World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 66462-GE

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 25.8 MILLION

Public Disclosure Authorized (US$40.00 MILLION EQUIVALENT)

AND A

PROPOSED LOAN

IN THE AMOUNT OF US$30 MILLION

GEORGIA

Public Disclosure Authorized FOR THE

SECOND SECONDARY AND LOCAL ROADS PROJECT (SLRP-II)

FEBRUARY 21, 2012

Sustainable Development Department South Caucasus Country Unit Europe and Central Asia Region

Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS

(Exchange Rate Effective January 1, 2012) Currency Unit = Georgian Lari (GEL) GEL 1.66 = US$ 1.00 US$1.551 = SDR 1.00

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AADT Average Annual Daily Traffic MCC Millennium Challenge Corporation ADB Asian Development Bank MENR Ministry of Environment and Natural Resources CPS Country Partnership Strategy MESD Ministry of Economy and Sustainable Development EA Environmental Assessment MRDI Ministry of Regional Development and Infrastructure EIB European Investment Bank NBG National Bank of Georgia EIRR Economic Internal Rate of Return NCB National Competitive Bidding EMP Environmental Management Plan NPV Net Present Value ESMF Environmental and Social Management Framework ORAF Operational Risk Assessment Framework FA Financing Agreement PAD Project Appraisal Document FEWHIP First East West Highway Improvement Project PBC Performance Based Contract FM Financial Management PDO Project Development Objective FMAR Financial Management Assessment Report PIP Project Implementation Plan FMM Financial Management Manual PIU Project Implementation Unit FPU Foreign Project Unit POM Project Operational Manual GEL Georgian Lari (currency unit) RAP Resettlement Action Plan HDM 4 Highway Design and Maintenance model, Ver-4 RD Roads Department IBRD International Bank for Reconstruction and RPF Resettlement Policy Framework Development ICB International Competitive Bidding SDR Special Drawing Rights IDA International Development Association SEWHIP Second East West Highway Improvement Project IFI International Financing Institution SIL Specific Investment Loan ISP Implementation Support Plan SLRP Secondary and Local Road Project JICA Japanese International Cooperation Agency TOR Terms of Reference KRRIP Kakheti Regional Roads Improvement Project TRRC Transport Reform and Rehabilitation Center

Regional Vice President: Philippe H. Le Houerou Country Director: Asad Alam Sector Director: Laszlo Lovei Sector Manager: Henry G. R. Kerali Task Team Leader: Joseph Melitauri Co-Task Team Leader Petrus Benjamin Gericke

GEORGIA

Second Secondary and Local Roads Project (SLRP II)

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT ...... 1 A. Country Context ...... 1 B. Sectoral and Institutional Context ...... 1 C. Higher Level Objectives to which the Project Contributes ...... 3

II. PROJECT DEVELOPMENT OBJECTIVES ...... 4 A. PDO...... 4 B. Project Beneficiaries ...... 4 C. PDO Level Results Indicators ...... 4

III. PROJECT DESCRIPTION ...... 5 A. Project Components ...... 5 B. Project Financing ...... 6 C. Lessons Learned and Reflected in the Project Design ...... 6

IV. IMPLEMENTATION ...... 7 A. Institutional and Implementation Arrangements ...... 7 B. Monitoring and Evaluation of Results ...... 8 C. Sustainability...... 8

V. KEY RISKS AND MITIGATION MEASURES ...... 9 A. Risk Ratings Summary Table ...... 9 B. Overall Risk Rating Explanation ...... 9

VI. APPRAISAL SUMMARY ...... 9 A. Economic and Financial Analyses ...... 9 B. Technical ...... 11 C. Financial Management ...... 11 D. Procurement ...... 12 E. Social (including Safeguards) ...... 13 F. Environment (including Safeguards) ...... 14 Annex 1: Results Framework and Monitoring ...... 15

Annex 2: Detailed Project Description ...... 17

Annex 3: Implementation Arrangements ...... 28

Annex 4: Operational Risk Assessment Framework (ORAF) ...... 39

Annex 5: Implementation Support Plan ...... 43

Annex 6: Ongoing Road Projects in Georgia ...... 46

Annex 7: Draft Procurement Plan...... 47

Annex 8: Map ...... 48

. DATA SHEET Georgia Second Secondary and Local Roads Project (SLRP II) (P122204) PROJECT APPRAISAL DOCUMENT

. EUROPE AND CENTRAL ASIA ECSS5

. Basic Information Date: 20-Feb-2012 Sectors: Rural and Inter-Urban Roads and Highways (90%), Public administration- Transportation (10%) Country Director: Asad Alam Themes: Infrastructure services for private sector development (65%), Administrative and civil service reform (15%), Trade facilitation and Sector Manager/Director: Henry G. R. Kerali/Laszlo Lovei market access (10%), Regional integration (10%) Project ID: P122204 EA Category: B - Partial Assessment Lending Instrument: Specific Investment Loan Team Leader(s): Joseph Melitauri Joint IFC: No

. Borrower: Georgia Responsible Agency: Road Department of the Ministry of Regional Development and Infrastructure Contact: Mr. Irakli Litanishvili Title: Deputy Chairman Telephone No.: Email: [email protected]

. Project Implementation Period: Start Date: 31-Mar-2012 End Date: 30-Dec-2016 Expected Effectiveness Date: 30-Jun-2012 Expected Closing Date: 30-Jun-2017

. Project Financing Data(US$M) [ X ] Loan [ ] Grant [ ] Other [ X ] Credit [ ] Guarantee Proposed Terms The variable spread IBRD Loan has a final maturity of 25 years including a grace period of 10 years. The IDA Credit will be provided on the basis of 25 years to maturity including 5 years grace period. For Loans/Credits/Others Total Project Cost (US$M): 87.50 Total Bank Financing (US$M): 70.00

. Financing Source Amount(US$M) BORROWER/RECIPIENT 17.50 International Bank for Reconstruction and Development 30.00 International Development Association (IDA) 40.00 Total 87.50

. Expected Disbursements (in USD Million) Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 Annual 0.00 15.00 25.00 20.00 8.00 2.00 0.00 0.00 0.00 Cumulative 0.00 15.00 40.00 60.00 68.00 70.00 70.00 70.00 70.00

. Project Development Objective(s) To improve local connectivity and travel time for selected secondary and local roads, and to strengthen the capacity of the Roads Department to manage the road network.

. Components Component Name Cost (USD Millions) Rehabilitation and Improvement of Selected Secondary and Local Roads 86.00 Institutional Strengthening and Project Management 1.50

. 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 [ X ] 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 Loan and Financing Agreement Section I, A. 2 07-Jul-2012 Description of Covenant By not later than one month as of the Effective Date, the RD and TRRC shall duly amend the Project Implementation Agreement Name Recurrent Due Date Frequency Loan and Financing Agreement Section I, A. 6 01-May-2012 Description of Covenant The Borrower shall cause RD to recruit a financial auditor under terms of reference and conditions satisfactory to the Bank

. Team Composition Bank Staff Name Title Specialization Unit Joseph Melitauri Senior Operations Officer Task Team Leader ECSS2 Petrus Benjamin Gericke Lead Transport Specialist Co-Task Team Leader, Road ECSS5 Safety Specialist Rodrigo Archondo-Callao Senior Highway Engineer Highway Engineer ECSS5 Deepal Fernando Senior Procurement Specialist Procurement Specialist ECSO2 Darejan Kapanadze Senior Environmental Specialist Environmental Specialist ECSS3 Elena Y. Chesheva Operations Officer Operations Officer SASDT Arman Vatyan Senior Financial Management Financial Management ECSO3 Specialist Joseph Formoso Senior Finance Officer Finance Officer CTRLA Joanna Peace De Berry Senior Social Development Social Safeguards ECSS4 Specialist Sophie Devnosadze Operations Analyst Operations Analyst ECCGE Marie Antoinette Laygo Program Assistant Program Assistant ECSSD Militsa Khoshtaria Program Assistant Program Assistant ECCGE Marinos Skempas E T Consultant Engineer ECSS5 Non Bank Staff Name Title Office Phone City David T Silcock Consultant

. Locations Country First Administrative Location Planned Actual Comments Division

I. STRATEGIC CONTEXT

A. Country Context

1. Georgia is located to the south of the Caucasus mountain range, with Russia located to its north, Armenia and Turkey to its south, and Azerbaijan to its east. It is a mountainous country with elevations from zero to 5,000 meters above sea level. With a population of 4.5 million, it is moderately urbanized, with 47 percent living in rural areas as of 2010. Poverty is a significant concern; nationwide about 24.7 percent live in poverty, but the rate in rural areas is significantly higher, at about 30.7 percent as of 2009.1

2. Over the last five years, Georgia has achieved significant economic progress. Due to very aggressive, broad reforms, its economy rapidly grew at an average rate of over 9 percent a year from 2004 to July 2008. The country successfully overcame the August 2008 conflict and the 2008-2009 global economic crisis. Although economic growth contracted by 3.8 percent in 2009, it recovered in 2010 to 6.3 percent and an estimated 6.8 percent in 2011. This recovery and growth was due to an increase in exports, and tourism, and continued high levels of public investment. The public investment of the Government was mainly focused on the road network. Increased public investments aimed at boosting economic recovery by improving main road corridors and local connections, and by creating temporary employment.

3. The underlying drivers of sustainable medium-term growth are evolving in the post-crisis period with a greater role for domestic financing and tradables, where the Government is launching new initiatives to attract private investors in selected regions. To this end, in June 2010, the Government approved the State Strategy on Regional Development of Georgia for 2010-2017 (Resolution no. 172), prepared by the Ministry of Regional Development and Infrastructure (MRDI).

4. In 2011, the Government developed a ten-point economic program with the goal of facilitating job creation and improving welfare of the population.2 Among the top ten priorities is the improvement of the infrastructure, especially roads. This program puts a special emphasis on the rehabilitation of secondary and local roads.

B. Sectoral and Institutional Context

5. Georgia has a well developed road network; however, the number of roads per 1,000 sq km is less than that in countries of the Organization for Economic Co-operation and Development (OECD) — although it is similar to that of most countries in the Caucasus region.3 It has a total road network of 20,930 km, of which 1,564 km are international roads, 5,466 km are secondary, and 3,750 km are core local roads.4 About 34 percent of secondary and local roads are paved, 59 percent are gravel, and 7 percent are earth roads. While programs to bring

1 Source: Staff estimates based on 2007 LSMS, 2003 IHS, and 2008-2009 HIS. See World Bank report ―Georgia Poverty Dynamics since the Rose Revolution‖, June 2011. 2 ―Georgia: Strategic Plan of Development. Ten Point Plan of Modernization and Employment, 2011-2015.‖ Government of Georgia, October 2011. 3 World Development Indicators (WDI), Institute of Fiscal Studies (IEF) data base. 4 Core local road length is a World Bank estimate from: ―Improving the Sustainability of Road Management and Financing in Georgia‖. World Bank, June 2011.

1 the main roads to a good condition are in place and their implementation is well advanced, 70 percent of secondary roads and large parts of local roads require significant improvement.

6. Trading with its neighbors and providing good links for transit traffic are important to Georgia's economy. To maximize these benefits the Government has focused on two areas: rehabilitating and modernizing the transport infrastructure along the main east-west corridor, and improving access throughout the country. To this end, the country has been investing in rehabilitating and improving both the main transport corridors and the secondary and local roads networks.

7. The Government’s ambitious plans to maintain high economic growth by promoting the transportation of goods within the country, increasing tourism, and revitalizing agriculture, pose challenges to the road sector: (a) significant capital investment is needed to bring the road network to a level that can support the economy; (b) scarce resources need to be prioritized to ensure long-term maintenance of the road assets; (c) local connections must be improved to provide the rural population with easy access to markets; and (d) investments in the road sector need to generate employment.

8. Secondary and local roads also create specific challenges given their poor state of repair and limited Government capacity to manage them: (a) there is a large rehabilitation backlog, (b) funding for rehabilitation and maintenance has been insufficient, and (c) those administering the efforts lack experience in managing contracts and efficiently using scarce resources.

9. Two Ministries are responsible for the transport sector. The Ministry of Economy and Sustainable Development (MESD), through its Transport Policy Department, determines the transport sector policy and regulates transportation. The Ministry of Regional Development and Infrastructure (MRDI) implements road infrastructure policies and decisions pertaining to all roads infrastructure investments. The Roads Department (RD) of the MRDI manages and administers the entire road network except for non-core local and all municipal roads. The latter are managed by local governments and municipalities. The RD is also responsible for implementing all donor-funded projects in the road sector.

10. To address the road sector issues in particular the need for improving international and domestic connections and reducing overall transportation costs, the Government has substantially increased funding for RD programs. In addition, it has directed the bulk of the external donor assistance into the sector. The largest allocations were made to improve the international road links, such as the East-West Highway (E60). However, a significant part is invested in rehabilitating secondary and local road networks. Besides World Bank support, the Asian Development Bank (ADB) financed sections of secondary roads in Svaneti region, and the Millennium Challenge Corporation (MCC) funded secondary and local roads in South Georgia.

11. To stop the deterioration of secondary and local roads, the Government increased funding for maintenance and rehabilitation. Since 2004, the budget for road rehabilitation increased fivefold, to about US$90 million in 2010. The Bank has financed three secondary road projects, totaling US$120 million, including an additional US$70 million for the ongoing Secondary and Local Road (SLRP) project, which rehabilitated about 500 km of additional secondary and local

2 roads. The Bank also supports the ongoing Kakheti Regional Roads Improvement Project, which has provided US$30 million to rehabilitate the Vaziani-Gombori-Telavi road.

