The World Bank

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 84038-KG

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A PROPOSED GRANT IN THE AMOUNT OF SDR 5.3 MILLION (US$8.2 MILLLION EQUIVALENT) Public Disclosure Authorized

AND A PROPOSED CREDIT IN THE AMOUNT OF SDR 23.9 MILLION (US$36.8 MILLION EQUIVALENT)

TO THE

KYRGYZ REPUBLIC

Public Disclosure Authorized FOR THE FIRST PHASE OF THE

CENTRAL ASIA ROAD LINKS PROGRAM (CARs-1)

March 27, 2014

Transport Sector Unit Sustainable Development Department Europe and Central Asia Region

Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective February 28, 2014)

Currency Unit = Kyrgyz Som (KGS) KGS 49 = US$1 US$ 1.53 = SDR 1

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AADT Average Annual Daily Traffic Standards ADB Asian Development Bank IRI International Roughness Index BCP Border Crossing Point ISA International Standards on Auditing BOMCA Border Management Programme in Central JICA Japan International Cooperation Agency Asia MOTC Ministry of Transport and Communications CADAP Central Asia Drug Action Program NCB National Competitive Bidding CAREC Central Asia Regional Economic NPV Net Present Value Cooperation NRRP National Road Rehabilitation (Osh-Batken- CARs Central Asia Road Links Isfana) Project CARs-1 The First Phase of the Central Asia Road NSDS National Sustainable Development Strategy Links Program NSW National Single Window CARs-2 The Second Phase of the Central Asia Road ORAF Operational Risk Assessment Framework Links Program OSCE Organization for Security and Cooperation CBA Cost-Benefit Analysis in Europe CBTA Cross-Border Transport Agreement OBI Osh-Batken-Isfana CEFACT Centre for Trade Facilitation and e- PDO Project Development Objective Business PIU Project Implementation Unit CPS Country Partnership Strategy PLUAD Regional Road Agency DEPs Local Maintenance Depots POM Project Operational Manual EBRD European Bank for Reconstruction and RAP Resettlement Action Plan Development RIBS Regional Improvement of Boarder Services EC European Commission RMD Road Asset Management Department EDB Eurasian Development Bank ROW Right of Way EIA Environmental Impact Assessment RPF Resettlement Policy Framework EIRR Economic Internal Rates of Return SDR Special Drawing Rights EMP Environmental Management Plan EU European Union SNIP Design Standards GDP Gross Domestic Product SOE Statement of Expenditures FM Financial Management SOP Series of Projects ICB International competitive bidding TOR Terms of Reference IDA International Development Association TRACECA Transport Corridor Europe-Caucasus-Asia IDB Islamic Development Bank TSCC Transport Sector Coordinating Committee IFAC International Federation of Accountants UAD Road Department IFR Interim Financial Report UN United Nations IMF International Monetary Fund WTO World Trade Organization IPF Investment Project Financing IPIG Investment Project Implementation Group IPSAS International Public Sector Accounting

Regional Vice President: Laura Tuck Country Director: Saroj Kumar Jha Country Manager: Alexander Kremer Sector Director: Laszlo Lovei Sector Manager: Juan Gaviria Task Team Leader: Cordula Rastogi

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT...... 1

A. Regional Context ...... 1

B. Country Context ...... 3

C. Sectoral and Institutional Context ...... 4

D. Higher Level Objectives to which the Program and Project Contributes ...... 5

II. PROGRAM AND PROJECT DEVELOPMENT OBJECTIVES ...... 6

A. The Program Objective ...... 6

B. The Project Development Objective (PDO) and Key Indicators of CARs-1 ...... 6

III. PROJECT AND PROGRAM DESCRIPTION ...... 8

A. Project Components ...... 8

B. Project Financing...... 9

C. Program Phases and Component (Series of Projects) ...... 10

IV. IMPLEMENTATION ...... 11

A. Institutional and Implementation Arrangements ...... 11

B. Arrangements with Development Partners ...... 12

C. Results Monitoring and Evaluation ...... 12

D. Sustainability ...... 12

V. KEY RISKS AND MITIGATION MEASURES...... 13

A. Risk Ratings Summary Table ...... 13

B. Overall Risk Rating Explanation ...... 13

VI. APPRAISAL SUMMARY ...... 13

A. Economic Analysis ...... 13

B. Technical ...... 14

C. Financial Management ...... 15

D. Procurement ...... 15

E. Social (including Safeguards) ...... 16 F. Environment (including Safeguards) ...... 16

G. Other Safeguards Policies Triggered ...... 17

Annex 1: Results Framework and Monitoring ...... 18

Annex 2: Detailed Project Description ...... 23

Annex 3: Implementation Arrangements ...... 26

Annex 4: Operational Risk Assessment Framework (ORAF) ...... 38

Annex 5: Implementation Support Plan ...... 41

Annex 6: Economic Analysis of the Program and Project ...... 44

Annex 7: Regional, Country and Sectoral Context...... 56

Annex 8: Program Overview and Complementarities with other Projects ...... 65

Annex 9: Map ...... 68

PAD DATA SHEET

Central Asia

Central Asia Road Links - Kyrgyz Republic (P132270)

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSTR

Report No.: PAD559

Basic Information Project ID EA Category Team Leader P132270 B - Partial Assessment Cordula Rastogi

Lending Instrument Fragile and/or Capacity Constraints [ ]

Investment Project Financing (IPF) Financial Intermediaries [ ]

Series of Projects [ X ]

Project Implementation Start Date Project Implementation End Date 02-July-2014 15-Jun-2019

Expected Effectiveness Date Expected Closing Date 01-July-2014 15-Jun-2019

Joint IFC

Sector Manager Sector Director Country Director Regional Vice President Juan Gaviria Laszlo Lovei Saroj Kumar Jha Laura Tuck

Borrower: Government of Kyrgyz Republic

Responsible Agency: Ministry of Transport and Communications

Contact: Mr. K. Mamaev Title: Director, IPIG Telephone No.: +996 312 610472 Email: [email protected]

Project Financing Data(in USD Million) [ ] Loan [ ] Grant [ ] Guarantee [ X ] Credit [ X ] IDA Grant [ ] Other

Total Project Cost: 54.00 Total Bank Financing: 45.00

Financing Gap: 0.00

Financing Source Amount

BORROWER/RECIPIENT 9.00

International Development Association (IDA) 45.00 Total 54.00

Expected Disbursements (in USD Million)

Fiscal Year 2015 2016 2017 2018 2019

Annual 5.00 8.00 10.00 12.00 10.00

Cumulative 5.00 13.00 23.00 35.00 45.00

Proposed Development Objective(s)

The Central Asia Road Links (CARs) program is the result of a collaborative effort initiated by respective governments in the Central Asia region which has been developed as a regional, multi-phase program considered as a regional transformational project under IDA16 and IDA 17. The program has the overall objective to increase transport connectivity between neighboring countries in Central Asia along priority cross-border road links whilst supporting improvements in road operations and maintenance practices.

Components Component Name Cost (USD Millions)

Rehabilitation of Priority Road Sections in Batken Oblast 51.30

Improvement of Road Operations and Maintenance Practices 1.70

Project Management and Implementation 1.00

Institutional Data

Sector Board

Transport

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits %

Transportation Rural and Inter-Urban 90 Roads and Highways

Public Administration, Law, and Justice Public administration- 10 Transportation

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project.

Themes

Theme (Maximum 5 and total % must equal 100) Major theme Theme %

Trade and integration Trade facilitation and market access 40

Rural development Rural services and infrastructure 40

Trade and integration Regional integration 20

Total 100

Gender Flag

Does the activity support (select all that apply)

Analysis and/or consultation on gender related issues

Specific actions to address the distinct needs of women and girls, or men and boys, or positive impacts on gender gaps   Mechanisms to monitor gender impact to facilitate gender-disaggregated analysis 

Compliance

Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ]

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Recurrent Due Date Frequency

Description of Covenant

Conditions Name Type

Additional Condition of Effectiveness Effectiveness

Description of Condition

The Osh-Batken-Isfana Roads Department ("the Roads Department") has been assigned with responsibility for routine maintenance and emergency works of road sections along the Osh-Batken-Isfana-Tajikistan road corridor in accordance with the Annual Service Level Agreement satisfactory to the Association. Name Type

Disbursement Condition Disbursement

Description of Condition

Prior to the commencement of any works on the sections within the Project area where land acquisition or resettlement may be required, the Recipient shall prepare a Resettlement Action Plan or Plans (RAP), satisfactory to the Association, in accordance with the Resettlement Policy Framework (RPF), and disclose and carry out consultations for said RAPs in accordance with the provisions of the RPF. Name Type

Disbursement Condition Disbursement

Description of Condition

Prior to the commencement of any works under the Project, prepare a site-specific Environmental Management Plan (EMP), satisfactory to the Association, in accordance with the Environmental Impact Assessment (EIA). Name Type

Disbursement Condition Disbursement

Description of Condition

Prior to withdrawal under category 1, a contract for road maintenance equipment has been signed with a supplier.

Team Composition

Bank Staff Name Title Specialization Unit

Cordula Rastogi Senior Transport Team Leader PRMTR Economist

Adam Shayne Lead Counsel Lead Counsel LEGLE

Joseph Paul Formoso Senior Finance Officer Senior Finance Officer CTRLA

Jasna Mestnik Finance Officer Finance Officer CTRLA

Nagaraju Duthaluri Lead Procurement Lead Procurement ECSO2 Specialist Specialist

Irina Goncharova Procurement Specialist Procurement Specialist ECSO2

Aliya Kim Financial Management Financial Management ECSO3 Analyst Analyst

Alexei Slenzak Senior Environmental Environmental Specialist ECSEN Specialist

Aly Zulficar Rahim Social Development Social Development ECSSO Specialist Specialist (until appraisal)

Asli Gurkan Social Development Social Development ECSSO Specialist Specialist (since appraisal)

Artan Guxho Senior Infrastructure Senior Infrastructure ECSTR Specialist Specialist

Rodrigo Archondo-Callao Senior Highway Senior Highway ECSTR Engineer Engineer

Aidai Bayalieva E T Consultant Operations Officer ECSTR

Krista Alexandra Soininen Junior Professional Junior Professional ECCU8 Associate Associate

Virginia Tanase Sr Transport. Spec. Sr Transport. Spec. TWITR

Aimonchok Tashieva E T Consultant E T Consultant LEGLE

Zhanetta Baidolotova Program Assistant Program Assistant ECCKG

Funda Canli Program Assistant Program Assistant ECSSD

Shirin Imanbaeva Team Assistant Team Assistant CEUAF

Locations

Country First Location Planned Actual Comments Administrative Division

Kyrgyz Republic Batken Oblast Batken x

I. STRATEGIC CONTEXT A. Regional Context

1. The Central Asia region, including the Republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan is undergoing a rapid transformation. Since the early 2000s, economic growth in the five republics has been fueled by strong exports in response to robust global commodity demand and prices as well as remittances reflecting strong growth in Russia. The structure of the economies is greatly biased towards heavy industries and extractive 1 activities (40 percent of Gross Domestic Product (GDP) on average ). The share of agriculture is high in the smaller economies, like the Kyrgyz Republic and Tajikistan. The most recent IMF economic outlook forecasts continued growth over the medium term, especially in resource rich countries while uncertainty regarding the future performance of the global economy and its impact on the region remains an issue.

2. Trade in the Central Asia region is very asymmetric. Exports are dominated by commodities, with Kazakhstan being the main exporter (over 85 percent). Import patterns are more balanced between countries, as the import basket is more diversified. One of the main features of importing is its reorientation towards China at the expense of Russia and other regions. The growth rate of trade with China has been twice as fast in Central Asia compared to the rest of the world (40 percent per year over 2001–10 as compared to 20 percent elsewhere). This also reflects an evolving regional trade environment, which intertwined political and economic influences. Tajikistan joined the World Trade Organization (WTO) in 2013 and Kazakhstan is in the final stages of the process. All countries of the region, except Turkmenistan are signatories of a Free Trade Agreement among the 8 member states of the Commonwealth of 2 Independent States .

3. The main extra-regional exports from the southern part of the region are mineral commodities, steel, and cotton. Significant unrealized potential appears to exist in trade with countries in the broader region, especially China, India, Pakistan and Turkey. Regional trade is relatively small, representing only a few percent of the total trade of Central Asia reflecting relatively low complementarity and similar asset base. Still, it is very important for the Kyrgyz Republic and Uzbekistan. The basket of products is more diversified than for extra-regional exports and is likely to be even greater if trade through non-standard channels (also referred to as “bazaar” channel because of its transactions take place at or through bazaars) is taken into account, reportedly, those values of flows represented 16 percent of the Kyrgyz Republic’s GDP in 2010. This is also known to exist in other Central Asian countries.

4. In the past 20 years, the economic gap between the five Central Asian Republics, which was already significant in 1990, has widened further. GDP per capita in the Kyrgyz Republic and Tajikistan in 1990 amounted to 36.9 and 30.1 percent of the GDP per capita in Kazakhstan in the same year. In 2011, GDP per capita in the Kyrgyz Republic was 9.9 percent of that of Kazakhstan’s, and Tajikistan’s GDP as a portion of the region’s GDP dropped from 5.7 percent in 1990 to 2.4 percent in 2011, according to official statistics. In the region, the Kyrgyz Republic and the Republic of Tajikistan are considered the most remote and poorest where in 2011 about 37 percent and 47 percent of the population lived below the poverty line, with a GDP

1 Details on the regional context are included in Annex 7. 2 CISFTA is a free trade agreement signed on 18 October 2011 among Russia, Ukraine, Belarus, Kazakhstan, Kyrgyz Republic, Tajikistan, Moldova and Armenia.

per capita of US$1,157 and US$951 (2012) respectively. Both countries lack natural resources such as oil and gas, but have reportedly substantial potential in hydropower development and mineral resources.

5. Lack of resources, a challenging regional context and a difficult business environment is preventing the countries from exploiting this potential. Sustainable growth and diversified export base will require better human, physical and institutional capital. While strong demand and prices for commodities have supported growth in the region so far, diversifying the “assets base” in the region will be critical to the diversification of the economies. This will require improvements in the quality of infrastructure, institutions and service delivery, as well as better human capital.

6. Notwithstanding the widening gap in economic development between countries, the Governments in the region face similar development challenges to connect peripheral areas 3 with regional and global economic centers of activities . In part, this can be attributed to the impacts of the breakup of the Former Soviet Union which formerly shaped important features of the transport networks through a unified economic and transport complex built without consideration for administrative borders. Nowadays, there is a need to address access to shifting global markets, increasing trade integration with neighboring countries and growing urban and rural disparities. This trend is reflected in greater labor migration from rural areas due to lack of 4 employment opportunities, hindering the development of those areas . Analysis of the poor in the region also indicates that the concentration of poverty lies in marginal geographical areas 5 characterized by lack of transport connectivity. This may trigger socio-economic tensions .

7. At the core of these challenges is the need to rebuild a regional network that links population centers and economic hubs across borders in the Central Asia region, in particular in the highly populated Ferghana Valley where more than 10 million people reside or 27 percent of Uzbekistan’s, 31 percent of Tajikistan and 51 percent of Kyrgyz Republic’s population. Relatively small investments in cross-border transport links are proven to have an impact on agglomeration processes disproportionate to the simple economic value-added from reduced transportation costs. However, this will only be achieved if reforms in other areas are addressed, including trade facilitation, non-tariff barriers and the like. The region in general ranks relatively poorly on the Logistics Performance Index. Logistics costs in the region are already very high in an international comparison, accounting to about 18-23 percent of exported 6 value and 16-18 percent of imported value according to a recent study which greatly impact trade, the competitiveness of domestic products as well as potential for economic diversification due to the rise of costs of inputs and costs of exports.

3 This will increase “density”, shorten “distances” and reduce “divisions”, all critical components for inclusive growth, as identified in the World Development Report (2009), Reshaping Economic Geography by the World Bank. 4 Strong migratory dynamics can be found especially in Tajikistan, the Kyrgyz Republic and Uzbekistan where remittances from labor migrants in 2013 were estimated to amount to US$3.9 billion (Tajikistan), US$2.1 billion (Kyrgyz Republic) and US$2.9 billion (Uzbekistan) respectively. 5 According to a UNDP report (Regional socio-economic disparities in Kyrgyzstan: are they shrinking? November 25, 2011), Batken oblast in the Kyrgyz Republic could be experiencing considerable socio-economic tensions as – in contrast to the rest of the country – industrial and agricultural outputs as well as retail trade (which can be seen as proxy for household spending and income) continues to fall. 6 World Bank (2013), Road Transport and Logistics Providers in Central Asia: Kazakhstan, Kyrgyz Republic and Tajikistan. Forthcoming.

8. While railways are the backbone for connectivity solution of the region to regional and international markets, the share of road transport in overall traffic flows has been continually increasing. This is particularly true for short-distance (and at times even for longer distances) and intra-regional movements, especially in countries such as the Kyrgyz Republic and Tajikistan given their relatively small rail network. Road transport is sometimes the only option given alpine topography of the region. It is also favored for time-sensitive items such as fruits and vegetables, textiles and clothing and other consumer goods which constitute a large share of the region’s non-oil sector. Passenger transport in the region is almost exclusively done by cars and buses and served only to some extent by air and railways.

9. Increasing connectivity of people and businesses to local and global services, markets and opportunities across borders is a priority of current policies and investments of the governments of the Central Asian Republics. This agenda is also at the core of the support intended by the World Bank and other development partners. Support towards these objectives has been underway for several years through, for example investments in transport infrastructure and upgrades of energy systems and networks. Efforts to rehabilitate six strategic transport corridors in the Central Asia region have been spelled out in the on-going Transport and Trade Facilitation Strategy and Action Plan for 2008-2017 and endorsed by Central Asia Regional Economic Cooperation (CAREC). Within CAREC, medium-term priority projects in the transport sector to be implemented during the period from 2011 to 2015 have obtained confirmed financing in the amount of US$15.5 billion from development partners and governments. Additionally, within the framework of CAREC, countries of Central Asia are working together on improving border crossing facilities under the ADB-financed Regional Improvement of Border Services (RIBS) Project (approved in April 2013).

B. Country Context

10. Landlocked, largely mountainous, with a multi-ethnic population of about 5.5 million and a GNI per capita of US$880 in 2011 (Atlas methodology), the Kyrgyz Republic is one of the poorest countries in the Europe and Central Asia region. Due to its elevation and topography, barely 7 percent of the land is arable, the rest consisting of glaciers, mountains, 7 and pastureland or steppe that support livestock grazing . The Kyrgyz economy’s rate of growth has been volatile reflecting its reliance on a few sectors (gold production concentrated in Kumtor mine as well as re-exports) as well as numerous domestic and external shocks, including two revolutions since 2005. GDP growth averaged just over 4 percent annually over 2003-2012, with varying year-to-year rates ranging from 8.5 percent in 2007 and -0.9 percent in 2012. Characterized by significant informal activities, the Kyrgyz economy relies heavily on the performance of a few sectors and remittances: industry as well as agriculture accounts each for about 20 percent of GDP while services generate about 50 percent of GDP out of which transport has a significant share.

11. Employment is concentrated in sectors with low productivity and weak governance and poor infrastructure continue to hinder competitiveness. During 1998-2008, labor has moved away from high productivity, formal sectors, such as mining and manufacturing, to low productivity sectors with high levels of informality such as agriculture and services, in particular construction, trade, and tourism. Moreover, despite numerous regulatory reforms in recent years,

7 Over 90 percent of its 198,500 km2 is at least 1,000 meters above sea level and 30 percent higher than 3,000 meters.

these have not yet translated into actual improvements in the business environment. Recent economic performance has been sound and the medium-term outlook is favorable though with significant risks. GDP expanded by 8 percent in the first eight months of 2013 driven by a recovery in gold production at Kumtor mine following the 2012 disruption as a result of unexpected ice movement, strong private transfers and more credit to the private sector.

