financial management for ARS. Further external assistance is needed to strengthen ARS’s capacity for financial management.

Table A2.4: Budgetary Allocation to the Road Subsector, 2001–2006 ($ million)

Item 2001 2002 2003 2004 2005 2006 Capital Investment 2.9 3.2 9.6 1.9 53.1 45.2 Road Maintenance Routine Maintenance 5.0 4.3 4.0 7.0 18.6 31.1 Periodic Maintenance 0.7 1.3 1.5 7.3 6.5 22.2 Equipment 0.0 0.0 0.3 0.0 0.0 2.2 Administration 0.2 0.2 0.2 0.4 3.9 Planning and Design 0.0 0.0 0.1 0.0 0.0 2.2 Total 8.8 9.0 15.7 16.6 78.2 106.8 Source: AzerRoadService Open Joint-Stock Company, Ministry of Transport.

F. Road Maintenance

16. Azerbaijan inherited a large stock of road infrastructure from the former Soviet Union and is facing the challenge of properly maintaining the road network with limited resources. However, funding for road maintenance has since then been inadequate. As a result, a large part of the road network deteriorated rapidly and has become non-maintainable. While ARS estimates that maintenance costs for 2006 were about $273 million based on the assumption that the entire road network is maintainable, ADB staff estimates that minimum road maintenance costs for 2006 were $41 million, partly because only about 25% of the road network is currently maintainable and partly because the unit rates were estimated lower (Table A2.5). In recognition that the transport development program cannot be sustained without adequate resources to properly maintain them, the Government significantly increased funding for road maintenance from $5.7 million in 2001 to $55.5 million in 2006 (Table A2.4), and further to $90 million in 2007. It also plans to launch a road maintenance program in parallel with the road improvement. The program envisages a steady increase in the maintainable network as road improvement takes place and a corresponding increase in maintenance funding to cover the entire network by 2015.

17. ARS’s 61 rayon-based maintenance units undertake road maintenance works on a force account basis. Each unit is responsible for the main and secondary roads in an individual rayon, and operates using its own labor force and equipment. However, the maintenance units are inefficient because of lack of economic scale and weak management. The World Bank recommended that the 61 rayon-based maintenance units be restructured into 4–5 regional maintenance units, with each responsible for about 5,000 km of the road network. It also recommended that periodic maintenance be undertaken through competitive bidding by private sector contractors, while routine maintenance will be initially undertaken by the regional maintenance units, and be gradually open to private sector contractors. ADB and EBRD are assisting ARS in reorganizing regional maintenance units.

28 Appendix 2

Table A2.5: Annual Funding Requirements for Road Maintenance, 2006–2015 ($ million)a

Year Maintainable ARS Assessment ADB Staff Assessment Network 2006 25% 273 41 2007 35% 287 48 2008 50% 301 57 2009 60% 316 65 2010 70% 332 75 2011 80% 348 85 2012 85% 366 93 2013 90% 384 101 2014 95% 403 110 2015 100% 424 120 ADB = Asian Development Bank, ARS = AzerRoadService Open Joint-Stock Company. a Adjusted with estimated annual inflation of 5%. Sources: AzerRoadService Open Joint-Stock Company and Asian Development Bank estimates.

18. ARS developed a pavement management system with World Bank assistance. The system provides the necessary steps of the planning cycle and relies on the highway design and maintenance 4 (HDM4) model for prioritizing the network for utilization of available resources. However, ARS needs support to implement the system by conducting annual surveys on road network conditions and preparing and implementing annual maintenance plans based on the outcome of the pavement management system. The World Bank will assist ARS to develop a database for main roads, while ADB plans to help establish a database for secondary roads.

G. Road Safety

19. Road safety has become an acute problem in Azerbaijan. After a gradual decline during 1994–2000, the number of road traffic accidents, fatalities, and injuries has risen rapidly at an annual rate of 12.5% since 2001. There were 3,179 road traffic accidents in 2005, resulting in 1,065 fatalities and 3,668 injuries (Table A2.6). The fatality rate in 2005 was 174 per 10,000 vehicles, or roughly 10 times the fatality rate in the Nordic European countries. Pedestrians accounted for 60% of casualties in urban areas, while passengers made up 50% of casualties in rural areas. The major causes of road traffic accidents are poor road conditions, lack of safety features and facilities, weak enforcement of road safety regulations, intoxicated driving, excess speed, and inadequate driver education.

20. Two government agencies (i.e., Road Traffic Police Department of the Ministry of Internal Affairs and ARS of the Ministry of Transport) are responsible for road safety. However, each operates largely independently. Although the National Road Safety Commission coordinates activities of the two agencies, it does not have executive or operational powers.

21. To improve road safety, the Government prepared a 5-year road safety program with World Bank assistance. The key recommendations included (i) replacing the National Road Safety Commission with a road safety board that has defined objectives, executive powers for taking actions to reduce accidents, adequate funding, and a permanent secretariat; (ii) strengthening ARS’s capability to identify and rectify accident black spots on the road network; (iii) establishing road accident monitoring, reporting, and information systems; (iv) reviewing and revising, if necessary, legislation and regulations on road safety; and (v) raising public awareness for road safety. The ADB-assisted East–West Highway Improvement Project is helping implement the road safety program; develop road accident monitoring, reporting, and

Appendix 2 29 information systems; identify accident black spots on the road network; and provide staff training.

Table A2.6: Road Traffic Accidents

Year Road Accidents Number of Deaths Number of Injuries 1994 2,908 1,130 3,301 1995 2,556 1,001 2,823 1996 2,200 767 2,441 1997 2,001 606 2,292 1998 1,998 595 2,309 1999 1,996 554 2,316 2000 1,987 596 2,199 2001 1,985 559 2,228 2002 2,196 642 2,486 2003 2,311 724 2,691 2004 2,388 811 2,766 2005 3,179 1,065 3,668 Source: State Statistical Committee of the Republic of Azerbaijan. 2006. Transport Statistical Yearbook. Baku.

H. Vehicle Axle-Load Control

22. Azerbaijan has developed regulations to limit vehicle axle load to 13 tons, but enforcement is weak primarily because of limited institutional capacity and lack of vehicle weigh facilities along the main roads. As a result, vehicle axle overloading is prevalent. Surveys conducted showed that about 20% of 4-axle trucks, 5-axle trucks, and buses exceeded the axle- load limit. Heavy vehicle weights are one of the primary causes of rapid pavements deterioration. The enforcement of vehicle axle-load control is urgently needed to prevent premature deterioration of the road network.

23. In response, the Government recently decided to enforce axle-load regulations by (i) establishing 12 vehicle weighing stations along main roads, where overloaded vehicles will be required to redistribute or unload exceeded freight; and (ii) collecting reliable data on vehicle axle loads by installing permanent “weigh-in-motion” devices at key points along the road network. ADB is assisting ARS in establishing and operating vehicle weigh stations, and improving monitoring of axle overloading under the East–West Highway Improvement Project, and will continue to do so under the proposed multitrache financing facility.

I. Road Transport Services

24. The road transport service market is almost fully liberalized in Azerbaijan. The private sector plays a key role in provision of road transport services, accounting for more than 95% of freight and passenger transport. The state-owned road transport operators were largely privatized and foreign road transport operators are allowed to set up business. Freight charges and bus fares for domestic road transport are determined based on market conditions, although the Government is setting up tariffs and prices for urban passenger transport, and crossborder and international transit traffic. The Government has recently introduced vehicle licensing to enhance axle-load control and improve road safety.

30 Appendix 3

ROAD SUBSECTOR ROAD MAP AND INVESTMENT PLAN

A. Challenges

1. Azerbaijan’s road subsector faces four major development challenges:

(i) Deteriorating infrastructure. The public road network was primarily developed under the former Soviet Union, and cannot meet the need of the rapidly growing economy. Most roads are in poor condition because of insufficient funding for road maintenance, and weak enforcement of vehicle axle-load controls. As a result, a large part of the road network is not maintainable and needs reconstruction or rehabilitation. The poor road conditions resulted in high transport costs, long travel time, and low safety levels. The rapid increase in vehicle fleet, which is projected to continue over the medium term, would require development of the road network.

(ii) Poor safety record. Road safety is an acute problem, as the number of road traffic accidents, fatalities, and injuries has increased rapidly since 2001, causing significant economic and human losses. The current fatality rate is around 10 times the fatality rate in the Nordic European countries. The major causes of road accidents are poor road conditions, lack of safety features, weak enforcement of safety regulations, intoxicated driving, excess speed, and inadequate driver education. With the rapid growth of vehicle fleet, there is potential for more road traffic accidents in the future, unless remedial action is taken.

(iii) Inefficient crossborder and transit facilities. Azerbaijan is a signatory to a number of international transit and transport agreements and conventions. However, crossborder and transit road transport is inefficient, mainly because of inadequate road infrastructure and crossborder facilities, as well as nonharmonized procedures with neighboring countries. Surveys showed that 80% of companies experienced delays of 1−3 days in crossing the borders of Azerbaijan.1 These barriers severely hinder crossborder and transit traffic.

(iv) Limited institutional capacity. Despite some improvement, institutional capacity in the road subsector remains limited. This is reflected by (a) lack of a legal and regulatory framework for tolling roads; (b) weak enforcement of some regulations; (c) lack of private sector participation in road maintenance; (d) the need to improve financial management; and (e) limited experience in management of road projects. Limited institutional capacity is a major constraint on sustainable development of the road subsector.