12. To boost the country’s economy and diversify the sources of growth, Georgia is focusing on developing selected sectors including infrastructure, agriculture and agroindustries, and tourism, with the expectation that this would create jobs. Rehabilitating secondary and local roads and improving local connections are known to stimulate agricultural development. Further, reduced transport costs would lower agriculture sector costs, thus making agricultural products more competitive.

13. The World Bank is involved in this project because: (a) it is uniquely placed to help the Government and RD gain from experiences in other countries with similar challenges through introducing innovative technologies, implementing more efficient rehabilitation/maintenance contracting methods, and optimizing design standards for secondary and local roads, all which provide a safer and more efficient road sector; (b) improving access in rural areas, where many of Georgia’s poor live, is particularly suited to the Bank’s mission to address poverty; and (c) the Bank has broad experience in Georgia’s transport sector and is successfully supporting the ongoing SLRP. The trust that results from this long involvement means the Bank is well placed to provide substantive assistance to the Government and RD for the sector’s needed institutional reforms.

14. Both the recent study on road maintenance financing5 as well as the public expenditure review6 recommended that Government should consider increasing resource allocation to the sector and introducing more cost effective design and contracting methodologies to better utilize those resources. The RD decided to pilot both design-build and performance-based contracting as part of SLRP II’s second year program based on the lessons learned in other countries. These methods involve lump-sum contracts that transfer the risk of design/construction to the contractor and usually result in faster implementation and significantly reduced overall costs.

15. The preparation of the detailed designs for the proposed SLRP II introduced two new aspects: (a) economic analysis of several technical alternatives; and (b) incorporation of safety features into the design process. The design for each road link will be based on an economic analysis of several technically viable options. This approach will improve the current rigid and sometimes uneconomic design practices, as it will study and introduce more modern designs. It will also include road safety mitigation during the design process to reduce the delays to amend designs and bid documents to incorporate the recommendations of road safety audits on the agreed designs. The new approach will incorporate road safety into the design process.

C. Higher Level Objectives to which the Project Contributes

16. The SLRP II is in line with investment priorities identified in the current 2010-2013 Country Partnership Strategy (CPS). The CPS identifies two strategic pillars: (a) meeting post- conflict and vulnerability needs; and (b) strengthening competitiveness for post-crisis growth. Direct job creation is the expected result of the first pillar. The ongoing SLRP has shown that investments in secondary and local roads substantially increase local employment. It is estimated

5 ―Improving the Sustainability of Road Management and Financing in Georgia‖. World Bank, June 2011. 6 Georgia Public Expenditure Review. World Bank, March 2012, Draft.

3 that every US$3,000 invested into roads directly creates one person-month of employment. Based on this estimate, SLRP II would create about 12,000 person-months of direct employment over its duration.

17. The SLRP II will also improve local road connections and reduce transport costs, which will directly contribute to the CPS second pillar of strengthening competitiveness. The 20047 socio-economic survey showed that reduced transport costs would increase the competitiveness of local products. In addition, the local construction industry could experience growth opportunities through the contracts issued in different parts of the country, and the improved local roads will lower costs for small businesses.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

18. The Project Development Objectives (PDO) are to improve local connectivity and travel time for selected secondary and local roads, and to strengthen the capacity of the Roads Department (RD) to manage the road network.

B. Project Beneficiaries

19. The direct project beneficiaries are the residents of the villages along the road sections to be rehabilitated and improved. The number of residents is estimated to be 150,300, of which about 78,800 are female.8 The number is based on population census data and updated as required by the RD. The benefits would accrue through improved connectivity and lower transportation costs with an additional interim benefit of temporary employment during the construction phase, estimated at 12,000 person months.

20. The Project will support an impact evaluation study to measure the socio-economic and other benefits the road improvements will have on beneficiaries. The impact evaluation will include a baseline survey of household characteristics in the first year of the project, followed up with two surveys, one at the middle and one at the end of the project implementation.

C. PDO Level Results Indicators

21. The key expected results from the Project and indicators to measure them are listed below, as well as in Annex 1. Results will also be measured by intermediate indicators described in Annex 1.

(a) Improved conditions on selected secondary and local roads. These will be measured through the following monitoring indicators: (i) Increase in the percentage of Secondary and Local Roads in good or fair condition from 30 percent at present to 34 percent at the end of the Project; (ii) Decrease in the current average travel time by about 20 percent over the life of the Project.

7 SLRP Project Appraisal Document. World Bank, Report No 27919-GE, May 28, 2004 8 The number of female residents has been derived from the national average female/male ratio of 52.4 %.

(b) Increased capacity of the RD to manage the road network. This will be measured through one indicator: (i) Kilometers of roads managed under alternate contract methods (as a measure of RD’s capacity to manage road network through PBC or Design / Build / Operate)

III. PROJECT DESCRIPTION

A. Project Components

22. The Project will build on the ongoing SLRP and complement other projects funded by the Bank in the road sector, by incorporating lessons from the ongoing projects and benefiting from the efficiency gains of the road rehabilitation works in the ongoing SLRP. Further, it will expand the institutional strengthening activities under the ongoing road projects so as to address the needs of local communities and maintenance of secondary and local roads. It will continue improving the secondary and local roads, essential for community access both to the primary network and to markets and social services, as well as mobilize community participation in the planning/monitoring of local road maintenance. It will also introduce new contracting methods to improve road management.

23. The Project has two components: Component 1, which will focus on rehabilitating and improving selected secondary and local roads; and Component 2, which will focus on institutional strengthening.

24. Component 1: Rehabilitation and Improvement of Selected Secondary and Local Roads (US$86 million total, US$69 million Bank financing). This component will rehabilitate and improve various secondary and local roads throughout the country. The Government has identified 19 road sections with a total length of about 225 km, as listed in Annex 2, for the first two years of project implementation. The first year program will include at least six road sections, with a total length of about 61 km, for which designs have been completed. Selection of the firms to design the planned rehabilitation under the second year program is also well advanced.

25. This component also supports pilot performance-based and design-build contracts. The RD identified about 200 km of roads in the Kakheti Region, as listed in Annex 2, for assessment and provisional inclusion in this contract. The consultancy to assess the viability, affordability and potential risks (and their mitigation) of the performance-based contracts is ongoing, funded under the Third East-West Highway Project. Based on the availability of funds for the Road Sector, the RD will review the assessment’s findings and decide on the required levels of service and the extent of the road network to be included in the contract. The consultant will thereafter prepare the bidding documents for implementation as part of the second year program.

26. The RD decided to rehabilitate two of the 19 road links (see Annex 2) with design-build methods. The assessment consultant will be selected within the third quarter of 2012, and bidding documents are expected to be issued in late 2012.

5 27. Component 2: Institutional Strengthening and Project Management (US$1.5 million total, US$1.2 million Bank financing). This component will finance the provision of goods, consultants’ services, and training aimed at strengthening the capacity of RD and FPU in: (a) project management and implementation; (b) identifying, developing and implementing road safety measures on secondary and local roads; and (c) carrying out impact evaluations.

B. Project Financing

Lending Instrument 28. The proposed credit of US$40 million equivalent and loan of US$30 million will be a repeater Specific Investment Loan (SIL) from IDA and IBRD, respectively.

Project Cost and Financing 29. The Project’s total cost is estimated at US$87.5 million. This amount will be financed by IDA and IBRD, and the Government, which will provide 20 percent counterpart financing. The Project cost breakdown is presented in the table below.

Project cost IDA IBRD Percent Financing Financing Financing Goods, works, non-consulting services, 80.12 36.63 27.47 80% consultants’ services, Training and Incremental Operating Costs

Total Baseline Costs 80.12 36.63 27.47 Physical contingencies 3.79 1.73 1.30 Price contingencies 3.59 1.64 1.15

Total Project Costs 87.50 40.00 29.92 Interest During Implementation 0.00 N/A Front-End Fees N/A 0.08 Total Financing Required 87.50 40.00 30.00

30. The Project will disburse the IDA Credit first and the IBRD Loan last.

31. The Project also allows for retroactive financing from the IDA Credit for all disbursement categories, starting from the last day of the project appraisal, January 30, 2011, mainly for the initial payments on the first year contracts, of US$4 million.

C. Lessons Learned and Reflected in the Project Design

32. The proposed SLRP II builds on the ongoing SLRP project and incorporates the following lessons learned:

(a) The RD and supervision consultant need additional staff to supervise the large number of small contracts. Thus, SLRP II will support a project contract manager for the RD, which will help manage the contracts. In addition, the terms of reference (TOR) of the supervision consultant were modified to provide one field-based

6 engineer for every two road sections in order to improve both on-site supervision of the rehabilitations and general technical oversight of the implementation activities.

(b) The ongoing SLRP showed that road safety mitigation measures are not always incorporated into the designs and that independent road safety audits (of the completed design) are only minimally useful when the recommendations require substantial design changes/amendments to the bidding documents. Thus, SLRP II will ensure that the mitigation measures recommended in the ongoing road safety assessments are included in the design. Also, the proposed SLRP II will support the strengthening of RD’s Road Safety Unit so it can conduct audits on a stand-alone basis.

(c) The ongoing SLRP supported road designs based on Georgian and international design standards that did not always result in efficient technical solutions. As part of the second year program, the design studies will require solutions based on economic evaluations and a comparison of different technical solutions. This approach should allow funds to be used more efficiently.

(d) An analysis of the road sector9 noted that the RD would benefit from adopting contracting methods that have been proven to be more efficient elsewhere. Thus, SLRP II will support the implementation, on a pilot basis, of two design-build contracts and one performance-based contract as part of the second year program. The usefulness and efficiency of the three pilot contracts will be assessed during implementation for possible wider acceptance in the road rehabilitation and maintenance programs of the RD.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

33. The RD will implement the proposed Project in the same manner as the ongoing Bank-financed transport projects. The Foreign Project Unit (FPU) of the RD, established by Ministerial Decree, is responsible for technical, procurement, monitoring and reporting, contract management, and other implementation matters. The Transport Reform and Rehabilitation Center (TRRC), established in 1995 to help implement Bank-supported transport projects, is responsible for the flow of funds, accounting, budgeting, financial reporting, and auditing.

34. This arrangement will be maintained for SLRP II. Both the Project Implementation Agreement between RD and TRRC signed in July 2009, and the Project Operations Manual (POM) used for all Bank-funded transport projects, will be updated to include the SLRP II. The Borrower will submit to the Bank the Project’s Operations Manual in form and substance acceptable to the Bank, which is an effectiveness condition of the Project.

35. In addition, TRRC has updated the Financial Management Manual (FMM), which applies to all Bank-financed projects, to include the SLRP II with its chart of accounts.

9 ―Improving the Sustainability of Road Management and Financing in Georgia‖. World Bank, June 2011.

7 36. The RD through FPU is responsible for procurement, contract management, monitoring and reporting, technical and other implementation tasks. Since the amount of work has significantly increased as more Bank-financed projects were added, the FPU will hire additional staff, including monitoring and evaluation specialists, to support project and contract management, procurement, and monitoring of environmental and social safeguards.

37. The RD initiated the selection of a replacement Head of both the FPU and the Monitoring and Evaluation Sub-unit when both positions became vacant during the second half of 2011. The vacancies for these positions were announced on February 1, 2012, applications have been received, and RD plans to select the both replacements by the second quarter of 2012. These two positions are essential to the functioning of the FPU.

38. Similarly, the TRRC needs to improve its financial management capacity to accommodate the additional work load under this project. The TRRC’s FM practices comply with World Bank guidelines. However, its fiduciary capacity will be strengthened by hiring one additional full-time staff.

B. Monitoring and Evaluation of Results

39. The Project will continue to use the agreed Bank-financed monitoring and evaluation arrangements. The RD, through the FPU, will be responsible for monitoring, evaluating and reporting the Project results. The FPU has a dedicated Monitoring and Evaluation sub-unit with a staff of three, who have been effectively monitoring projects and preparing reports in a timely manner. The FPU will retain adequate staff (a unit head plus two others) to continue monitoring results.

C. Sustainability

40. Project sustainability will largely depend on the continued availability of resources and the commitment and ability of the RD to use effectively the resources allocated for the road sector. Efforts in this area will include applying the institutional changes and efficiency improvements to managing the road network. The study on the sustainability of road maintenance10 found that, despite significant budgetary increases during 2004-2010, the currently allocated funds for these purposes are insufficient to finance adequate maintenance. The study proposed several options that the Government could adopt to address this deficiency.

41. Part of the solution is in using the resources allocated to the road sector as efficiently as possible. This could be achieved through: (a) adopting more efficient road design standards; and (b) introducing alternate forms of contracting on a pilot basis to test their potential for efficiency improvements. The SLRP II will support the Government’s decision to test new contract methods on a pilot basis.

10 ―Improving the Sustainability of Road Management and Financing in Georgia‖. World Bank, June 2011.

8 V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Stakeholder Risk Low Implementing Agency Risk Moderate - Capacity Moderate - Governance Low Project Risk Moderate - Design Moderate - Social and environmental Moderate - Program and donor Low - Monitoring and sustainability Moderate Overall Implementation Risk Low

B. Overall Risk Rating Explanation

42. The Project's overall preparation and implementation risks are both rated low. Despite the potentially high impact of some of the risks above rated as low (based on the Bank's past experience with the ongoing SLRP), the likelihood of those risks endangering the Project is low. Thus, the overall risk rating is rated ―Low‖.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

43. The economic evaluation of the civil works during the first year of the project (six road links with a total of 61 km) was conducted using the World Bank’s Highway Development and Management Model (HDM-4) that computes annual road agency and user costs for each project alternative over the evaluation period. The resources consumed and vehicle speeds, which are related to traffic volume and composition, type of road surface, geometric characteristics and riding quality (measured in terms of road roughness), are calculated first and then multiplied by unit costs to obtain total vehicle operating costs and travel time costs. The evaluation was done assuming construction will occur over one year and benefits were calculated over a 20-year evaluation period, at a 12 percent discount rate.