12. Going forward, real GDP growth in the Kyrgyz Republic is projected to be between 8 7.5 (2015) and 5.0 (2017) , expected to be largely driven by increased efficiency of public spending and development of a vibrant private sector. Growing regional integration and improved infrastructure are seen to support the growth of the country’s vibrant, but largely informal trade and transit sector. The current government’s National Sustainable Development Strategy (NSDS), 2013-17 focuses on investments that will further integrate the country with growing markets such as Russia, China and neighboring Central Asian countries while support local development in peripheral region. The NSDS recognizes that achieving sustained economic development in the Kyrgyz Republic will require improvements in transport connectivity and logistics and expresses the determination of the government to address these issues. Nonetheless, the risks to the Kyrgyz external environment are significant as lower growth rates are forecast in Russia as well as moderating, yet strong, growth rates in China. Gold prices add an additional layer of uncertainty given the importance of gold exports for the balance of payments and underscore the importance of upgrading assets (infrastructure and institutions) to diversify export earnings.

C. Sectoral and Institutional Context

13. Rehabilitating and managing the country’s transport infrastructure poses 9 particular challenges due to geography and limited international connectivity . Diversified export-driven growth will require a reduction in economic distances, greatly improved connectivity, and lower transport costs, both within the country and through regional links. Those links include six strategic road corridors which carry the majority of the traffic and form about 4,163 kilometers (international roads) of the republican road network (under the jurisdiction of the Ministry of Transport and Communications (MOTC) which are currently under rehabilitation. The link between the capital Bishkek and the second largest city, Osh was the first international road that was rehabilitated. Works on other road links are in progress, including the Osh-Batken-Isfana-Tajikistan border road which is a principal traffic thoroughfare for the country and region (traffic counts in 2012 show average annual daily traffic of about 5,200 (Osh), 4,500 (Batken) and 1,700 (Isfana)).

14. Accordingly, the completion of the rehabilitation of the Osh-Batken-Isfana- Tajikistan border road and the need to fund the financing gap has a prominent role in the 10 NSDS . This will help reduce poverty and secure sustained improvements in the population’s living standards, but also contribute substantially to regional development and integration with neighboring countries, in particular Tajikistan. Given the dependence on road transport which carries 95 percent of all passenger movements and 60 percent of all freight traffic, improving the road links to neighboring countries, in particular in the Ferghana valley is likely to positively

8 World Bank (2013), Country Partnership Strategy for the Kyrgyz Republic for the Period FY14-17, June 24, 2013. 9 “Connectivity” has become a commonly used reference term to describe the extent to which a country is integrated in a local, regional and global network relative to other countries. 10 See Annex 7 for details.

impact bilateral trade which is rising. Over the last three years, for example, bilateral trade with Tajikistan grew between 20-47 percent.

15. Despite the laudable achievements and plans ahead, road maintenance management 11 in the country remains poor . While the importance of road maintenance has been advocated in a number of recent government policy documents, financing road maintenance at the required level and improving current maintenance practices remains a challenge. The on-going Bank financed National Road Rehabilitation (Osh-Batken-Isfana) Project is financing the development and implementation of a road asset management system that MOTC is willing to effectively use at the oblast and corridor level Road Maintenance Departments. MOTC expects that improved planning and management of road investments, including a new decision-making tool to facilitate resource allocation could increase efficiency in spending as well as potentially a shift towards increased levels of funds for maintenance. Road maintenance set-up and works implementation remain a challenge, in particular for recently rehabilitated road segments.

16. Improvements in road operations are directly related to the issue of road maintenance and the control of vehicle weight. Notably, the allowable axle load is one of the most important parameters in preserving road quality. Currently, countries in Central Asia and neighboring China have different vehicle weight standards, either on the total or on the axle weight. Each country applies different methodologies to sanction and calculate penalties for overloading, and in some cases the institutional setting is different among them; moreover the 12 degree of enforcement varies significantly and the rules and regulations are not always transparent and readily available to the transport operators. Vehicle weight standards differing along a transport and trade corridor translate into inefficient transport operations because the truck capacity might not be used optimally; differing standards can also be used as a tool to limit the access of foreign operators to the market.

D. Higher Level Objectives to which the Program and Project Contributes

17. The proposed Central Asia Road Links (CARs) Program complements the on-going efforts of the countries in the region described in the on-going Transport and Trade Facilitation Strategy and Action Plan for 2008-2017 which is endorsed by the Central Asia Regional Economic Cooperation (CAREC). This strategy foresees the rehabilitation of 6 strategic transport corridors in the Central Asia region based on their impact on economic growth and poverty reduction as highlighted by the recently development framework for the CAREC program 2011-2020 (CAREC 2020). The program has the aim to expand trade and improve competitiveness by developing “economic corridors” as well as improve trade facilitation. Within the trade facilitation component, cross-border transport agreements (CBTAs) between the Kyrgyz Republic, the Republic of Tajikistan and Afghanistan are being developed and implemented to ensure smooth flow of goods and people.

18. The first phase of the CARs program (CARs-1) supports one of the areas of engagement under the Bank’s Country Partnership Strategy for the Kyrgyz Republic for the

11 Recurrent maintenance activities are performed by local maintenance units on an ad hoc basis using force account labor and inspection/certification of completed works not always undertaken. Due to the lack of systemic road network data collection and evaluation, planned maintenance programs are only partially implemented. 12 In the Kyrgyz Republic, vehicle weight control is currently under the shared responsibility of Transport Control Authority under the MOTC (for the weighing stations located inland) and Customs (for the weighing stations located at the border crossing points).

Period FY14-17 which aims to help reduce extreme poverty and promote shared prosperity through support for improved governance. The strategy will provide support for improved governance, centered on three broad areas of engagement – public administration and public service delivery, business environment and investment climate, and natural resources and physical infrastructure. The CPS identifies that diversified growth based on exports will require a reduction in economic distances, greatly improved connectivity and lower transport costs, both within the country and through regional corridors. Increasing transport connectivity between the Kyrgyz Republic and its neighboring countries along priority cross-border road links will greatly improve peoples’ and business’ access to markets for goods and services, as well as provides for greater income opportunities.

19. The CARs Program aims at promoting shared prosperity and reducing extreme poverty, the twin goals in the World Bank Group strategy. Improved transport connectivity raises prosperity in the region by making trade and production sharing more efficient, developing larger regional value chains, and tapping on economies of scale. This will lead to important social and economic outcomes in those underserved regions where the program road links are located. At present, inadequate transport links in poor rural areas such as Batken region compound to people’s social and economic isolation. The program will contribute to unlocking the region’s potential in participating to commerce and supply chains, notably in the areas of producing agricultural products marketable to urban areas or in the agro-industry. Additionally, the road links targeted by the program are important trade and transit routes of further regional and local importance as indicated by the high traffic volumes (5,000-10,000 vehicles per day) experienced on the main road link in Osh and Khujand region, for example.

II. PROGRAM AND PROJECT DEVELOPMENT OBJECTIVES

A. The Program Objective

20. The CARs program is the result of a collaborative effort initiated by respective governments in the Central Asia region which has been developed as a regional, multi-phase program considered as a regional transformational project. The program has the overall objective to increase transport connectivity between neighboring countries in Central Asia along priority cross-border road links whilst supporting improvements in road operations and maintenance practices. The road links once rehabilitated will improve access along priority transport connections between major urban agglomerations within the Central Asia region, thereby supporting the creation of an integrated economic region across borders. In addition to each country’s capital city, major urban agglomerations include cities such as: (i) Osh city, the second largest city in the Kyrgyz Republic in Osh Oblast, (ii) Khujand, the second largest city in Tajikistan within Sugd Oblast, (iii) Almaty, the formerly capital of Kazakhstan until 1997 within Almaty Oblast, as well as (iv) Andijan (Andijan Oblast), Fergana (Fergana Oblast) and Namangan (Namangan Oblast) in the Ferghana valley.

B. The Project Development Objective (PDO) and Key Indicators of CARs-1

21. The project development objective (PDO) of the First Phase of the Central Asia Road Links Program (CARs-1) is to increase transport connectivity between the Kyrgyz Republic and Tajikistan along priority cross-border road links in Batken Oblast whilst supporting improvements in road operations and maintenance practices. The road sections to be financed under CARs-1 prioritize connectivity between Osh and Batken Oblast in the

Kyrgyz Republic and Sugd Oblast in Tajikistan as they build lateral spurs from the Osh-Isfana 13 axis to the Tajik border; complementary activities are financed through other projects (see Annex 7).

Project Beneficiaries

22. The beneficiaries of the project will include the mobile population along the road corridor from Osh to Batken and onwards, representing passengers, haulers, traders from neighboring countries, and the immobile population, employees in supportive business and their families, residents along the road sections, tradable sectors of the economy and ultimately, consumers and producers both inside and outside the sub-region. The project will directly benefit about 680,000 residents of Batken and Osh Oblasts who are expected to be regular road users 14 travelling along the road sections . Batken and Osh Oblasts have above average poverty headcounts, while Osh Oblast has the highest poverty density in the country. The percent of females on the total direct beneficiary population is 50 percent and the percent of urban population is 49 percent. While women and men will equally benefit from the project investments, citizen engagement and beneficiary consultations will be held during project implementation in order to facilitate evaluation of gender impacts as has been done during project preparation. Broader indirect benefits are estimated to affect more than three million residents of the Kyrgyz Republic and Tajikistan who might benefit from the improved 15 connectivity . PDO Level Results Indicators

23. To measure the results of the project, several project intermediate and outcome indicators were discussed and agreed between the Bank and MOTC at negotiations (see Annex 1). The indicators relating to the connectivity component of the PDO are: (i) volume of freight through Kyzyl-Bel/Guliston and Kairagach/Madaniyat border crossing points, (ii) market accessibility index of Batken Oblast, and (iii) strategic plan on transport control has been discussed at the regional level (CAREC) and approved by MOTC. The indicators related to sustainability of road operations and maintenance will be tracked during project implementation, including: (i) road users satisfied with maintenance of the Pulgon-Batken road section, (ii) annual budget allocation for routine (summer and winter) maintenance for road sections in sustainable condition along the corridor under OBI UAD, and (iii) compliance by OBI UAD with service level criteria as specified in the Service Level Agreement.

24. The achievements of the overall program could be measured through a regional analysis of the wider economic impacts of the phases of the program. As such, it would be more than just the sum of each phase and could be designed based on the methodology pioneered under the

13 Those activities include for example, the development of a road safety strategy, financing of border facilities between Tajikistan and the Kyrgyz Republic as well as other trade facilitation measures (see Annex 7). 14 As presented in the economic analysis, most of the direct economic benefits to beneficiaries results from a reduction of vehicle operating costs (85 percent of total benefits). 15 Through participatory consultations, communities in the project area have emphasized to the Bank team and government that inadequate transport links compounds their social isolation. It was voiced that the rehabilitation of the project-financed road links will (i) greatly improve their access to administrative and commercial centers (Batken and Osh) as well as Khujand’s key markets in Tajikistan which the region is closely tied to for commerce and trade, and (ii) provide them with greater employment and income opportunities. Communities stressed the high transportation costs which reportedly take up to about one third of their household expenditures due in part to the

poor quality of roads.

economic analysis for each phase (see Annex 5). Such a study, to be commissioned at the end of the entire program would require additional funding from the Bank and/or support from grants.

III. PROJECT AND PROGRAM DESCRIPTION A. Project Components

25. The components of the First Phase of the CARs program (CARs-1) will focus on the Kyrgyz Republic and include the following (a more detailed description of the components is provided in Annex 2):

26. Component 1: Rehabilitation of priority road links in Batken Oblast (estimated total cost US$51.30 million, including IDA financing of US$42.30 million): The component will finance the provision of works and consultants’ services for the rehabilitation of about 56 kilometers of road sections in Batken Oblast along and within close vicinity of the road corridor Osh-Batken-Isfana. Those road sections will link the Kyrgyz Republic with its neighboring countries and include specifically:

(a) Isfana – Kairagach/Madaniyat border crossing (36.08 kilometers),

(b) Batken- Tortkul (14.30 kilometers), and

27. These road sections are in poor condition and in dire need of rehabilitation. The road rehabilitation designs propose geometric characteristics that match the requirement of category III/IV of SNIP KR 32-01:2004 (carriage width up to 12 meters, shoulder width up to 2.5 meters), and therefore the roads will not be upgraded except for the profile to improve the evenness, strengthen road pavement, and thereby reduce road user costs. This component also includes consultants’ services for construction supervision, as well as physical and price contingencies (10 percent each). The estimated cost of this component is US$51.30 million equivalent. The road works costs are based on estimates prepared by an international consulting firm, as part of the Detailed Designs and Bidding Documents, and include 12 percent of VAT.

28. Component 2: Improvement of Road Operations and Maintenance Practices (estimated total cost US$1.70 million, including IDA financing of US$1.70 million): This component will finance the provision of goods, and consultants’ services for the improvement of road operations and maintenance practices. Improvement of maintenance practices will include the establishment of Service Level Agreement between MOTC and the Osh-Batken-Isfana Roads Department 16 (OBI UAD) . No new institutional set up is proposed (such as the setting up of a separate team 17 or unit) or outsourcing to the private sector , but rather to work with existing staff within the OBI UAD. Under the Service Level Agreement, OBI UAD will be responsible for routine maintenance (summer and winter) and emergency works for the entire Osh-Batken-Isfana

16 In order to cover the entire Osh-Batken-Isfana road corridor, MOTC agreed to transfer two local maintenance units from the Regional Maintenance Department Osh-Sary-Tash-Irkeshtam (OSI UAD) to the OBI UAD. 17 Contracting out routine maintenance works to the private sector has been attempted by an ADB-financed pilot project, but without success due to lack of private contractors. This is particularly due to the fact that routine maintenance and in particular winter maintenance is based on very long experience in local terrain and climatic conditions.

corridor, with special focus on those sections which have recently been rehabilitated and/or are in sustainable condition. The OBI UAD will need to receive secured and adequate funds for routine maintenance as well as emergency works from the republican budget (estimated at about US$100,000 annually) to maintain the road sections at a defined level of service, and in accordance with the performance indicators (targets). These costs will cover staff, operation of equipment and purchase of materials in order to perform maintenance activities. The project will support OBI UAD, and its Local Maintenance Units (DEPs) along the Osh-Batken Isfana road corridor, with a set of equipment (as detailed in Annex 2) – about US$ 1.00 million equivalent. Additionally, Component 2 will support exposure of OBI UAD management to international practices on maintenance techniques through the hiring of individual internationally recruited consultants.

29. Finally, the improvement of road operations will include a review of regional standards, norms, and parameters on vehicle (truck) weight and axle load limits and tariffication as well as the development of a strategic plan for the institutional arrangements for transport control, the setting up of an axle-load control system and methods for enforcement of axle load limits. Investments or technical assistance in border crossing is not envisaged.

30. Component 3: Project Management and Implementation (estimated total cost US$1.00 million, including IDA financing of US$1.00 million): This component is expected to finance the provision of goods, consultants’ services, and training, operating costs, including a financial management software and financial audit to support project coordination, implementation, and management. MOTC, its IPIG, and the World Bank agreed that at least two new staff will have to be hired in order to strengthen implementation capacity of IPIG. Those staff includes a road engineer with experience in international tendering for road works in the Kyrgyz Republic, a contract administration specialist as well as a lawyer to review relevant regulations and legislations resulting out of the technical assistance financed out of the on-going NRRP as well as to be financed out of the proposed CARs.

B. Project Financing

31. This project is designed as part of a series of projects (SOP) (horizontal regional program) with multiple countries (borrowers). The program is horizontal in that not all countries would need to start at the same time, but rather each would begin when ready, through a series of sequential phases. The proposed project in the Kyrgyz Republic is the first phase in this program (CARs-1) since the country has demonstrated formal commitment and readiness. Tajikistan’s commitment to join the program has been conveyed in a formal letter to the Bank; the proposed second phase in this program is currently under preparation. Kazakhstan has expressed its interest in the program to consider its participation in the future; discussions are currently on-going between the Government of the Kyrgyz Republic and the Republic of Kazakhstan with a view to increase transport connectivity between the two countries in bordering Issyk-Kul Oblast (Kyrgyz Republic) with bordering Almaty Oblast (Republic of Kazakhstan). Assuming at least three project phases the investments are expected to total US$500 million. Implementation of the first phase is planned for July 2014 to June 2019, the second phase for April 2015 to December 2020, and the third phase for July 2015 – April 2021. Any phase can be advanced to meet client demand.

32. This SOP is regional and interdependent in nature because no country can manage cross-border transport connectivity on its own. The magnitude and complexity of problems

transcend national boundaries and call for harmonization of investments, knowledge sharing and compatible policies. The regional approach will help build synergies, enhance cross-border road links through a regional connectivity approach, provide tools for more effective policy dialogue and build closer collaboration within existing regional fora, such as CAREC. The advantage of the SOP instrument is that it allows the Bank to provide support in a flexible manner and it is well-suited to support long-term reform, with logical sequencing of activities, when individual countries have met the necessary triggers, and are ready for implementation. Each subsequent project in the SOP will be described in a separate PAD.

33. The lending instrument for CARs-1 in the Kyrgyz Republic is Investment Project Financing (IPF). The sources of funds for this IDA credit/grant come from national IDA allocation as well as regional IDA allocation made available in Special Drawing Rights (SDR). The national IDA financing terms are on a 45 percent grant and 55 percent credit basis with a 10- year grace period and 40 years to maturity (US$20.5 million equivalent). The regional IDA financing terms are on a 100 percent credit (US$ 24.5 million equivalent).

18 Table 1: Project Cost and Financing by Component for CARs-1

Government Total Project

% Bank

IDA Financing

Costs co-financing financing

Project Components (US$ M

(inclusive of

(US$ M

equivalent)

tax)

equivalent)

1. Rehabilitation of Priority Road Links 51.30 42.30 9.00 83% in Batken Oblast

2. Improvement of Road Operations and 1.70 1.70 0.00 100% Maintenance Practices

3. Project Management and 1.00 1.00 0.00 100% Implementation

Total Project Costs 54.00 45.00 9.00

C. Program Phases and Component (Series of Projects)

34. The CARs program has been designed to ensure the following: (i) the use of a phased approach within a consistent program framework; (ii) the simplification of project objectives, implementation arrangements, design and components; (iii) early preparation of engineering, social, environmental, and institutional aspects to ensure quality at entry; (iv) extensive consultation with key stakeholders to ensure increased ownership; (v) improved cross-sectoral and coordination with development partners to support necessary institutional reforms; and (vi) careful selection of the physical infrastructure to ensure maximum economic and social impact and regional spill-over.

35. Each project in this SOP is expected to have substantial positive regional spill-over and promote positive change as the majority of the investment focuses on important cross- border road links. In line with the overall program objective, sequential entry of countries in the program is proposed based on their readiness and achievement of program triggers. For

18 A detailed breakdown of activities and costs in the project is provided in Table 1 in Annex 2.

countries to join the horizontal regional program, the triggers are as follows: (i) a formal expression of interest to join the program; (ii) a program of activities designed to meet the PDO of the program; (iii) the preparation of detailed designs and related safeguards documents in form and substance acceptable to the Bank; and (iv) appraisal of the project by the World Bank. Those triggers have been developed based on experience of similar programs in other regions.

36. The CARs program meets the eligibility criteria contained in the Guidelines for IDA Regional Program Funding in IDA 16 as follows: (i) the program involves a minimum of three contiguous economically interdependent countries (Kyrgyz Republic, Tajikistan, and Kazakhstan); (ii) the expected welfare improvements (such as trade efficiency gains) cannot be fully achieved without the direct and integrated involvement of the countries in the program; (iii) the social and economic benefits spill over countries’ boundaries and can only be achieved through the coordinated implementation of an integrated set of infrastructure and facilitation measures in the countries; and (iv) the operational establishment and mandated role of the CAREC indicates that there is a platform for regional policy harmonization with a high degree of country and regional ownership.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

37. The participating countries of the program have agreed to use the existing regional coordination mechanism of CAREC in order to ensure the achievement of the PDO. Regional coordination would be exercised at two levels: (i) policy level; and (ii) the operational level. At the policy level, the Transport Sector Coordinating Committee (TSCC) within CAREC would be the platform to discuss policy-related issues, such as the harmonization of standards, norms, and parameters on vehicle (truck) weight and axle load limits and tariffication. At the project’s operational level, interactions between respective implementing agencies of the projects would be expected and supported through financing provided by the Bank on project management and implementation. This may include regular meetings between the implementing agencies to report on progress of physical investments.