B. Development Strategy

2. The Government has set improvement of road infrastructure as one of the priorities in two state programs: (i) State Program on Poverty Reduction and Economic Development (SPPRED), and (ii) State Program on Socioeconomic Development of Regions. To implement these programs, the Ministry of Transport has drafted a Transport Policy Paper, followed by a Transport Sector Development Strategy developed with Asian Development Bank (ADB)

1 World Bank. 2002. Trade and Transport Facilitation in South Caucasus: Azerbaijan. Washington, DC.

Appendix 3 31 assistance in 2006.2 The draft Transport Policy Paper and the Transport Sector Development Strategy, pending Government approval, paved the way for a road subsector roadmap, which is presented in Table A3.1.

Table A3.1: Road Subsector Road Map, 2006–2015

Objective Impact Performance Measurement Responsibility Target Party Development of An efficient and East–west and north– Volume of traffic on MOT, ARS road network affordable road south highways east–west and north– network capable of reconstructed by 2010 south highways, and meeting the needs of other improved roads the rapidly growing 2,666 km of selected economy in sections of Republican Vehicle operating Azerbaijan roads reconstructed or costs on improved rehabilitated by 2015 Republican and secondary roads 5,928 km of selected sections of secondary Travel time on the roads improved by improved Republican 2015 and secondary roads

Share of roads in poor Progress report on condition reduced to Road Network less than 15% by 2015 Development Program

Improvement of Road traffic Annual growth rate of Number of road traffic ARS, road safety accidents maintained road accidents accidents, fatalities, Road Traffic Police at reasonable levels reduced to about 5% and injuries Department of by 2015 Ministry of Internal Road accident Affairs Fatality rate monitoring, reporting decreased to less than and information 5 deaths per 10,000 systems vehicles by 2015

Establishment of the Road Safety Board by 2008

Road safety features installed on all Republican and secondary roads by 2015

Facilitation of Azerbaijan’s road Share of crossborder Volume of MOT, ARS, State crossborder and transport links with and transit traffic on crossborder and Customs transit transport neighboring the east–west and transit freight and Committee, countries enhanced north–south highways passenger transport Ministry of increased to 10% of Economic total traffic by 2015 Progress report on Development Action Plan for Delays in vehicle harmonizing transport border crossing regulations avoided crossborder agreements

2 ADB 2005. Technical Assistance to the Republic of Azerbaijan for Transport Sector Development Strategy. Manila.

32 Appendix 3

Objective Impact Performance Measurement Responsibility Target Party Strengthening of Sound legal and Road Law amended MOT reports MOT institutional regulatory by 2008 capacity in the road frameworks subsector developed Bus legislation for licensing and route management developed by 2009

Vehicle testing system based on European legislation developed by 2009

Legislation for truck licensing developed by 2010

Legal and regulatory frameworks for tolling roads developed by 2010

Road management ARS’s corporate plan Service agreements MOT, ARS improved developed by 2006 between MOT and ARS

Road Advisory Board Establishment of the MOT established by 2009 Road Advisory Board

Manual on financial ARS progress reports ARS reporting and procedures developed by 2006 and implemented

Road maintenance Regional road ARS reports ARS improved maintenance units restructured

Road maintenance ARS road Ministry of Finance, funding increased to maintenance budgets MOT, ARS $120 million by 2008, $180 million by 2010, and at least $250 million by 2015

Road maintenance Number of private ARS undertaken through sector contractors for competitive bidding road maintenance open to private sector contractors by 2009

Vehicle axle load Vehicle weigh stations Share of overloading ARS control enforced along main roads set vehicles on main up by 2010 roads ADB = Asian Development Bank, ARS = AzerRoadService Open Joint-Stock Company, km = kilometer, and MOT = Ministry of Transport.

Appendix 3 33

C. Investment Plan

3. The Ministry of Transport developed a road network development program in the road subsector for 2006–2015 (the Program) in June 2006. The Program will construct, upgrade, and rehabilitate approximately 9,500 kilometer (km) of 124 roads, comprising 3,570 km of 64 state roads and 5,928 km of 58 secondary roads. The overall investment is around $3.4 billion over the 10-year period. Most of this will be financed from the Government’s budget; some external financing is projected. The details of the Program is shown in Table A3.2.

34 Appendix 3

Table A3.2: List of Road Development and Improvement Subprojects, 2006–2015

No. Road Subproject Total To be Cost No. Road Subproject Total To be Cost Length Improved ($ million) Length Improved ($ million) (km) (km) (km) (km) A. State Road B. Secondary Road R-1 Baku–Guba–border with Russia 208 208 311.8 S-1 Absheron 56 40 2.0 R-2 Baku–Gazakh–border with Georgia 503 453 676.0 S-2 Aghjabedi 171 80 10.0 R-3 Alyat–Astara–border with Iran 243 243 416.0 S-3 Aghdam 97 55 4.8 R-4 Baku–Shemakha–Muganli and Muganli–Yevlakh 280 266 178.3 S-4 Aghdash 234 110 13.5 R-5 Yevlakh–Zakatali–border with Georgia 164 164 54.8 S-5 Aghstafa 109 75 8.4 R-6 Hajigabul–Minjivan–border with Armenia 189 184 170.0 S-6 Aghsu 250 125 14.3 R-7 Nakhichevan–Sadarak–border with Turkey 87 87 44.4 S-7 Astara 175 80 9.0 R-8 Nakhichevan–Zarani st.–border with Armenia 100 100 47.9 S-8 Balakan 242 125 11.4 R-9 Gandob–Yalama–border with Russia 88 88 23.5 S-9 Beylagan 159 80 9.0 R-10 Gilazi–Khizi 31 31 4.8 S-10 Barda 247 107 12.9 R-11 Guba–Gusar 12 12 4.0 S-11 Bilasuvar 63 30 3.5 R-12 Guba–Khachmaz 22 22 5.3 S-12 Jalilabad 307 130 16.0 R-13 Gusar–Khudat 29 29 5.0 S-13 Dashkesan 248 95 11.8 R-14 G.Z. Taghiyev–Sahil 40 40 37.5 S-14 Davachi 165 75 9.6 R-15 G.Z. Taghiyev–Sumgait 18 18 5.0 S-15 Fizuli 205 140 17.0 R-16 Muganli–Topchu 40 40 90.6 S-16 Gadabay 336 150 16.3 R-17 Garamaryam–Sheki entrance to Oghuz 158 158 38.7 S-17 Goranboy 330 172 15.5 R-18 Garamaryam–Mususlu 22 22 7.2 S-18 Goychay 224 108 12.9 R-19 Agsu–Kurdamir–Bahramtapa 113 113 33.9 S-19 Hajigabul 118 55 6.8 R-20 Goychay–Bargushad 18 18 4.2 S-20 Khachmaz 350 150 18.7 R-21 Goychay–Ujar 20 20 4.6 S-21 Khanlar 123 100 9.0 R-22 Agdash–Laki 10 10 2.5 S-22 Khizi 207 103 10.7 R-24 Goraghan–Gakh–Zagatala 43 43 6.7 S-23 Imishli 152 65 7.8 R-25 Khaldan–Mindachevir 14 14 3.5 S-24 Ismayilli 364 153 19.9 R-26 Mindachevir–Baramtapa 166 166 117.9 S-25 Kurdamir 243 110 13.0 R-27 Ganja–Khanlar–Togana 56 56 13.0 S-26 Gakh 178 92 10.3 R-28 Ganja–Dashkesan 38 38 7.1 S-27 Gazakh 110 77 8.4 R-29 Ganja–Samuh 8 8 0.8 S-28 Gabala 234 125 12.8 R-30 Shamkir–Gadabay 45 45 9.1 S-29 Gobustan 135 70 8.0 R-31 Gazakh–Uzuntala–border with Armenia 14 14 2.5 S-30 Guba 429 175 21.5 R-32 Agstafa–Poylu–border with Georgia 54 54 21.8 S-31 Gusar 299 137 16.1 R-33 Goran–Naftalan 18 18 2.5 S-32 Lerik 456 150 18.0 R-34 Goranboy–Terter 35 35 6.9 S-33 Lenkaran 201 104 11.7 R-35 Terter–Hindarkh 41 41 7.0 S-34 Masalli 194 99 10.7 R-36 Yevlakh–Barda–Khachinchay 54 54 16.5 S-35 Neftchala 211 95 12.2 R-37 Barda–Kelbejer 37 37 12.0 S-36 Oghuz 152 80 9.0 R-38 Uchar–Zardab–Agjabedi 76 76 62.0 S-37 Saatli 132 60 7.5 R-39 Agjabedi–Hindarkh–Garadagli 40 40 22.0 S-38 Sabirabad 325 158 17.8