44. The roads selected for the second and third years will be subject to the same evaluation methods and road works will be required to yield an Economic Internal Rate of Return (EIRR) above 12 percent.

45. The roads which will be financed first are in very poor condition with many potholes and other major problems. Their riding quality was visually estimated to vary from 10 to 13 in terms of the International Roughness Index (IRI, in m/km). The table below shows the basic road characteristics.

9 Basic Road Characteristics Length Width Road (km) (m) Surface Condition Shulaveri-Red Bridge km7-km11 5.0 8.0 Paved Very Poor Kveda Sakara-Sazano km1-km14 14.0 7.0 Paved Very Poor Chiatura-Usakhelo-Korbouli km6-km24 19.0 7.0 Paved Very Poor Kutaisi-Alpana-Mamisoni pass km116-km125 10.0 6.0 Paved Very Poor Didi Dmanisi-Dmanisi-Bediani km17-km26 10.0 7.0 Paved Very Poor Chokhatauri-Bakhmaro km4-km6 3.0 6.0 Paved Very Poor Total 61.0

46. The table below summarizes the economic evaluation results. The reconstruction of all roads is economically justified with the Economic Internal Rate of Return (EIRR) above 12 percent for all of the roads. The overall Net Present Value (NPV) is US$13.1 million, at 12 percent discount rate, and the overall EIRR is 19.8 percent.

Economic Evaluation Results NPV EIRR (US$ Road Million) (%) Shulaveri-Red Bridge km7-km11 4.9 38.1% Kveda Sakara-Sazano km1-km14 1.6 16.7% Chiatura-Usakhelo-Korbouli km6-km24 2.6 17.5% Kutaisi-Alpana-Mamisoni pass km116-km125 1.4 16.2% Didi Dmanisi-Dmanisi-Bediani km17-km26 2.3 20.7% Chokhatauri-Bakhmaro km4-km6 0.3 18.1% Total 13.1 19.8%

47. The table below shows the results of the sensitivity analysis for the first year program considering: (i) increasing costs by 15 percent; (ii) decreasing benefits by 15 percent; and (iii) increasing costs by 15 percent and decreasing benefits by 15 percent. The sensitivity results show that even under the scenarios of increasing costs by 15 percent and decreasing benefits by 15 percent, the first year program is economically justified with an EIRR of 15.8 percent. The switching values analysis shows that costs would have to increase by 79 percent or benefits would have to decrease by 44 percent to yield an EIRR below the required 12 percent.

EIRR Sensitivity Analysis Results Base A: Cost B: Benefits Road Case +15% -15% A + B Shulaveri-Red Bridge km7-km11 38.1% 34.6% 34.6% 31.5% Kveda Sakara-Sazano km1-km14 16.7% 14.7% 14.7% 12.9% Chiatura-Usakhelo-Korbouli km6-km24 17.5% 15.6% 15.6% 13.8% Kutaisi-Alpana-Mamisoni pass km116-km125 16.2% 14.3% 14.3% 12.5% Didi Dmanisi-Dmanisi-Bediani km17-km26 20.7% 18.7% 18.7% 16.8% Chokhatauri-Bakhmaro km4-km6 18.1% 16.1% 16.1% 14.2% Total 19.8% 17.7% 17.7% 15.8%

48. The RD improved the design requirements for the second and third year project roads and will consider a wider range of viable technical options to improve efficiency. In general, future road rehabilitation and improvements would be required to yield an EIRR above 12 percent.

10 B. Technical

49. The SLRP II will rehabilitate about 225 km of secondary and local roads throughout Georgia, including 19 road sections (see Annex 2) in five regions. The rehabilitation will mostly be executed within the roads’ existing horizontal alignment, with bridge and culvert repairs where appropriate. The civil works contracts will be designed to promote competition and decrease the tasks associated with contract administration, as appropriate. The Project will support the current supervision consultancy under the ongoing SLRP, and technical audits will be carried out to assure construction quality.11 Detailed designs for six road sections with a total length of about 61 km are already complete. Designs for the remaining 11 road sections are being financed through the Additional Financing for the First East West Highway Improvement Project. Selection of the design consultant is progressing well, and the contract should be awarded by July 31, 2012.

50. The SLRP II will support pilot contracts to test the applicability of design-build and performance-based contracting for the road sector (see Annex 2 for a description of the two methods). Design-build contracts require a contractor to employ a consultant to develop a design that complies with the minimum standards and, after approval by the employer, to undertake the required works. This is normally a lump sum contract where the design risks and those of additional works to complete the contract are all assumed by the contractor. The pilot contracts would be implemented on two of the 19 road sections already identified for rehabilitation.

51. The proposed performance-based contract will be for a longer-term (about five years) and will require the contractor to improve the road network to the required levels of service and then maintain it for the duration of the contract. Contractors may determine where and when they want to execute the works, provided that, where designs are required, these have been reviewed and approved by the employer. Payment will be based on achieving and maintaining specified levels of service and not on the completion of physical works.

52. The RD selected a road network of about 200 km in the Kakheti Region (listed in Annex 2), consisting of a mix of paved and unpaved roads with various technical and service conditions for the assessment and possible inclusion in the final bid document.

53. For the pilot performance-based contract the final decision on the extent of the road network to be included and the levels of service to be required will be determined by a number of factors, the main ones being affordability and viability.

54. An independent road safety audit will be conducted for the existing six designs. The RD will conduct the road safety audit for the remaining 11 road sections once the detailed designs are ready as described in the section on Sectoral and Institutional Context.

C. Financial Management

55. The financial management (FM) arrangements of the TRRC have been reviewed periodically as part of the on-going projects implementation support and supervisions, as well as

11 There will be a technical auditing firm financed under the ongoing TEWHIP

11 during the FM assessment of the proposed Project in December 2011, and have been found satisfactory. The financial management arrangements of the project will be the same as for the ongoing SLRP and other road projects implemented by the TRRC, which are acceptable to the Bank.

56. The significant strengths that provide a basis for reliance on the project financial management system include: (i) significant experience of TRRC Financial Management staff in implementing Bank-financed projects for the past several years; (ii) adequate accounting software utilized by the TRRC; (iii) FM arrangements similar to the on-going projects currently being implemented by the TRRC and found to be adequate; and (iv) the unqualified audit reports and management letters with no major issues found by the auditors on the projects financial statements.

57. The TRRC plans to enhance its staffing arrangements by hiring additional FM staff to be in charge of contract monitoring. It has been agreed that prior to the project implementation: (i) the TRRC/RD will finalize recruitment of one additional FM/accounting staff to be in charge of maintaining the contract management module to strengthen contract monitoring; and (ii) TRRC will update the ongoing projects’ Financial Management Manual to incorporate the activities of the proposed project. These actions are intended to increase capacity of the TRRC. Since January 2006, the Treasury’s foreign currency account at the National Bank of Georgia (NBG) has been used for all new World Bank financed projects’ DAs. Overall these arrangements are satisfactory and will remain in place during the project implementation.

D. Procurement

58. Procurement will be carried out according to the World Bank’s ―Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants, January 2011‖ and the ―Guidelines: Selection and Employment of Consultants under IBRD Loans & IDA Credits & Grants by World Bank Borrowers, January 2011;‖ and the provisions stipulated in the Loan Agreement and Financing agreement.

59. The Roads Department, through the Foreign Project Unit (FPU), will be responsible for procurement. The core FPU staff has the experience needed to carry out procurement activities. However, the Project should have a designated procurement specialist. The current FPU/RD staff and the FPU’s procurement consultant are all familiar with Bank guidelines and procedures as they have been involved in the ongoing SLRP, and have gained substantial experience during the ongoing project and other transport projects financed by the Bank. The proposed Project will finance 19 rehabilitation contracts for about 225 km of secondary and local roads (average package size is about 10 km, estimated to cost around US$4 million) with a wide geographic spread and 3 pilot contracts, two for testing design-build and one for testing performance-based contracting methodology. The proposed Project will also finance consultancy contracts and several contracts for supply of goods, as indicated in the Procurement Plan. The contract awards for supply of goods may follow ―direct contracting‖ requirements according to the Procurement Guidelines (paragraph 3.7). Consultancy contracts will include several services for assessment studies, construction supervision and design studies and an individual consultant for a project manager selected according to Bank Guidelines for Selection of Consultants.

12 60. Readiness for implementation. The designs for the first year program are ready to be bid out. Detailed designs for rehabilitation of 6 road sections have been completed and draft bidding documents for two contracts have been submitted for review by the Bank. The designs for the second and third year programs are also in an advanced stage of preparation; the selection process for the design consultant for preparation of detailed designs for 11 road sections has commenced. The deadline for submission of Expression of Interest for ―Preparation of Detail Design and Bid Documents for Rehabilitation of Road Sections Under Secondary and Local Roads Project II‖ was August 29, 2011. The FPU has prepared the draft RFP and submitted it along with the shortlist to be reviewed by the Bank.

61. The selection of the supervision consultant has also started; the FPU is preparing the shortlist and the draft RFP for hiring the services of the supervision consultant for the rehabilitation of 19 road sections including the first 6 road sections.

E. Social (including Safeguards)

62. The project is expected to have positive long term social impacts on the communities using the secondary and local roads targeted for rehabilitation as well as the tourists visiting cultural and natural heritage sites located along some of these roads. No major land acquisition or physical displacement of residents is expected under the project, since it will not finance new road construction nor major widening activities. All civil works will be carried out within the existing horizontal alignment of the selected roads. However, experience from the ongoing SLRP shows that minor land acquisitions along existing rights-of-way may be needed to improve geometric standards, provide adequate space for drainage, and enhance/add road safety features such as sidewalks, pedestrian crossings, guardrails, and safety barriers. In addition, land acquisition may be required due to unforeseen events such as landslides where previous alignments are no longer feasible and the optimum design for a modified road stretch requires more land. For these reasons, and largely as a precautionary measure, the project triggers OP4.12.

63. A Resettlement Policy Framework (RPF) was prepared by the client, approved by the Bank, and disclosed on January 25, 2012. Site-specific Resettlement Action Plans (RAPs) will be developed - if necessary - in the course of project implementation. The RPF and RAP will ensure the proper calculation and recording of the land area to be acquired as well as identifying and mitigating the impacts of land acquisition for the affected people to ensure that there is no adverse effect on living conditions and livelihoods. Compensation to the affected land owners will be provided according to requirements in the RAPs prior to commencement of civil works at those sites where land take occurs. The RD will ensure that the owners and users of the land, where the civil works will be implemented, are fully informed about the provisions of the RAPs.

64. The RFP and RAP will be consistent with those developed by the RD and agreed to by the Bank for other Bank-funded projects, ensuring a coherent approach to land acquisition and resettlement across all transport projects.

13 F. Environment (including Safeguards)

65. The Project is classified as Category B for environmental assessment purposes and thus triggers the OP/BP 4.01 Environmental Assessment, as the planned interventions would mostly be to rehabilitate and maintain existing roads with works undertaken within the existing right-of- way. The RD prepared an Environmental and Social Management Framework (ESMF) for project implementation that was disclosed within the country and through the Bank’s InfoShop on January 25, 2012. Based on its principles, site-specific environmental management plans (EMPs) will be prepared, reviewed, and approved for individual investments. Since the potential environmental impacts will be known at the start, EMPs will be developed using the Bank- acknowledged EMP Checklist for Small-Scale Road Construction or Rehabilitation, with mitigation activities included in the respective Bill of Quantities. For the first year program comprising 6 road sections, site-specific EMPs have been prepared, and 2 EMPs have been submitted to the Bank for the review.

66. Prior to the issuing of the bidding documents for civil works for each road section, the RD will prepare and submit to the Bank for approval: (i) the proposed design and site plan for the works and the related site-specific EMP; and (ii) the draft contract for the civil works to ensure that the provisions of the site-specific EMP are adequately included in the contract. In addition, prior to the signing of works contracts, the RD will prepare and submit for the Bank’s no-objection the site-specific land acquisition and/or resettlement action plan(s) as needed.

14 Annex 1: Results Framework and Monitoring

. Country: Georgia Project Name: Second Secondary and Local Roads Project

. Results Framework

. Project Development Objectives

. PDO Statement To improve local connectivity and travel time for selected secondary and local roads, and to strengthen the capacity of the Roads Department to manage the road network.