38. The overall responsibility for the implementation of all activities under CARs-1 will lay with the Ministry of Transport and Communications of the Kyrgyz Republic (MOTC), including fiduciary responsibility for project execution. The Investment Project Implementation 19 Group (IPIG ) within the MOTC will be responsible for day-to-day administration of project activities which include, inter alia: (i) the management of designated accounts; (ii) financial management and reporting on the overall project; (iii) ensuring the execution of the audit of the project; (iv) preparation of quarterly financial and bi-annual progress reports; (v) the management of the environmental and social safeguards aspects; and (vi) undertaking all procurement and contract management activities for all components.

19 The IPIG with its 26 full-time staff was established in 1996 and has considerable experience in all project management aspects related to roads projects; it has provided project management assistance to MOTC for road projects valued at more than US$1 billion. Project implementation performance of IPIG has been rated satisfactory under the on-going Bank financed NRRP.

11 B. Arrangements with Development Partners

39. For the CARs-1, the Government has invited -along with the World Bank - the Japan International Cooperation Agency (JICA) and other developing partners such as the European Union (EC), the European Bank for Reconstruction and Development (EBRD), Islamic Development Bank (IDB) and the Exim Bank of China, to finance separate road sections along the Osh-Khujand axis. In this regard, the CARs-1 contributes substantially to leveraging contributions from those development partners as the IDA financing terms (grant element) allows the Government to attract non-concessional terms. It would build upon and physically connect to the on-going Bank financed NRRP in the Kyrgyz Republic and its two additional financing operations.

40. Coordination, joint implementation support and monitoring as well as collective policy dialogue mechanisms have been discussed with the development partners. During project preparation, efforts were made from the side of the World Bank to harmonize the set of criteria, guidelines and policies used for each project financed by individual development partners. The implementing agency however requested to use each financiers safeguards (most of which are similar to the World Bank safeguards policies) as well as fiduciary policies and guidelines. Coordination and cooperation during project implementation has been agreed upon between the development partners and the implementing agency.

C. Results Monitoring and Evaluation

41. The project has designed and includes a set of monitoring indicators at the project levels. The chosen indicators can be replicated in subsequent phases to allow the effective measurement of the outcome and results of the project(s) and aggregated to provide results for the program. These indicators together with the monitoring and evaluation arrangements are detailed in Annex 1. The overall responsibility for monitoring and evaluation of outcomes of CARs-1 will formally lie with the MOTC of the Kyrgyz Republic. MOTC will prepare half yearly progress report, with contributions from other stakeholders, and forward these to IDA within 45 days from the end of the reporting period. These reports will detail physical progress and progress in respect of the monitoring indicators in the results framework (Annex 1). The reports will also contain a summary of the status of the implementation of the EMPs and RAPs in respect of the improvement of the physical infrastructure.

D. Sustainability

42. The government’s commitment towards the rehabilitation of priority road links is a key determinant for the sustainability of the project. This commitment is demonstrated by the highlighting of the project’s importance in the NSDS. The government has already embarked on the rehabilitation of other segments of the Osh-Batken-Isfana road corridor and has completed construction of the several sections in time (e.g., Pulgon-Burgandy, Burgandy-Batken). The first phase of the CARs program is designed to ensure sustainability of the investment through improved road structures, with timely and improved maintenance practices, and targeted traffic safety measures.

V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table

Risk Category Rating

Stakeholder Risk Low

Implementing Agency Risk

- Capacity Moderate

- Governance Substantial

Project Risk

- Design Low

- Social and Environmental Moderate

- Program and Donor Low

- Delivery Monitoring and Sustainability Low

Overall Implementation Risk Substantial

B. Overall Risk Rating Explanation

43. The CARs program will be implemented by various countries and implementing agencies, including some post-conflict countries. As such, the weighted risk profile for the program is rated substantial. All countries share similar social, economic and political risks, and are perceived as countries with systemic fraud and corruption according to Transparency 20 International . Contentions between countries about access to natural resources such as water and pastureland increases regional instability which is aggravated by external security threats due to the region’s geopolitical position in a volatile neighborhood.

44. The CARs program which will realize its full benefits when all the phases have been implemented has been designed to reduce the risk of implementation failure. High quality and readiness at entry as well as proper sequencing of interventions within the objectives of the program is expected to help mitigate some of the risks in particular pertaining to the more difficult changes in the institutional framework necessary for effective road maintenance practices and the harmonization of transport operations across countries. The Operational Risk Assessment Framework (ORAF) is presented in Annex 4.

VI. APPRAISAL SUMMARY

A. Economic Analysis

45. An economic evaluation has been done using the Highway Development and Management Model (HDM-4). The return on the investments is satisfactory with an overall EIRR of 16.6 percent, Net Present Value (NPV) of US$14.9 million at a discount rate of 12 percent, and Benefit Cost Ratio of 1.5. The EIRR of individual road sections varies from 14.1 to

20 All Central Asian countries are placed on the top 2-15th percentile on Transparency International’s Corruption Index.

13 21 21.8 percent. A severe worst case scenario with construction costs increased by 15 percent and traffic growth rates benefits decreased by 15 percent still shows a reasonable return for the project with an EIRR of 13.8 percent. Switching values analysis shows that construction costs would have to increase by 40 percent for the project EIRR be reduced to 12 percent. Vehicle operating costs savings represent 85 percent of the project benefits, while travel time savings 22 represent 15 percent .

46. The HDM-4 economic model used for the cost-benefit analysis provides estimates of transport savings for different categories of users. The wider economic benefits from the project derive from other mechanism where changes in connectivity patterns increase the consumer welfare and enhance the production and trading patterns in the regions targeted by the project. The project is expected to have positive impact on the economy of the region and further promote the towns of Osh, Batken, and Isfana as regional centers (including links through the airports located there), generating substantial road user cost savings and improve per capita income at the local and regional level. An estimate of the wider benefits from connectivity improvements has been implemented combining partial equilibrium and fixed effect gravity 23 modeling to estimate connectivity changes. These changes are related to changes in total logistics costs on the main links of the network which add to the savings on transportation costs estimated from HDM-4, the savings in value of time. The aggregate benefits on consumers and traders in the Batken Oblast are estimated to represent between 1.6 and 2.3 percent of regional GNI.

B. Technical

47. The completed Feasibility Study covered the investigation of several sections, within and around Batken and Isfana cities, including those leading to respective Border Crossing Points (BCPs). It provided economic and technical assessments, and recommendations for sections suitable for financing under the project. The condition of the sections to be financed under the project are poor to very poor, with a roughness index (IRI) varying from 7 to 10, with extensive potholes, cracks, raveling, and edge breaks, which require an immediate intervention. The adopted intervention strategy (to be reflected in the detailed designs under preparation) consists of rehabilitation of the existing sections with 40 mm asphalt concrete, 60 to 70 mm binder course, gravel base and sub-base of 150 mm and 200 mm, respectively, with maximum use of the existing pavement layers.

48. The cost of the above interventions average to US$ 0.75 million/km, or US$ 49.2 million, in total, including physical/price contingencies of 20 percent and VAT of 18 percent. Current geometric characteristics of the road sections matches the requirement of category III/IV according to SNIP KR 32-01:2004 (carriage width up to 12 meters, shoulders width up to 2.50 meters, each), and therefore the intervention addresses the improvement of the evenness of the road profile and thereby reduction of road user costs. In addition, the rehabilitation works include, drainage, pipe/box culverts and bridges repair and construction,

21 Variation orders under the on-going Bank-financed NRRP have not exceeded 15 percent of original engineer’s estimates. 22 See Annex 5 for results of economic analysis and sensitivity analysis. 23 The model used is comparative static and does not capture structural changes brought by the improvement in connectivity.

14 24 following the norms and technical requirements in force in Kyrgyz Republic . This component also includes consultants’ services for construction supervision with the estimated cost of US$1.50 million equivalent.

49. The completion of the Project will make a contribution to the quality and level of maintenance undertaken at road links along the corridor (such as Pulgon-Batken section) which have just recently been rehabilitated with funding from the World Bank and the EBRD. Focus on maintenance of rehabilitated road sections will be achieved by the creation of a unit in charge of the performance-based maintenance and that will receive technical support and adequate tools to perform recurrent maintenance activities.

C. Financial Management

50. The overall financial management (FM) functions under the project, including budgeting and planning, accounting and reporting, internal control procedures, staffing of the FM function and external audit will be handled by the IPIG within the MOTC. This is identical to arrangements and responsibilities under the on-going Bank-financed NRRP. A full FM assessment was carried out for the IPIG in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board in March 2010. This assessment, combined with assessments done as part of regular FM supervision of the on-going Bank-financed NRRP indicates that the FM arrangements in the IPIG within the MOTC are adequate and meet Bank requirements. To meet the project’s reporting and accounting requirements, the existing accounting software used under NRRP (1C) will need to be updated in addition to the FM chapters of the existing Project Operational Manual (POM). The overall project risk for FM was assessed as moderate.

D. Procurement

51. Procurement under the project will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Procurement Guidelines); "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines); and provisions stipulated in the Financing Agreement. An initial procurement plan has been developed covering the procurement activities expected under project components and was agreed at negotiations. Thereafter, the procurement plan will be updated from time to time or at least once a year and each update will be subject to the Bank’s prior review. The initial procurement plan (see Annex 3) and subsequent updates will be published on the Bank’s external website in line with Bank’s requirements.

52. The MOTC has the overall responsibility for procurement activities, while its IPIG will carry out contract management activities. This is identical to arrangements and responsibilities under the on-going Bank-financed NRRP. An assessment of the capacity of the MOTC and its IPIG to implement all procurement activities for the project was undertaken in June 2013 to review the organizational structure, functions, staff skills and experiences, and adequacy for implementation of the project. As a result of considerable experience with prior and

24 SNIP 2.05.03-84 “Bridges and Culverts”, SNIP KR32-01: 2004 “Roads and Highways”, SNIP 2.03.01-84 “Concrete and Reinforced Concrete Constructions”, SNIP 2.05.07.91 “Industrial Transport”, SNIP 11-7-81 “”Construction in Seismic Regions”

on-going Bank-financed projects, the MOTC and its IPIG was assessed to be basically conversant with Bank procedures. The overall project risk for procurement after mitigation was assessed as moderate.

E. Social (including Safeguards)

53. Overall, the social benefits resulting from the project are expected to be significant. The project area (Batken oblast) is isolated geographically, economically and socially from the rest of the country and other parts of the Ferghana Valley. The rehabilitated road sections have great potential to enable enhanced trade and economic links between the Kyrgyz and Tajik areas of the Ferghana valley thereby contributing to social and economic integration of the region. This could be seen as a substantial social benefit which would help counter multi-dimensional fragility. The project will monitor some of the key social and economic benefits that are expected to result from the project, using indicators that are gender disaggregated. The consultant for construction supervision will report those indicators through their regular monitoring reports. The project will also consider other measures to support social and economic benefits during implementation, primarily through citizen engagement and beneficiary consultations. The grievance redress mechanism already operating under the on-going Bank-financed NRRP will be maintained and further strengthened under CARs-1.

54. The project triggers OP/BP 4.12 – Involuntary Resettlement due to land acquisition. Impacts involve compensation for assets such as fences, trees and crops as well as the demolition and subsequent compensation for a small number of structures along the section between Isfana and Kairagach. Some permanent acquisition of small private land parcels is needed along this section; at present, resettlement of occupied homes is not anticipated. The draft Resettlement Policy Framework (RPF) was disclosed in country on July 26, 2013 through MOTC website: www.piumotc.kg and at the Bank’s Info Shop on August 9, 2013 and final RPF on September 13, 2013 The RPF covers only the specific road segments financed by the Bank. Public consultations in Isfana and Batken city have been held on July 29, 2013 and July 30, 2013. An abbreviated site-specific Resettlement Action Plan (RAP) for the road section from Isfana to Kairagach has been prepared by MOTC and reviewed by the Bank.

F. Environment (including Safeguards)

55. The main adverse environmental and social impacts are site specific and transient and relate to the proposed rehabilitation of priority road sections in the Kyrgyz Republic and include the following: (i) air pollution and noise from trucks and other construction machinery, and asphalt plants; (ii) soil disturbance during earthmoving and material (gravel/sand/soil) extraction; (iii) tree-cutting and loss of vegetation; (iv) generation and disposal of construction and household (from construction camps) solid waste; and (v) construction camp management (which will be temporary with only minor and localized negative effects).

56. The project has been assigned the Environmental Category B – Partial Assessment. Road rehabilitation will be undertaken within the existing right of way (ROW) of the road and environmental impacts can thus be mitigated by good construction and housekeeping practices. The project triggers OP/BP 4.01 - Environmental Assessment. The site-specific Environmental Impact Assessment (EIA) has been finalized by MOTC, reviewed by the Bank’s Regional Safeguards Coordinator, and was disclosed. The final EIA was disclosed in country on October 18, 2013 through MOTC website: www.piumotc.kg and at the Bank’s Info Shop on October 22, 2013. The Environmental Management Plan (EMP) will be part of the civil works contract and

16 implementation with be monitored by the supervision consultants, MOTC, the IPIG, and the Bank team.

G. Other Safeguards Policies Triggered

Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP /BP 4.01) [X] [ ] Natural Habitats ( OP/ BP 4.04) [ ] [X] Pest Management ( OP 4.09) [ ] [X] Indigenous Peoples ( OP /BP 4.10) [ ] [X] Physical Cultural Resources ( OP/BP 4.11) [ ] [X] Involuntary Resettlement ( OP /BP 4.12) [X] [ ] Forests ( OP /BP 4.36) [ ] [X] Safety of Dams ( OP/ BP 4.37) [ ] [X] Projects on International Waterways ( OP /BP 7.50) [ ] [X] Projects in Disputed Areas ( OP /BP 7.60) [ ] [X]

57. Approximately half of the border between the Kyrgyz Republic and Tajikistan has not been officially demarcated. The Kyrgyz government has informed the Bank that there are two bilateral commissions set up between the Kyrgyz Republic and the Republic of Tajikistan to resolve border issues as well as cross-border economic and cultural issues. On the Kyrgyz side, the Minister of Transport and Communications heads the Kyrgyz delegation on the commission dealing with border demarcation. There is no pending international litigation between the Kyrgyz Republic and Tajikistan regarding border issues relevant to the project, nor is there conflicting legislation in the two countries that impacts the project on the issue of borders.

58. Certain road sections to be financed by IDA are in close proximity to the border with Tajikistan, including at least one Tajik enclave. For the reasons referenced in the preceding paragraph, the project does not trigger OP/BP 7.60. Nevertheless, to ensure close coordination between the two Governments, the Government of the Kyrgyz Republic provided the proposed alignment to the Government of the Republic of Tajikistan. In a letter from the Tajik Minister of Transport, the Government of the Republic of Tajikistan responded that it supports the proposed Bank-financed project linking Osh and Khujand through two transport routes and did not express reservations about the proposed alignment. Additionally, the government of the Kyrgyz Republic will inform the Government of the Republic of Tajikistan, local authorities and communities along the road alignment of the specific location of intended works before they begin. By supporting the proposed project, the Bank does not intend to prejudice the final determination of either parties’ claims to any lands in the project area.

17 Annex 1: Results Framework and Monitoring

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

Project Development Objectives

PDO Statement

The Central Asia Road Links (CARs) program is the result of a collaborative effort initiated by respective governments in the Central Asia region which has been developed as a regional, multi-phase program considered as a regional transformational project under IDA17. The program has the overall objective to increase transport connectivity between neighboring countries in Central Asia along priority cross-border road links whilst supporting improvements in road operations and maintenance practices.

Project Development Objective Indicators

Cumulative Target Values Data Source/ Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection

Volume of freight through Kyzyl-

Bel/Guliston and Annual (semi- Customs data,

Number 500000.00 500000.00 500000.00 510000.00 520000.00 550000.00 MOTC and its IPIG

Kairagach/Madaniy annual report) border service at border crossing points

Market accessibility

At the end of index of Batken Number 4.60 4.60 4.60 4.60 5.00 5.50 Survey MOTC and its IPIG

the project

Oblast

Road users satisfied Annual (baseline

Road user with maintenance of Percentage 0.00 20.00 30.00 50.00 70.00 80.00 Annual will be established

surveys the Pulgon-Batken during first year

18 road section project)

Annual budget allocation for routine (summer and winter)

Republican maintenance for

Amount(USD) 80000.00 80000.00 90000.00 100000.00 150000.00 200000.00 Annual budget and MOTC and IPIG road sections in

MOTC budget sustainable condition along the corridor under OBI

UAD

Strategic Plan on transport control has

Project been discussed at At the end of

Yes/No No No No No No Yes completion MOTC and its IPIG the regional level the project

report

(CAREC) and approved by MOTC

Intermediate Results Indicators

Cumulative Target Values Data Source/ Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection

Road user costs by truck along the

Project project road At the end of

Number 0.52 0.52 0.52 0.52 0.52 0.42 completion MOTC and its IPIG sections and in the project

report project area (US$/ veh-km)

Roads in good and

Project fair condition as a At the end of

Percentage 40.00 40.00 40.00 40.00 40.00 80.00 completion MOTC and its IPIG share of total the project

report classified roads

Kilometers Project

Size of the total At the end of

Sub-Type 420.00 420.00 420.00 420.00 420.00 420.00 completion MOTC and its IPIG classified network the project

Supplemental report

19 Roads rehabilitated, Progress

Kilometers 0.00 0.00 5.00 25.00 35.00 56.00 Annual MOTC and its IPIG

Non-rural Reports

Compliance by OBI

UAD with service level criteria as Project specified in the Percentage 0.00 10.00 30.00 50.00 70.00 100.00 Annual progress report MOTC and its IPIG

Service Level

Agreement

Project Development Objective Indicators Indicator Name Description (indicator definition etc.)

Volume of freight through Kyzyl-Bel/Guliston and This indicator measures the annual total freight volume crossing Kyzyl-Bel/Guliston and Kairagach/Madaniyat border crossing points Kairagach/Madaniyat border crossing points as recorded by the customs service of the Kyrgyz Republic in '000 tons.

Market accessibility index of Batken Oblast Passengers component -This indicator measures the average market accessibility of Batken Oblast, described as the sum of population of the selected major cities weighted by travel time to reach major markets. Major cities include Batken and Isfana. Freight component - a freight component such as average travel times for a typical freight truck between Batken to/from the Kyzyl-Bel/Guliston and from Isfana to/from Kairagach/Madaniyat border control points.

Road users satisfied with maintenance of the Pulgon-Batken This indicator measures the satisfaction of road users (by car, truck and bus) as expressed in the road section annual road user satisfaction survey to be undertaken with respect to the maintenance along the Pulgon-Batken road section. Road user satisfaction will be measured according to a scale (satisfactory/unsatisfactory).

Annual budget allocation for routine (summer and winter) This indicator measures the amount of funds in US$ allocated in the republican budget of the maintenance for road sections in sustainable condition along Kyrgyz Republic on an annual basis towards routine maintenance (winter and summer) for road the corridor under OBI UAD sections in sustainable condition along the Osh-Batken-Isfana road corridor.

Strategic Plan on transport control has been discussed at the This indicator measures the actual approval of the strategic plan on transport control by MOTC. regional level (CAREC) and approved by MOTC It also reflects whether the strategic plan was presented at the regional level, such as at a meeting of the Central Asia Regional Economic Cooperation.

Intermediate Results Indicators

Indicator Name Description (indicator definition etc.)

Road user costs by truck along the project road sections and in This indicator measures road user costs (vehicle operating costs) by truck along the project road project area (US$/ veh-km) sections and in project area in US$ per vehicle-kilometer. This indicator will be measured at the end of the project.

Roads in good and fair condition as a share of total classified Percentage of the total classified road network in the project area that is in good and fair roads condition depending on the road surface and the level of roughness. Classified roads are the roads that have been included in the roads legislation as public roads. Please note that this

21 indicator requires supplemental information Supplemental Value: Total classified network in the project area (KM). The Supplemental value is the total classified network in the project area. Classified roads are the roads that have been included in the roads legislation as public roads.

Size of the total classified network Classified roads are the roads that have been included in the roads legislation as public roads.