Appendix 3 35

No. Road Subproject Total To be Cost No. Road Subproject Total To be Cost Length Improved ($ million) Length Improved ($ million) (km) (km) (km) (km) A. Republican Road (continued) B. Secondary Road (continued) R-40 Agdam–Fizuli–Horadiz 10 10 3.1 S-39 Salyan 113 60 7.3 R-41 Upper Karabakh–Beylakan–Dashburun 32 32 10.0 S-40 Samukh 210 97 10.7 R-42 Bahramtapa–Bilyasuvar 62 62 18.8 S-41 Siyazan 166 74 9.2 R-43 Bilyasuvar–border with Iran 19 19 6.3 S-42 Shemakhi 298 136 15.3 R-44 Hajigabul–Ali Bayramli 11 11 3.1 S-43 Sheki 343 167 18.4 R-45 Ali Bayramli–Nakhodlu–Salyan 43 43 TBD S-44 Shamkir 281 149 15.4 R-46 Salyan–Neftchala 40 40 8.5 S-45 Terter 128 95 11.3 R-47 Masalli–Yardimli 53 53 27.0 S-46 Tovuz 328 171 18.4 R-48 Nakhichevan–Shahbuz–border with Armenia 65 65 10.6 S-47 Ujar 296 138 17.9 R-49 M2 (km 371)–international airport in Ganja 11 11 5.5 S-48 Yardimli 300 119 15.0 R-50 M2 (km 336)–Ganja 8 8 4.0 S-49 Yevlakh 127 78 9.6 R-51 M2 (km 317)–Kurakchay railway street 5 5 1.3 S-50 Zakatala 257 127 13.4 R-52 M2 (km 376)–Alabashli railway street 8 8 1.8 S-51 Zardab 167 85 11.0 R-53 M2 (km 70)–Alyat railway street 5 5 1.1 S-52 Babek 159 78 9.3 R-54 M3 (km 220)–Masalli railway street 5 5 1.1 S-53 Julfa 151 70 8.1 R-55 M5 (km 17)–Karimli 31 31 21.0 S-54 Kangarli 80 25 2.8 R-56 M5 (km 46)–Sheki 12 12 3.0 S-55 Ordubad 248 98 12.0 R-57 M5 (km 128)–Zakatala railway street 9 9 2.3 S-56 Sadarak 49 21 2.6 R-58 M5 (km 150)–Belakan railway street 2 2 0.5 S-57 Shakhbuz 174 112 14.1 R-59 M6 (km 94)–Imishli 7 7 1.8 S-58 Sharur 329 93 11.1 R-60 M7 (km 58)–Sharur 4 4 1.0 R-61 M7 (km 80)–Sadarak 8 8 2.0 R-62 M7 (km80)–Babek 3 3 0.8 R-63 M8 (km 44)–Julfa 2 2 0.5 R-64 M8 (km 75)–Ordubad railway street 5 5 1.1 Subtotal (A) 3,639 3,570 2,670.4 Subtotal (B) 12,435 5,928 680.7

Total (A + B) 16,074 9,498 3,351.1 km = kilometer, TBD = to be determined. Source: AzerRoadService Open Joint-Stock Company, Ministry of Transport, Republic of Azerbaijan. 2006. Public Investment Program, 2006–2015. Baku.

36 Appendix 4

EXTERNAL ASSISTANCE TO THE ROAD SUBSECTOR

Project Title Amount Date of Approval Source (million) A. Lending 1. ADB East–West Highway Improvement $52.0 8 December 2005 2. Czech Export Bank Baku–Samur Road Reconstruction $180.0 10 June 2005 3. EBRD Silk Road (Hajigabul–Kyurdamir Section) €34.6 8 June 2004 4. EBRD Baku–Samur Road Reconstruction €84.5 28 June 2005 5. IsDB and OPEC Ujar–Yevlakh Road Reconstruction $26.0 22 October 2003 Fund 6. IsDB Reconstruction of Yevlakh–Ganja Road $10.4 10 February 2006 7. IsDB and Kuwait Improvement of the Alyat–Hajigabul Road $33.8 May 1997 Fund 8. Kuwait Fund and Baku Bypass Highway $25.5 1 December 2002 Abu-Dhabi Fund 9. SFD Reconstruction of Yevlakh–Ganja Road $13.0 November 2006 10. World Bank (IDA) Highway I (Ganja–Qazakh Section) $40.0 16 May 2001 11. World Bank Highway II $200.0 January 2006

B. Nonlending 1. ADB Feasibility Study on the Yevlakh–Ganja Road $0.15 12 August 2004 Rehabilitation Project (TA No. 4374) 2. ADB Transport Sector Development Strategy (TA No. $0.35 28 April 2005 4582) 3. ADB Preparing the Southern Road Corridor Improvement $1.13 3 November 2005 Project (TA No. 4684) 4. EBRD Pre-feasibility Study of the Baku–Samur Road €0.40 April 2004 5. EBRD Economic Analysis of the Hajigabul–Georgian Border €0.34 December 2004 Road and Preliminary Design Study of the Kyurdamir– Georgian Border Road 6. EBRD Silk Road Lenders Monitoring (East–West Highway) €0.20 December 2004 7. EBRD Engineering Supervision Silk Road (Hajigabul– €0.75 May 2005 Kyurdamir section) 8. EBRD Restructuring and Capacity Building at RTSD €0.40 28 June 2005 9. European Union Road Transport Services €0.25 January 1996 (TACIS)−TRACECA 10 European Union Implementation of Pavement Management System €2.00 March 1996 (TACIS)−TRACECA 11. European Union Feasibility Study for Rehabilitation and Reconstruction €2.00 November 2000 (TACIS)−TRACECA of the Road Link between Baku, Tbilisi and Yerevan 12. European Union Supervision of Civil Works on the Ganja–Qazakh €1.50 November 2002 (TACIS)−TRACECA Section 13. European Union Reconstruction of two bridges on the Ganja–Qazakh €2.00 December 2000 (TACIS)−TRACECA road 14. European Union Supervision of Civil Works on the Hajigabul– €2.00 June 2004 (TACIS)−TRACECA Kyurdamir Section 15. Iran Feasibility Study of the Southern Road Corridor €2.00 2005 Improvement ADB = Asian Development Bank, EBRD = European Bank for Reconstruction and Development, IDA = International Development Agency, IsDB = Islamic Development Bank, No. = number, OFID = Organization of Petroleum Exporting Countries (OPEC) for International Development, RTSD = Road Transport Service Department (it is now called AzerRoadService Open Joint-Stock Company), SFD = Saudi Fund for Development, TA = technical assistance, TACIS = Technical Assistance for the Commonwealth of Independent States, TRACECA = Transport Corridor Europe–the Caucasus Asia. Source: AzerRoadService Open Joint-Stock Company, Ministry of Transport.

Appendix 5 37

SELECTION CRITERIA AND APPROVAL PROCESS FOR PROJECTS AND SUBPROJECTS

1. The Asian Development Bank (ADB) will only finance projects/subprojects that (i) are part of the Transport Sector Development Strategy adopted by Azerbaijan as described in Schedule 1 to the Framework Financing Agreement (FFA), (ii) adhere to the implementation arrangements set forth in Schedule 3 to the FFA, (iii) fully comply with the safeguard frameworks set forth in Schedule 5 to the FFA, and (iv) meet the eligibility requirements set forth in this appendix.

A. Selection Criteria

2. To be financed under the multitranche financing facility (MFF), each proposed project or subproject shall:

(i) construct, upgrade, or rehabilitate roads of high development priority, assessed from their contribution to the objectives of the State Program on Poverty Reduction and Economic Development (SPPRED);

(ii) be in line with the approved feasibility assessment meeting the engineering, financial, economic, environmental, and social requirements of Azerbaijan and ADB;

(iii) have been allocated counterpart funding sufficient to implement the project or subproject as scheduled and maintain such project/subproject facilities upon completion; and

(iv) have been granted government approvals and endorsements.

B. Approval Procedures

3. Approval procedures for projects or subprojects proposed for financing under the MFF will follow the required government review and approval processes as supplemented by the requirements of the Ministry of Transport (MOT) attached to Schedule 5 to the FFA.

4. For the subprojects proposed for financing under tranche 1 of the MFF, all necessary government approvals have been obtained as of the date of the FFA.

5. For all projects or subprojects intended for financing under subsequent tranches of the MFF, the approval procedures will be as follows:

(i) The AzerRoadService Open Joint-Stock Company (ARS) will review the project or subproject proposals to confirm compliance with eligibility criteria and then submit those eligible projects or subproject proposals to MOT for endorsement.

(ii) ARS will prepare a periodic financing request (PFR) in a format agreed with ADB to finance specific projects or subprojects, and submit it to MOT for review and approval. Upon approval of MOT, ARS will submit, through MOT, the PFR to ADB, together with those eligible project or subproject proposals.

38 Appendix 5

(iii) For the projects or subprojects that are added in the course of updating the Government’s Road Network Development Program, all statutory clearances should be sought prior to the submission of the PFRs to ADB.

(iv) MOT, ARS, and ADB will maintain contact through periodic ADB review missions and quarterly progress reports, and in so doing may effect advanced consultation on PFRs prior to submission to ADB.

(v) Subject to satisfactory compliance with the selection criteria and approval procedures, and in compliance with ADB’s relevant policies, ADB will approve the proposals of the projects or subprojects.

(vi) Upon receipt of ADB approval, ARS will proceed with tendering in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time).