. Project Development Objective Indicators Responsibility Cumulative Target Values Data Source/ for Unit of Methodology Data Indicator Name Core Baseline YR1 YR2 YR3 YR4 End Target Frequency Measure Collection Roads in good and fair condition as a share of Percentage 30.00 30.00 30.00 32.00 33.00 34.00 Annually Semi annual progress report RD total classified roads Size of the total Kilometers 5446.00 5446.00 5446.00 5446.00 5446.00 5446.00 Annually Semi annual progress report RD classified network Average decrease in Percentage 0.00 0.00 2.50 5.00 10.00 20.00 Annually Semi annual progress report RD travel time Roads managed under Last semi annual progress alternative contracting Kilometers 0.00 0.00 200.00 200.00 200.00 200.00 Annually RD report methodology

. Intermediate Results Indicators Responsibility Cumulative Target Values Data Source/ for Unit of Methodology Data Indicator Name Core Baseline YR1 YR2 YR3 YR4 End Target Frequency Measure Collection Roads rehabilitated, Kilometers 0.00 30.00 60.00 100.00 150.00 225.00 Annually Semi annual progress report RD Rural

15 Number of safety Number 0.00 1.00 5.00 5.00 5.00 5.00 Annually Semi annual progress report RD audits conducted Implementing pilot alternative contracting Number 0.00 0.00 1.00 2.00 2.00 2.00 Annually Semi annual progress report RD methodology Direct project Number 150,338 150,338 150,338 150,338 150,338 150,338 Annually RD GIS Database RD beneficiaries The project finances rehabilitation of the existing roads, therefore no change is anticipated in the number of Direct Project Beneficiaries, and thus share of female beneficiaries is also assumed to be constant. Baseline as Female beneficiaries Percentage 52.40 52.40 52.40 52.40 52.40 52.40 Annually RD well as targets for this indicator will be updated once the 2012 census results are available. 52.4% is average share of females overall population throughout Georgia based on GeoStat data.

16 Annex 2: Detailed Project Description GEORGIA: Second Secondary and Local Roads Project

1. The Project Development Objectives (PDO) are to improve local connectivity and travel time for selected secondary and local roads, and to strengthen the capacity of the Roads Department to manage the road network.

2. The Project consists of two components: (i) Rehabilitation and Improvement of Selected Secondary and Local Roads; and (ii) Institutional Strengthening and Project Management.

Component 1: Rehabilitation and Improvement of Selected Secondary and Local Roads (US$ 86 million equivalent, US$ 69 million Bank Financing).

3. This component will finance the rehabilitation of various secondary and local roads sections throughout the country. The Government has identified 19 road sections with a total length of about 225 km plus a road network of about 200 km in Kakheti Region for rehabilitation and improvement. The first year program will include the first six road sections for which designs have been completed. Selection of the firm to design the rehabilitation under the second and third year programs is also well advanced while the assessment study for the pilot performance-based contract in Kakheti Region is already ongoing.

4. The proposed design for these road sections, as described in the studies, will be the subject of a rigorous economic evaluation to determine its viability. The result of the economic analysis of the first year program is summarized below and detailed in Appendix 1 to Annex 2. The roads proposed for the second and third years will be subject to the same evaluation and all road works will be required to yield an Economic Internal Rate of Return (EIRR) above 12 percent.

5. The following table summarizes the economic evaluation results. The reconstruction of all roads is economically justified with an EIRR higher than 12 percent. The overall Net Present Value (NPV) is US$13.1 million, at 12 percent discount rate, and the overall EIRR is 19.8 percent.

17 6. The table below shows the results of the overall first year program sensitivity analysis considering: (i) increasing costs by 15 percent; (ii) decreasing benefits by 15 percent; and (iii) increasing costs by 15 percent and decreasing benefits by 15 percent. The sensitivity analysis results show that even under the scenarios of increasing costs by 15 percent and decreasing benefits by 15 percent, the first year program is economically justified with an EIRR of 15.8 percent. The switching values analysis shows that costs would have to increase by 79 percent or benefits would have to decrease by 44 percent to yield an EIRR below the required 12 percent.

7. The RD improved their design requirements for the second and third year project roads and will consider a wider range of viable technical options to improve efficiency. In general, future rehabilitation and improvements would be required to yield an EIRR above 12 percent after sensitivity analysis.

8. This component also supports both the pilot performance-based and design-build contracts. The consultancy to assess the affordability, viability and potential risks, with proposed mitigation, related to performance-based contracts in Georgia, is ongoing financed under the Third East-West Highway Project. Based on the availability of funds for the Road Sector, the RD will review the assessment findings and will decide on the required levels of service and the extent of the road network to be included in the contract. The consultant will thereafter prepare the bidding documents for implementation as part of the second year program.

9. The RD has provisionally identified about 200 km of the road network in the Kakheti Region for inclusion in this contract. A final decision on the extent of this road network to be included will be made following the recommendations of the assessment study.

10. The Bank has supported performance-based contracts in many projects in various countries. These contracts have evolved, based on lessons learned during implementation, from simple performance-based maintenance contracts to asset management contracts. Appendix 2 below provides more information on the current approach to performance-based contracting. The TOR for the current assessment study also provides for this approach.

11. The RD has already conducted an assessment of a design-build contract on the Sioni- Sasadilo road under the ongoing KRRIP. Bidding was cancelled in an advanced stage when the Government decided to finance improvements on another road with the funds under KRRIP.

12. The RD will continue to pilot the design-build method and has decided to implement the rehabilitation of two of the road sections, the Tbilisi-Tianeti and the Mtskheta-Shiomgvime

18 Monastery, using design-build methods. The assessment consultant will be selected by August 2012 and the bidding documents will be issued early in 2013.

Component 2: Institutional Strengthening and Project Implementation (US$1.5 million, US$1.2 million Bank Financing).

13. This component will finance consultant services, supply of goods and training aimed at strengthening the capacity of RD and FPU in: (a) Project management and implementation; (b) identifying, developing and implementing road safety measures on secondary and local roads; and (c) carrying out impact evaluations.

14. This component will support development of technical specifications for and acquisition of the equipment required for establishing a new road management system through the through the provision of goods and consultants’ services. It will also support TRRC with regards to Project financial management and audits through the provision of consultants’ services.

15. The project will build on and complement the institutional strengthening activities supported by the ongoing transport projects funded by the Bank, by both incorporating lessons learned from the ongoing projects and benefiting from the efficiency gains of the road rehabilitation works achieved under the SLRP project.

16. The project will allow for specific road safety improvements and campaigns where the roads through villages are improved. One example is to construct well-marked pedestrian crossings with traffic calming measures close to schools and to coordinate with the Traffic Police and such communities to implement improved traffic management and safer road use.

17. The design study for the second and third year roads includes, for the first time, provisions for ongoing road safety engineering during the design stage. This approach will reduce the need for amendments to the design and bid documents following the recommendations of the independent road safety audit on the relevant design reports.

18. The SLRP II will support this implementation with the procurement of equipment to undertake road condition surveys.

19. The pilot contracting arrangements, design-build and performance-based contracting, could, if found to be successful, result in an expanded application of these methodologies. This in itself would require a realignment of the roads budget and the functions and responsibilities of specific units within the RD. The Bank will, through its ongoing transport projects, assist the RD with implementing these changes.

19 Appendix 1 to Annex 2: Results of Economic Evaluation of First Year Roads

20. The economic evaluation of the civil works of the project has been carried out using the World Bank’s Highway Development and Management Model (HDM-4) that computes annual road agency and user’s costs for each project alternative over the evaluation period. The quantities of resources consumed and vehicle speeds are calculated first and then multiplied by unit costs to obtain total vehicle operating costs and travel time costs. The resources consumed and vehicle speeds are related to traffic volume and composition, and road surface type, geometric characteristics and roughness. The evaluation was done assuming construction will be carried out during one year and benefits were calculated over a 20 year evaluation period, at a 12.0 percent discount rate. The economic evaluation was done for the six roads that are part of the first year program of the project. All remaining project roads will be subject in the future to the same evaluation methodology and all the proposed road works will be required to yield an EIRR higher than 12 percent.

21. The first year program roads have a total length of 61 km. The roads are paved in very poor condition with high level of potholes and deformations. Due to the very poor condition of the roads, it was not possible to measure their riding quality in terms of roughness, which was visually estimated to vary from 10 to 13 IRI (m/km). The table below shows the basic road characteristics.

Basic Road Characteristics Length Width Road (km) (m) Surface Condition Shulaveri-Red Bridge km7-km11 5.0 8.0 Paved Very Poor Kveda Sakara-Sazano km1-km14 14.0 7.0 Paved Very Poor Chiatura-Usakhelo-Korbouli km6-km24 19.0 7.0 Paved Very Poor Kutaisi-Alpana-Mamisoni pass km116-km125 10.0 6.0 Paved Very Poor Didi Dmanisi-Dmanisi-Bediani km17-km26 10.0 7.0 Paved Very Poor Chokhatauri-Bakhmaro km4-km6 3.0 6.0 Paved Very Poor Total 61.0

22. The table below shows the average annual daily traffic (AADT), in vehicles per day, on the project roads measured in 2010. Normal traffic, i.e., traffic that is expected to materialize in the With and Without Project scenarios, is expected to grow at 6 percent per year from 2011 to 2021 and at 5 percent per year onwards, considering that the average annual growth rate of GDP over 2000–2009 period was about 6.2 percent per year and an elasticity of traffic growth to GDP growth equal to one. Highway traffic volumes grew in Georgia at average annual rates of 6.8 percent for passenger cars and 5.0 percent for minibuses and trucks respectively between 2005 and 2010. Generated traffic corresponding to 15 percent of the normal traffic was assumed considering that a decrease in road user costs will allow road users to make more trips or travel further than before. The 2010 average traffic for all roads is 836 vehicles per day, with 8 percent trucks composition.

20 2010 Average Annual Daily Traffic (AADT in vehicles per day) Mini Art. Trucks Total Car Truck Bus Truck Percent Road (AADT) (AADT) (AADT) (AADT) (AADT) (%) Shulaveri-Red Bridge km7-km11 2,488 2,196 238 43 11 2% Kveda Sakara-Sazano km1-km14 445 291 80 65 9 17% Chiatura-Usakhelo-Korbouli km6-km24 845 719 104 21 1 3% Kutaisi-Alpana-Mamisoni pass km116-km125 649 485 104 52 8 9% Didi Dmanisi-Dmanisi-Bediani km17-km26 968 750 186 30 2 3% Chokhatauri-Bakhmaro km4-km6 405 310 71 19 5 6% Average 836 669 122 40 5 8%

23. The table below presents the representative vehicle fleet economic unit costs and basic characteristics for the four vehicle types adopted on the evaluation.

Vehicle Fleet Economic Unit Costs and Basic Characteristics Mini Articulated Car Bus Truck Truck Economic Unit Costs New Vehicle Cost (US$/vehicle) 13,253 21,084 42,169 120,482 New Tire Cost (US$/tire) 36 54 120 163 Fuel Cost (US$/liter) 1.23 1.25 1.23 1.23 Lubricant Cost (US$/liter) 6.02 6.02 6.02 6.02 Maintenance Labor Cost (US$/hour) 0.96 1.39 1.81 1.81 Crew Cost (US$/hour) 2.17 2.17 1.16 1.57 Overhead (US$/year) 386 386 771 771 Interest Rate (%) 12.00 12.00 12.00 12.00 Working Passenger Time (US$/hour) 2.17 2.17 0.00 0.00 Non-working Passenger Time (US$/hour) 0.48 0.48 0.00 0.00 Cargo Delay (US$/hour) 0.00 0.00 1.26 1.86 Basic Characteristics Kilometers Driven per Year (km) 23,000 30,000 40,000 86,000 Hours Driven per Year (hr) 550 750 1,200 2,050 Service Life (years) 10 8 12 14 Percent Private Use (%) 100 0 0 0 Number of Passengers (#) 2 12 0 0 Work Related Passenger-Trips (%) 75 75 0 0 Gross Vehicle Weight (tons) 1.20 2.20 7.50 28.00 Equivalent Standard Axels (ESA) 0.00 1.20 1.25 4.63

24. The table below presents the typical unit road user costs, in US$ per vehicle-km, under each project-alternative. Reconstructing the roads reduces the average vehicle fleet unit road user costs by around 15 percent.

Unit Road User Costs (US$ per vehicle-km) Mini Articulated Vehicle Car Bus Truck Truck Fleet Existing Very Poor Condition Roads (Roughness 10 IRI, m/km) 0.30 0.75 0.61 1.67 0.39 New Bituminous Road (Roughness 2 IRI, m/km) 0.26 0.61 0.50 1.34 0.33

25. The Without and With Project scenarios consider maintaining the existing roads with proper maintenance works composed of crack sealing, patching and routine maintenance works. The overall financial cost of the first year program is US$19.70 million and the financial average construction cost is around US$355,000 per km. The economic costs, net of taxes, were estimated to be 80 percent of financial costs. The table below summarizes the financial construction costs and unit costs per km.

Financial Construction Costs Road Cost Cost Cost Work (GEL (US Road Million) Million) (US$/km) Shulaveri-Red Bridge km7-km11 Reconstruction 2.706 1.630 326,000 Kveda Sakara-Sazano km1-km14 Reconstruction 7.736 4.660 332,857 Chiatura-Usakhelo-Korbouli km6-km24 Reconstruction 10.226 6.160 332,973 Kutaisi-Alpana-Mamisoni pass km116-km125 Reconstruction 7.420 4.470 447,000 Didi Dmanisi-Dmanisi-Bediani km17-km26 Reconstruction 4.997 3.010 301,000 Chokhatauri-Bakhmaro km4-km6 Reconstruction 1.195 0.720 240,000 Total 34.279 20.650 341,322

26. The table below summarizes the economic evaluation results. The reconstruction of all roads is economically justified with an Economic Internal Rate of Return (EIRR) higher than 12 percent. The overall Net Present Value (NPV) is US$13.1 million, at 12 percent discount rate, and the overall EIRR is 19.8 percent.