Roads rehabilitated, Non-rural Kilometers of all non-rural roads reopened to motorized traffic, rehabilitated, or upgraded under the project. Non-rural roads are roads functionally classified in various countries as Trunk or Primary, Secondary or Link roads, or sometimes Tertiary roads. Typically, non-rural roads connect urban centers/towns/settlements of more than 5,000 inhabitants to each other or to higher classes of road, market towns and urban centers. Urban roads are included in non- rural roads.

Compliance by OBI UAD with service level criteria as This indicator shows to what extent OBI UAD meets the service level criteria as specified in specified in the Service Level Agreement the Service Level Agreement, signed between MOTC and OBI UAD.

22 Annex 2: Detailed Project Description

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

The components of the First Phase of the CARs program will focus on the Kyrgyz Republic and include the following):

Component 1: Rehabilitation of Priority Road Links in Batken Oblast (estimated total cost US$51.30 million, including IDA financing of US$42.30 million)

This component includes civil works related to the rehabilitation of road sections around Batken city leading to the border crossing point (BCP) with Tajikistan at Kyzyl Bel/Guliston and between Isfana city and the BCP with Tajikistan at Kairagach/Madaniyat. The completed Feasibility Study covered the investigation of several sections in and around Batken and Isfana cities leading to respective BCPs. The road sections are classified as international roads reflecting their importance as segments of one of the six strategic road corridors of the Kyrgyz Republic. Traffic data indicates an average annual daily traffic (AADT) of between 3,000 around Batken city and 1,000 vehicles per day around Isfana city, of which about 20 percent are heavy trucks.

The sections to be financed under the project, as agreed between the Government of the Kyrgyz Republic and the World Bank, include (i) Batken roundabout–Tortgul (km232-248) and Batken – Kyzyl Bel/Guliston BCP , totaling to 20.41 kilometers, and (ii) Isfana West –Samat – Suluktu Center – Koltso – Kairagach/Madaniyat BCP, totaling to 36.08 kilometers. The conditions of these road sections are poor to very poor, with a roughness index (IRI) varying from 7 to 10, with extensive potholes, cracks, raveling, and edge breaks, which require an immediate intervention. The technical detailed designs for all sections to be financed under the project have been finalized in December 2013.

Current geometric characteristics of the road sections matches the requirement of category III/IV according to SNIP KR 32-01:2004 (carriage width up to 12 meters, shoulders width up to 2.50 meters, each), and therefore the intervention addresses the improvement of the evenness of the road profile and thereby reduction of road user costs. In addition, the rehabilitation works include, drainage, pipe/box culverts and bridges repair and construction, following the norms and technical requirements in force in Kyrgyz Republic (SNIP 2.05.03-84 “Bridges and Culverts”, SNIP KR32-01: 2004 “Roads and Highways”, SNIP 2.03.01-84 “Concrete and Reinforced Concrete Constructions”, SNIP 2.05.07.91 “Industrial Transport”, SNIP 11-7-81 “”Construction in Seismic Regions”).

The pavement is designed for a life-span of 15 years which is standard for such a road with traffic that is expected to grow. Alternatives such as reducing the design standard and reducing the pavement thickness have been considered but rejected due to the following reasons: (i) the expected future traffic, (ii) the road is the only “life line” for the region, (iii) it is better to invest upfront in category III/IV upfront rather than to upgrade in 5 years when traffic has increased, (iv) the road is part of the Government’s program of 6 strategic road corridors which are all

category III and above. The Bank team has reviewed the final detailed technical designs to ensure that the proposed design standards match international practice.

The adopted intervention strategy (to be reflected in the detailed designs under preparation) consists of rehabilitation of the existing section with 40 mm asphalt concrete, 60 to 70 mm binder course, gravel base and sub-base of 150 mm and 200 mm, respectively, with maximum use of the existing pavement layers. In the sections foreseeing a complete new asphalt pavement the existing asphalt pavement will be removed and processed for reuse. The crushed base will incorporate recycled asphalt from the existing pavement. The reconstructed road sections have been designed according to the required resilient modulus at a relative compaction of 95 percent and a surface roughness on opening of 2.5 IRI. Online work will consist of maintenance and overlay, only. Offline Road Construction comprises the major realignment between Sulukta and Koltso, using the existing narrow gauge rail track. The design for this section has been drawn up to SNIP Category III standard (2 x3.50 m lanes + 2 x 2.50 m shoulders) respectively. Pavement design follows that for the online reconstruction scenario with consideration of various existing sub-soil types.

Interventions in major structures include: In Batken – Kyzyl-Bel section a three-span bridge, in total 7.4 m wide and 18 m long was investigated. The bridge will be widened and new cornices and handrails will be installed. In Batken roundabout km 235 – km 248, a one span bridge crosses the Batyrkanov irrigation channel. It is about 9 m long and only 8.35 m wide, and the rehabilitation foresees the removal of existing pavement, followed by an additional reinforced slab, new sidewalks and handrails, waterproofing and asphalt pavement. In addition a three span 18 meter long bridge was investigated, which sidewalks are missing. The deck should be fully dismantled, and after widening its abutments reinforced concrete slab will be cast. In addition, the rehabilitation works foresee the construction of one sidewalk, handrails, waterproofing and paving. In Koltso – Kairagach BCP, the existing sidewalks and cornices of the bridge at km 4+180 will be dismantled. The existing pavement will be removed including waterproofing up to the existing concrete slab on top of the beams. Following an additional reinforced concrete slab, new sidewalks will be constructed including handrails, water-proofing and paving of the carriageway.

Component 2: Improvement of Road Operations and Maintenance Practices (Total cost US$1.70 million, including IDA financing of US$1.70 million)

This component will finance the provision of goods, and consultants’ services for piloting improved operations and maintenance practices, as well as better planning and budgeting of maintenance. Improvement of maintenance practices will include the establishment of Service 25 Level Agreement between MOTC and OBI UAD . No need institutional set up is proposed (such as the setting up of a separate team or unit), but rather to work with existing staff within the OBI UAD. Under the Service Level Agreement, OBI UAD will be responsible for routine maintenance (summer and winter) and emergency works for the entire Osh-Batken-Isfana corridor, with special focus on those sections which have recently been rehabilitated and/or are in sustainable condition. The OBI UAD will need to receive secured and adequate funds for

25 In order to cover the entire Osh-Batken-Isfana road corridor, MOTC agreed to transfer two local maintenance units from the Regional Maintenance Department Osh-Sary-Tash-Irkeshtam (OSI UAD) to the OBI UAD.

routine maintenance as well as emergency works to maintain the road sections at a defined level of service, and in accordance with the performance indicators (targets). These costs will cover staff, operation of equipment and purchase of materials in order to perform maintenance activities. The project will support OBI UAD, and its DEPs along the Osh-Batken Isfana road corridor, with a set of equipment (as detailed in Annex 2) – about US$ 1.00 million equivalent. Additionally, the Component 2 will support exposure of OBI UAD management to international practices on maintenance techniques through the hiring of individual internationally recruited consultants.

Finally, the improvement of road operations will include a review of regional standards, norms, and parameters on vehicle (truck) weight and axle load limits and tariffication as well as the development of a strategic plan for the institutional arrangements for transport control, the setting up of an axle-load control system and methods for enforcement of axle load limits. Investments or technical assistance in border crossing is not envisaged. Exposure to international practices on maintenance techniques through the hiring of two individual internationally recruited consultants is expected to be financed out of the project. Those technical experts (road engineers and specialists) would be hired for duration of at least 12 months to work jointly with the new unit established at the local level and train them in the use of the equipment and modern maintenance practices.

A tentative list of road maintenance equipment has been agreed upon by MOTC and includes inter alia: mechanized combined road machines, dump trucks, asphalt concrete cutters, bitumen tank semi-trailer, air piston mobile compressor, crack sealing machine, etc. This list includes the necessary equipment to undertake summer maintenance, winter maintenance, current repairs, and emergency works at the Pulgon-Batken road section along the corridor. This equipment will be financed out of the project and may include: bitumen tank semitrailer, dump truck, asphalt- concrete line cutter, air piston mobile compressor.

Improvement of road operations will include a review of regional standards, norms, and parameters on vehicle (truck) weight and axle load limits and tariffication as well as the development of a strategic plan for the institutional arrangements for transport control, the setting up of an axle-load control system and methods for enforcement of axle load limits. Investments or technical assistance in border crossing is not envisaged as this is covered by on- going ADB-finance Regional Improvement of Border Services (RIBS) Project.

Component 3: Project Management and Implementation (Total cost US$1.00 million, including IDA financing of US$1.00 million)

This component is expected to finance the provision of goods, consultants’ services, and training, operating costs, including a financial management software and financial audit to support project coordination, implementation, and management. MOTC, its IPIG, and the World Bank agreed that at least two new staff will have to be hired in order to strengthen implementation capacity of IPIG. Those staff includes a road engineer with experience in international tendering for road works in the Kyrgyz Republic as well as a lawyer to review relevant regulations and legislations resulting out of the technical assistance financed out of the on-going NRRP as well as to be financed out of the proposed CARs, and probably a material engineer to increase internal capacities in overseeing quality of performed works and materials used during the implementation of reconstruction contracts.

25 Annex 3: Implementation Arrangements

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

The following institutional arrangements for regional project coordination and country-based project implementation are being followed.

Regional Program Coordination As staged in Section I.D. of the main text, the participating countries of the program have an existing regional coordination mechanism, the Central Asia Regional Economic Cooperation (CAREC). CAREC is a partnership of 10 countries (Afghanistan, Azerbaijan, Kazakhstan, Kyrgyz Republic, Mongolia, Pakistan, People’s Republic of China, Tajikistan, Turkmenistan, and Uzbekistan) and is supported by 6 multilateral institutions, including the World Bank. CAREC aims to promote regional cooperation in four priority areas, including transport and trade facilitation. The on-going Transport and Trade Facilitation Strategy and Action Plan for 2008-2017 presents the shared vision of transport and trade facilitation development across the region, identifying three transport goals: (i) establish competitive transport corridors across the CAREC region; (ii) facilitate efficient movement of people and goods across borders; and (iii) develop safe, people-friendly transport systems. The Strategy’s Implementation Action Plan details both physical and non-physical investments designed to improve the region’s competitiveness, and expand trade – both among CAREC economies, regionally, and globally. At the policy level, the Transport Sector Coordinating Committee (TSCC) within CAREC would be the platform to discuss policy-related issues, such as the harmonization of standards, norms, and parameters on vehicle (truck) weight and axle load limits and tariffication. At the project’s operational level, interactions between respective implementing agencies of the different phases would be expected and supported through financing provided by the Bank on project management and implementation.

Project Institutional and Implementation Arrangements

The first Phase of the CARs program in the Kyrgyz Republic will be implemented by the MOTC. MOTC will have overall responsibility for the implementation of all activities under the project, including fiduciary responsibility for project execution. The IPIG within the MOTC will be responsible for day-to-day administration of project activities which include, inter alia: (a) the management of designated accounts; (b) financial management and reporting on the overall project; (c) ensuring the execution of the audit of the project; (d) preparation of quarterly financial and bi-annual progress reports; (e) the management of the environmental and social safeguards aspects; and (f) undertaking all procurement and contract management activities for all components.

The IPIG which was established in 1996 has considerable experience in all project management aspects related to roads projects; it has provided project management assistance to the MOTC for more than 15 road projects valued at more than US$ 1 billion. The IPIG has 26 full-time staff. Project implementation performance of IPIG has been satisfactory under the on-going Bank- financed National Road Rehabilitation (Osh-Batken-Isfana) Project. MOTC through IPIG will

26 engage consultants, financed from the credit/grant, as and when needed to assist the IPIG with complex issues, especially those related to the implementation of Component 2.

Financial Management The overall financial management (FM) functions under the project, including budgeting and planning, accounting and reporting, internal control procedures, staffing of the FM function and external audit will be handled by the IPIG within the MOTC. This is identical to arrangements and responsibilities under the on-going Bank-financed NRRP. A full FM assessment was carried out for the IPIG in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board in March 2010. This assessment, combined with assessments done as part of regular FM supervision of the on-going Bank-financed NRRP indicates that the FM arrangements in the IPIG within the MOTC are adequate and meet Bank requirements. To meet the project’s reporting and accounting requirements, the existing accounting software used under NRRP (1C) will need to be updated in addition to the FM chapters of the existing Project Operational Manual (POM). The overall project risk for FM was assessed as moderate.

Strengths and Weaknesses: There are no major weaknesses at the IPIG MOTC. The significant strengths that would provide a basis for reliance on the project financial management system include: (i) FM arrangements similar to existing projects being implemented by the IPIG MOTC and found to be adequate; (ii) no significant issues arisen in the audits of the active projects being implemented by the IPIG MOTC; and (iii) experienced FM staff. It has been agreed that the existing accounting software for accounting and financial reporting purposes of the proposed project, specifically designed to meet World Bank financed project requirements including ability to generate Interim Financial Reports, withdrawal application, statements of expenditure and annual financing statements will be updated within 30 days of the project’s effectiveness.

Budgeting and planning. The IPIG within MOTC has acceptable planning and budgeting capacity in place. However, it should be noted that budget approval process is delayed in the Kyrgyz Republic for the last two years, but the situation is improving gradually. Budget for 2013 was approved in March 2013. Once approved the budget is entered into the accounting system by the Financial Manager and used for monitoring purposes.

Accounting and Reporting. Cash basis of accounting will be applied for projects’ accounting. Cash basis IPSAS will be used by MOTC and its IPIG for reporting purposes. IPIG utilizes 1- C accounting software that is specially designed to meet Bank-financed project requirements, including ability to generate IFRs, withdrawal applications, statement of expenditures (SOEs) and annual financial statements. An additional module will need to be included in the existing accounting software to allow accounting for the project within 30 days after the Project’s effectiveness. Interim Financial Reports (IFRs) will be prepared and submitted to the Bank within 45 days after the end of each quarter. Annual audits of the project financial statements will be provided to the Bank within six months after the end of each fiscal year and at the project closing. The Recipient will have to audit reports for the project at the agreed public venue within one month after receipt of these reports from auditors; the Bank will make them publically available according to the World Bank Policy on Access to Information. As part of project

implementation support and supervision missions, quarterly interim unaudited financial reports (IFRs) will be reviewed and regular risk-based FM missions conducted.

Internal Controls. Internal control procedures followed by the IPIG MOTC are very comprehensive and documented in Financial Management section of the Project’s Operational Manual (POM) for the on-going NRRP in detail. The FM section of the POM will need to be updated to include the project in line with preparation of the general POM.

Staffing. Financial management function of the on-going NRRP is covered by two people, including one Financial Manager who works for 8 internationally funded investment projects of the MOTC and one dedicated Disbursement Specialist. Such staffing arrangements are assessed to be adequate.

External Audit. Audited Financial Statements for the on-going NRRP have been received on time and the auditors, KPMG, Kyrgyz Republic issued unmodified (clean) audit opinion on the projects’ financial statements. The management letter enclosed to the audit report did not highlight major internal controls deficiencies.

The project’s audit will be conducted (i) by an independent private auditor acceptable to the Bank, on terms of reference acceptable to the Bank, and selected by the MOTC; and (ii) according to the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC). The terms of reference will include activities covering (i) audits of financial statements, (ii) assessments of the accounting system, and (iii) a review of the internal control mechanisms. The following table identifies the required audit reports that will be submitted by the PCU together with the due date for submission.

Audit Report Due date Project Financial Statements Within 6 months of the end of The Project Financial Statements include Sources and Uses of each fiscal year and also at the Funds, Uses of Funds by Project activities, Statement of closing of the project Expenditures Withdrawal Schedule, Designated Account Statement, Notes to the financial statements, and Reconciliation Statement

The audited financial statements will be disclosed to the public in a manner acceptable to the Bank. Following the Bank’s formal receipt of these statements from the Recipient, the Bank makes them available to the public in accordance with the World Bank Policy on Access to Information.

Disbursements Disbursements from the IDA Accounts will follow the transaction-based method, i.e., traditional Bank procedures: including advances to the designated account, direct payments, Special Commitments and reimbursement (with full documentation and against Statements of Expenditures - SOEs). The separate designated account will be opened in a commercial bank acceptable to the Bank. For payments above the minimum application size, as will be specified

in the Disbursement Letter, the MOTC and its IPIG may submit withdrawal applications to the Bank for payments to suppliers and consultants directly from the Credit Accounts. Disbursement arrangements will be detailed in the Disbursement Letter.

Procurement Procurement under the project will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Procurement Guidelines); "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines); and provisions stipulated in the Financing Agreement. The World Bank Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants dated October 15, 2006 and revised on January 2011, will also apply.

Assessment of the agencies’ capacity to implement procurement

The implementation responsibility of the proposed Project would lie with the MOTC through the IPIG.

Summary of Risks and Risk Mitigation Measures:

The key issues and risks concerning procurement for implementation of the project include: (i) potential risk of delays in the implementation of the project, due to the complexity of the procurement process and decision making within the MOTC; and (ii) limited number of experienced staff within IPIG with the capacity to undertake procurement and monitor contract implementation in accordance with Bank’s procedures and agreed timeline.

Given the findings of the assessments the initial overall procurement risk under the project is assessed as substantial. To mitigate the identified procurement-related risks, the following mitigation actions have been agreed:

Actions Deadline 1. Preparation of a Project Operational Manual (POM) with a Negotiations (done) detailed chapter on procurement including detailed description of procurement decision making process and accountability for Procurement Decisions; 2. Prepare a detailed procurement plan for the first 18 months of Negotiations (done) the project and submit updates as and when required 3. Preparation of the bidding documents, ToRs and Draft RFPs for On-going the first year of project implementation to facilitate the initiation of the procurement as per the agreed Procurement Plan 4. Ensure quality review of the both technical specifications/ Ongoing TORs, Bid Evaluation Reports and the final deliverables 5. Signing of the contract with contract administration specialist Not later than 3 and road engineer with procurement experience months after project effectiveness

It is expected that, after the above measures have been taken, the risk would be reduced to “Moderate”.

Procurement Implementation and Arrangements

Procurement of works and goods and consulting services. The main activities to be procured under the CARs include civil works for rehabilitation of three road sections (Isfana-Kairagach, Batken-Kyzyl-Bel and Batken-Tortkul), procurement of road maintenance equipment, consultant services for technical supervision, project audit, training and salaries of IPIG staff. The IPIG staff hired under the NRRP project will continue working for implementation of the project activities.

Draft detailed designs and first procurement packages are under finalization by MOTC. The process of pre-qualification for selection of the contractors for civil works is expected to be launched immediately after the negotiations of the project.

Shortlists composed entirely of national consultants. Short lists of consultants for services estimated to cost less than U$100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The Bank's Standard Request for Proposal Document would be used as a base for all procurement of consultancy services to be procured under the Project. Some of the PIU staff hired under previous projects would continue working for implementation of the Project.

Training: As will be agreed during project implementation, IPIG and MOTC staff may attend procurement training organized by World Bank and/or other institutions.

Operating Costs: The grant/credit will finance incremental operating costs. An operating costs will cover dissemination of Project related information, travel costs, lodging and per diem for field trips related to Project implementation, at the rates specified under the financial management requirements set in the Project Operational manual; vehicle rent; supplies and utilities; salaries of contractual staff; mail, advertisement costs, translation costs, commercial bank charges, communication costs, office equipment maintenance, as such costs shall be agreed with the Bank on an annual basis, but excluding salaries of officials and /or employees of the Recipient’s civil service as well as any contributions by employers to the Social Fund..

Advance Procurement: In order to advance procurement activities MOTC has agreed to advance procurement before project effectiveness in line with the agreed procurement plan.

Procurement Supervision and Ex-post Review: Routine procurement reviews and supervision will be provided by the procurement specialist based in the country office. In addition, two supervision missions are expected to take place per year during which ex-post reviews will be conducted for the contracts that are not subject to Bank prior review on a sample basis (20 percent in terms of number of contracts). One ex-post review report will be prepared per fiscal year, including findings of physical inspections for not less than 10 percent of the contracts awarded during the review period.

30 Procurement Thresholds and Methods of Procurement: The following methods of procurement shall be used for procurement under the project. It has been agreed that if a particular invitation for bid comprises of several packages, lots or slices, and invited in the same invitation for bid, then the aggregate value of the whole package determines the applicable threshold amount for procurement and also for the review by the Bank. The national competitive bidding (NCB) conditions will be part of Financing Agreement.