Appendix 6 39

DETAILED COST ESTIMATES FOR PROJECT 1

Table A6.1: Detailed Cost Estimates by Expenditures Category

Item Foreign Local Total Foreign Local Total % Base (AZN million) ($ million) Costs A. Investment Costsa 1. Civil Works a. Subproject A (km 0–km 22.1) 36.7 9.8 46.5 33.4 9.0 42.4 25.5 b. Subproject B (km 22.1–km 45.1) 42.9 9.3 52.2 39.0 8.4 47.4 27.4 c. Subproject C (km 45.1–km 58.6) 21.5 5.6 27.1 19.5 5.1 24.6 14.2 d. Local Roads 3.3 10.1 13.4 3.0 9.2 12.2 7.0 2. Weighing Stations and Road Maintenance Equipment 2.2 0.0 2.2 2.0 0.0 2.0 1.2 3. Land Acquisition and Resettlement 0.0 5.6 5.6 0.0 5.1 5.1 2.9 4. Consulting Services a. Construction Supervision, Project Monitoring and 2.3 2.8 5.1 2.1 2.6 4.7 2.7 Evaluation, and Preparation of Project 2 b. Development of Database for Secondary Roads 1.1 1.1 2.2 1.0 1.0 2.0 1.2 c. Preparation of Legal and Regulatory Framework and 0.1 0.2 0.3 0.1 0.2 0.3 0.2 Operational Procedures for Toll Roads 5. Taxes and Duties 0.0 34.9 34.9 0.0 31.8 31.8 18.4 Subtotal (A) 110.0 79.5 189.5 100.1 72.4 172.5 99.6 B. Project Management 1. Project Implementation Unit 0.3 0.4 0.7 0.3 0.3 0.6 0.3 2. External Financial Auditing 0.0 0.1 0.1 0.0 0.1 0.1 0.1 Subtotal (B) 0.3 0.5 0.8 0.3 0.4 0.7 0.4 Total Base Costs 110.3 80.0 190.3 100.4 72.7 173.2 100.0 C. Contingencies 1. Physicalb 27.1 18.0 45.1 24.6 16.3 40.9 23.6 2. Pricec 7.3 18.8 26.1 6.6 17.0 23.6 13.7 Subtotal (C) 34.4 36.8 71.2 31.2 33.3 64.5 37.3 D. Interest and Other Chargesd 1. Interest during Construction 10.8 0.0 10.8 9.8 0.0 9.8 5.7 2. Commitment Charges 1.6 0.0 1.6 1.5 0.0 1.5 0.9 Subtotal (D) 12.4 0.0 12.4 11.3 0.0 11.3 6.6 Total Project Costs (A+B+C+D) 157.1 116.8 273.9 142.9 106.1 249.0 143.9 a In 2007 prices. b Computed at 23.6% of base costs. c Computed at 3.0% for 2007–2008, and 2.5% for 2009 on foreign exchange costs; and 14% for 2007–2008, and 10% for 2009 on local currency costs. d Includes interest and commitment charges. Interest during construction has been computed at the 5-year forward London interbank offered rate and Asian Development Bank terms for spread. Source: Asian Development Bank estimates.

40 Appendix 6

Table A6.2: Detailed Cost Estimates by Financier

Item Total ADB Azerbaijan ($ million) Amount % of Cost Amount % of Cost ($ million) Category ($ million) Category A. Investment Costsa 1. Civil Works a. Subproject A (km 0–km 22.1) 42.4 42.4 100 0.0 0 b. Subproject B (km 22.1–km 45.1) 47.4 47.4 100 0.0 0 c. Subproject C (km 45.1–km 58.6) 24.6 24.6 100 0.0 0 d. Local Roads 12.2 12.2 100 0.0 0 2. Weighing Stations and Road Maintenance Equipment 2.0 2.0 100 0.0 0 3. Land Acquisition and Resettlement 5.1 0.0 0 5.1 100 4. Consulting Services a. Construction Supervision, Project Monitoring and 4.7 4.7 100 0.0 0 Evaluation, and Preparation of Project 2 b. Development of Database for Secondary Roads 2.0 2.0 100 0.0 0 c. Preparation of Legal and Regulatory Framework and 0.3 0.3 100 0.0 0 Operational Procedures for Toll Roads 5. Taxes and Duties 31.8 0.0 0 31.8 100 Subtotal (A) 172.5 135.6 79 36.9 21 B. Project Management 1. Project Implementation Unit 0.6 0.6 100 0.0 0 2. External Financial Auditing 0.1 0.1 100 0.0 0 Subtotal (B) 0.7 0.7 100 0.0 0 Total Base Costs 173.2 136.3 79 36.9 21 C. Contingencies 1. Physicalb 40.9 32.7 80 8.1 20 2. Pricec 23.6 19.7 83 4.0 17 Subtotal (C) 64.5 52.4 81 12.1 19 D. Interest and Other Chargesd 1. Interest during Construction 9.8 9.8 100 0.0 0 2. Commitment Charges 1.5 1.5 100 0.0 0 Subtotal (D) 11.3 11.3 100 0.0 0 Total Project Costs (A+B+C+D) 249.0 200.0 80 49.0 20 ADB = Asian Development Bank. a In 2007 prices. b Computed at 23.6% of base costs. c Computed at 3.0% for 2007–2008, and 2.5% for 2009 on foreign exchange costs; and 14% for 2007–2008, and 10% for 2009 on local currency costs. d Includes interest and commitment charges of 0.35%. Interest during construction has been computed at the 5-year forward London interbank offered rate and Asian Development Bank terms for spread. Source: Asian Development Bank estimates.

Appendix 7 41

PROGRAM MANAGEMENT ORGANIZATION CHART

Asian Steering Ministry of Transport Development Committee (Executing Agency) Bank (ADB)

AzerRoadService Capacity Building OJC Consultant (Implementing Agency)

Project Project Supervision Implementation Unit and Preparation Consultant

Contractor for Subproject A

Contractor for Subproject B

Contractor for Subproject C

Contractor for Local Roads

42 Appendix 8

IMPLEMENTATION SCHEDULE Table A8.1: Indicative Impelmentation Schedule for the Road Network Development Program

2008 2009 2010 2011 2012 2013 2014 Activity Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

A. Project 1

1. Complete detailed design

2. Land acquisition and sreettlement

3. Recruitment of project management consultant

4. Procurement ofc ivil works

5. Procurement ofequipm ent

6. Recruitment ofconsultants for advisory services

7. Implementation ofcivil works

B. Project2

1. Preparationof Project 2

2. Land acquisition and sreettlement

3. Recruitment of project management consultant

4. Procurement ofc ivil works

5. Implementation ofcivil works

C. Project3 1. Preparationof Project 3

2. Land acquisition and sreettlement

3. Recruitment of project management consultant

4. Procurement ofc ivil works

5. Implementation ofcivil works

Source: Asian Development Bank.

Appendix 8 43

Table A 8 .2: Det ailed Implement ation Sched u le for Project 1 20 07 20 08 2 009 Ac tiv ity May J un Jul Au g S ep Oc t Nov D ec Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 A. S u bp ro je ct A (S ec ti o n km 0 – k m 22 .1) 1. Re view o f de ta ile d de si g n 2. La nd acqui si tio n an d res e tt lemen t a. pre p aratio n o f rese tt le m ent pl an b. im pl em en tation of re se ttle me nt p lan 3. P roj ec t ma na g e m e n t co ns u lta nt Su bprojects B and pr epari ng the second tr an che a. issu e of r eq ues t f or prop osa l S ubprojects A a nd C b. s u b m is si on an d eval ua tio n of p rop os al s c. s ig n in g t h e c o n tra ct an d se rvic es 4. Ad vanc e co ntrac ting of ci vil w o rk s a. p rep ar a tio n of p req u a lifica tion an d bi d d o c u me nt s b. ad vert ising an d pre q ua lifica tio n c. bi d su bm is si on an d evaluati o n d. co ntrac t aw ard 5. Impl em en tation of C ivil W ork s B . S u b p roj ec t B (S ec ti o n km 22 .1 – km 45 .1) 1. C o mp le tio n of de tailed de si g n 2. La nd acq uisitio n an d rese ttle me nt a. pre p aratio n o f rese tt le m ent pl an b. im pl em en tation of re se ttle me nt p lan 3. Ad vanc e co ntrac ting of ci vil w o rk s a. p rep ar a tio n of p req u a lifica tion an d bi d d o c u me nt s b. ad vert ising an d pre q ua lifica tio n c. bi d su bm is si on an d evaluati o n d. co ntrac t aw ard 4. I m ple m en ta tio n of c ivil w o rk s C . S u b p roj ec t C (S ec ti o n km 45 .1 – km 58 .6) 1. Re view o f de ta ile d de si g n 2. La nd acq uisitio n an d rese ttle me nt a. pre p aratio n o f rese tt le m ent pl an b. im pl em en tation of re se ttle me nt p lan 3. Ad vanc e co ntrac ting of ci vil w o rk s a. p rep ar a tio n of p req u a lifica tion an d bi d d o c u me nt s b. ad vert ising an d pre q ua lifica tio n c. bi d su bm is si on an d evaluati o n d. co ntrac t aw ard 4. I m ple m en ta tio n of c ivil w o rk s 5. L o c a l r o ad s im pr o ve m en t a. de si g n an d prep ara tion of bid do cum e nts b. im pl em en tation of civil w ork s km = kilom e te r. Sou rce : Asi a n Dev e lop m en t Ban k.