27. The table below shows the results of a overall first year program sensitivity analysis considering: (i) increasing costs by 15 percent; (ii) decreasing benefits by 15 percent; (iii) increasing costs by 15 percent and decreasing benefits by 15 percent. The sensitivity analysis results show that even under the scenarios of increasing costs by 15 percent and decreasing benefits by 15 percent, the first year program is economically justified with an EIRR of 15.8 percent. The switching values analysis shows that costs would have to increase by 79 percent or benefits would have to decrease by 44 percent to yield an EIRR below the required 12 percent.

EIRR Sensitivity Analysis Results (%) Base A: Cost B: Benefits Road Case +15% -15% A + B Shulaveri-Red Bridge km7-km11 38.1% 34.6% 34.6% 31.5% Kveda Sakara-Sazano km1-km14 16.7% 14.7% 14.7% 12.9% Chiatura-Usakhelo-Korbouli km6-km24 17.5% 15.6% 15.6% 13.8% Kutaisi-Alpana-Mamisoni pass km116-km125 16.2% 14.3% 14.3% 12.5% Didi Dmanisi-Dmanisi-Bediani km17-km26 20.7% 18.7% 18.7% 16.8% Chokhatauri-Bakhmaro km4-km6 18.1% 16.1% 16.1% 14.2% Total 19.8% 17.7% 17.7% 15.8%

28. The RD has improved design requirements for the road sections to be designed. The roads will consider a wider range of viable technical options to improve efficiency of road rehabilitation. In general, future rehabilitation and improvements would be required to yield an Economic Internal Rate of Return (EIRR) above 12 percent.

23 Appendix 2 to Annex 2: Rationale for Introducing Output and Performance-based Road Contracting (OPRC) in the Roads Department

29. The RD already recognizes the benefits of longer term contracts for the road sector, a point that was confirmed in the Bank-financed study on the Sustainability of Road Maintenance Financing.

30. This recognition led to the RD-decision to study the benefits of performance-based contracting, financed under the ongoing TEWHIP. The RD identified a road network of about 200 km in Kakheti region for the pilot contract. These roads are listed in the Table below.

No Road Name Section Length Note 1 2 3 4 5 SH-39 Tsnori-Dedoplistskaro-KvemoKedi km 1-74.2 74.2 Paved, Unpaved SH-171 Gumbati-Khirsa-Enamta- km 1-67.3 67.3 Paved, Unpaved Samtatskaro-Sabatlo SH-174 Khornabuji-Erisimedi km 1-22 22.0 Unpaved SH-175 Sighnaghi-Tsnori km 1-8 8.0 Paved, Unpaved SH-176 Sighnaghi-TsmindaNinos Monastery km 1-1.5 1.5 Paved (St. Nino Nunnery) SH – 177 Access Road to St. Nino Spring km 1-2.9 2.9 Paved, Unpaved SH-173 Arkhiloskalo-Samtatskaro (border km 1-6.5 6.5 Paved with Azerbaijan)

31. Efficiency improvement is continuing in the road sector internationally as road management shifts to road asset management, combining public/private sector partnerships with the traditional government responsibility. This management method aims at achieving optimal use of resources, better value for money and thus optimized life of road assets. The enhanced design and operational strategy involves road asset management principles characterized by a unified contracting method, in which all required road interventions during the lifespan of the project, are to be implemented under a single output-based performance contract with a uniform financial and payment model. This methodology is known as Design, Build, Maintain, Operate and Transfer (DBMOT) or Output and Performance-based Road Contracting (OPRC). This methodology allows a contractor to plan and implement the required works ―when and how‖ he considers as optimal, provided that he meets the designed Level of Service criteria. This methodology allows a contractor to apply (a) his best methodology based on his designs (which meet at least the minimum required specifications and standards and are approved by a monitoring/supervision consultant on behalf of Employer) and to (b) innovate and optimize his outputs under a fixed price contract. The design and construction risks, traditionally vested in Employer in an ordinary FIDIC - operated civil works contract, are transferred to the contractor.

32. The implementation of road asset management as the performance-based contracting approach in Georgia would have an important and, possibly, immediate impact on successful implementation of the larger national roads program. In this respect the following is noted;

24  There is sufficient international evidence that a change in contracting methodology from input (activity)-based contracts to a comprehensive asset management (OPRC, or otherwise called, DBMOT) results in significant road management efficiency increases. Given that asset management technology and contracting systems are familiar to the private sector, it would be sensible to also pilot this experience to specific road links in order to assess the benefits it can bring to Georgia.  The planned longer Defects Liability Periods (DLP) would still not be adequate to transfer the risk of poor construction to the contractor. A DLP of even 3-4 years remains too short to indicate the possible failures in road works, given the nature of construction material properties and normal road use deterioration. Additionally, since the contactor already demobilized his plant, his level of interest declines during the DLP-phase, as he is not paid any more. Therefore, although the basis for deciding to increase the length of the DLP is sound, it still does not bring the maximum benefits to the road sector. The contractor will only do the minimum, and, if pushed too hard to repair major defects, will simply abandon the contract and forfeit the retention payment.  In addition, while certain road sections on a road link are newly rehabilitated, other sections on the same road may fail after the initial construction. Thus, a road link will never be in overall acceptable condition while the works will continue in indefinite cycles. This situation is created because the initially designed method of contracting involves a targeted intervention while disregarding a road/facility as an asset that needs to be in good condition to provide for the expected benefits and user’s comfort.  Activity-based road contracting requires input from a significant number of highly qualified staff to manage all the phases of implementation. This places a heavy burden on Government. In many countries the Ministry/Department simply cannot recruit sufficient number of qualified staff due to salary disparities and lack of funding.  Activity-based contracting results in a long and specific design and a procurement phase, before actual works commence. With asset management methodologies, the contractor becomes responsible for the design and construction, resulting in significant time and cost savings.  An OPRC places the risk of any construction/ rehabilitation/maintenance methods with the contractor (who also design his works based on the principles and specifications given to him by the Employer), as he has (i) to provide a road at certain defined service levels for the whole contract period and (ii) to manage the operation and usage of the facility in accordance to the given regulations, if to be paid (therefore this methodology is called output-based contracting and management). 33. Rehabilitation versus Maintenance. In many countries, there is still a debate whether performance-based contracting should be limited to maintenance only, while rehabilitation/improvement works should be carried out first, separately and under traditional schemes. This approach has a number of disadvantages additional to the well-known shortcomings of traditional input-type contracting. The more important ones are:

 Sharing of contractual risks are limited and basically all risks remain with government,  Difficult to control final project cost,

25  Difficult to control quality of works,  Potential for numerous claims as a result of strained relationship between the three parties involved in such types of contracts, namely, Employer, Engineer and Contractor,  Short defect liability period, and  Extensive number of transactions/contracts during the life of a facility requires large Government staff inputs and increases the potential for non-transparent transactions. 34. The separation of rehabilitation and maintenance operation bears the risk of attracting fewer investors for the latter, because of the smaller contract size and the reluctance of maintenance contractors to assume liability for an asset rehabilitated by others. Separate rehabilitation also comes with all risks inherent to traditional works contracts and the associated disadvantages experienced in the past in the country and elsewhere. Moreover, the division of responsibilities between design, construction and maintenance creates unnecessary inefficiencies and potential disputes.

35. Domestic contractors and consultancy firms sometimes claim that combining rehabilitation and maintenance into one contract operation would exceed their financial and human capacity and hence exclude them as potential bidders. In reality, even if foreign contractors are awarded large rehabilitation and maintenance contracts, they often sub-contract a good proportion of the work to local firms. Longer term contracts provide an opportunity for the main contractor to build a longer term relationship with his sub-contractors. This will lead to better cash flows for the successful smaller companies/firms and provide them with opportunities for growth that shorter term contracts do not bring. In the case of the proposed new project, the road links would be packaged so as to include contract sizes that would make it possible for local contractors to be part of the implementation team, either singly or jointly.

36. OPRC as a “value added” investment. An innovative project offers the advantage of a trial and error process, which can be easily revised and adopted, while otherwise, dealing with the major investment related to rehabilitation and maintenance, in traditional fashion, would bear the risk of yet another unsustainable one-time intervention. OPRCs have the distinct advantage of passing on the construction quality, cost and time risks to the private sector which is best placed to deal with them.

37. Furthermore, in relation to the large budget outlays in the road sector and the size and duration of the OPRC, the civil works contracts to be awarded under the project could be considered as a pilot phase, to be followed with more such contracts when the method is proven successful.

38. The implementation of OPRC-contracts in the Kakheti Region would provide the opportunity for the RD and the Government of Georgia to assess the impact of implementing OPRC-contracts. This assessment would include affordability - can Georgia sustainably finance the levels of service required by the contract, viability and value for money. The RD will, during the assessment stage, closely review the funding requirements for this type of contracting and would have two options to adjust the total contract value, either by adjusting the required levels of service or the extent of the road network to be included.

26 39. The recommended duration for these contracts usually depends on the best option to transfer construction risks to the contracting entity and are determined as part of the assessment study. The contract duration is normally based on, among others, the physical condition of the specific road links included in the contract, potential traffic increases, the types of interventions required to improve and maintain the road links at a desired standard/service level and the estimated service life of these interventions. It is always advisable to cover as much of the service life on a specific intervention in the actual contract period as possible. This will guarantee that the contractor will provide good construction quality, as he would not like to redo an intervention at his cost.

40. The pilot contract would have duration of about five years. During implementation the potential benefits of longer contract periods would be reviewed for inclusion in possible future contracts.

List of Road Sections to be Rehabilitated Section Name Length in km 1 Shulaveri-Red Bridge km7-km11 5 2 Kveda Sakara-Sazano km1-km14 14 3 Chiatura-Usakhelo-Korbouli km6-km24 19 4 Kutaisi-Alpana-Mamisoni pass km116-km125 10 5 Didi Dmanisi-Dmanisi-Bediani km17-km26 10 6 Chokhatauri-Bakhmaro km4-km6 3 7 Chalaubani-signagi-Anaga km 16-km22 7 8 Ulianovka-Bodbe-Gamrjveba km1-km21.3 22 9 Natanebi-Shroma-Ureki km2-km17 16 10 Tbilisi-Tianeti road km39-km51 13 11 Ingiri-Shamgona 7 12 Kutaisi-Tskaltubo-Lentekhi-Lasdili km50-km63 14 13 Kutaisi-Alpana-Mamisoni pass km 74-km78 5 14 Nokalakevi-Ledzadzame-Didi Chkoni km13-km23.5 12 15 Nosiri-Gejeti-Nokalakevi km9-km10; km15-km16.5 6 16 Igoeti-Lamiskana-Akhmaji km 1-km9.5 10 17 Zomleti-Khikhadziri km5-km11 7 18 Mtskheta-Shio Mgvime monastery km5-km11 7 19 Chiatura-Perevisa-Sveri-Tvalueti-Gezruli km8-km22 15 Physical Contingency 24 Total Length 225

27 Annex 3: Implementation Arrangements GEORGIA: Second Secondary and Local Roads Project

Project Institutional and Implementation Arrangements

1. The Loan and Financing Agreements will be entered into between the IDA/IBRD and Georgia. The Project will use the implementation arrangements agreed upon for all ongoing Bank-financed transport projects.

2. The RD, under the MRDI, will be responsible for implementation.

3. The TRRC was established in 1995 to help implement Bank-financed transport projects. Through a Project Implementation Agreement (PIA) signed between RD and TRRC in 2004, and amended in 2006, 2008, and 2009, the latter assits RD with procurement, accounting, disbursement, financial reporting and auditing, and other project-related matters in seven Bank transport projects. A new PIA was signed in July 2009, and agreed for use on all Bank-financed projects. It will be amended to reflect arrangements in the new project.

4. Since 2004, the Government has integrated the implementation agencies on a case-by- case basis into the line ministries/agencies; the integration of TRRC was considered in the last few years but this did not occur. Over the same time, the TRRC responsibilities were reduced and it focused instead on the financial management functions, including accounting, disbursement, reporting and auditing.

5. The MRDI issued a decree in 2009 that amended the RD charter and created the Foreign Project Unit (FPU) in that entity: It is responsible for overall project management, monitoring and reporting, technical audits, and other functions under all IFI-financed Projects.

6. The FPU staff consists of five RD employees and several consultants hired as specialists to help with its tasks. The FPU head reports to the RD Deputy Chairman responsible for coordinating IFI project activities. The Unit has three subdivisions for (a) procurement, (b) project management, monitoring and reporting, and (c) environmental management.

7. At project appraisal, several FPU positions were vacant, although the RD has tried to recruit Government staff to fill these positions. Thus, SLRP II will support the hiring of more consultants to help the FPU and RD manage and implement the Project. To fill the vacancies and address FPU’s overstretched capacity, up to 10 full-time staff will be needed. TRRC will hire additional full-time staff to assist it with financial management (FM).

8. TRRC’s FM practices comply with World Bank guidelines. TRRC updated its Financial Management Manual (FMM) to reflect the Project’s specific activities, and includes a chart of accounts. TRRC has participated in seven IBRD/IDA-financed projects and will work with both the treasury service of the MOF and the NBG to administer the designated account (DA), and with the MRDI and RD for financial management.

9. The estimated incremental expenses to be financed by the SLRP II (for implementation, audits, and monitoring/evaluation) will be US$0.82 million. The TRRC is also funded under the

28 other ongoing road projects. The SLRP II will cover incremental expenses of TRRC caused by implementation of the SLRP II project.

10. The Project will be implemented over 54 months from the first quarter of 2012 to December 30, 2016 with the project closing date of June 30, 2017. The Project contains a provision for retroactive financing up to US$4.0 million from IDA credit (10 percent of the total IDA credit amount). Its principal component is the rehabilitation of 19 sections of roads throughout Georgia. Works will be supervised by a competitively selected firm hired under TOR satisfactory to the Bank. The RD will be supported by an internal technical auditing team.