Contracts

Expenditur Subjects to

Contract Value Threshold (US$) Procurement Method e Category Prior Review

(US$)

All ICB ≥200,000 ICB

contracts Goods (including <200,000 NCB First 2 contracts

non- consulting <100,000 Shopping First 2 contracts

services) All DC NA DC

contracts

All ICB ≥1,000,000 ICB

contracts

<1,000,000 NCB First 2 contracts

Works <100,000 Shopping First 2 contracts

All DC NA DC

contracts

Pre-Qualification will apply to works contracts valued at or more than $ 10,000,000

QCBS/QBS/LCS/FBS/CQ All contracts

Irrespective of Value

S* above US$

100,000 for NA SSS

firms plus the

1st CQS

Consultant

contract

Services

regardless of

(including

value; and all

training)

contracts above NA IC US$ 50,000 for

individuals; and

all SSS

contracts

Notes: Shortlist can include national consultants only for contracts of less than US$100,000 equivalent Legend: ICB – International Competitive Bidding NCB – National Competitive Bidding DC – Direct Contracting QCBS – Quality and Cost Based Selection QBS – Quality Based Selection LCS – Least Cost Selection FBS – Fixed Budget Selection *CQS – Selection Based on Consultants’ Qualifications will be followed depending on type of assignments for estimated value less than $300,000 SSS – Single Source Selection IC – Individual Consultants

Procurement Plan (PP). An initial procurement plan has been developed covering the procurement activities expected under project components and was agreed at negotiations. Thereafter, the procurement plan will be updated from time to time or at least once a year and each update will be subject to the Bank’s prior review. The initial procurement plan presented below and subsequent updates will be published on the Bank’s external website in line with Bank’s requirements.

The prior review thresholds will be periodically reviewed and revised as needed during the project implementation period based on implementation of risk mitigation measures, reports from procurement post-review, and improved capacity of the implementing agency.

32 Procurement Plan - Goods and Works

Compon WB No-

ent Date of Date of PQ PQ WB no- WB Rvw WB No- Date of Bid Date of Date of

Item Contract Description Procu. proposal Date of Draft Date of Bid objection to Contract Referenc Contract Ref. № Plan vs Actual invitation to Evaluation objection to (Prior/ objection to Invitation to Evaluation Contract № Method BD to WB Opening Contract e as per PQ submission Report PQ Report Post) BD Bids Report Signing Completion Award

Коды Обзор

Дата Конкурс. Одобрение

согласн Дата объяв. Оценочный Одобрение Банка Одобрение Вскрытие

Метод подачи документ на Оценочный ВБ на Подписание Завершение

№ о № Контракта Описание контракта План и Факт пригл. на отчет по ВБ на ПК (предвар ВБ на Объявление конкурсных закупок заявок на рассмотрен отчет присуждение контракта контракта

Таблице пред. квал. пред. квал отчет ит./после конкурс. док. заявок пред. квал. ие ВБ контракта

Затрат дующ.)

GOODS/ТОВАРЫ

Road Maintenance Equipment for

1 CARs/ICB-G-01 Plan/План ICB N/A N/A N/A N/A prior 3/21/2014 4/4/2014 4/11/2014 5/23/2014 6/6/2014 6/20/2014 6/27/2014 8/26/2014

the OBI road corridor

Дорожно-эксплуатационное оборудование для дорожного Actual/Факт

коридора ОБИ

2 CARs/SH-G-01 IPIG office equipment Plan/План SH N/A N/A N/A N/A prior 11/7/2014 11/21/2014 11/28/2014 12/12/2014 12/19/2014 1/2/2015 1/9/2015 2/8/2015

Офисное оборудование ГРИП Actual/Факт

3 CARs/SSS-G-01 1C Accounting Software Plan/План SSS N/A N/A N/A N/A prior 3/16/2014 3/30/2014 N/A N/A N/A 4/20/2014 4/27/2014 5/27/2014

Програмное обеспечение (софт) Actual/Факт

1С Бухгалтерия

WORKS/РАБОТЫ

Isfana-Karagach section 36 km,

CARs/ICB-CW-Lot 1 including 12 km of new Plan/План ICB 3/21/2014 4/25/2014 5/9/2014 5/23/2014 prior 5/30/2014 6/13/2014 6/20/2014 8/1/2014 8/22/2014 9/5/2014 9/12/2014 2/28/2017

construction

Исфана-Карагач, участок 36 км,

включая 12 км нового Actual/Факт

строительства

Batken-Kyzyl-Bel (border point),

CARs/ICB-CW-Lot 2 section 5,2 km; Batken-km248, Plan/План ICB 3/21/2014 4/25/2014 5/9/2014 5/23/2014 prior 5/30/2014 6/13/2014 6/20/2014 8/1/2014 8/22/2014 9/5/2014 9/12/2014 2/28/2017

section 14,3 km (km234-km248)

Баткен-Кызыл-Бель (граница),

участок 5,2 км; Баткен-248км, Actual/Факт

участок 13 км (км 235-км248)

33 Procurement Plan – Consultancy Services

WB No-

Request for Date of Combined WB No- Date of Date of

Item Select. WB Review Draft RFP (incl. objection to Tech. Evaluation WB No-objection Draft Final

Contract Ref. Contract Description Plan vs Actual Exp. Of RFP Issued Proposal Tech & Fin objection to Contract Contract

№ Method (Prior/ Post) TOR, Short List) RFP (full Report (TER) to TER Contract

Interest Submission Eval. Report Draft Contract Signing Completion

package)

Обзор

Одобрение

№ Банка Технический Проект Одобрение

Метод Запрос на Проект ППП вкл Банка на Срок подачи Одобрение ВБ Комбин. Подписание Завершение

Пунк (предварит./ ТЗ и КС Выпуск ППП оценочный оцен. отчет финального Банка на контракта контракта № Контракта Описание контракта План и Факт отбора выраж. заинт полный предложений на ТО

та последующ. отчет( ТО) контракта контракт пакет ППП

)

Consulting Services for

1 CARs/CS-QCBS-01 Plan/План Prior 3/14/2014 4/11/2014 4/25/2014 4/28/2014 6/9/2014 6/30/2014 7/14/2014 7/28/2014 8/4/2014 8/18/2014 8/25/2014 2/10/2017 QCBS construction supervision

Консультационные услуги

по надзору за Actual/Факт

строительными работами

Review of axle load and

2 CARs/CS-QCBS-02 Plan/План QCBS Prior 4/16/2015 5/28/2015 6/11/2015 6/14/2015 7/26/2015 8/16/2015 8/30/2015 9/13/2015 9/20/2015 10/4/2015 10/11/2015 3/29/2018

transport control

Рассмотрение

весогабаритного контроля

Actual/Факт

(осевая нагрузка и

транспортный контроль)

3 CARs/CS-LCS-01 Project audit Plan/План LCS Prior 9/7/2015 10/19/2015 11/2/2015 11/5/2015 12/17/2015 1/7/2016 1/21/2016 2/4/2016 2/11/2016 2/25/2016 3/3/2016 TBD

Аудит проектных счетов Actual/Факт

34 WB No- WB No-

WB No- Request for Evaluation Date of Date of

Firm or Select. WB Review objection to RFP Issued Proposal Draft Final objection to

Item № Contract Ref. Contract Description Plan vs Actual Draft TOR objection to Exp. Of report for Contract Contract

Ind. Method (Prior/ Post) RFP/ Short (for CQS) Submission Contract Draft

TOR Interest Short list Signing Completion list Contract

Фирма Одобрение Одобрение

Обзор Банка Оцен. отчет Срок подачи Проект

или Метод Одобрение Запрос на ВБ на ППП ВБ на Подписание Завершение

№ Пункта № Контракта Описание контракта План и Факт (предварит./ Проект ТЗ по краткому Выпуск ППП предложени финального

Индивид отбора ВБ выраж. заинт и краткий финальный контракта контракта

последующ.) списку й контракта уал список контракт

Financial Manager Plan/План Ind SSS prior 12/4/2014 12/11/2014 N/A N/A N/A N/A N/A 12/18/2014 12/25/2014 1/1/2015 6/30/2019

1 CARs/CS-IC-01

Финансовый менеджер Actual/Факт

Environmental (safeguards)

2 CARs/CS-IC-02 Plan/План Ind SSS prior 12/4/2014 12/11/2014 N/A N/A N/A N/A N/A 12/18/2014 12/25/2014 1/1/2015 6/30/2019

Specialist

Специалист по защитным Actual/Факт

мерам (эколог)

3 CARs/CS-IC-03 Communications Specialist Plan/План Ind SSS prior 12/4/2014 12/11/2014 N/A N/A N/A N/A N/A 12/18/2014 12/25/2014 1/1/2015 6/30/2019

Специалист по связям Actual/Факт

4 CARs/CS-IC-04 Procurement Specialist Plan/План Ind SSS prior 12/4/2014 12/11/2014 N/A N/A N/A N/A N/A 12/18/2014 12/25/2014 1/1/2015 6/30/2019

Специалист по закупкам Actual/Факт

5 CARs/CS-IC-05 Disbursement Specialist Plan/План Ind SSS prior 12/4/2014 12/11/2014 N/A N/A N/A N/A N/A 12/18/2014 12/25/2014 1/1/2015 6/30/2019

Специалист по выплатам Actual/Факт

Contract Administration

6 CARs/CS-IC-06 Plan/План Ind IC prior 5/21/2014 5/28/2014 6/4/2014 6/11/2014 N/A N/A N/A 6/18/2014 6/25/2014 7/1/2014 6/30/2019

Specialist

Специалист по контрактам Actual/Факт

Road Engineer (with experience

7 CARs/CS-IC-07 Plan/План Ind IC prior 5/21/2014 5/28/2014 6/4/2014 6/11/2014 N/A N/A N/A 6/18/2014 6/25/2014 7/1/2014 6/30/2019

in procurement)

Инженер-дорожник (с опытом Actual/Факт

закупок)

8 CARs/CS-IC-08 Lawyer Plan/План Ind IC prior 5/21/2014 5/28/2014 6/4/2014 6/11/2014 N/A N/A N/A 6/18/2014 6/25/2014 7/1/2014 6/30/2019

Юрист Actual/Факт

9 CARs/CS-IC-09 Driver Plan/План Ind IC prior 5/21/2014 5/28/2014 6/4/2014 6/11/2014 N/A N/A N/A 6/18/2014 6/25/2014 7/1/2014 6/30/2019

Водитель Actual/Факт

Office-Manager/Translator

10 CARs/CS-IC-10 Plan/План Ind IC prior 5/21/2014 5/28/2014 6/4/2014 6/11/2014 N/A N/A N/A 6/18/2014 6/25/2014 7/1/2014 6/30/2019

(Kyrgyz-Russian)

Офис-менеджер/Переводчик Actual/Факт

(Кырг-Русс)

Office-Manager/Translator

11 CARs/CS-IC-11 Plan/План Ind IC prior 5/21/2014 5/28/2014 6/4/2014 6/11/2014 N/A N/A N/A 6/18/2014 6/25/2014 7/1/2014 6/30/2019

(English-Russian)

Офис-менеджер/Переводчик

Actual/Факт

(Англ-Русс)

Individual International

Consultants for Road Plan/План Ind IC prior 8/20/2014 8/27/2014 9/3/2014 9/10/2014 N/A N/A N/A 9/17/2014 9/24/2014 10/1/2014 TBD

maintenance practices

12 CARs/CS-IC-12 Индивидуальные

междуанродные консультанты Actual/Факт

по практике дорожного

содержания

Environmental and Social (including safeguards)

Policy on Environmental Assessment (OP/BP 4.01) is triggered. Road rehabilitation will generally be undertaken within the existing right of way of the road and environmental impacts can be mitigated by good construction and housekeeping practices. Environmental issues will be similar to those under the ongoing Bank-financed NRRP. In order to comply with national environmental legislation and requirements of the World Bank, the EA/EMP was prepared by the MOTC which covers road sections financed under the project.

The Environmental Category of the project is “B”. The alignment of the proposed road sections will go mainly along the existing road and in some places (i.e. section Sulukta - Koltso village) through open space or farmland. The road alignment will not go through either forests or protected areas/important natural habitats and OP/BP 4.36 Forests and OP/BP 4.04 Natural Habitats will not be triggered.

The MOTC is responsible for the implementation of all transport and communications related projects. MOTC and its IPIG have accumulated substantial knowledge on project management from the implementation of projects financed by the World Bank and other development 26 partners. IPIG is supporting MOTC on a day-to-day basis on safeguards related functions of the project, assessment and analysis of project progress, and implementation of safeguards policies. IPIG staff (two environmental safeguard specialists and one social safeguards specialist) have been assigned to update the environmental and social safeguards documentation and monitor compliance with safeguards requirements during project implementation.

Monitoring & Evaluation The project design includes an agreed set of Project Monitoring Indicators to effectively measure the outcome and results of the project and program. The indicators (Annex 1) will be collected, monitored, reported and disseminated by MOTC with support from IPIG. The baseline data for CARs-1 has been collected during the preparation phase by IPIG, and the Bank team from secondary sources. Capacity for data collection within MOTC and its IPIG is assessed as satisfactory. The cost for establishing data collection, monitoring and reporting will be borne from the project (component 3: project management and implementation).

Role of Partners The World Bank has been working in close coordination with other development partners in Central Asia on transport issues to ensure complementary support along transport corridors. Exim Bank of China has become the largest investment partner of the Government in the road sector, followed by ADB. For the purposes of the Central Asia Road Links Program, close coordination with CAREC is foreseen as well as development partners that are parallel-financing

26 The IPIG has worked with Asian Development Bank (ADB), the Eurasian Development Bank (EDB), the European Bank for Reconstruction and Development (EBRD), the delegation of the European Union (EU), the Islamic Development Bank (IsDB) as well as China Exim Bank.

36 road segments along the corridors. For the first phase (CARs-1) in the Kyrgyz Republic, this would include JICA, EBRD, EDB, IDB as well as the Exim Bank of China.

37 Annex 4: Operational Risk Assessment Framework (ORAF)

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

Project Stakeholder Risks Stakeholder Risk Rating Low

Risk Description: Risk Management: Donors will support activities that are scattered without much MOTC organizes regular exchanges with other donors; a donor coordinating group with a coordination among them (e.g., procurement, supervision). working group on transport has been established.

Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both Yearly

Implementing Agency (IA) Risks (including Fiduciary Risks)

Capacity Rating Moderate

Risk Description: Risk Management: Experience in the past and on-going project in the country shows IPIG should carefully analyze its human resources and volume of work and request additional frequent procurement delays. Shortage of FM staff can results in staff, if necessary. The Bank team will also take an implementing agency capacity assessment inadequate capacity to maintain FM arrangements at satisfactory during preparation of the proposed Project; careful procurement planning and realistic scheduling; level. Safeguards staff seems adequate. advanced preparation of technical specifications or ToRs.

Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Both

Governance Rating Substantial

Risk Description: Risk Management: IPIG fails to implement proper contract management. An internationally recruited supervision consultant will be hired to supervise the implementation of civil works. This will be complemented by implementation support missions (with field visits) scheduled at least twice a year.

Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Both Semi-Annually

Risk Management:

Project staff and other stakeholders to be trained in procedures and processes required for World Bank financed projects (potentially with increased support from EXT). Fiduciary due diligence through rigorous reviews to determine that activities have been implemented following Bank operational policies, guidelines and procedures. An internationally reputable supervision consultant will be hired for the civil works; a technical audit is proposed to be undertaken once civil works are completed. The disclosure of project documentation per Bank disclosure policies, transparent procurement process will serve to provide information to civil society. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Implementation

Project Risks

Design Rating Low

Risk Description: Risk Management: Detailed technical designs not appropriate and over-dimensioned Proper packaging of contracts will ensure contract size is appropriate and highest competition. in addition to in-proper packaging of contracts. Preparation of designs will be done by an internationally reputable consulting firm.

Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Completed Both

Social and Environmental Rating Moderate

Risk Description: Risk Management: Risk of low degree of safeguards integration into project Bank team will expedite due diligence (detailed field visits) to review the performance by the structure and budgeting. Priority given to construction schedule contractors. Land acquisition and resettlement is seen to be minor given that the expected works may result in poor handling of environmental and social matters. are mainly rehabilitation along the right of way. The grievance redress mechanism will be used to make sure affected people can voice concerns.

Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Implementation

Program and Donor Rating Low

Risk Description: Risk Management:

39 The road sections to be rehabilitated under the Project end at the Regular communication between the Bank and ADB on trade and transport facilitation has been

border with Tajikistan. There is no trade facilitation and custom initiated within the framework of CAREC. This will also include regular exchange on the status of

reform component in the Project as ADB is preparing the RIBS. borders.

There is a risk emanating from the closing of borders with

Resp: Status: Stage: Recurrent: Due Date: Frequency:

neighboring countries which has effects on trade patterns.

Bank In Progress Both

Delivery Monitoring and Sustainability Rating Low

Risk Description: Risk Management:

IPIG will increase coordination with MOTC staff in order to ensure technical input from MOTC

Given the focus on contract management within the

staff.

implementing agency, MoTC may not have the ability to

monitor results and impacts and supervise related consultancy Resp: Status: Stage: Recurrent: Due Date: Frequency:

contracts on maintenance. Sustainability of the investments in Client Not Yet Due Implementation

the road sections requires renewed focus on road maintenance

Risk Management: financing.

MOTC to engage actively on the need to allocate more on road maintenance, using effective

decision making tools (such as the Road Asset management system) to demonstrate the needs and

priorities of road maintenance program

Resp: Status: Stage: Recurrent: Due Date: Frequency:

Client Not Yet Due Implementation

Resp: Status: Stage: Recurrent: Due Date: Frequency:

Overall Risk

Overall Implementation Risk: Rating Substantial

Risk Description:

Risks involved in the implementation of the CARs-1 and overall program are substantial due to high risks at the country/regional level despite the fact that implementation of the on-going Project in the Kyrgyz Republic is satisfactory due to the high ownership by MOTC and substantial capacity in its implementing agency, IPIG.

40 Annex 5: Implementation Support Plan

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

Strategy and Approach for Implementation Support

1. The strategy for implementation support has been developed based on the nature of the project and its risk profile. It will aim at making implementation support to the client more flexible and efficient, and will focus on implementation of risk mitigation measures defined in the Operational Risk Assessment Framework (ORAF), namely the delivery quality and design risk which are rated as moderate, as well as the traditional supervision focus areas including safeguards and fiduciary aspects. 2. Formal supervision and field visits will be carried out semi-annually, and will focus on:

(i) Technical inputs. Engineering inputs are required to review bid documents to ensure fair competition through proper technical specifications and fair assessment of the technical aspects of bids. An experienced highway engineer will review the detailed designs for the civil works related to road rehabilitation. During construction and commissioning, close technical supervision will be provided to ensure technical, environmental and social contractual obligations are met. The team’s engineer will conduct site visits on a semi-annual basis throughout project implementation. Inputs will also be provided by a transport specialist/economist on the support towards improvement of road operations and maintenance practices, and the proposed technical assistance and studies.

(ii) Fiduciary requirements and inputs. Training will be provided by the Bank’s financial management specialist and the procurement specialist during project implementation. The team will support MOTC and its IPIG in their financial management capacity and to improve procurement management efficiency. The financial management specialist and the procurement specialist will both be based in the country office to provide timely support. Supervision of financial management arrangements will be carried out semi-annually as part of the project supervision plan and support will be provided on a timely basis to respond to client needs. Procurement supervision will be carried out on a timely basis as required by the client. Concerning financial management, the World Bank will conduct risk-based financial management implementation support and supervision within six months from the project effectiveness date, and then at appropriate intervals, as part of its project implementation and supervision missions. During project implementation, the World Bank will supervise the project’s financial management arrangements in the following ways: (i) review the project’s quarterly IFRs as well as the project’s annual financial statements and the auditor’s management letters and remedial actions recommended in the auditor’s management letters; and (ii) during the World Bank’s on-site missions, review the following key areas: (a) project accounting and internal control systems; (b) budgeting and financial planning arrangements; (c) disbursement arrangements and financial flows, including counterpart funds, as applicable; and (d)

any incidences of corrupt practices involving project resources. As required, a World Bank-accredited financial management specialist will participate in the implementation support and supervision process.