44 Appendix 9

PROCUREMENT PLAN

A. Investment Program Information

Country Republic of Azerbaijan Name of Borrower Republic of Azerbaijan Project Name Road Network Development Program TA Reference TA No. 4684 Loan Reference 39176 Date of Effectiveness of Procurement Plan To be determined Amount The total cost of the Program is estimated at about $3.4 billion equivalent, which is financed partly from a multitranche financing facility (MFF) from the Asian Development Bank (ADB). The maximum amount available under the MFF is $500 million. The total cost of Project 1 is estimated at $249 million equivalent. Of Which Committed $0 Executing Agency Ministry of Transport Approval Date of Original Procurement Plan This is the first Procurement Plan Approval of Most Recent Procurement Plan Publication for Local Advertisements1 National newspapers Period Covered by This Plan 2007–2009

1. Procurement Thresholds: Goods, Works and Related Services

Procurement Method To Be Used Above or Below ($) International Competitive Bidding (works) Above $3 million International Competitive Bidding (goods) $1 million and above National Competitive Bidding (works) Up to $3 million

2. Procurement Thresholds: Consulting Services

Procurement Method To Be Used Above or Below ($) Quality- and Cost-Based Selection $200,000 and above Consultants’ Qualification Selection Less than $200,000 Least-Cost Selection Less than $100,000

1 General procurement notice, invitations to bid, and calls for expression of interest.

Appendix 9 45

Table A9: Indicative ADB-Financed Contract Packages for Project 1

Contract Description Number Estimated Procurement of Valuea Method Contract ($ million) A. Civil Works 1. Construction of the Masalli–Astara Expressway a. Subproject A (km 0–km 22.1) 1 53.0 ICB b. Subproject B (km 22.1–km 45.1, excluding 1 52.0 ICB the Lenkaran Bridge) c. Lenkaran Bridge 1 8.0 ICB d. Subproject C (km 45.1–km 58.6) 1 30.0 ICB 2. Rehabilitation of Local Roads 5 14.9 NCB

B. Equipment 1. Road Maintenance 1 2.0 ICB 2. Vehicle Weighing 1 0.4 LIB

C. Consulting Services 1. Construction Supervision, Project Monitoring and 1 4.7 QCBS with FTP Evaluation, and Preparation of Project 2 (80 weighting for quality and 20 weighting for cost) 2. Development of Database for Secondary Roads 1 2.0 QCBS with FTP (80 weighting for quality and 20 weighting for cost) 3. Development of Legal and Regulatory Frameworks 1 0.3 QCBS with STP and Operational Procedures for Toll Roads (80 weighting for quality and 20 weighting for cost) ADB = Asian Development Bank, FTP = full technical proposal, ICB = international competitive bidding, km = kilometer, LIB = limited international bidding, NCB = national competitive bidding, QCBS = quality- and cost-based selection, STP = simplified technical proposal. a “This information was deemed confidential according to exception #10 of ADB’s Public Communications Policy (2005)”. Source: Asian Development Bank estimates.

46 Appendix 10

ECONOMIC ANALYSIS OF PROJECT 1

A. General

1. Project 1 comprise a core subproject covering section A of the Masalli–Astara expressway (kilometer [km] 0–km 22.1) and three non-core subprojects: (i) section B of the Masalli–Astara expressway (km 22.1–km 45.1, including the Lenkaran bridge); (ii) section C of the Masalli–Astara expressway (km 45.1–km 58.6); and (iii) improvement of local roads, installation of vehicle weighing station, and procurement of road maintenance equipment. The economic analysis of Project 1 covers two major project components: construction of the new expressway between Masalli and Astara and rehabilitation of local roads. The economic analysis covers 2008–2027, comprising 2 years of construction and 18 years of operation. It is based on a comparison of with- and without-project cases, and uses 2006 economic prices.

B. Traffic Forecasts

2. Traffic on the new expressway between Masalli and Astara near the Iranian border was based on traffic surveys on the existing road between Alyat and Astara conducted by the consultants under the project preparatory technical assistance, supplemented by (i) surveys and analysis from Passillo Engineering Consultants, (ii) regular traffic counts from AzerRoadService Open Joint-Stock Company (ARS) under the Ministry of Transport, and (iii) spot traffic checks from the World Bank consultants (for the Alyat–Masalli section). The results of the traffic surveys are summarized in Table A10.1. Four major findings are worth mentioning. First, the current level of traffic follows a decreasing trend from Alyat to Astara. The average daily traffic fell from about 7,000 vehicles near Alyat to about 5,000 vehicles near Masalli and further to around 3,800 vehicles near Astara. Second, cars and jeeps account for about three quarters of the traffic, while heavy vehicles make up 20% of the traffic. Third, approximately 60% of the traffic is local, with crossborder and international transit vehicles, either coming from or destined for Iran or Turkey, accounting for about 5% of the total traffic.

Table A10.1: Summary of Average Daily Traffic, 2006

Vehicle Near Masalli (km 242) After Lenkaran (km 282) Number % Number % Car/Jeep 3,606 72 2,829 75 Microbus 221 4 222 6 Van 125 3 85 2 Big bus 84 2 129 3 Truck 2 axles 393 8 145 5 Truck 3 axles 259 5 178 5 Truck 4 axles 42 1 13 0 Truck 5 axles 212 4 130 3 Truck 6 axles 53 1 44 1 Total 4,995 100 3,775 100 Sources: Asian Development Bank staff and project preparatory technical assistance.

3. Traffic demand was projected based on projected growth of gross domestic product (GDP) per capita and population, as well as the estimated income elasticity of demand in Azerbaijan. GDP was projected to grow at 9% annually for 2008–2012 and 8.1% for 2013–2027. The annual growth rate of population was forecast to remain stable at 1%. The average income

Appendix 10 47 elasticity of demand of 1.5 for passengers and 1.0 for freight was used in the economic analysis.

4. Traffic on the new expressway is expected to comprise (i) normal traffic, (ii) generated traffic arising from lower transport cost and reduced travel time, and (iii) diverted traffic from the existing road between Masalli and Astara. The new expressway is projected to attract a low volume of generated traffic initially, because road users are not expected to significantly increase their travel on the expressway. Once the reconstruction of the entire north–south road corridor running from the Russian border to the Iranian border through Baku is completed, generated traffic is projected to grow rapidly. The expressway is also expected to result in little diverted traffic, because the majority of the current traffic between Masalli and Astara is local. As such, traffic projection uses the diversion rates of 100% for international traffic, 100% for traffic from/to Baku, 90% from through traffic from other origins and destinations, 50% for local traffic between rayon (district) centers, and 20% for local traffic within the same rayon. Traffic volume on the expressway is projected to grow at 8.3% annually, with average daily traffic increasing from 4,040 vehicles in 2008 to 20,358 vehicles in 2027 (Table A10.2).

Table A10.2: Traffic Projection for the Masalli–Astara Expressway, 2008–2027 (number of vehicles per day)

Year Normal and Diverted Traffic Generated Traffic Total Traffic 2008 4,040 0 4,040 2009 4,408 0 4,408 2010 4,811 505 5,316 2011 5,249 551 5,800 2012 5,728 601 6,329 2013 6,192 650 6,842 2014 6,694 702 7,396 2015 7,236 759 7,995 2016 7,822 821 8,643 2017 8,456 887 9,343 2018 9,141 959 10,100 2019 9,881 1,037 10,918 2020 10,681 1,121 11,802 2021 11,547 1,211 12,758 2022 12,482 1,310 13,791 2023 13,480 1,416 14,909 2024 14,559 1,530 16,116 2025 15,724 1,654 17,422 2026 16,981 1,788 18,833 2027 18,340 1,933 20,358 Sources: Asian Development Bank staff and project preparatory technical assistance.

C. Economic Costs

5. The economic costs of Project 1 comprise (i) capital investment, including civil works, environmental mitigation, land acquisition and resettlement, and consulting services for construction supervision; and (ii) road maintenance. Costs related to taxes and duties and financing charges during implementation were excluded. The project costs were divided into tradable and non-tradable components. The costs of non-tradable components such as unskilled labor and domestic materials were converted into the world price numeraire using a

48 Appendix 10 conversion factor of 0.92.1 Capital investment costs are estimated at $2.29 million per km. The annual average maintenance cost of the existing road between Masalli and Astara under the without-project scenario is estimated at $27,500 per km, while the annual maintenance cost of the new expressway is estimated at $13,800 per km. The reduction in maintenance costs is because the new expressway entails lower expense on maintenance than the existing road, which is in poor condition and requires major surfacing and rehabilitation during the analysis period. The shadow wage rate factor of 0.7 was used to estimate the economic price of unskilled labor. Skilled labor is not shadow priced since Azerbaijan has no surplus of skilled labor.

D. Economic Benefits

6. The economic benefits of Project 1 are savings on vehicle operating costs and travel time, and reduced traffic accidents because of improved road conditions and the short distance of the new expressway after project completion. The new expressway will have an average international roughness index (IRI) value of 2.5, compared to the IRI value of 11.0 for the existing road between Masalli and Astara in 2006. Savings on vehicle operating costs and travel time were calculated using the highway design and maintenance 4 (HDM4) model. Savings on vehicle operating costs embody the value of time saved by vehicle drivers and crews, but not by passengers or freight. Travel time savings for passengers were calculated at $1.00 per hour— the average nominal wage—for work-related trips. For nonbusiness trips, one third of the value of the work time saved is used as proxy for willingness to pay. The time saved for freight is estimated at $0.2 per ton per hour.2

7. Rehabilitation of local roads in the project area also generates economic benefits because it improves the access to the Masalli–Astara expressway for local communities. The selected local roads are in poor condition, and the improvement of these roads will reduce transport costs and travel time for local residents. However, it is difficult to quantify such benefits.

8. The economic benefits are summarized in Table A10.3. It shows that Project 1 will bring savings on vehicle operating costs per km of 11% for cars, 14% for heavy trucks, and near 20% for articulated trucks. The benefits from savings on vehicle operating costs, which initially accrue to vehicle owners and operators, will be gradually shared with passengers and freight customers through reduced bus fares and freight charges. Project 1 will also result in savings on travel time between Masalli and Astara of about 60% for all types of vehicles. The benefits from reduced traffic accidents are not easy to quantify, so it is assumed that Project 1 will conservatively reduce the number of road traffic accidents by half, based on similar assumptions used in economic analysis from other road projects in Azerbaijan. The benefits from reduced traffic accidents were conservatively estimated at $25,000 for a fatality and $1,500 for an injury.

1 The conversion factor of 0.92 was also used by the World Bank for its Highway II project, which includes constructing the new Alyat–Masalli expressway on the same southern corridor. 2 This figure has been widely used in the economic analysis of road projects in Central Asia.