Financial Management, Disbursements and Procurement

11. The project’s FM function will be handled by RD through TRRC, which will be responsible for the flow of funds, accounting, planning and budgeting, financial reporting, internal controls, and auditing. The FM arrangements of the TRRC have been reviewed periodically as part of the ongoing projects’ implementation support and supervisions, as well as during the FM assessment of the proposed Project carried out in December 2011, and were found satisfactory. The Project’s FM arrangements will be the same as for the ongoing SLRP and other ongoing transport projects implemented by TRRC, which are acceptable to the Bank. The basis for relying on this FM system include: (a) TRRC staff has gained significant experience implementing Bank-financed projects over the past few years; (b) TRRC has used accounting software appropriately; (c) FM arrangements are similar to the ongoing projects the TRRC is implementing, which are found to be adequate; and (d) TRRC audit reports and management letters on its financial statements have no major issues. The TRRC will hire one additional FM/accounting staff, to monitor contracts. Also, it will update the ongoing projects’ Financial Management Manual to reflect the activities of the proposed project. These actions relate to capacity building and are not conditions.

12. Since January 2006, the Treasury’s foreign currency account at the National Bank of Georgia (NBG) has been used for the Das of all new World Bank-financed projects. Overall, these arrangements are satisfactory and will remain in place under the new project.

13. The FM risk for the ongoing TRRC projects was previously rated as substantial. However, given the significant progress with implementing the action plan agreed upon during the February 2011 fiduciary review (which included hiring of one of the proposed two accountants), the overall FM risk for the proposed project was assessed as moderate, with inherent and control risks before and after mitigation measures also rated moderate.

14. Overall, TRRC has acceptable planning/budgeting capacity. It has been preparing annual budgets for ongoing projects (based on procurement plans) that allocate funds to project activities and request counterpart government funds for payments through the Treasury. These activities are appropriate. TRRC’s financial manager and the FPU’s head of procurement are responsible for preparing the budget, which is approved by RD and agreed with the Bank.

15. The TRRC FM staff consists of an experienced financial manager, three accountants, and a finance assistant. As mentioned above, the FM needs one additional staff, to oversee the contract management module which can, in turn, strengthen contract monitoring. The financial

29 manager will have primary responsibility for the Interim unaudited Financial Reports (IFRs) and will prepare annual financial statements for audit.

16. TRRC’s accounting books and records will be maintained on a modified cash basis; and, project financial statements, including IFRs, will be presented in US dollars. For reporting purposes, cash basis International Public Sector Accounting Standards (IPSAS) will be applied. TRRC uses ORIS accounting software, which is used for most projects in Georgia and was found to be adequate for accounting and reporting purposes in Bank-financed projects. The accounting package generates the IFRs automatically.

17. In general, the internal control procedures applied at TRRC are acceptable to the Bank, are adequate for the ongoing projects and SLRP II implementation, and are seen as able to provide timely information for reporting on the projects. Still, TRRC needs to enhance its staffing arrangements and update the FMM for the ongoing projects to reflect the activities of the new project. The TRRC has no internal audit function and none is considered necessary given the organization’s small size.

18. Project management-oriented IFRs will be used for monitoring and supervision, and the format is included in the TRRC FMM. The format was confirmed during assessment and includes: (a) Project Sources and Uses of Funds; (b) Uses of Funds by Project Activity; (c) Designated Account Statements; (d) Balance Sheets; and (e) SOE Withdrawal Schedule. The TRRC will produce a full set of IFRs every semester during the Project. These financial reports will be submitted to Bank within 45 days of the end of each calendar semester. The first semester IFRs will be submitted after the end of the first full semester following the initial disbursement.

19. The audit of the SLRP II (single audit for IDA and IBRD) will be conducted by independent private auditors under TOR acceptable to the Bank, and according to the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC). TRRC’s current auditing arrangements and findings are satisfactory to the Bank. Thus, it was agreed that similar audit arrangements will be adopted for the SLRP II. In particular, the sample audit TOR agreed with the Bank is attached to the FMM, and the annual audited project financial statements will be provided to the Bank within six months of the end of each fiscal year and also at the close of the project. If the period from the date of loan effectiveness to the end of the borrower’s fiscal year is no more than six months, the first audit report may cover financial statements for the period from effectiveness to the end of the second fiscal year. The Borrower has agreed to disclose the audit reports for the project within one month of their receipt from the auditors, by posting the reports on the TRRC website12 or by publishing them in a national newspaper. Following the Bank's formal receipt of these reports, the Bank will make them publicly available according to World Bank Policy on Access to Information. The contract for the audit awarded during the first year of project implementation may be extended from year-to-year with the same auditor, subject to satisfactory performance. The RD will recruit the financial auditor by not later than May 1, 2012 and the cost of the audit will be financed by the Project.

12 www.trrc.ge

Disbursement

20. TRRC will establish two segregated designated accounts (one for the IDA Credit and one for the IBRD Loan) in US dollars and maintain them until project completion. The DAs will be opened as the Treasury’s foreign currency account at the National Bank of Georgia (NBG), and on terms and conditions acceptable to the Bank. The DAs will be drawn upon to meet payments to contractors, suppliers and consultants under the Project. The Designated Account Statement will be audited in conjunction with the annual audit of the Project. Detailed instructions on withdrawal of IBRD Loan and IDA Credit proceeds are provided in the Disbursement Letters.

21. Project funds will flow from (a) the Bank, either through the DA, which will be replenished on the basis of SOEs or full documentation; or, on the basis of direct payment withdrawal applications and/or special commitments, received from TRRC; and (b) the Government, through the Treasury’s normal budget allocation procedures initiated by the implementing agency according to standard Georgian Treasury and Budget execution regulations. These funds will finance eligible expenditures under the Project. Withdrawal applications documenting funds used from the DA will be sent to the Bank at least every three months.

22. The IDA part of the project will be disbursed first. Disbursements of IDA and IBRD will be made according to the following categories:

Category IDA Financing IBRD Financing Percent (US$ equivalent ) (expressed in US$) Financing Goods, works, non-consulting 40.000 29.925 80% services, consultants’ services, Training and Incremental Operating Costs Front-end fee N/A 0.075 Interest Rate Cap or Interest N/A 0.000 Rate Collar premium Total 40.000 30.000

23. The Project will also allow for retroactive financing from IDA-allocation for all disbursement categories, starting from the last day of the project appraisal, January 30, 2011, mainly for the initial contract payments on the first year contracts, of US$4 million.

Procurement

24. Country and sector level risks: The last country level risk assessment for public procurement was carried out during the preparation of the CPAR in 2009, which was conducted on the basis of four OECD-DAC/World Bank pillars for public procurement. The conclusion was that all four Pillars needed improvements for the public procurement system to meet the standards and international best practices. A three year action plan was prepared and Georgia is

31 making slow progress towards fulfilling the actions. One important step is the introduction and implementation of electronic procurement system for all government contracts The World Bank is yet to assess the system to allow to be used for Bank financed projects.

25. Implementation arrangements: RD through FPU will be responsible for all procurement functions under the project. The Bank team concluded that the core FPU staff has adequate experience to conduct procurement activities. However, a procurement specialist should be appointed and designated for the project work. The current FPU staff and Procurement Consultant of FPU are familiar with Bank procurement guidelines and procedures as they have been involved in the ongoing SLRP, and gained substantial knowledge and experience during, the implementation of the above project.

26. Procurement Risk Assessment: A procurement assessment was carried out during the preparation of the proposed project in November 2011 and was updated during the appraisal in January 2012. The assessment found the following areas for attention: (i) lack of designated procurement capacity as staff replacements have not been done; (b) poor contractor capacity/performance when contracts are simultaneously awarded to the same contractor; (c) significant contract price variations (average contract price variation under the ongoing project is around 10 percent); and (d) potential collusion among the contractors.

27. Risk Mitigation: The above areas for attention and the mitigation measures were discussed and agree with RD for implementation as follows: (a) Hire a procurement specialist by the end March 2012 and a contract manager by June 2012; (b) Improve the quality/quantity checks at the design/preparation stage to minimize contract variations due to change in quantities to a level of less than 5 percent: (c) Exercise due diligence in avoiding collusive practices/risks during the bidding process by checking bidding patterns during bid evaluation by comparing unit prices of all bidders against the detailed cost estimates and prices among them; (d) Assess the bid capacity of the winning bidders for award of multiple contracts for simultaneous execution. Such evaluation and award criteria will be disclosed in the bidding documents (e) The Bank’s Procurement Specialist will provide to FPU staff a full set of the most recent procurement documents, including but not limited to, the Procurement and Consultant Guidelines, standard and sample bidding documents, sample evaluation reports, etc., and conduct a session to discuss red flags and other Bank procedures.

28. With the above measures in place, the project procurement risk is considered ―moderate‖.

29. The Bank conducted a fiduciary review of the transport sector projects and rated MRDI’s procurement performance as ―moderately satisfactory.‖ RD has addressed some of the issues and will now have separate filing rooms secured to maintain the confidentiality of the documents.

32 The rest of the recommendations made during the review and agreed as part of action plan will be monitored by the Bank team during the project implementation.

30. Procurement: Procurement for the project will be carried out according to the World Bank’s ―Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants, January 2011,‖ the ―Guidelines: Selection and Employment of Consultants under IBRD Loans & IDA Credits & Grants by World Bank Borrowers, January 2011,‖ and the provisions stipulated in the Loan Agreement.

31. The Bank’s anti-corruption norms (―Guidelines on Preventing and Combating Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants‖) of October 15, 2006 will be applied.

32. The Project will finance about 19 contracts to rehabilitate about 225 km of secondary and local roads (the average package will be for 10 km estimated at US$4 million) across the country, a pilot contract for 200 km under Output and Performance-based Road Contracting (OPRC), as well as consultant contracts and the supply of goods, as indicated in the Procurement Plan. Some contracts may be awarded following procedures for Direct Contracting, in accordance with the Procurement Guidelines (paragraph 3.7). Consultant contracts will include a firm to supervise construction as well as several specialists in procurement, contract management, road safety, monitoring, and environmental, social and resettlement issues, selected according to Bank Guidelines for Selection of Consultants.

33. Procurement Plan and Arrangements: The RD developed a draft procurement plan which was finalized during project negotiations for implementation during the first 18 months, and will provide the basis for the procurement methods to be adopted. In the plan, all contracts will be grouped in bid packages as much as possible to promote competition. The procurement plane was agreed between the Borrower and the Bank during negotiations and will be available at the MRDI office and on the Bank's external website. The plan will be updated annually, in agreement with the Bank, or as required to reflect actual project implementation needs and improvements in institutional capacity. Contracts not subject to Bank prior review will be reviewed afterwards by the Bank’s procurement specialist assigned to the project. Such reviews will be made annually. The General Procurement Notice was published on December 6, 2011

34. Documents: The RD will maintain complete records for each activity, which will include all procurement documents for each contract, including bidding documents, RFPs, advertisements, bids received, bid evaluations, no objections, letters of acceptance, contract agreements, bid securities, advance payment guarantees, performance securities, photocopies of invoices and payments, and related correspondence. Contract award information will be promptly recorded and contract rosters maintained.

35. Procurement of goods and non-consultant technical services: The contracts estimated to cost US$300,000 equivalent or more will be procured through ICB. Goods, equipment and non-consultant technical services estimated to cost under this amount may be procured through National Competitive Bidding (NCB); contracts estimated to cost less than US$100,000 equivalent may be procured through shopping.

33 36. Procurement of works: Contracts estimated to cost US$4 million equivalent or more will be procured through ICB. Those under this amount may be procured though NCB and less than US$200,000 equivalent following shopping procedures.

37. Selection of consultants: These services will be procured according to the Bank’s Consultant Guidelines mentioned above, and by using the standard RFP and contract forms. Such services will be selected following quality and cost-based selections (QCBS), fixed-budget selections (FBS), consultant qualifications (CQS), least-cost selections (LCS), single-source selections (SSS) and individual consultants (IC). Contracts estimated to cost more than US$200,000 will be selected through QCBS, while individual consultants will be selected according to provisions 5.1 to 5.6 of Section V of the Consultant Guidelines. This method will require comparing at least three qualified candidates who are interested and available. As the RD has agreed, consultants hired to senior staff positions will be subject to World Bank review and approval of TOR, selection criteria, selection processes and final awards.

38. Short list composed entirely of national consultants: The shortlist of consultants for services estimated to cost under US$100,000 per contract may consist entirely of national consultants (unless qualified international firms express interest), according to provisions of paragraph 2.7 of the Consultant Guidelines.

39. Incremental Operating Costs, or operation costs. These will be reasonable and necessary incremental expenses incurred by the Recipient/Borrower with respect to Project implementation, management and monitoring, including the costs of staff salaries (excluding salaries of the Recipient/Borrower's civil service staff), communication, editing, printing and publication, translation, vehicle operation and maintenance, bank charges, local travel costs and field trip expenses, office rentals, utilities, equipment and supplies.

40. Retroactive financing. Project activities that cost about US$ 4 million (up to 10 percent of the IDA credit amount) have been identified for retroactive financing. These procurement activities will be conducted according to the Procurement and Consultant Guidelines. Retroactive financing would apply to payments made by the Borrower not more than 12 months before the expected date of the Loan/Credit signing.