(iii)Safeguards. The environment and social specialist will support relevant counterpart staff and provide any necessary training. On the social side, supervision will focus on the implementation of the RPF and potential Resettlement Action Plans (RAPs), if needed, and the social and poverty-related benefits associated with the road rehabilitation. Field visits will be made on a semi-annual basis. The social and environmental specialists will ideally both be based in the country office to ensure close follow-up.

(iv) Client Relations. The Task Team Leader will coordinate the Bank team to ensure project implementation is consistent with Bank requirements, as specified in the legal documents. He will meet with senior officials on a regular basis to keep them apprised of project progress and issues requiring resolution at their level. The Task Team Leader will also discuss readiness and interest with potential participant countries in the program, and liaise as necessary with the CAREC and other stakeholders.

Implementation Support Plan

The main focus in terms of support to implementation would be as follows:

Time Focus Skills Needed Resource Estimate (Staff Weeks/year) First twelve Team Leadership Management, supervision, coordination, Task Team Leader 8 months dialogue with potential country members of program Project Support Supervision, coordination Operations Officer in-country 6

Technical Road engineering, design, technical Road Engineer 4 supervision Transport Specialist/Economist 4 Social Social safeguards, land acquisition and Social Specialist 3 resettlement, gender and poverty Environment Bank norms knowledge, environmental Environmental Specialist 3 safeguards Procurement Procurement experience, Banks Procurement Specialist 4 procurement norms knowledge, training Financial FM experience, knowledge of Bank FM FM Specialist 4 Management norms, training 12-48 months Team Leadership Management, supervision, coordination, Task Team Leader 8 dialogue with potential country members of program Project Support Supervision, coordination Operations Officer in-country 6

Technical Road engineering, supervision Highway Engineer 4

Transport Specialist/Economist 3 Social Social safeguards, land acquisition and Social Specialist 3 resettlement, gender and poverty

42 Environment Environmental safeguards, supervision Environmental Specialist 3 and monitoring, training as needed Procurement Procurement reviews and supervision, Procurement Specialist 4 training as needed

Financial FM reviews and supervision, training and FM Specialist 4 Management monitoring

48-60 months Team Leadership Project management, supervision, Task Team Leader 8 coordination Project Support Supervision, coordination Operations Officer in-country 6

Technical Road engineering, supervision, trade Highway Engineer 3 facilitation expertise Transport Specialist/Economist 3 Social Social safeguards, land acquisition and Social Specialist 3 resettlement, gender and poverty Environment Environmental safeguards, supervision Environmental Specialist 2 and monitoring, training as needed Procurement Procurement reviews, training as needed Procurement Specialist 4

Financial FM reviews, training and monitoring FM Specialist 4 Management

The following skills mix is required for implementation support:

Skills Needed Number of Staff Weeks Number of Trips Comments Task Team Leader 8 Staff Weeks/year Two/year HQ based Operations Officer 6 Staff Weeks/year Two/year Field based Highway Engineer 3-4 Staff Weeks/year Two/year Field based Transport Specialist/Economist 3-4 Staff Weeks/year n/a HQ based Social Specialist 3 Staff Weeks/year Two/year Country based Environmental Specialist 3 Staff Weeks/year Two/year Country based Procurement Specialist 4 Staff Weeks/year n/a Country based FM Specialist 4 Staff Weeks/year n/a Country based

43 Annex 6: Economic Analysis of the Program and Project

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

The Economic Impact of the Connectivity Program The key question in measuring the economic impact of any intervention is to decide on the scope of the analysis: In theory, a cost-benefit analysis (CBA) should identify the costs and benefits to whoever and wherever they accrue. Ideally, a comprehensive assessment would measure the wider economic impacts (static) on welfare, revenue, and eventually trade. Beyond intuition, no robust conceptual framework has been developed so far to measure improvement in connectivity brought by transport projects. However, macroeconomic estimates have shown strong positive links between the aggregate levels of connectivity-enhancing or trade cost reduction measures and investments and economic performance as measured by GDP or productivity growth or employment. But the models and reasoning used (e.g., gravity, CGE) do not incorporate micro- economic benefits of individual projects and are hardly applicable to economic appraisal of projects.

Current models uses in CBA capture direct user benefits in form of cost savings to operators (e.g., HDM-IV model) or consumers (e.g., total logistics costs). A new methodological approach has been experimented which lies between the micro and macro-level of approach and assesses the impact (static) based on a connectivity description of the effect of the project. The model developed combines (i) modern gravity modeling of interaction between regions served by the road links and (ii) simplified (partial equilibrium) description of how the economies of these entities work. The benefits are expressed in terms of surplus or consumer and producers living in the Batken oblast.

The CARs project improves road connectivity between several relatively densely populated areas in Central Asia, located in the Fergana valley, and belonging to three countries Kyrgyz Republic, Tajikistan and Uzbekistan. These include:  The Batken Oblast in Kyrgyz Republic   The Osh Oblast in Kyrgyz Republic   The Khujand region in Tajikistan   The cities and regions in the Uzbek Eastern Panhandle: Andijan, Fergana. 

Eventually these regions link beyond Osh to the rest of the world through Kazakhstan and China (from Osh directly to Xinjiang, or through Almaty). The network is also a major transit route for the rest of Tajikistan in the South. Investments in road rehabilitation in this part of Central Asia has been lagging as the current infrastructure is in a very poor condition, with significant negative impact on a relatively dense area with relatively high traffic volumes for the region. CARs-1 and in general the entire program addresses those gaps. Improvements in border crossing are also important to limit delays and congestion; this component is being addressed by a complementary project under led by ADB, the Regional Improvement of Border Services Project.

Batken Oblast in the Kyrgyz Republic is a rural area, but close to urban areas of the Fergana valley, in Tajikistan (Khujand), Kyrgyz Republic (Osh), and Uzbekistan. Despite borders,

Batken is quite closely integrated to its neighbors and for instance supply agricultural goods, including some being processed or packaged for exports (e.g. dry fruits, or fresh fruits). The project is expected to enhance this integration in a way, which will increase the welfare in Batken. For instance the better road condition will facilitate the shipments from the farm and reduce the losses en route. Conversely, from a consumer perspective, better connectivity will lower the cost of manufactured goods imported into Batken.

The transit trade to Tajikistan (from China or Kazakhstan) and the energy trade are excluded in the analysis, at this stage. The CARs project targets a relatively small section of the typical road transit route. The gains are primarily reduction in logistics costs for shippers at the end of the transit route; hence the main beneficiaries are economic units in Tajikistan.

The improvement in physical connections brought by CARs-1 brings wider economic benefits through at least two channels: on the one hand trade and commerce and on the other hand human mobility (including cross-boundary labor and services for instance). This analysis focuses on the benefits brought to the population of the Oblast through the first channel. The facilitation of physical trade in goods the main result of the project reduces the cost of transportation and logistics on the links between the regional entities on the idealized network.

The intensity of the flows (trade or mobility) on the link of the networks depends on i) the friction (trade costs) between the nodes and the importance of each of the nodes at origin and destination (gravity concept). In trade theory there is an explicit relationship (power law) between generalized costs on each links and the friction or impedance that determines trade flows. The exponent corresponds to an elasticity of substitution between locations (typically quite high like 8).

Connectivity of a node (region) on the network measures how well a node interacts with the entire network. It is defined for origins (respective for destinations) as the normalized gravity pull (respective push) received from the rest of the network.

Incremental changes in cost on a link correspond to a change in friction or impedance on the same link. Generalized trade costs can be estimated from micro level transport or supply chain models (HDM, Total Logistics Costs). Generalized costs include costs of transportation and the value of time (depreciation, inventory costs).

The benefits to producers and consumers at a particular node location are estimated using the following sequence: 1. Incremental changes in costs determine incremental changes in connectivity. 2. Incremental changes in connectivity determines changes in surplus according to the rule:

where σ is the elasticity of substitution.

The data expected data to run the model include:  Matrix of existing flows for each relevant trade or mobility layers (section 3) 

45   Changes in costs or friction brought by the project (section 4)   Some very rough hypothesis on the production function (e.g. share of tradable vs. non tradable goods and services), labor mobility. 

The application to the Batken Oblast differentiates two layers between agriculture and manufactured goods, which have very different patterns and also quite different sensitivity to time.

The main local activities are agricultural production and the Kyrgyz bazar trade that not only include informal cross-border trade of local products but also re-export of product from China or other distant trade partners. The Batken Oblast, is relatively poorer than its more urban surroundings, being located in a narrow piedmont area between the populous Fergana valley in Uzbekistan and Tajikistan and the mountains. It hosts less than ten percent of the population of the Kyrgyz Republic. According to official statistics, the main production of the oblast was agriculture and manufactured goods. According to the trade statistics of the Kyrgyz Republic and Tajikistan, the share of the Batken oblast in the Kyrgyz imports is proportional to its importance in the national economy, thus it is estimated that aboutUS$262 million manufactured or processed goods and US$47 million food and agricultural products are being imported. This flow of goods is estimated to be transported through Osh along the corridor. However, it is likely that this share is higher due to the importance of cross-border bazar trade that includes imports and re-export through nonstandard channels.

The Bazar trade has been valued at US$3.5 billion for the entire country. Given its location conducive to cross-border trade the Batken Oblast should have more than its share. We estimate conservatively that the oblast has a share of bazar trade in excess of 50 percent more than its population size at an amount of US$432 million, a large of which is expected to target exportation.

The improvement in physical connections brought by the CAR project brings wider economic benefits through at least two channels: on the one hand trade and commerce, and on the other hand human mobility (including cross-boundary labor and services for instance). This analysis focuses on the benefits brought to the population of the Oblast through the channels first channel. The facilitation of physical trade in good the main result of the project reduces the cost of transportation and logistics on the links between the regional entities. The transit trade to Tajikistan and the energy trade are excluded in the analysis.

The main assumptions are:  The primary transmission channel of improvement of connectivity is the reduction of total logistics costs (and eventually other costs not captured here) of commerce on  the network;   Savings in total logistics costs add reduction of user’s vehicle costs and the reduction of value of time, thanks to higher speeds and more reliable transportation (e.g. less  breakdown on bad roads);   The impact of value of time is higher for agricultural products, which are perishables and more time sensitive; 

 Product differentiation hypothesis (Armington’s) does apply in this context: specialization between countries even for agriculture products, preference to certain locations (e.g. fair or Bazar). 

The change in costs structure due to the project triggers a reallocation of flows so as to maximize consumer and producer surplus. In order to compute these changes a cost matrix is estimated for the same geographical breakdown as the trade matrix. The costs on each link are estimated by multiplying the distance by an ad valorem equivalent of total logistics costs savings per km.

Thus, the model with the above data estimates the following static effect on the agents in the Batken Oblast, depending on the choice of the range of values for the value of time. The equivalent percentages of GNI are: 1.06 percent for the lower range, 2.29 percent for the upper range. Taking into account the most plausible hypothesis of low value of time for manufactured goods and high value for food products, the benefits amount to 1.57 percent of the regional GNI.

Economic Analysis (Cost-Benefit) of CARs-1

The project development objective (PDO) of the First Phase of the Central Asia Road Links Program (CARs-1) is to increase transport connectivity between the Kyrgyz Republic and its neighboring countries along priority cross-border road links whilst supporting improvements in road operations and maintenance practices. The program is expected to have substantial positive impacts on poverty reduction and economic growth, not only because of the high population density along the catchment area of the cross-border road links, but also high poverty rates and related impacts on cohesion and migration. The Osh-Khujand axis with its total length of about 404 km in the Kyrgyz republic runs along the southern border of the Ferghana Valley, basically across the territory of Batken oblast in parallel with the state border of Tajikistan and Uzbekistan. This road is a continuation of the Bishkek-Osh road and connects the southwestern region of the republic with Osh city.

Also the given corridor is a continuation of Osh-Sary-Tash-Irkeshtam road and it provides the shortest exit from the western oblasts of Uzbekistan and northern part of Tajikistan to the border with China. Some of the sections of the Osh-Batken-Isfan road have already been rehabilitated, while at other sections works are going on now whilst other sections still remain untouched in poor condition. The table below presents the rehabilitation program road sections, the financing entity and the rehabilitation year. For the economic evaluation, the road section M13-8 from Batken roundabout west (km 235) to Tortkul (km 248) with 14.3 km includes the Batken/Kyzyl- Bel to Kyzyl-Bel Border Crossing Point link road (6.1 km) considering that both road sections will be constructed under a single contract package.

Table 1. Osh-Batken-Isfana-Tajikistan Border Road Sections Section Start End Start End Length Rehabilitation Number Km Km Location Location (km) Financing Year M13-1 2.3 10 Osh Outskirts Start Nookat Pass 7.7 TBD TBD M13-2 10 28 Start Nookat Pass End Nookat Pass 18.0 WB NRRP AF 2013 M13-3 28 108 End Nookat Pass Kyzyl Kiya 80.0 TBD TBD M13-4 108 123 Kyzyl Kiya Pulgon 15.0 EC 2013 M13-5 123 155 Pulgon Burgandy 32.0 WB NRRP 2011 M13-6 155 220 Burgandy km 220 65.0 EBRD 2011 M13-7 220 235 km 220 Batken Roundabout 15.0 EXIM Bank 2013 M13-8 * 235 248 Batken Roundabout Tortkul 20.4 WB CARs-1 2014 M13-9 248 271 Tortkul Ak Tatyr 23.0 EXIM Bank 2013 M13-10 271 360 Ak Tatyr Isfana East 89.0 EXIM Bank 2013 ISF-1 360 366 Isfana East Isfana West 6.1 TBD TBD ISF-2 366 402 Isfana West Kairagach Border 36.1 WB CARs-1 2014 Total 407.3 * M13-8 includes 6.1 km link road from Batken/Kyzyl-Bel to Kyzyl-Bel Border Crossing Point

An economic analysis was carried out in 2008 by Finnroad Oy for the rehabilitation of the Osh- Batken-Isfana road sections as part of the feasibility study commissioned by MOTC. The 2008 analysis yielded Economic Internal Rates of Return (EIRR) ranging from 32.3 to 119.7 percent for the different road sections. Subsequently, in 2009 the analysis was redone for the preparation of the on-going Bank-financed NRRP considering revised GDP growth rate projections, yielding EIRRs from 23.6 to 74.5 percent. The economic analysis was redone in 2013 by the World Bank for the entire program given the actual rehabilitation cost of the sections already rehabilitated, the road links financed under the program, and current road condition, traffic levels and GDP growth projections for the Kyrgyz Republic.

Assumptions and Inputs The PDO of the CARs-1 is to increase transport connectivity between the Kyrgyz Republic and its neighboring countries along priority cross-border road links whilst supporting improvements in road operations and maintenance practices. This will bring direct benefits to road users arising from reduction in vehicle operating costs, passenger time costs and maintenance costs as consequence of improving ride quality. The improvement of the road links will also have major impact on communities living in the vicinity to the road through stimulation of economic activities in the region and provision of better access to non-farm employment opportunities, local markets and basic social services. However, these benefits were not included on the economic analysis because they are difficult to quantify in monetary terms.

The economic analysis was conducted using the Highway Development and Management Tool (HDM-4), which simulates life-cycle predictions of road deterioration, road works effects and their costs and road user costs, and provides economic decision criteria for road construction and maintenance works. The HDM-4 analyses projects by computing costs and benefits of different investment options in terms of savings in road maintenance costs, vehicle operating costs and travel time costs. The comparison is done between the “do something” scenario (project case) and the “do minimum” scenario (without project case) over the analysis period.

The “do minimum” scenario incorporates an assessment of what would happen if the project was not undertaken; therefore consist of the recurrent maintenance practice and reconstruction when

the road reaches very poor condition at 12 IRI, m/km. The project scenario consists of the rehabilitation, improvement or new construction works followed by proper recurrent maintenance and periodic maintenance works over the analysis period consisting of 6 cm overlays triggered at 4 IRI, m/km.

The economic analysis was conducted for the entire Osh-Batken-Isfana-Tajikistan Border road through the analysis of 12 separate road sections divided according to their characteristics; condition and traffic covering 407 km (see Table 1). Most of the road sections will be rehabilitated; while the Isfana East-Isfana West road section (ISF-1) represents the construction of the Isfana bypass, with an 8 percent distance savings, and the Isfana West-Kairagach Border road section (ISF-2) includes realignment along the territory of Tajikistan, with a 10 percent increase in road length. The table below presents the estimated financial investment costs and current traffic.

Table 2. Rehabilitation Costs and Current Traffic Section Financial Financial 2012 Traffic Number Cost (M US$) Cost (M US$/km) (vpd) M13-1 6.2 0.802 5,185 M13-2 17.9 0.996 5,184 M13-3 53.0 0.662 4,203 M13-4 10.3 0.689 4,916 M13-5 24.1 0.752 4,509 M13-6 26.6 0.410 3,260 M13-7 10.8 0.719 3,309 M13-8 13.2 0.648 2,328 M13-9 14.2 0.619 3,108 M13-10 86.6 0.973 2,985 ISF-1 9.8 1.613 1,616 ISF-2 36.0 0.997 1,783 Total 308.6 0.758 3,457

The roads to be rehabilitated are in poor to very poor condition with an estimated roughness varying from 6.2 to 11.7 IRI, m/km. Current traffic data was obtained from traffic surveys done by the DEPs in charge of road maintenance of the project roads in 2012. Normal growth is driven by economic development best represented by growth in real Gross Domestic Product (GDP). The IMF’s GDP growth forecasts for Kyrgyz Republic from 2014 to 2017 (on average 5.2 percent per year) have been used as a starting point for the development of the best estimate growth forecasts for the national economy. The strong relationship between economic growth and traffic growth is widely recognized and cars and other light passenger vehicle traffic are generally considered to grow slightly faster than GDP, while the growth of goods vehicle traffic, being driven directly by the economy, is commonly in line with GDP growth. Accordingly, an elasticity of 1.05 for car and passenger traffic has been adopted together with a conventional value of 1.0 for goods vehicles. The resulting adopted traffic growth rates are summarized in Table 3 below.

Table 3. GDP Growth Rate Projections Vehicle Type From To Percent Cars and 2014 2018 5.46 Buses 2019 2023 4.73 2024 2028 3.68 2029 2040 3.15 Trucks 2014 2018 5.20 2019 2023 4.50 2024 2028 3.50 2029 2040 3.00

The table below presents the vehicle fleet characteristics and economic unit costs adopted on the analysis, in 2013 US$ prices, for eight vehicle types. Unit costs were calculated net of taxes and transfer payments to arrive at economic values. The 2013 value of working time was computed based on the average wage of about US$250 per month. The average value of working time over the analysis period (US$2.41 per hour) was computed assuming an increase in real wages in line with real per capita GDP growth.

Table 4 - Vehicle Fleet Economic Unit Costs and Basic Characteristics Small Medium Heavy Articulated Mini Car Pickup Truck Truck Truck Truck Bus Bus Economic Unit Costs New Vehicle Cost (US$/vehicle) 18,709 23,251 24,116 30,885 42,392 89,392 22,710 27,978 New Tire Cost (US$/tire) 57.00 81.00 90.00 127.00 283.00 283.00 99.00 109.00 Fuel Cost (US$/liter) 0.89 0.89 0.82 0.82 0.82 0.82 0.82 0.82 Lubricant Cost (US$/liter) 6.51 6.51 6.51 6.51 6.51 6.51 6.51 6.51 Maintenance Labor Cost (US$/hour) 3.03 3.03 3.03 3.03 3.03 3.03 3.03 3.03 Crew Cost (US$/hour) 0.00 3.03 3.03 3.03 3.03 3.03 3.03 3.03 Overhead (US$/year) 726 2419 2419 3024 3629 7862 2419 6047 Interest Rate (%) 12 12 12 12 12 12 12 12 Working Passenger Time (US$/hour) 2.41 2.41 2.41 2.41 2.41 2.41 2.41 2.41 Non-working Pass. Time (US$/hour) 0.80 0.80 0.8 0.8 0.8 0.8 0.80 0.80 Cargo Delay (US$/hour) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Basic Characteristics Kilometers Driven per Year (km) 23,000 30,000 40,000 40,000 86,000 86,000 34,000 70,000 Hours Driven per Year (hr) 550 750 1,300 1,200 2,050 2,050 850 1,300 Service Life (years) 10 8 8 12 14 14 8 7 Percent Private Use (%) 100 0 0 0 0 0 0 0 Number of Passengers (#) 1.5 3.3 1 0.6 1 0.3 0.4 9 Work Related Passenger-Trips (%) 25 25 25 25 75 75 90 50 Gross Vehicle Weight (tons) 1.2 1.8 3 7.5 13 28 2.5 6 Equivalent Standard Axels (ESA) 0 0.01 0.2 0.52 1.69 2.24 0.01 0.7 Typical Traffic Composition (%) 65% 2% 12% 2% 4% 5% 5% 5%

The table below presents the estimated unit road user costs (vehicle operating costs plus travel time costs), in US$ per vehicle-km, for different roughness levels. A road with roughness equal to 2 IRI, m/km, is in good condition, from 4 to 8 IRI, m/km, is in fair condition and from 8 to 12 IRI, m/km, is in poor condition. On average, unit road user costs decrease by 20 percent if the roughness decreases from 10 to 2 IRI, m/km, after the rehabilitation works.