Appendix 10 49

Table A10.3: Economic Benefits by Vehicle Type

Vehicle Type Without Project With Project Savings Savings (%) A. Vehicle Operating Cost ($ per km) Car 0.14 0.13 0.01 11.1 Goods Vehicle 0.44 0.35 0.09 20.5 Light Bus 0.30 0.25 0.05 15.9 Light Truck 0.72 0.58 0.14 18.8 Medium Truck 0.62 0.49 0.13 20.7 Heavy Truck 0.87 0.75 0.12 14.0 Articulated Truck 1.50 1.20 0.30 19.8

B. Travel Time between Masalli and Astara (hours per trip) Car 1.01 0.36 0.65 64.4 Goods Vehicle 1.13 0.46 0.67 59.3 Light Bus 1.06 0.42 0.64 60.3 Light Truck 1.13 0.46 0.67 59.3 Medium Truck 1.21 0.51 0.70 57.9 Heavy Truck 1.09 0.44 0.65 59.6 Articulated Truck 1.06 0.42 0.64 60.4 km = kilometer. Source: Asian Development Bank project preparatory technical assistance.

E. Economic Internal Rate of Return

9. An economic evaluation was undertaken for Project 1, and the results are summarized in Table A10.4 and detailed in Table A10.5. They show that Project 1 is economically viable, with an estimated economic internal rate of return (EIRR) of 12.8% and an estimated net present value of $7.0 million at a 12% discount rate. Section B has a lower EIRR of 8% and a corresponding negative net present value, mainly due to the high construction cost of a new Lenkaran bridge. However, section B is an integral part of the entire Masalli–Astara expressway, so it is justifiable to include this section in Project 1.

Table A10.4: Summary Results of Economic Analysis

Road Section Length Economic Internal Net Present Value (km) Rate of Return (%) ($ million) Section A (km 0–km 22.1) 22.1 17 15.9 Section B (km 22.1–km 45.1) 23.0 8 (17.1) Section C (km 45.1–km 58.6) 13.5 17 11.0 Total Project 1 Expressway 58.6 12.8 7.0 ( ) = negative number, km = kilometer. Source: Asian Development Bank estimates.

50 Appendix 10

Table A10.5: Detailed Economic Analysis ($ million)

Costs Benefits Net Year Without With Project VOC Time Accident Total Benefits Project Capital O&M Net Savings Savings Reduction 2008 0.00 39.17 0.00 39.17 0.00 0.00 0.00 0.00 (39.17) 2009 0.00 91.40 0.00 91.40 0.00 0.00 0.00 0.00 (91.40) 2010 1.71 0.00 0.79 (0.92) 8.40 2.45 0.28 11.13 12.05 2011 1.71 0.00 0.79 (0.92) 9.19 2.67 0.31 12.17 13.09 2012 1.71 0.00 0.79 (0.92) 10.06 2.91 0.33 13.30 14.22 2013 1.71 0.00 0.79 (0.92) 10.88 3.15 0.36 14.38 15.30 2014 1.71 0.00 0.79 (0.92) 11.76 3.40 0.39 15.55 16.47 2015 1.71 0.00 0.79 (0.92) 12.71 3.68 0.42 16.81 17.72 2016 1.71 0.00 0.79 (0.92) 13.74 3.97 0.46 18.17 19.09 2017 1.71 0.00 0.79 (0.92) 14.85 4.30 0.49 19.64 20.56 2018 1.71 0.00 0.79 (0.92) 16.05 4.64 0.53 21.23 22.15 2019 1.71 0.00 0.79 (0.92) 17.35 5.02 0.58 22.95 23.87 2020 1.71 0.00 0.79 (0.92) 18.76 5.43 0.62 24.81 25.73 2021 1.71 0.00 0.79 (0.92) 20.28 5.87 0.67 26.82 27.74 2022 1.71 0.00 0.79 (0.92) 21.92 6.34 0.73 28.99 29.91 2023 1.71 0.00 0.79 (0.92) 23.70 6.85 0.79 31.34 32.26 2024 1.71 0.00 0.79 (0.92) 25.62 7.41 0.85 33.88 34.79 2025 1.71 0.00 0.79 (0.92) 27.69 8.01 0.92 36.62 37.54 2026 1.71 0.00 0.79 (0.92) 29.93 8.66 0.99 39.59 40.50 2027 1.71 0.00 0.79 (0.92) 32.36 9.36 1.07 42.79 43.71 Net present value (at 12% discount rate, $ million) 7.0 Economic Internal Rate of Return (%) 12.8 ( ) = negative number, O&M = operation and maintenance, VOC = vehicle operating cost. Source: Asian Development Bank estimates.

F. Sensitivity Analysis

10. The sensitivity analysis assesses the variables to which the estimated EIRR and net present value of Project 1 are sensitive. The results are summarized in Table A10.6. Project 1 remains economically viable, with the EIRR higher than the cutoff level of 12% when operation and maintenance costs increase by 20%. The EIRR figures are marginally lower than 12% when (i) project implementation is extended by 1 year, (ii) capital costs increase by 10%, (iii) traffic growth decreases by 10%, and (iv) project benefits decrease by 10%. However, these figures are deemed to be within an acceptable range.

Table A10.6: Sensitivity Analysis

Parameters EIRR (%) Net Present Value Switching ($ million) Value (%) Base Case 12.8 7.0 Implementation Extended by 1 Year 11.9 (0.8) Capital Cost Increased by 10% 11.6 (3.8) 6 O&M Cost Increased by 20% 12.7 6.0 153 Traffic Growth Decreased by 10% 11.9 (1.2) (9) Project Benefits Decreased by 10% 11.5 (4.0) (6) ( ) = negative number, EIRR = economic internal rate of return, O&M = operation and maintenance. Source: Asian Development Bank estimates.

Appendix 10 51

G. Risk Analysis

11. The risk analysis examines the probability distribution of the estimated net present value and the EIRR. The results show that Project 1 has 93% probability of positive net present value and an EIRR higher than 12%. Specifically, the net present value of Project 1 has a 95 percentile value of $14.6 million and a 5 percentile value of –$1.3 million (Figure A10). For Project 1, the probability of having an EIRR lower than 12% is very low. Thus, the risk analysis confirms the economic viability of Project 1.

Figure A10: Risk Analysis

Minimum -4.480 Distribution for Net Present Value (at 12% discount rate) Mean 6.946 Maximum 19.551 X <=-1.32 X <=14 .57 1 5% 95% Standard Deviation 4.951 M ean = 6.94 5713 Variance 24.513 0.8 Skewness 0.041 Kurtosis 2.603 0.6

Mode 8.044

0.4 Left X -1.315 Left P 5% 0.2 Right X 14.572 Right P 95% 0 -5 0 5 10 15 20 Differences X 15.888 Differences P 90% 5th Percentile -1.315 Source: Asian Development Bank estimates. 95th Percentile 14.572

52 Appendix 11

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

A. Linkages to the Country Poverty Analysis

Is the sector identified as a national Yes Is the sector identified as a national Yes priority in country poverty analysis? priority in country poverty partnership No agreement? No Contribution of the sector or subsector to reduce poverty in Azerbaijan: Roads are one of the major transport modes in Azerbaijan, carrying 74% of passengers in passenger-kilometers and 28% of freight in ton-kilometers in 2005. However, about 70% of the road network is in poor condition, inhibiting sustained economic growth and social development. The State Program on Poverty Reduction and Economic Development developed with Asian Development Bank (ADB) assistance and the State Program on Socioeconomic Development of the Regions identified improvement of road network infrastructure as a high priority for economic growth and poverty reduction. The Road Network Development Program (the Program) will construct, upgrade, and rehabilitate about 9,500 kilometers (km) of 124 priority roads during 2006–2015, which will result in (i) people’s increased mobility and accessibility to markets, jobs, and social services; (ii) greater opportunities for private sector participation; and (iii) improved governance in the road subsector. The major poverty reduction impacts of the Program include (i) reduced prices of transport services, food, and other daily necessities because of lower transport costs; (ii) jobs and income generated for the poor from road reconstruction, operation, and maintenance, as well as roadside commercial activities; and (iii) improved access of the poor to markets and social services.

B. Poverty Analysis Targeting Classification: General intervention What type of poverty analysis is needed? Despite recent oil-based economic growth, poverty in Azerbaijan remains high—the official poverty rate was about 20% for the country in 2006. Poverty is severer in rural areas (45% in 2003), compared to urban areas (44%). Poverty is higher in the rayons (districts) of Nakhichevan (59%) and Mughan-Salyan (52%). Project 1 of the Program covers three rayons—Masalli, Lenkaran, and Astara in southern Azerbaijan—with a total population of 790,700. Rural residents account for the majority of the population and about 70% of the households live below the poverty line in the project area in 2006. The average monthly per capita income in the project area is estimated at AZN40.4, lower than the national poverty line of AZN42. Rural villages located at the foot of the Talysh mountains and along the existing road in Astara on the border with Iran appear to be the poorest since they have too little unfertile land and insufficient means of livelihood. Overall, the majority of the population in the project area is prone to flooding and increase in the Caspian Sea level.

The main causes of poverty in the project area are (i) economic degradation in southern Azerbaijan as a result of decline in demand for the region’s exports of citrus and other fruits, and the collapse of local processing industries; (ii) limited access to the country’s capital, Baku and international markets because of remoteness; (iii) high rural out- migration; (iv) natural calamities; (v) limited social services; and (vi) deterioration of health among working-age populations (e.g., tuberculosis, malaria). However, poor road network infrastructure imposes constraints on access to job opportunities, markets, and basic social services (education and health), and thus affect the poor. Most villages are located 0.5 km or more from the main roads. The majority of the rural population, particularly the poor, has to walk to the main roads to access social services and buy necessities. The cost of reaching markets outside the village is high, due to poor road conditions and expensive transport services. Improving road infrastructure is one of the priorities in the State Program on Poverty Reduction and Economic Development and the State Program on Socioeconomic Development of the Regions.