41. Project Operational Manual. RD shall update the existing manual. This is an effectiveness condition for the project.

42. Prior Review Thresholds:

Category Prior Review Thresholds in US$ Works NCB ≥300,000; All DC; All ICB First 2 SH <$100,000; First 2 NCB Goods and non Consulting Services NCB ≥200,000; All DC; All ICB; First 2 SH Consulting firms All QCBS; All ≥100,000; All SSS Individual consultants ≥50,000; All SSS

43. Improvement of bidding procedures. To ensure economy, efficiency, transparency and broad consistency with the Procurement Guidelines, the NCB shall comply with the procedures

34 recommended in the April 2009 Country Procurement Assessment Report for Georgia (CPAR) as listed below:

(i) ―Open competitive procedures‖ (i.e. ―public tender‖‖) shall be the default rule. A single envelope procedure shall be used for the submission of goods, works, or non- consulting services.

(ii) Invitations to bid shall be advertised in at least one widely circulated national daily newspaper allowing a minimum of thirty (30) days for the preparation and submission of bids. Advertisements published in foreign language newspapers shall be in compliance with such a 30-day-minimum in number of days for bids preparation and submission.

(iii) Bidding shall not be restricted to pre-registered firms. If registration is required, it shall not be denied to eligible bidders for reasons unrelated to their capacity and resources to successfully perform the contract (e.g., mandatory membership in professional organizations, classification, etc). Post-qualification shall be conducted to verify that the bidder has the capability and resources to successfully perform the contract.

(iv) Government-owned enterprises in Georgia shall be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law and are not a dependent agency of the Government. Government-owned enterprises will be subject to the same bid and performance security requirements as other bidders.

(v) Procuring entities shall use the appropriate Association’s sample bidding documents, including pre-qualification documents, for the procurement of goods, works, or technical services (other than consultants' services), and such documents shall contain draft contract and conditions of contract including clauses on fraud and corruption, audit and publication of award, all acceptable to the Association.

(vi) Bids shall be opened in public, immediately after the deadline for submission of bids. Bidder’s representatives shall be permitted to attend the bid opening.

(vii) Extension of bid validity shall be allowed once only for not more than thirty (30) days. No further extensions should be requested without the prior approval of the Association.

(viii) Evaluation of bids shall be based on quantifiable criteria expressed in monetary terms as defined in the bidding documents, no merit point system and no domestic preference shall be used in the evaluation of bids. Contracts shall be awarded to qualified bidders having submitted the lowest evaluated substantially responsive bid and no negotiations shall be carried out prior to contract award.

(ix) Civil works contracts of long duration (e.g. more than eighteen (18) months) shall contain an appropriate price adjustment clause.

(x) No bid shall be rejected purely on the basis that the bid price is higher than the estimated budget for that procurement. All bids shall not be rejected and new bids solicited without the Association’s prior concurrence.

Environmental and Social (including safeguards)

44. The SLRP II is classified as environmental Category B according to OP/BP 4.01. It will finance rehabilitation of several priority sections of the existing roads. Works to be undertaken in various locations that will be similar in terms of applied technologies and scope. Their potential environmental risks and measures required for mitigation of these risks are also mostly common for the target sections of roads and are well known upfront. An Environmental and Social Management Framework (ESMF) was developed to provide guiding principles for environmental management under the SLRP II, and the checklist for developing site-specific EMPs for small scale road construction or rehabilitation will be used as a simplified tool applicable to individual investments.

45. The SLRP II will support rehabilitation works on existing roads in the current right-of way, without tangible widening or re-routing of the carriageways. Most of these roads pass through significantly transformed landscape, away from important habitats and biodiversity hotspots. For all road sections, the potential environmental issues are expected to be minor and typical for small-scale rehabilitation works on roads, mainly comprising: construction waste management, sourcing of natural construction materials (soil/gravel/sand), running of small asphalt/concrete plants, and maintaining/servicing construction machinery.

46. No major land acquisition or physical displacement of residents is expected under the project; the project will not finance new road construction. All civil works will be carried out within the existing horizontal alignment of the selected roads. Nevertheless, experience from the ongoing SLRP shows that minor land acquisition along existing rights-of-way may contribute to the improved geometric standards of existing right-of-way, provide adequate space for drainage, and enhanced road safety solutions such as sidewalks, pedestrian crossings, guardrails, and safety barriers. In addition, land acquisition may be necessitated in response to unforeseen events such as landslides where previous alignments are no longer feasible and the optimum design for a modified road stretch requires additional and an increased land foot print.

47. For all these reasons, and largely as a precautionary measure, the project triggers OP4.12. A Resettlement Policy Framework (RPF) was prepared by the client, and approved by the Bank. Site-specific Resettlement Action Plans (RAPs) will be developed - if necessary - in the course of the project implementation. The RPF and RAPs will ensure the proper calculation and recording of the land area to be acquired as well as identification and mitigation of the impacts of land acquisition for the affected people to ensure that there is no adverse effect on the living conditions and livelihoods of the affected people.

48. The RPF and RAP will be consistent with those developed by the RD and agreed to by the Bank for the other Bank-funded projects, ensuring a coherent approach to land acquisition and resettlement across the transport projects.

36 49. Preparation and implementation of SLRP II includes public consultation on the environmental and social risks associated with the Project as well as on the proposed ways of their mitigation. Both the ESMF and RPF were disclosed in-country and through the InfoShop on January 25, 2012 and made available for comments from all stakeholders of the project. Site- specific EMPs and RAPs - as required - will be developed, reviewed, and approved in the course of the project implementation prior to commencement of civil works at any individual site. Public consultation on site-specific EMPs and RPAs will specifically target the affected local communities.

50. The RD is responsible for due application of environmental and social safeguards. Due environmental diligence of RD will include assuring: (i) presence of satisfactory site-specific EMPs for all sections of roads under rehabilitation; (ii) presence of the required permits for waste disposal, quarrying and borrowing, operation of asphalt/concrete plants, etc., as applicable; (iii) proper application of mitigation measures provided in the site-specific EMPs in the course of works and upon their completion; and (iv) observance of occupational safety rules as well as safety of traffic and pedestrian movement in and around work sites. For meeting such standards RD through FPU will exercise quality control of EMPs, guarantee their inclusion in the bidding documents and incorporation into the works contracts, and maintain efficient mechanism of field environmental monitoring of works.

51. The RD will be capable of performing these functions through strengthening its institutional capacity for environmental management by filling in one vacant position in the environmental unit designed to hold five staff units. The RD based on the needs may also hire an external highly qualified environmental consultant. These arrangements are intended to serve critical institutional needs of RD in general, as well as to ensure smooth implementation of SLRP II and other ongoing operations being implemented by RD with the Bank support.

Monitoring & Evaluation

52. The project will continue to use the agreed Bank-financed Project results monitoring and evaluation arrangements. The RD, through the FPU, will be responsible for monitoring and evaluation and reporting the project results. The FPU has a dedicated Monitoring and Evaluation sub-unit, staffed by three persons; the head of the sub unit, and two staff. The implementation of the ongoing SLRP has proved that the FPU has been effectively monitoring projects, preparing reports on a timely manner through the monitoring sub-unit. The FPU will retain adequate staff to continue results monitoring; as a minimum there will be two staff and the head of the sub-unit.

53. To monitor the project the FPU will interact with and get inputs from the different RD departments, TRRC, and supervision engineers. Three divisions of the RD will provide information to the monitoring unit; the works division, roads administration division, and financial division. The contract management information required for the monitoring such as contract payments will be provided by the TRRC. The values for the project monitoring indicator such as annual expenditures will be obtained from the financial division of the RD.

54. The monitoring sub-unit will continue to collect a wide range of information concerning project management, safeguard compliance, resettlement progress, and work progress, which

37 will be the basis for the project semi-annual progress report. The format and content of the status report will be modified to incorporate lessons learned during the ongoing SLRP project.

55. Data for the project outcome and results indicators will come from various divisions of the RD, TRRC, supervision engineers, and sub-units of the FPU. Three divisions and one sub- division of the RD; the financial division, technical division, works division, and Data Bank sub- division, will provide data on the monitoring indicators. The supervision engineer’s monthly supervision reports will also be used for the monitoring work progress. The TRRC in conjunction with the FPU procurement sub-nit will provide data on the contract payments dates, outstanding balances, payment amounts, overdue payment requests. This data will be collected by the monitoring and evaluation sub-unit of the FPU.

56. The semi-annual progress report will be built on the template used for the ongoing SLRP project. However it will be updated to match growing demand for the monitoring information. To aid the monitoring process the FPU uses project management system which has been purchased under the ongoing road projects. The other FPU sub-units cooperate with the monitoring sub-unit to report on the environmental and social safeguard compliance, which represents part of the progress report.

57. The monitoring and reporting function is performed by three staff of the sub-unit: the sub-unit head and two staff. The position of the head of the monitoring sub-unit is vacant; however the RD plans to fill this position by the project effectiveness date. The sub-unit staffing is adequate to perform effective monitoring data collection, processing, and reporting. All staff of the sub-unit are public servants, thus are paid from the RD operating budget. The monitoring function has no incremental cost on the project.

58. The monitoring function of the sub-unit overlaps with the project management function. Even though the project management is performed by the RD, through the designated deputy head of the RD, there is a need for a designated project manager in the FPU.

59. It has been agreed that FPU will hire a designated project manager. The monitoring and evaluation sub-unit will relay on the data collected for project management. The role of the sub- unit will be broadened to subsume project management function. This will create an effective system of project management, monitoring and reporting and will avoid duplication of the functions and will help to integrate results monitoring into the project management function.

Annex 4: Operational Risk Assessment Framework (ORAF)

GEORGIA: Second Secondary and Local Roads Project Project Stakeholder Risks Stakeholder Risk Rating Low Description: Risk Management: The local residents may complain in connection with the Resettlement Policy Framework has been prepared. Prepare Resettlement Action Plan and ensure its land acquisition and cause delay of rehabilitation works. implementation. Despite that no new road construction is anticipated Resp: Client Stage: Implementation Due Date: 01-Jan-2012 Status: In Progress under the project and all rehabilitation works are conducted within the right-of-way, minor land acquisition may be required. As implementation of the ongoing SLRP project has shown minor land acquisition could be required for road safety improvements Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Moderate Description: Risk Management: The RD may not be able to retain acquired capacity in 1. FM capacity building actions agreed upon will be implemented. Throughout the project negotiation FM, project management, and environmental the Bank and the Borrower agreed and recorded in the minutes to finalize appointment of one additional management. full-time FM staff. The new staff will be put in charge of maintaining the software module to strengthen

contract management and accounting. It was also agreed and recorded in the minutes that the RD will The existing FM/accounting staff is overloaded with the hire an additional contract manager. current work volume., Considering the increasing workload for the existing staff this may result in Resp: Client Stage: Preparation Due Date: 01-Mar-2012 Status: In Progress deterioration of FM and disbursement arrangements (including impacting internal controls) under the projects. There are delays in hiring required officers.

The procurement risk impact is significant but the likelihood of risk is low. RDMRDI and TRRC procurement track record in the ongoing project has been satisfactory. Also the procurement unit of RDMRDI has experience with the World Bank financed procurement

39 Governance Rating Low Description: Risk Management: The MRDI has proved to have institutional standing to No mitigation measure has been proposed effectively shield the project from outside interference. The risk is low as the governance structure of the project Resp: Stage: Due Date: Status: is well defined and proved to be functioning well Risk Management:

1. The project will use the SLRP internal control framework which has proved to be functioning well; there have been no records of corruption, financial mismanagement, miss-procurement or fraud. The Bank staff will closely monitor performance during project implementation using the existing SLRP supervision systems. Resp: Bank Stage: Implementation Due Date: 01-Jan-2012 Status: In Progress Risk Management: 2. The Borrower continues to ensure that the Project is carried out in accordance with the provisions of the Anti-Corruption Guidelines, stipulated in the FA. Resp: Client Stage: Implementation Due Date: 01-Jan-2012 Status: In Progress Project Risks Design Rating Moderate Description: Risk Management: Unforeseen events such as natural disasters, landslides, 1. Mitigate the risk through adequate contingency funding in the project. floods may lead to extra cost of the rehabilitation. Resp: Bank Stage: Implementation Due Date: 01-Jan-2012 Status: In Progress Rehabilitated road sections degrade to pre-rehabilitation Risk Management: poor stage faster as quality of rehabilitation works are substandard 2. Deploy a field-based road engineer, conduct scheduled construction quality monitoring. Resp: Bank Stage: Implementation Due Date: 01-Jun-2012 Status: Not Yet Due Risk Management: 3. Improve existing monitoring tool for the SLRP project and adopt it for the construction quality monitoring. Resp: Bank Stage: Implementation Due Date: 01-Jun-2012 Status: Not Yet Due Social and Environmental Rating Moderate Description: Risk Management: The project will not finance new road construction and 1. An Environmental and Social Management Framework (ESMF) have been developed as a

40 all civil works will be performed within the existing comprehensive guide on the scope and type of the requited site-specific environmental management right-of-way, however minor land acquisition may take planning and a Resettlement Policy Framework (RPF) will be produced to set out general principles of place to provide adequate sidewalks and drainage if handling possible types of resettlement matters. required. The project will not finance road works in Resp: Client Stage: Preparation Due Date: 09-Jan-2012 Status: Completed disputed areas. The project has been rated environmental Category B. Supervision of contractors' environmental Risk Management: performance has been a relative weakness of the client in 2. The RD will seek consultant services for the preparation of investment specific Environmental the past. Management Plans (EMPs). The RD will review and approve EMPs, will monitor their implementation, and ensure full compliance with them. The RD will be responsible for the preparation and implementation of the social mitigations plans. Resp: Client Stage: Implementation Due Date: 22-Mar-2012 Status: Not Yet Due Risk Management: 3. The client will ensure that the arrangements for safeguards supervision throughout the project implementation are satisfactory to the Bank. This includes deployment of additional RD staff and/or external individual consultant for the supervision of the safeguards implementation. Resp: Client Stage: Implementation Due Date: 01-Jan-2012 Status: In Progress Program and Donor Rating Low Description: Risk Management: There is an active coordination between donors through Continue close cooperation with other donors. regular donor-government conferences. Donor active in the road sector include; Resp: Bank Stage: Implementation Due Date: 01-Jan-2012 Status: In Progress ADB, JICA, EBRD, EIB. In addition, the RD supports information exchange between donors which further supports effective donor coordination. Delivery Monitoring and Sustainability Rating Moderate Description: Risk Management: Rehabilitation of the selected road sections may be of a Lessons learned from the current SLRP are shared with the contractors. Road supervision is enhanced by poor quality. increased staffing and funding as described in risk section above Resp: Client Stage: Implementation Due Date: 01-Jan-2012 Status: In Progress Other (Optional) Rating Description: Risk Management:

Resp: Stage: Due Date: Status:

41 Other (Optional) Rating Description: Risk Management:

Resp: Stage: Due Date: Status: Overall Risk Preparation Risk Rating: Low Implementation Risk Rating: Low Description: The proposed project is a continuation of the successful SLRP project; therefore the rating for Overall Preparation Risk is Low.