Table 5 – Unit Road User Costs Function of Roughness (US$ per vehicle-km) Roughness Small Medium Heavy Articulated Mini (IRI, m/km) Car Pickup Truck Truck Truck Truck Bus Bus 2 0.25 0.37 0.33 0.42 0.68 1.05 0.34 0.55 4 0.25 0.38 0.35 0.44 0.70 1.11 0.35 0.56 6 0.26 0.41 0.37 0.46 0.74 1.17 0.37 0.59 8 0.28 0.45 0.40 0.49 0.76 1.23 0.40 0.64 10 0.30 0.50 0.43 0.52 0.81 1.34 0.43 0.71 12 0.32 0.56 0.47 0.57 0.88 1.47 0.48 0.79

The proposed investments were evaluated over the period 2014 to 2040, accounting for 25 years of project benefits at a 12 percent discount rate.

Overall Osh-Batken-Isfana Road Corridor Results and Sensitivity The return on the investments of the overall road corridor is satisfactory with an overall EIRR of 24.0 percent, Net Present Value (NPV) of US$303.4 million at a discount rate of 12 percent, and Benefit Cost Ratio of 2.6. The EIRR of individual road sections varies from 14.1 to 34.9 percent. The results of the economic analysis are presented in Table 6 below. The 2013 economic analysis yielded lower economic returns than those estimated in 2009 as a reflection of the impact of reduced traffic growth rates and updated construction costs.

Table 6. Economic Analysis Results Section EIRR NPV PV Cost PV Benefits B/C Number (%) (M US$) (M US$) (M US$) Ratio M13-1 34.9% 12.8 3.8 16.7 4.4 M13-2 30.3% 27.5 11.5 39.0 3.4 M13-3 29.5% 85.2 31.4 116.6 3.7 M13-4 32.8% 20.6 6.2 26.9 4.3 M13-5 28.9% 36.5 14.7 51.2 3.5 M13-6 32.2% 54.1 13.5 67.6 5.0 M13-7 22.5% 9.4 6.5 15.9 2.4 M13-8 21.8% 10.6 5.9 16.8 2.8 M13-9 23.6% 14.1 8.3 22.4 2.7 M13-10 16.2% 26.6 55.3 81.9 1.5 ISF-1 14.5% 1.7 6.5 8.2 1.3 ISF-2 14.1% 4.3 23.4 27.7 1.2 Total 24.0% 303.4 187.0 490.8 2.6

A sensitivity analysis was carried out to assess the robustness of the results to possible variations in key project parameters, which in this case were identified as construction costs and the forecast traffic growth rates. A severe worst case scenario with construction costs increased by 15 percent and traffic growth rates benefits decreased by 15 percent still shows a reasonable return for the program with an EIRR of 20.6 percent. The results of the sensitivity analysis are presented in Table 7 below.

Table 7. Sensitivity Analysis Results Base A: Cost B: Traffic Growth Section EIRR +15% -15% C: A & B Number (%) (%) (%) (%) M13-1 34.9% 31.9% 33.6% 30.7% M13-2 30.3% 27.5% 29.1% 26.4% M13-3 29.5% 26.9% 28.2% 25.7% M13-4 32.8% 30.1% 31.5% 28.8% M13-5 28.9% 26.3% 27.6% 25.1% M13-6 32.2% 29.5% 30.8% 28.2% M13-7 22.5% 20.4% 21.4% 19.3% M13-8 21.8% 19.7% 20.7% 18.6% M13-9 23.6% 21.4% 22.4% 20.3% M13-10 16.2% 14.5% 15.2% 13.5% ISF-1 14.5% 12.8% 13.7% 12.0% ISF-2 14.1% 12.1% 13.3% 11.4% Total 24.0% 21.7% 22.9% 20.6%

CARs Project Results and Sensitivity CARs-1 will finance 2 contract packages of the overall program, totaling 56.5 km and US$49.2 million of investments. CARs-1 road sections characteristics are summarized in Table 8 below.

Table 8. CARs-1 Project Road Sections Section Start End Length Financial Financial Cost 2012 Traffic Number Location Location (km) Cost (M US$) (M US$/km) (vpd) M13-8 * Batken Roundabout Tortgul 20.4 13.2 0.648 2,328 ISF-2 Isfana West Kairagach Border 36.1 36.0 0.997 1,783 Total 56.5 49.2 0.871 1,980 * M13-8 includes 6.1 km link road from Batken/Kyzyl-Bel to Kyzyl-bel Border Crossing Point

The return on the investments under the CARs-1 is satisfactory with an overall EIRR of 16.6 percent, Net Present Value (NPV) of US$14.9 million at a discount rate of 12 percent, and Benefit Cost Ratio of 1.5. The EIRR of individual road sections varies from 14.1 to 21.8 percent. Vehicle operating costs savings represent 85 percent of the project benefits, while travel time savings represent 15 percent. The results of the economic analysis and sensitivity analysis are presented in Table 8 below. A severe worst case scenario with construction costs increased by 15 27 percent and traffic growth rates benefits decreased by 15 percent still shows a reasonable return for the project with an EIRR of 13.8 percent. Switching values analysis shows that construction costs would have to increase by 40 percent for the project EIRR be reduced to 12 percent.

Table 8. CARs-1Project Economic Analysis Results Base A: Cost B: Traffic Section EIRR NPV PV Cost PV Benefits B/C Cost +15% Growth -15% C: A & B Number (%) (M US$) (M US$) (M US$) Ratio EIRR (%) EIRR (%) EIRR (%) M13-8 21.8% 10.6 5.9 16.8 2.8 19.7% 20.7% 18.6% ISF-2 14.1% 4.3 23.4 27.7 1.2 12.1% 13.3% 11.4% Total 16.6% 14.9 29.3 44.4 1.5 14.6% 15.8% 13.8%

27 Variation orders under the on-going Bank-financed NRRP have not exceeded 15 percent of original engineer’s estimates.

Social Benefits The project is located in the southwest of the Kyrgyz Republic in the Batken and Osh oblasts. The total beneficiary population is composed of the residents of Osh city and the Batken oblast. The beneficiary population is shown in table 9 based on the census data of 2009. The total beneficiary population is 686.7 thousand persons that represent 13 percent of the population of the Kyrgyz Republic. The percent of females on the total beneficiary population is 50 percent and the percent of urban population is 49 percent. The project will directly benefit 686.7 thousand residents of Batken Oblast and Osh Oblasts who are expected to be regular road users travelling along the road sections. Beneficiary population living along the road sections to be rehabilitated by the project includes residents of the 39 villages located in the vicinity of the program road with a total population of 235.8 thousand persons.

Table 9: Project Beneficiaries 2009 Population (thousand people) Percent Total Urban Rural Female Osh City 258.1 233.8 24.3 52% Batken Oblast 428.6 103.8 324.8 49% - Town of Batken 19.7 13.4 6.3 50% - Town of Kyzyl-Kiya 44.2 31.8 12.4 51% - Town of Sulukta 20.7 20.0 0.7 51% - Batken Region 69.6 0.0 69.6 48% - Kadamjai Region 157.6 20.4 137.2 49% - Leilek Region 116.8 18.2 98.6 49% Town of Isfana 18.2 18.2 0.0 49% Total Beneficiary Population 686.7 337.6 349.1 50% Kyrgyz Republic 5,362.8 1,828.2 3,534.6 51%

28 29 Table 10 below presents the poverty rate and the market accessibility index for the districts (rayons) located in the project area, together with the length of the road corridor on each district. The market accessibility index takes into account the condition of the roads in terms of travel times to mayor cities. The average market accessibility index on the program districts is lower than the national average and 205 km of the program road, out of 402 km, are located on districts with very low market accessibility index (Kadamjai and Batken districts).

28 Share of the population living below the absolute national poverty line. 29 Measure of how far an area is from a group of select major cities. The formula is a sum of population of the select major cities weighted by travel time to reach there. Therefore, the index takes a larger score if surrounding cities are larger or travel time to these cities is shorter.

Table 10. Program Area Poverty Rate and Accessibility Program Poverty Market Road Rate Accessibility Location Length (km) (%) Index Osh Oblast Nookat District 75 28% 8.9 Batken Oblast Kadamjai District 104 46% 1.8 Batken District 101 23% 1.8 Leilek District 122 24% 5.8 Average Program Districts 30% 4.6 Average Kyrgyz Districts 37% 8.7 Sources: Poverty Mapping in the Kyrgyz Republic Methodology and Key Findings, 2013, World Bank Market Accessibility and Regional Maps: Kyrgyz Republic, 2013, World Bank

There is a relationship between market accessibility index and the poverty rate as shown in the figure below. In the Kyrgyz Republic, poverty rates appear significantly lower in districts where people have high market access such as in Bishkek and Chui oblast. A good transportation network links the population to jobs and markets but also to social services which enhance the quality of life. Therefore, one can infer that improving the accessibility of the program roads by improving their ride quality and reducing travel times will have a positive social impact.

Kyrgyz Republic Districts 90%

80%

70%

60%

(%)

50% Kadamzh

Rate

40%

Poverty

30%

Nookat Batken

20% Leilek

10%

0 5 10 15 20 25 30 35 40 45 50

Market Accessibility Index

Public Sector Financing and World Bank Added Value

Public sector financing is the appropriate vehicle for financing the rehabilitation of the project roads because the construction costs cannot be recovered through tariffs due to relatively low levels of traffic along the project roads. Public investment in road infrastructure is desirable because it is a way the government plays a key role in the country’s development by handling a

54 range of issues that can only be accomplished or implemented through government actions, such as axle weight controls and road safety regulations. The World Bank’s role is justified because of the project’s economic and social benefits and because of the value added it brings beyond financing in areas such as: construction quality control, sustainability of road maintenance, transport planning, environmental risk management, safeguards, procurement, and financial management.

55 Annex 7: Regional, Country and Sectoral Context

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

Regional Context

The Central Asia region, including the Republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan is undergoing a rapid transformation. Since the early 2000s, economic growth in the five Central Asian Republics has been fueled by strong exports in response to robust global commodity demand and prices as well as remittances reflecting strong growth in Russia. The structure of the economies is greatly biased towards heavy industries and extractive activities (40 percent of GDP on average, Table 2). The share of agriculture is high in the smaller economies, like the Kyrgyz Republic and Tajikistan. The most recent IMF economic outlook forecasts continued growth over the medium term, especially in resource rich countries while uncertainty regarding the future performance of the global economy and its impact on the region remains an issue.

Table 2: Production and Growth Patterns (2010)

Agriculture, % Industry, % Trade, % GDP Growth, ten Value Added Value Added GDP years’ average Kazakhstan 6% 40% 67% 7.7%

Kyrgyz Republic 20% 29% 105% 4.2%

Tajikistan 20% 20% 68% 8.5%

Turkmenistan 15% 48% 65% 8.8%

Uzbekistan 19% 36% 51% 7.4%

Central Asia Region 10% 39% 65% 7.3%

Source: World Development Indicators, 2012.

Trade in the Central Asia region is very asymmetric Exports are dominated by commodities, with Kazakhstan being the main exporter (over 85 percent). Import patterns are more balanced between countries, as the import basket is more diversified. One of the main features of importing is its reorientation towards China at the expense of Russia and other regions. The growth rate of trade with China ( Table 3) has been twice as fast in Central Asia compared to the rest of the world (40 percent per year over 2001–10 as compared to 20 percent elsewhere). This also reflects an evolving regional trade environment, which intertwined political and economic influences. Tajikistan joined the World Trade Organization (WTO) in 2013 and Kazakhstan is in the final stages of the process. All countries of the region, except Turkmenistan are signatories of a Free Trade Agreement among the 8 member states of the Commonwealth of Independent 30 States .

Table 3: Change in Origins of Imports for Central Asian Countries (2000–10)

30 CISFTA is a free trade agreement signed on 18 October 2011 among Russia, Ukraine, Belarus, Kazakhstan, Kyrgyz Republic, Tajikistan, Moldova and Armenia.

56 2000 2010

Central Asia 9.5% 6.8%

China 2.4% 20.5%

Russia 29.4% 18.9%

European Union 19.4% 19.5%

incl. Germany 5.9% 5.5%

Turkey 2.6% 2.3%

WORLD 100.0% 100.0%

Source: IMF Direction of Trade Statistics (import statistics).

The main extra-regional exports from the southern part of the region are mineral commodities, steel, and cottons. Regional trade is relatively small, representing only a few percent of the total trade of Central Asia. However, it is very important for the Kyrgyz Republic and Uzbekistan. The basket of products is more diversified than for extra-regional exports ( Table 4) and is likely to be even greater if trade through non-standard channels (also referred to as “bazaar” channel because of its transactions take place at or through bazaars) is taken into account. According to a 31 recent study , the value of flows through the bazaar channel averaged US$3.5 billion 2007- 2010, or 77 percent of the Kyrgyz Republic’s GDP. While the Kyrgyz Republic has reportedly the largest network of bazaars that export foreign and domestically produced goods to its neighboring countries, non-standard trade (through transshipments and border/bazaar trade) is also known to exist in other Central Asian countries.

Table 4: Share of Regional Trade among Central Asian Countries

Country Share in CA Share in CA Share of Share of CA in Share of CA in exports imports GDP country imports country exports Kazakhstan 83.9% 49.2% 68.7% 2.8% 3.6%

Kyrgyz Republic 1.5% 14.8% 2.2% 9.0% 44.9%

Tajikistan 1.8% 5.4% 2.4% 17.5% 2.9%

Turkmenistan 4.7% 11.6% 10.2% 4.3% 4.0%

Uzbekistan 8.1% 19.0% 16.6% 16.6% 15.4%

Central Asia 7.3% 5.2%

Source: IMF Direction of Trade Statistics (import statistics).

In the past 20 years, the economic gap among the five Central Asian Republics, which was already significant in 1990, has widened further. Gross domestic product (GDP) per capita in the Kyrgyz Republic and Tajikistan in 1990 amounted to 36.9 and 30.1 percent of the GDP per capita in Kazakhstan in the same year. In 2011, GDP per capita in the Kyrgyz Republic was 9.9 percent of that of Kazakhstan’s, and Tajikistan’s GPD as a portion of the region’s GDP dropped 32 from 5.7 percent in 1990 to 2.4 percent in 2011, according to official statistics . In the region,

31 Kaminski, Bartlomiej; Mitra, Saumya, Borderles Bazaars and Regional Integration in Central Asia: Emerging Patterns of Trade and Cross-Border Cooperation, Directions in Development, 69311, World Bank: Washington, DC. 32 The National Statistics Committee of the Kyrgyz Republic estimates that the country’s shadow economy has grown more than 18 folds in the past ten years from about US$1.4 billion in 1995 to more than US$26 billion in

the Kyrgyz Republic and the Republic of Tajikistan are considered the most remote and poorest where in 2011 about 37 percent and 47 percent of the population lives below the poverty line, with a GDP per capita of US$1,157 and US$951 (2012) respectively. Both countries lack natural resources such as oil and gas, but have reportedly substantial potential in hydropower development and mineral resources.

Lack of resources, a challenging regional context and a difficult business environment is preventing the countries from exploiting this potential. Sustainable growth and diversified export base will require better human, physical and institutional capital. While strong demand and prices for commodities have supported growth in the region so far, diversifying the “assets base” in the region will be critical to the diversification of the economies. This will require improvements in the quality of infrastructure, institutions and service delivery, as well as better human capital.

Notwithstanding the widening gap in economic development between countries, the Governments in the region face similar development challenges to connect peripheral areas with regional and global economic centers of activities. In part, this can be attributed to the impacts of the ‘disruptive’ recent breakup of the Former Soviet Union which formerly shaped important features of the transport networks through a unified economic and transport complex built without consideration for administrative borders. Nowadays, there is a need to address access to shifting global markets such as the People’s Republic of China, increasing trade integration with neighboring countries and growing urban and rural disparities. This trend is reflected in the increase of labor migration from rural areas due to lack of employment opportunities, leaving those areas partially abandoned and under a slow development path. Strong migratory dynamics can be found especially in Tajikistan, the Kyrgyz Republic and Uzbekistan where remittances from labor migrants in 2013 were estimated to amount to US$3.9 billion (Tajikistan), US$2.1 billion (Kyrgyz Republic) and US$2.9 billion (Uzbekistan) respectively.

Analysis on the profile of the poor in the region indicates that the spatial concentration of poverty lies in marginal geographical areas which are characterized by unfavorable climatic conditions as well as lack of transport connectivity. In the Kyrgyz Republic, the Ferghana Valley oblasts of Osh and Batken have above-average poverty headcount rates, while Osh oblast has the highest poverty density in the country. According to a recent report by UNDP, Batken oblast in the Kyrgyz Republic could be experiencing considerable socio-economic tensions as – in contrast to the rest of the country – industrial and agricultural output as well as retail trade 33 (which can be seen as proxy for household spending and incomes) continues to fall . The World Bank’s FY13 poverty mapping exercise in the Kyrgyz Republic highlighted the correlation between well-being and increased transport connectivity.

At the core of these challenges is the need to rebuild a regional framework of connectivity that links population centers and economic hubs across borders in the Central Asia region, in particular in the highly populated Ferghana Valley where more than 10 million people reside or 27 percent of Uzbekistan’s, 31 percent of Tajikistan and 51 percent of Kyrgyz Republic’s

2007. Independent experts believe the shadow economy is actually larger than official figures indicate and may constitute more than half of the country’s GDP. 33 UNDP, Regional socio-economic disparities in Kyrgyzstan: are they shrinking? November 25, 2011, at http://km.undp.sk/uploads/public1/files/vulnerability/Data%20bases/Fast%20facts/Kyrgyzstan%20regional%20fast%20facts_5_1 2_2011.pdf.

population. Relatively small investments in cross-border transport links are proven to have an impact on agglomeration processes disproportionate to the simple economic value-added from reduced transportation costs. To date, logistics and transportation costs in the region are already very high in an international comparison, accounting to about 18-23 percent of exported value and 16-18 percent of imported value according to a recent study. The effects of this can be significant as they greatly impact trade, the competitiveness of domestic products as well as potential for economic diversification due to the rise of costs of inputs and costs of exports.

While railways are the backbone for connectivity solution of the region to regional and international markets, the share of road transport in overall traffic flows has been continually increasing. This is particularly true for short-distance (and at times even for longer distances) and intra-regional movements, especially in countries such as the Kyrgyz Republic and Tajikistan given their relatively small rail network. Road transport is sometimes the only option given alpine topography of the region. It is also favored for time-sensitive items such as fruits and vegetables, textiles and clothing and other consumer goods which constitute a large share of the region’s non-oil sector. Passenger transport in the region is almost exclusively done by cars and buses and served only to some extent by air and railways.

Increasing connectivity to improve access of people and businesses to local and global services, markets and opportunities across borders is a priority of current policies and investments of the governments of the Central Asian Republics. This agenda is also at the core of the support intended by the World Bank and other development partners. Support towards these objectives has been underway for several years through, for example investments in transport infrastructure and upgrades of energy systems and networks. Efforts to rehabilitate six strategic transport corridors in the Central Asia region have been spelled out in the on-going Transport and Trade Facilitation Strategy and Action Plan for 2008-2017 and endorsed by Central Asia Regional Economic Cooperation (CAREC). Within CAREC, medium-term priority projects in the transport sector to be implemented during the period from 2011 to 2015 have obtained confirmed 34 financing in the amount of US$15.5 billion from development partners and governments . Additionally, within the framework of CAREC, the countries are currently working together on improving border crossing facilities under the ADB-financed Regional Improvement of Border Services (RIBS) Project.