The Program will contribute to poverty reduction in Azerbaijan by creating an enabling environment for poverty reduction; and increasing access to markets, job opportunities, and basic social services for the whole population, including the poor. Project 1 is expected to create about 3,000 person-years of jobs for road construction, of which about 2,000 person-years will be unskilled jobs; half of the unskilled work will be for the poor.

Appendix 11 53

C. Participation Process

Is there a stakeholder analysis? Yes No During the preparation of the Program and Project 1, extensive consultations were held with various stakeholders— including representatives of central and local governments, civil society, local communities, the private sector, road users, and external aid agencies. The public consultations were held through meetings, interviews, surveys, group discussions, and written communications, with the participation of about 3,000 people. The consultations covered major issues such as selection of roads, road alignment, transport services, investment benefits, and social and environmental impacts of the Program. The results showed a high degree of public support for the Program. The designs of the Program and Project 1 incorporated the views of stakeholders. Special attention was given to the needs and constraints faced by women, internally displaced people, refugees, and other vulnerable groups. The summary environmental impact assessment of Project 1 was disclosed publicly through the ADB website. The resettlement plan for subproject A of Project 1 was disclosed to the affect persons. The resettlement plans for subprojects B and C of Project 1 are being prepared in consultation with affected persons, and will be disclosed to them upon completion. Stakeholder participation and consultation will continue during implementation. The AzerRoadService Open Joint- Stock Company (ARS) under the Ministry of Transport will ensure that resettlement monitoring reports are made available to affected persons. For subsequent projects, ARS will hold stakeholder consultations during the preparation of resettlement plans and environmental assessments, and disclose them to the public through the ADB website.

Is there a participation strategy? Yes No The participation strategy aims to ensure the active participation of stakeholders during the design and implementation of the Program to achieve its impact fully. This strategy will include the need for raising stakeholders’ awareness of the impacts, outcome, outputs, and activities of the Program, using multiple methods such as public meetings, interviews, surveys, newspapers, and local announcements. The strategy will include a consultative phase during detailed design, through which the program support consultant will assist in the participatory process, together with local stakeholders, to develop appropriate locations and designs for pedestrian and livestock crossing points, lighting, speed control, and roadside market areas. This strategy will be reviewed with representatives of target groups and modified, if needed, according to relevant inputs during implementation.

D. Gender Development Strategy to maximize impacts on women: During preparation of Project 1, a gender analysis was conducted, based on the gender-disaggregated data collected via household surveys, review of secondary data, and qualitative data gathered though community consultations in collaboration with the Azerbaijan Women and Development Center, one of the leading nongovernment organization in Azerbaijan. The analysis showed that women (single, young, elderly, and those with many children) need special assistance to fully benefit from the Program.

The Program is expected to create job opportunities for women during implementation (e.g., construction, catering, cleaning, and food services) and in roadside businesses (e.g., cafes and shops) after completion. Contracts for civil works and consulting services will include provisions to encourage employment of skilled and unskilled women laborers. During detailed design, the consultant will coordinate closely with representatives of vulnerable women’s associations in the project area to identify effective modalities to ensure (i) their involvement in, and direct benefit from, increased commercial activities in roadside markets; and (ii) appropriate mitigation measures included in the project design to minimize negative impacts on them. During implementation, civil works contractors will be required to take measures to mitigate the potential risks of HIV/AIDS. These measures will include raising public awareness on the risk of sexually transmitted infections (including HIV/AIDS) through leaflet distribution to road construction workers and local communities, and giving workers time to be tested or receive treatment.

Has an output been prepared? Yes No, included in the contract documents.

54 Appendix 11

E. Social Safeguards and Other Social Risks Significant/ Strategy to Address Issues Plan Required Item Not Significant/ None The impact on land acquisition and resettlement will be Full Resettlement Significant assessed for all projects financed under the multitranche Short Not significant financing facility (MFF) in accordance with the None None resettlement framework prepared by the Government and agreed with ADB in compliance with ADB’s Involuntary Resettlement Policy (1995), and relevant laws and regulations in Azerbaijan. Project 1 will require significant land acquisition. The preparation of the resettlement plan for Project 1 follows a sector modality. The resettlement plan for section A of the Project 1 expressway (km 0–km 22.1)—a core subproject—was prepared to ensure that fair compensation and assistance are provided for affected persons or businesses. The resettlement plans for all non-core subprojects under Project 1 (i.e., sections B and C of the Project 1 expressway) are being prepared in accordance with the resettlement framework, and will be submitted to ADB for approval and fully implemented before the awards of concerned civil works contracts. Appraisal of subsequent projects financed under the MFF will require reviewing the resettlement framework and preparing resettlement plans for those projects with land acquisition and resettlement impacts. Implementation of the resettlement plans will be a condition to commencement of civil works under the relevant projects. Affordability Significant No tolls will be collected on the project roads financed Yes Not significant under the MFF. The Program will lead to savings on No None vehicle operating cost, which will lower transport costs. The Program will create a considerable number of jobs for Labor Significant road construction work. Civil works contractors will be Yes Not significant required to meet labor law standards, in terms of No None conditions of employment, work safety, pay and insurance according to national laws; and equal job opportunities and payments for national and international laborers. The Program is expected to have no impact on Indigenous Significant indigenous peoples. Ethnic Azeri peoples account for Yes Peoples Not significant more than 95% of the population in Azerbaijan; there are No None few other ethnic groups, which include Kurds, Russian, and Turks. The minorities are neither indigenous nor expected to be adversely affected by the Program. All projects financed under the MFF will include measures Other Risks Significant to mitigate the risks of sexually transmitted infections Yes and/or Not significant (including HIV/AIDS) and drug/human trafficking. Civil No Vulnerabilities None works contractors will be required to raise public awareness of the risks of HIV/AIDS and other sexually transmitted infections at construction sites, and give construction workers time to be tested or receive treatment.

Appendix 12 55

SUMMARY SOCIAL SAFEGUARDS

A. Background

1. The Government of Azerbaijan has requested the Asian Development Bank (ADB) to help finance the Road Network Development Program (the Program) through a multitranche financing facility (MFF) in the amount up to the equivalent of $500 million. The MFF will comprise multiple loans. The projects financed under the MFF are expected to cause land acquisition and resettlement (LAR) impacts. Project 1 will construct about 59 kilometers (km) of a new four-lane expressway between Masalli and Astara on the border with Iran, which is the southern segment of the new expressway between Alyat and Astara the southern transport corridor. Project 1 comprises subproject A—a core subproject covering section km 0–km 22.1 of the Masalli–Astara expressway and two non-core subprojects: (i) subproject B (section km 22.1–km 45.1 of the Masalli–Astara expressway), and (ii) subproject C (section km 45.1–km 58.6 of the Masalli–Astara expressway). Under subproject A, the financing will also be provided for rehabilitation of local roads, procurement of road maintenance equipment and vehicle weighing station to be used on the Masalli–Astara expressway, project support, and capacity building. All subprojects on the new Masalli–Astara expressway will entail LAR. No impacts on indigenous peoples are envisaged for the entire Program.

B. General Procedures

2. LAR will follow Azerbaijan’s relevant laws and regulations, and ADB’s Involuntary Resettlement Policy (1995) and Operations Manual F2 on Involuntary Resettlement (2006). Appraisal of the MFF and each project involving LAR will require preparing the following documents.

(i) A resettlement framework for the MFF to be reviewed, updated (if necessary), and submitted to ADB for approval annually and before the preparation of each tranche.

(ii) An initial poverty and social assessment, indicating whether LAR impacts are expected and, if so, their type and magnitude for each project.

(iii) A resettlement plan for the project with LAR impact, based on detailed design and inclusive of compensation budgets and schedules.1

3. Appraisal of the MFF and each project will meet the following LAR-related requirements.

(i) Appraisal of MFF and Project 1: conditional to preparation of a resettlement framework for the MFF and a resettlement plan for the core subproject acceptable to ADB.

(ii) Appraisal of subsequent projects: conditional to (a) review and updating of the resettlement framework, and (b) preparation of the resettlement plans for all projects with LAR impact.

(iii) Contract awards for each project: conditional to preparation of the concerned resettlement plan, based on the final design and accepted by ADB.

1 According to ADB. 2006. Operations Manual. Section F2: Involuntary Resettlement. Manila, the type of resettlement plan rests on the significance of the involuntary resettlement impacts. If 200 or more people will be resettled from housing, or 10% or more of their income will be lost, a project is classified category A and a full resettlement plan will be prepared. If less than 200 people will be resettled or less than 10% of their income will be lost, a project is classified category B and a short resettlement plan will be prepared.

56 Appendix 12

(iv) Start of civil works for each project: conditional to the implementation of a full resettlement plan.

4. In accordance with the above requirements, the Ministry of Transport, the Executing Agency and the AzerRoadService Open Joint-Stock Company (ARS) under the Ministry of Transport, the Implementing Agency, prepared the resettlement framework and the resettlement plan for section A of Project 1—the core subproject under Project 1. The resettlement plans for all non-core subprojects under Project 1 (i.e., sections B and C of the Project 1 expressway) are being prepared in accordance with the resettlement framework, and will be submitted to ADB for approval and fully implemented before the awards of concerned civil works contracts.