42 Annex 5: Implementation Support Plan GEORGIA: Second Secondary and Local Roads Project

Strategy and Approach for Implementation Support 1. The implementation support strategy was developed considering the lessons learned from the implementation of the ongoing SLRP operation. The risks and mitigation measures identified in the ORAF, and provision of flexible and efficient implementation support to the client was the key principle of the strategy. Based on the strategy, the specific approach to various project activities will be as follows:

 Financial Management. The Bank will conduct risk-based financial management implementation support and supervision mission within a year from the project effectiveness, and then at appropriate intervals. In addition, the regular IFRs and annual project audit reports will be reviewed by the Bank. As required, a Bank-accredited Financial Management Specialist will assist in the implementation support and supervision process.

 Procurement: The procurement related implementation support will include: (a) timely advice from the region-based procurement officer on various procurement related issues and guidance on the Bank’s Procurement Guidelines; (b) monitoring of procurement progress against the procurement plan.

 Environmental and Social Safeguards: The Bank’s field-based environmental specialists will provide regular support in strengthening the capacity of the RD and FPU. In addition, the Bank’s safeguards specialists will closely monitor implementation of the agreed site specific EMPs, will conduct selected site visits and provide guidance to the FPU to address the issues that may arise.

 Various technical aspects: The Bank team will supervise the implementation of the project on daily basis to provide needed support and guidance to the RD and FPU on various technical and aspects of project implementation. The region-based engineer will be available for regular guidance to the RD and FPU. With regards to implementation support for piloting alternative contracting methodology, the team will engage one transport specialist experienced in the alternative contracting methodology.

Implementation Support Plan

2. The project team will provide timely and effective implementation support through combination of daily supervision and semiannual implementation support missions. Since the number of project team members are based in country and regional office task team will provide more effective supervision and daily implementation support to the RD. The team leader, project engineer, procurement and financial management specialist, and environmental specialist are all based in the region.

43  Technical inputs: The project engineer will support the RD to supervise road rehabilitation works and manage rehabilitation contracts. The engineer jointly with the RD staff will conduct regular site visits and review of documentation to ensure adequate quality of the rehabilitation works. The transport specialist will provide guidance to the RD with regards to implementation of the DB and PBC contracts.

 Fiduciary requirements and inputs: The financial management and procurement specialists, based in the country office, will provide timely support. The financial management specialist will conduct risk-based FM missions within a year since the project effectiveness, and then at appropriate intervals, while the procurement supervision will be carried out as per Bank’s procurement rules and guidelines.

 Safeguards: The environmental specialist will closely supervise implementation of the site specific EMPs of the project. The environmental specialist will conduct field visits on annual basis to monitor implementation of safeguards policies. The social specialist will be engaged on as needed bases, if involuntary resettlement issues arise.

 Operation: The task team leader of the project will be based in the region and will conduct quarterly supervision of the project and coordinate with the client and other project team members to provide timely guidance and support to the client.

Resource Period Activity Skills Needed Estimate (Staff Weeks) First twelve Technical review of detailed designs Highway engineer 4 months for 19 section BoQs Procurement review of the bidding Sr. Procurement specialist 4 documents Financial management and Sr. Financial management 3 disbursements specialist Environmental supervision Sr. Environmental specialist 3

Support with project supervision Operations officer 1 coordination Project implementation guidance Lead transport sector specialist 4 and advice Support with social safeguard Sr. Social development specialist 1 compliance /impact evaluation Task management Sr. Operations Officer 8 12-48 months Environmental supervision Sr. Environmental specialist 4

Social supervision Sr. Social development specialist 1

Support with PBC/DB/ contracting Lead transport sector specialist 4 Financial management and Sr. Financial management 4 disbursements specialist Review of procurements Sr. Procurement specialist 8 Design supervision review Highway engineer 4 Task management Sr. Infrastructure Specialist 24

44 Skills Mix Required

Number of Skills Needed Number of Trips Comments Staff Weeks Task team leader 32 Field trips as required Country office based Transport sector specialist 8 Two Washington based Operations Officer 1 Field trips as required Country office based Highway engineer 8 Two Region-based Environmental specialist 7 Four Country office based Social specialist 2 Four Washington based Procurement specialist 12 Field trips as required Region-based Financial management 7 Field trips as required Region-based specialist

Annex 6: Ongoing Road Projects in Georgia GEORGIA: Second Secondary and Local Roads Project

Name Size FY Objective Ongoing Projects Secondary and Local To improve the economic and social well being of the rural population in selected regions, through: 1 Roads and US$90M 04-12 Rehabilitation of 400 km of selected secondary and local roads Strengthening capacity of the Road Additional Finance Department to maintain a cost effective and sustainable secondary and local road network

First East West To contribute to the gradual reduction of road transport costs and improve access, ease of transit and Highway safety along the central part of Georgia's East-West, To strengthen the capacity of the government, 2 US$47M 07-12 Improvement and Roads Department and the local road construction industry to plan and better manage the road network. Additional Finance upgrading segments of the East-West Highway from Tbilisi to Rikoti, including the rehabilitation of the Rikoti Tunnel; and

Second East-West To contribute to the gradual reduction of road transport costs and improve access, ease of transit, and 3 Highway US$55M 08-12 safety along the central part of Georgia's East-To strengthen the capacity of the government, RD and the Improvement patrol police to develop and implement a traffic safety program. West, upgrading a segment of the East- West Highway from Tbilisi to Rikoti. To contribute to the gradual reduction o f road transport costs and improve access, ease of transit, and Third East-West road safety along the central part of the Borrower’s East-Strengthen the capacity of the Roads 4 Highway US$147M 09-13 Department and relevant government entities to plan and manage the road network and to improve road Improvement safety. Kakheti Regional To Reduce transport costs and improve access between Vaziani, Gombori and Telavi; and 5 Roads Improvement US$30M 09-13 Improve traffic safety along the Vaziani-Gombori-Telavi (VGT) road and along the Vaziani-Sagarejo- Project Bakhurtsikhe-Bakhurtsikhe-Gurjaani-Telavi road. Total ongoing US$369M Projects under

Preparation Secondary and 1 US$70M 12 Local Roads II Third East-West Highway 2 US$43M 12 Improvement Additional Finance

46 Annex 7: Draft Procurement Plan GEORGIA: Second Secondary and Local Roads Project

Actual Cost $ Issue of Eval done - Contract Contract Description Company Type Method PQ PR Packs USD BD/ITQ/RFP Bid Opening NO issued Signed Start Component 1. Rehabilitation of Selected Secondary and Local Roads 15-Feb-12 19-Mar-12 1-Apr-12 30-Mar-12 15-May-12 1 Shulaveri-Red bridge road km7-km11 CW NCB N Y 1 2 Kveda Saqara-Sazano road km1-km14 CW ICB N Y 1 20-Feb-12 5-Apr-12 20-Apr-12 10-May-12 1-Jun-12 3 Kutaisi-Alpana-Mamisoni pass km116-km125 CW ICB N Y 1 20-Feb-12 5-Apr-12 20-Apr-12 10-May-12 1-Jun-12 4 Chokhatauri-Bakhmaro road km4-km6 CW NCB N Y 1 20-Feb-12 21-Mar-12 5-Apr-12 15-Apr-12 1-May-12 5 Chiatura-Usakhelo-Korbouli road km6-km24 CW ICB N Y 1 24-Feb-12 10-Apr-12 25-Apr-12 15-May-12 1-Jun-12 24-Feb-12 26-Mar-12 10-Apr-12 20-Apr-12 10-May-12 6 Didi Dmanisi-Dmanisi-Bediani road km17-km26 CW NCB N Y 1 7 Chalaubani-Signagi-Anaga km 16-km22 CW NCB N N 1 4-Jul-12 10-Aug-12 25-Aug-12 10-Sep-12 1-Oct-12 8 Ulianovka-Bodbe-Gamrjveba km1-km21.3 CW ICB N Y 1 4-Jul-12 17-Aug-12 5-Sep-12 15-Sep-12 5-Oct-12 20-Jul-12 20-Aug-12 5-Sep-12 20-Sep-12 1-Oct-12 9 Natanebi-Shroma-Ureki road km2-km17 CW NCB N Y 1 10 Tbilisi-Tianeti road km39-km51 CW NCB N Y 1 20-Jul-12 20-Aug-12 5-Sep-12 20-Sep-12 1-Oct-12 4-Aug-12 5-Sep-12 15-Sep-12 1-Oct-12 15-Oct-12 11 Ingiri-Shamgona CW NCB N N 1 12 Kutaisi-Tskaltubo-Lentekhi-Lasdili km50-km63 CW ICB N Y 1 4-Aug-12 17-Sep-12 5-Oct-12 20-Oct-12 1-Nov-12 13 Kutaisi-Alpana-Mamisoni pass km 74-km78 CW NCB N N 1 15-Aug-12 15-Sep-12 25-Sep-12 15-Oct-12 1-Nov-12 14 Nokalakevi-Ledzadzame-Didi Chkoni km13-km23.5 CW NCB N Y 1 15-Aug-12 15-Sep-12 30-Sep-12 20-Oct-12 10-Nov-12 30-Aug-12 30-Sep-12 10-Oct-12 25-Oct-12 1-Nov-12 15 Nosiri-Gejeti-Nokalakevi km9-km10; km15-km16.5 CW NCB N N 1 16 Igoeti-Lamiskana-Akhmaji km 1-km9.5 CW NCB N Y 1 10-Sep-12 10-Oct-12 25-Oct-12 10-Nov-12 1-Dec-12 20-Sep-12 20-Oct-12 5-Nov-12 20-Nov-12 5-Dec-12 17 Zomleti-Khikhadziri km5-km11 road section CW NCB N Y 1 20-Jan-13 20-Mar-13 10-Apr-13 1-May-13 20-May-13 18 Mtskheta-Shio Mgvime monastery km5-km11 (DB) CW NCB N N 1 19 Chiatura-Perevisa-Sveri-Tvalueti-Gezruli km8-km22 (DB) CW ICB N Y 1 20-Jan-13 20-Mar-13 10-Apr-13 1-May-13 20-May-13 20 Performance-Based contract for Kakheti region CW ICB Y Y 1 1-Mar-13 1-May-13 1-Jun-13 15-Jun-13 1-Jul-13 21 Road Safety Activities in Villages CW NCB N N 1 TBD TBD TBD TBD TBD Total Works 22 Supervision of rehabilitation works CS QCBS N/A Y 1 25-Feb-12 30-Apr-12 15-May-12 25-May-12 30-May-12 23 Assessment Study for two DB sections CS QCBS N/A Y 1 30-Mar-12 1-May-12 30-May-12 15-Jun-12 30-Jun-12 24 Design Studies for future Project CS QCBS N/A Y 1 TBD TBD TBD TBD TBD 25 Monitoring consultant CS QCBS N/A Y 1 1-Nov-2012 1-Dec-2012 25-Dec-2012 10-Jan-2013 10-Feb-2013 26 Impact Evaluation Studies (three combined) CS QCBS N/A Y 1 TBD TBD TBD TBD TBD Total Services TOTAL COMPONENT 1 Component 2: Institutional Strengthening 27 Road Asset Management Workshops (2 weeks) CS CQS N/A Y 1 TBD TBD TBD TBD TBD 25-Mar-2012 10-Apr-2012 10-May-2012 20-May-2012 20-Jun-2012 28 Project/Contracts Manager for 4 years CS ICS N/A Y 1 29 TRRC Consulting Services for 2 years CS ICS N/A N/A N/A N/A N/A N/A N/A N/A 30 TRRC Operating costs for 2 years IOC N/A N/A N/A N/A N/A N/A N/A N/A N/A TBD TBD TBD TBD TBD 31 Project Financial Audits for 2 years CS CQS N/A Y 1 32 Road Management System Equipment (RD) G SH N/A Y Several 1-May-13 1-Jun-13 20-Jun-13 30-Jun-13 30-Jun-13

TOTAL COMPONENT 2 Unallocated/contingencies TOTAL FOR ALL COMPONENTS

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