Country Context

Landlocked, largely mountainous, with a multi-ethnic population of about 5.5 million and a GNI per capita of US$880 in 2011 (Atlas methodology), the Kyrgyz Republic is one of the poorest countries in the Europe and Central Asia region. Due to its elevation and topography, barely 7 percent of the land is arable, the rest consisting of glaciers, mountains, and pastureland or steppe 35 that support livestock grazing . The Kyrgyz economy’s rate of growth has been volatile reflecting its reliance on a few sectors (gold production concentrated in a single mine Kumtor as well as re-exports) as well as numerous domestic and external shocks, including two revolutions since 2005. GDP growth averaged just over 4 percent annually over 2003-2012, with varying

35 Over 90 percent of its 198,500 km2 is at least 1,000 meters above sea level and 30 percent higher than 3,000 meters.

year-to-year rates ranging from 8.5 percent in 2007 and -0.9 percent in 2012. Characterized by significant informal activity, the Kyrgyz economy relies heavily on the performance of a few sectors and remittances: industry as well as agriculture account each for about 20 percent of GDP (less if gold is excluded) while services generate about 50 percent of GDP.

Employment is concentrated in sectors with low productivity and weak governance and poor infrastructure continue to hinder competitiveness. During 1998-2008, labor has moved away from high productivity, formal sectors, such as mining and manufacturing, to low productivity sectors with high levels of informality such as agriculture and services, in particular construction, trade, and tourism. Moreover, despite numerous regulatory reforms in recent years, these have not yet translated into actual improvements in the business environment. Recent economic performance has been sound and the medium-term outlook is favorable though with significant risks. GDP expanded by 8 percent in the first eight months of 2013 driven by a recovery in gold production at Kumtor mine following the 2012 disruption as a result of unexpected ice movement, strong private transfers and more credit to the private sector.

Going forward, real GDP growth in the Kyrgyz Republic is projected to be between 7.5 (2015) 36 and 5.0 (2017) , expected to be largely driven by increased efficiency of public spending and development of a vibrant private sector. Growing regional integration and improved infrastructure are seen to support the growth of the country’s vibrant, but largely informal trade and transit sector. The current government’s National Sustainable Development Strategy (NSDS), 2013-17 focus on investments that will further integrate the country with growing markets such as Russia, China and neighboring Central Asian countries while support local development in peripheral region. The NSDS recognizes that achieving sustained economic development in the Kyrgyz Republic will require improvements in transport connectivity and logistics and expresses the determination of the government to address these issues. Nonetheless, the risks to the Kyrgyz external environment are significant. Russia’s growth forecasts have been reduced recently and larger slowdown could potentially be unfolding in China. Gold prices add an additional layer of uncertainty given the importance of gold exports for the balance of payments and underscore the importance of upgrading assets (infrastructure and institutions) to diversify export earnings.

Sectoral and Institutional Context

Landlocked, mountainous, and with limited international connectivity, rehabilitating and managing the country’s transport infrastructure pose particular challenges. The road transport system is a priority for the Government of the Kyrgyz Republic, as 95 percent of passenger and 60 percent of freight are transported by the network. The road network comprises of about 34,000 km; 18,000 km are under the responsibility of MOTC, 6,500 km of which are international corridors. The paved public roads account for 40 percent, while the main roads connecting large cities are not in a good condition, except for those that were rehabilitated by with the support of international donors. Formerly part of the railway network of the Former Soviet Union (FSU), the existing railway network in the Kyrgyz Republic is relatively small with 425 kilometer and carries limited traffic, mainly imports and exports of bulky nature. The northern and the southern rail network are not directly connected with each other, but link individually to Uzbekistan and Kazakhstan servicing the country’s imports and exports. The

36 World Bank (2013), Country Partnership Strategy for the Kyrgyz Republic for the Period FY14-17, June 24, 2013.

number of registered vehicles as of 2008 was 417,201, including motorcycles, passenger cars, buses, trucks, trailers, special vehicles (update). Total freight turnover in ton-km reached 1265,5 million and passenger movement was 513,7 million in 2010.

Diversified growth based on exports will require a reduction in economic distances, greatly improved connectivity, and lower transport costs, both within the country and through regional links. Those links include six strategic road corridors which carry the majority of the traffic and form about 4,163 kilometers (international roads) of the republican road network which are currently under rehabilitation by the Kyrgyz Government. International (4,163 km), national roads (5,678 km) and local roads (8,969 km) are under the jurisdiction of the Ministry of Transport and Communications (MOTC) of the Kyrgyz Republic.

Assistance is provided in the sector to the MOTC by various development partners, including the Asian Development Bank (ADB), the Eurasian Development Bank (EDB), the European Commission (EC), the European Bank for Reconstruction and Development (EBRD), the Islamic Development Bank (IDB), the Japan International Cooperation Agency (JICA), the Exim Bank of China, the International Development Association (IDA, World Bank) as well as other development partners. The link between the capital Bishkek and the second largest city of the Kyrgyz Republic, Osh was the first international road that was rehabilitated. As this is the only route connecting north and south, the Government of the Kyrgyz Republic considers expansion of its transit capacity and developed the concept of Central Asia Road and Transport Link, which would connect Tajikistan, Kyrgyzstan, Kazakhstan and Russia. The government has recently signed the financing agreement with Exim Bank of China on US$ 400 million for the first phase (142 km from Jalalabad to Kazarman, and the construction of 1.7 km of tunnel) of construction of North-South route, connecting Osh and Bishkek within the country and comprising a part of 37 the above transit corridor . Other road links are in progress (see Table 5).

Table 5: Status of On-going Road Rehabilitation Projects (External Finance)

Corridor Time Frame Km Cost Progress (US$ million) (as of Dec. 2012) Bishkek - Osh 1997 – 2012 545 209 81% Bishkek – Naryn - Torugart 2008 – 2016 539 582 33% Osh – Sarytash - Irkeshtam 2006 – 2013 258 147.9 74% Sarytash – Karamyk 2008 – 2013 136 45.6 90% Taraz – Talas – Suusamyr 2012 -2015 100.6 38% Osh – Batken – Isfana 2012 -2015 385 105 32% Source: “Master Plan on Road and Transport Sector Development (2010-2025)” p.28

The Osh-Batken-Isfana road corridor is mentioned as one of the priorities of the NSDS for which financing is sought to be spent on the rehabilitation of several road sections that are in poor condition, including (i) Osh-Nookat Pass (km0-10), (ii) Nookat city- Kyzyl Kiyz (km28-108), (iii) Northern Batken Link (km216-248), (iv) Batken-Kyzyl Bel (5.2 km), and Isfana – Kairagach (47 km). Accordingly, the completion of the rehabilitation of the Osh-Batken-Isfana road corridor will help reduce poverty and secure sustained improvements in the population’s living standards, but also contribute substantially to regional development and integration with

37 Starting in Khujand (Tajikistan) and going through Isfana-Batken-Osh-Jalalabad-Kazarman-Balykchy- Tyup-Tegen (Kazakhstan).

neighboring countries, in particular Tajikistan. Given the dependence on road transport which carries 95 percent of all passenger movements and 60 percent of all freight traffic, improving the road links to neighboring countries, in particular in the Ferghana valley is likely to positively impact bilateral trade which is rising. Over the last three years, for example, bilateral trade with Tajikistan grew between 20-47 percent.

Despite the laudable achievements and plans ahead, road maintenance management in the country is poor. There are nine regional road agencies (PLUADs) and four road departments (UADs) with 57 maintenance depots (DEPs) that perform recurrent maintenance activities on an ad hoc basis using force account labor. As a general rule, inspection and certification of the completed work is not always undertaken and systematic road network data collection and evaluation are not being done which results that planned maintenance programs are only partially implemented. While the importance of road maintenance has been advocated in a number of recent government policy documents, financing road maintenance at the required level and improving current maintenance practices remains a challenge. It is estimated that the budget allocation for maintenance in the amount of US$28.9 million (2011) which includes labor and other costs is insufficient to maintain the roads network at an internationally accepted standard (Table 6). Until now, the majority of resources made available to MOTC have been directed towards the rehabilitation of international roads.

Table 6: MOTC Road Expenditures (2005-2011)

2005 2008 2011 Maintenance (US$ million)* 5.4 41.2 28.9 Investment (US$ million) 16.5 22.1 144.4 External financed 13.4 18.0 139.0 MOTC financed 3.1 4.1 5.4 Total Expenditures 21.9 63.3 173.3 MOTC Expenditure 8.5 45.3 34.3 Maintenance as % of Total 25 % 65 % 17 % Maintenance as % MOTC 64 % 91 % 84 % Source: Master Plan on Road and Transport Sector Development (2010-2025) *Maintenance expenditures have increased exponentially over 2005-2008 given the Government’s focus on road maintenance as well as certain conditions put forward by donors on budget levels to be assigned for road maintenance.

At the request of the Government of the Kyrgyz Republic and based on the experience of the past, the on-going Bank financed National Road Rehabilitation (Osh-Batken-Isfana) Project is financing the development and implementation of a road asset management system. A Road Asset Management team is currently being established within the Road Asset Management Department (RMD) of the MOTC which will be in charge of the system with well-defined terms of reference, technical capacity and secured budget. In addition, the Investment Project Implementation Group (IPIG) within the MOTC will hire an internationally recruited road asset management consultant as well as a nationally recruited road asset management coordinator to work with the team for the initial period. Improved planning and management of road investments, including a new decision-making tool to facilitate resource allocation could increase efficiency in spending as well as potentially a shift towards increased levels of funds for maintenance.

To this end, MOTC is now focusing its efforts on the reorganization of its subordinate maintenance units at the regional (PLUAD) and local (DEP) level which will remain under the Ministry's jurisdiction in the medium-term. At the same time, due to the lack of road construction and maintenance equipment in the country, the Government's recent SDS plans to allocate KGS 250 million annually for their purchase. In the medium-term, elements of performance-based contracts are also envisioned to be introduced at the DEPs level. Another measure for making road investments more sustainable is strengthening transport control, including axle load and control systems in the country through further development of legislation, procurement of weight control scales, and most importantly, through improvement in rule enforcement. These measures are expected to be harmonized across the region.

The project will support piloting improved maintenance operations and practices as well as better planning and budgeting of maintenance. Improvement of maintenance practices will be stipulated through the establishment of a Service Level Agreement between MOTC and OBI 38 UAD . No need institutional set up is proposed (such as the setting up of a separate team or unit), but rather to work with existing staff within the OBI UAD. Under the Service Level Agreement, OBI UAD will be responsible for routine maintenance (summer and winter) and emergency works for the entire Osh-Batken-Isfana corridor, with special focus on those sections which have recently been rehabilitated and/or are in sustainable condition. The OBI UAD will need to receive secured and adequate funds for routine maintenance as well as emergency works to maintain the road sections at a defined level of service, and in accordance with the performance indicators (targets). These costs will cover staff, operation of equipment and purchase of materials in order to perform maintenance activities. The project will support OBI UAD, and its DEPs along the Osh-Batken Isfana road corridor, with a set of equipment (as detailed in Annex 2) – about US$ 1.00 million equivalent. Additionally, the Component 2 will support exposure of OBI UAD management to international practices on maintenance techniques through the hiring of individual internationally recruited consultants.

Improvements in road operations are directly related to the issue of road maintenance, as vehicle weight and notably the axle load is one of the most important parameters in preserving road quality. Currently countries in Central Asia and neighboring China have different vehicle weight standards, either on the total or on the axle weight. Each country applies different methodologies to sanction and calculate penalties for overloading, and in some cases the institutional setting is different among them; moreover the degree of enforcement varies significantly and the rules and regulations are not always transparent and readily available to the transport operators. Vehicle weight standards differing along a transport and trade corridor translate into inefficient transport operations because the truck capacity might not be used optimally; differing standards can also be used as a tool to limit the access of foreign operators to the market.

Currently, in the Kyrgyz Republic vehicle weight control is under the shared responsibility of Transport Control Authority under the MOTC (for the weighing stations located inland) and Customs (for the weighing stations located at border crossing points). At international level, the Kyrgyz Republic, Tajikistan, Uzbekistan and Russia are Contracting Parties to the UN Convention on Harmonization of Frontier Controls of Goods, which provides a set of good practices for the international transport including among others a unified Weighing Certificate.

38 In order to cover the entire Osh-Batken-Isfana road corridor, MOTC agreed to transfer two local maintenance units from the Regional Maintenance Department Osh-Sary-Tash-Irkeshtam (OSI UAD) to the OBI UAD.

At regional level all Central Asian Republics are bound by norms and practices of the Community of Independent States including in the area of vehicle weights. All these obligations remain however highly theoretic as they are not enforced. There is however an intention to further harmonize various technical standards such as vehicle weights or social legislation (driving time and rest periods provisions) at the regional level among neighboring countries.

The project envisages a review of this topic (consultancy services) at the regional level and support to MOTC of the Kyrgyz Republic towards: (i) the development of a strategic plan for the institutional arrangements for transport control; (ii) the setting up of a coherent, comprehensive and realistic vehicle weight control system, including best practices in sanctioning and calculating penalties for overloading, proportional to the damage produced to the infrastructure; and (iii) enhancing the enforcement of vehicle weight norms.

64 Annex 8: Program Overview and Complementarities with other Projects

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)

The proposed Central Asia Road Links (CARs) Program complements the on-going efforts of the countries in the region contained in the on-going Transport and Trade Facilitation Strategy and Action Plan for 2008-2017 which is endorsed by the Central Asia Regional Economic Cooperation (CAREC). This strategy foresees the rehabilitation of 6 strategic transport corridors in the Central Asia region based on their impact on economic growth and poverty reduction as highlighted by the recently development framework for the CAREC program 2011-2020 (CAREC 2020). The program has the aim to expand trade and improve competitiveness by developing “economic corridors” as well as improve trade facilitation. Within the trade facilitation component, cross-border transport agreements (CBTAs) between the Kyrgyz Republic, the Republic of Tajikistan and Afghanistan are being developed and implemented to ensure smooth flow of goods and people.

ADB, CAREC.

The CARs program is the result of a collaborative effort initiated by respective governments in the Central Asia region which has been developed as a regional, multi-phase program considered as a regional transformational project under IDA17. The program has the overall objective to

65 increase transport connectivity between neighboring countries in Central Asia along priority cross-border road links whilst supporting improvements in road operations and maintenance practices. The road links once rehabilitated will improve access along priority transport connections between major urban agglomerations within the Central Asia region, thereby supporting the creation of an integrated economic region across borders. In addition to each country’s capital city, major urban agglomerations include cities such as: (a) Osh city, the second largest city in the Kyrgyz Republic in Osh Oblast, (b) Khujand, the second largest city in Tajikistan within Sugd Oblast, (d) Almaty, the formerly capital of Kazakhstan until 1997 within Almaty Oblast, as well as (e) Andijan (Andijan Oblast), Fergana (Fergana Oblast) and Namangan (Namangan Oblast) in the Ferghana valley.

The first phase of the CARs (CARs-1) with total financing from IDA in the amount of US$45 million equivalent is to increase transport connectivity between the Kyrgyz Republic and Tajikistan along priority cross-border road links in Batken Oblast. Those cross-border links end at the Kyzyl-Bel-Guliston border crossing point as well as at the Kairagach-Madaniyat border crossing points, both at the border with Tajikistan.

The second phase of the CARs (CARs-2) with an estimated total financing requirement from IDA in the amount of at least US$45 million equivalent which is currently in project preparation stage is to increase transport connectivity between Tajikistan and the Kyrgyz Republic along cross-border links in Sugd Oblast (adjacent oblast to Batken Oblast). Those cross-border links end at the Guliston-Kyzyl-Bel border crossing point as well as at the Madaniyat-Kairagach border crossing points, both at the border with Kyrgyz Republic. In addition, the Government of the Republic of Tajikistan has suggested additional road links to Uzbekistan, including the border at Patar.

The third phase of the CARs (CARs-3) is currently under discussion between the Government of the Kyrgyz Republic and the Republic of Kazakhstan with a view to increase transport connectivity between both countries in bordering Issyk-Kul oblast (Kyrgyz Republic) with bordering Almaty oblast (Republic of Kazakhstan). A letter exchange and preliminary discussions have been held between the governments. The total costs of required investments are estimated at this preliminary stage to amount up to S$100 million.

The preparation of the fourth and fifth phase of the CARs (CARs-4 and 5) have not advanced as of today, but could potentially include road links to Afghanistan, Uzbekistan, as well as Turkmenistan.

Additionally, the program complements other activities, financed by donors in the area of trade facilitation, customs and logistics. Those activities are presented herewith:

 Customs Modernization and Border Management, including the development of a unified automated information system (UAIS), border-post infrastructure, border inter- agency cooperation, border crossing points (including Guliston-Kyzyl-Bel and Karamyk border crossing points), and introduction of National Single Window (NSW) platform through the ADB-financed Regional Customs Modernization and Infrastructure Development Project (KGZ), 2004-2013 (US$ 7.5 mln) and Central Asia Regional Economic Cooperation (CAREC) Regional Improvement of Border Services Project  (RIBS), 2013-2017 (US$ 17.6 mln, excluding co-financing by Kyrgyzstan and Tajikistan).   Transit Regime and Cross-Border Agreement: Phase I of an ADB-financed Technical Assistance provided support towards the preparation of cross-border agreement (CBA) 

between Tajikistan and the Kyrgyz Republic connecting the countries along the CAREC Corridor 5. In Afghanistan, the Corridor starts at Torkham at the border with Pakistan, continuing through Jalalabad to Kabul, Kunduz, and Shirkhan Bandar. From the Tajikistan border crossing of Nizhni Pianj, Corridor 5 passes through Kurgan Tyube, Dushanbe, and Karamik. In the Kyrgyz Republic, it runs to the PRC border via Karamik, Sary Tash, and Irkeshtam.  Other trade facilitation related Technical Assistance:  o ADB: The Regional Trade Facilitation and Cooperation Program (2002-2006) in KGZ and TAJ ($15 million and $10 million, respectively); (ii) Regional Customs Modernization and Infrastructure Development Project (2005-present) KGZ and TAJ ($7.5 million and $10.7 million, respectively); (iii) Technical Assistance: Integrated Trade Facilitation Support for Central Asia Regional Economic Cooperation (2007-present; $3.0 million); (iv) Technical Assistance: Regional Trade Facilitation and Customs Cooperation (Phase II, 2004-2009, $900,000); (v) Technical Assistance: Preparing the CAREC Transport and Trade Facilitation Project: Border Crossing Point Improvement and Single Window Development (2011-2012; $2 million); and (vi) Technical Assistance: Formulating and Implementing an Intergovernmental Agreement of the Shanghai Cooperation Organization Member States on Facilitation of International Road Transport (2005-2008; $500,000). o European Union: Border Management Programme in Central Asia (BOMCA) with the aim to promote stability and security in Central Asia through Integrated Border Management and Regional Cooperation. It also supports regional economic development and trade facilitation through 4 components: a) institutional reform; b) enhancing professional skills, c) strengthening counter drugs capacities at borders, d) border crossing and border outposts. o OSCE: Capacity building program for border management in Kyrgyzstan, including cross-border cooperation, customs training, document security, counter- narcotics and risk analysis, border security and management models, human trafficking, support to resource center on border delimitation and demarcation. The most recent project is “Enhancing the ability of the Kyrgyz Government to engage in regional cooperation in border security and management”. The OSCE Centre in Bishkek assists the Kyrgyz authorities to develop a comprehensive long-term approach to border management. o TRACECA: In 2001 TRACEC implemented a series of technical assistance: a) Customs Facilities at Central Asian Border Crossings; and b) harmonization of border crossing procedures. o USAID has been providing technical assistance support in a variety of field related to trade and transport facilitation over the years. Its on-going Regional Economic Cooperation Project aims to support Central Asian and Afghan firms trade by facilitating partnerships, training, and promoting an improved environment for trade.

67 Annex 9: Map

CENTRAL ASIA: Central Asia Road Links – Kyrgyz Republic (CARs-1)