C. Resettlement Framework

5. The resettlement framework was prepared in accordance with relevant laws and regulations in Azerbaijan and ADB’s Resettlement Policy. The resettlement framework prescribes the following principles: (i) LAR will be avoided or at least minimized; (ii) compensation will ensure the maintenance of the pre-project living standards of affected people; (iii) affected persons will be fully informed of and consulted on compensation options; (iv) socio- cultural institutions of affected persons will be supported and used; (v) LAR provisions will apply equally to both genders; (vi) lack of formal title will not be a bar to compensation and rehabilitation; (vii) particular attention will be paid to women-headed households and vulnerable groups; (viii) LAR will be conceived and executed as an integral part of the project and LAR budgets will be included in project costs; and (ix) compensation will be fully provided prior to ground leveling and demolition. The resettlement framework also covers all relevant issues for LAR tasks to be carried out effectively in accordance with ADB policy, and sets the eligibility/entitlement provisions in Table A12.1.

Table A12.1: Compensation Entitlement Matrix

Asseta Specification Affected People Compensation Entitlements Permanent All land losses Farmer/Titleholder • Land for land compensation with plots of equal value and impact on independently productivity to the plots lost, or arable land from impact • Cash compensation for affected land at replacement cost based severity on market valueb free of taxes, registration, and transfer. • Residual portions of plots affected by the required right-of-way that are reduced to less than 400 m2 or rendered unusable by alterations in access, irrigation, or workability will be included in the affected land and compensated as above indicated above. Leaseholder • Renewal of lease in other plots of equal value/productivity of plots lost, or • Cash compensation for affected land at full replacement cost free of taxes, registration, and transfer costs. Sharecroppers • Cash compensation equal to the market value of the lost harvest share once (temporary impact) or twice (permanent impact). Agricultural • Cash indemnity corresponding to their salary (including portions workers losing their in kind) for the remaining part of the agricultural year. contract Squatters • Actual crop loss compensation and resettlement assistance will be provided (see below). Additional Farmer/Titleholder • 1 severe impact allowance equal to market value of 1 net provisions for Leaseholder harvest of the affected land for 1 year (inclusive of winter and severe impacts summer crop and (additional to standard crop compensation). (more than Sharecroppers • 1 severe impact allowance equal to market value of share of 10% of land harvest (additional to standard crop compensation). loss) Squatters • 1 severe impact allowance equal to market value of net harvest

Appendix 12 57

Asseta Specification Affected People Compensation Entitlements of the affected land for 1 year (additional to standard crop compensation). Residential/ Titleholder • Land for land compensation through provision of a plot commercial comparable in value/location to plot, or land • Cash compensation for affected land at full replacement cost free of taxes, registration, and transfer costs. Renter/Leaseholder • 1–3 months allowance Squatters • Provision of a free or leased plot in a government resettlement area or a self-relocation allowance. Houses and All relevant affected • Cash compensation at replacement rates for affected structure Structures persons and other fixed assets free of salvageable materials, depreciation and transaction costs. In case of partial impacts full cash assistance to restore remaining structure. Crops Crops affected All affected persons • Crop compensation in cash at full market rate for harvest (including losses. squatters) Trees Trees affected All affected persons • Cash compensation shall reflect income replacement. (including squatters) Business Temporary or All affected persons • Business owner: (i) cash compensation equal to 1 year’s employ- permanent (including income, if loss is permanent; (ii) cash compensation for the ment loss of squatters) period of business interruption, if loss is temporary. business or • Worker/employees: Indemnity for lost wages for the period of employment business interruption up to a maximum of 3 months. Relocation Transport and All affected persons • Provision of sufficient allowance to cover transport expenses transitional and livelihood expenses for 1 month. livelihood costs Community • Rehabilitation/substitution of the affected structures/utilities (i.e., assets mosques, footbridges, roads, schools, health centers, etc.). Vulnerable Affected persons • Employment priority in project-related jobs. people below poverty line • Additional measures will be specified in the resettlement plans. livelihood M2 = square meter. a Other impacts unidentified may occur in non-core subprojects of Project 1 or during core-subproject implementation. Following their identification during subproject preparation or implementation this entitlement matrix and description of compensation entitlements will be revised and updated accordingly. Source: Project preparatory technical assistance consultants.

6. Institutional Responsibilities. ARS has overall responsibility for the Program including the preparation, implementation, and financing of all LAR tasks and interagency coordination. ARS will exercise its functions through the project implementation unit (PIU), which will be responsible for handling day-to-day project implementation activities. Within ARS, LAR tasks will be managed by the Land Acquisition Division (LAD), which will organize and monitor preparation, approval, and implementation of resettlement plans (including surveys, asset valuation, and community consultation); and LAR-related interagency coordination. In the implementation of these tasks, LAD will be supported by:

(i) a resettlement team under the supervision consultants, which will assist in LAR planning, implementation, monitoring and evaluation, and training of staff in ARS and local governments in the requirements of ADB’s Involuntary Resettlement Policy;

(ii) a local consulting team engaged to prepare resettlement plans, undertake surveys, collect baseline information, or consult with affected persons; and

(iii) an independent agency, engaged to conduct periodic monitoring and evaluation, and third party validation of implementation of the resettlement plans.

58 Appendix 12

7. Local governments at rayon levels have jurisdiction for land administration, valuation, and acquisition, while a number of other local officials (i.e., local representatives of the State Land Committee and Institute of Cartography) will carry out specific roles such as title identification and verification. Functions pertaining to compensation of non-land assets (i.e. buildings and crops) or income rehabilitation also fall on local governments and, more specifically, on relevant rayon offices.

8. A central LAR commission will be established, which will be chaired by the Ministry of Transport and will comprise representatives of the Ministry of Transport, Ministry of Finance, Ministry of Economic Development, State Land and Cartography Committee, and the State Service for Land Registration. The function of this commission is to ensure effective interagency coordination at central government level, carry out a final review of the resettlement framework and resettlement plans, and provide official approval of these documents. To provide effective interagency coordination and officially endorse the impacts and compensation rates surveys, each affected rayon government will also establish a rayon LAR commission, comprising representatives of the following local government agencies: Department of Roads, Department of Finance, Land and Cartography Commission, local division of the Ministry of Ecology and Natural Resources, Real Estate Registration Service, local executives, and other relevant organizations.

9. Disclosure and Public Consultation. The preparation and implementation of resettlement plans will involve extensive consultation with affected persons. As an appraisal condition, the resettlement framework and relevant resettlement plans in English will be disclosed on the ADB website, while the resettlement framework and resettlement plans in the Azeri language will be disclosed to affected persons.

10. Grievance Procedures. Affected persons will first lodge a complaint with the PIU. If settlement is not reached within 15 days, the complaint would then be lodged with the rayon LAR commission. If the grievance is still not settled within 2 weeks, the affected persons may seek redress directly with ARS headquarters. If no solution is found, they may then lodge their complaints with the appropriate court of law.

11. Monitoring and Evaluation. The PIU will monitor implementation of the resettlement plans and ARS will report to ADB on a quarter basis. ARS will engage an independent agency for external monitoring. External monitoring reports will be submitted to ARS and ADB semiannually. At the end of project implementation, the independent monitoring agency will carry out a general evaluation of LAR implementation.

12. Financing and Schedule. The resettlement framework prescribes that each resettlement plan will detail LAR budgets and provide clear schedules linking LAR tasks to the initiation of civil works.

D. Resettlement Plan for Section A of Project 1

13. The core subproject of Project 1 is section A of the Masalli–Astara expressway from east of Khil village in Masalli rayon approximately to the vicinity of Girdani Canal (km 0–km 22.1, 22 km). The resettlement plan for section A of Project 1, which was prepared based on the resettlement framework and detailed design, outlines the impacts, compensation policy, compensation and rehabilitation provisions, cost estimates, and implementation schedule. The core subproject will affect 672 households (2,626 persons). A total of 787 lots with a total area

Appendix 12 59 of 5.5 square meters (km2) will be affected, and the land taken from these lots for the right-of- way (ROW) is 1.55 km2. The lots to be affected comprise 604 private lots (including a lot owned by the municipality but leased to the private sector) and 187 public lots. The total area of affected private land is 4.2 km2 and the area taken for the ROW is 0.8 km2. Most of the land is unfenced grazing land freely used by owners of animals with few structures and little active cultivation. Public lands are the land belonging to the central or municipal governments, and used for public works such as roads, canals, irrigation channels, and open grazing lands. The total area of affected public land is 0.6 km2, all of which will be taken for the ROW. The majority of the public land is municipal and non-arable. A total of 141 public infrastructure assets on the affected non-arable public land—comprising canal structures, irrigation structures, and agricultural assess structures—are expected to be affected by the project. The project is also expected to affect 16 private buildings. A summary land acquisition and compensation is in Table A12.2. The total cost estimates of LAR compensation and rehabilitation are estimated at $3.7 million (Table A12.3).

Table A. 12.2: Summary Land Acquisition and Compensation

Item Private Landa Public Land Total Total lot count 604 183 787 % of lot count 77 23 100 Total area (m2) 4,887,523 635,121 5,522,644 Total area taking (m2) 912,217 635,121 1,547,338 % of area taken 57 41 100 Total amount (AZN) 2,168,179 307,534 2,120,435 Total amount ($) 2,580,133 365,729 2,945,863 AZN = Azerbaijan manat, m2 = square meter. a Include a lot owned by the municipality but leased to the private sector. Source: Project preparatory technical assistance consultants.

Table A12.3: Summary Resettlement Impacts and Costs

Item Amount AZN $ Land 2,475,515 2,945,863 Structure 170,884 203,352 Lease in kind in kind Internal monitoring 18,500 22,015 External monitoring 48,125 57,269 Contingency (15% of base costs) 406,954 484,275 Total 3,119,978 3,712,773 AZN = Azerbaijan manat. Source: Project preparatory technical assistance consultants.