The World Bank

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 84945-GE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

Public Disclosure Authorized IN THE AMOUNT OF US$75 MILLION

GEORGIA

FOR A

THIRD SECONDARY AND LOCAL ROADS PROJECT

Public Disclosure Authorized May 30, 2014

Transport Sector Unit Sustainable Development Department Europe and Central Asia Region

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 Public Disclosure Authorized Bank authorization.

CURRENCY EQUIVALENTS (Exchange Rate Effective May 30, 2014) Currency Unit = Georgian Lari (GEL) US$1.00 = 1.76 GEL 1.00 GEL = US$0.56 FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AADT Average Annual Daily Traffic IFR Interim Unaudited Financial Report ADB Asian Development Bank IPSAS International Public Sector Accounting Standards AF Additional Financing IRI International Roughness Index CO Country Office ISA International Standards on Auditing CPAR Country Procurement Assessment Report JICA Japan International Cooperation Agency CPS Country Partnership Strategy KRRIP Kakheti Regional Roads Improvement Project CQS Consultant Qualifications LCS Least-Cost Selection CSPA Competition and State Procurement Agency MRDI Ministry of Regional Development and Infrastructure DA Designated Account NBG National Bank of Georgia EBRD European Bank for Reconstruction and Development NCB National Competitive Bidding ECA Europe and Central Asia NGO Non-Government Organization EIB European Investment Bank NPV Net Present Value EIRR Economic Internal Rate of Return OECD Organization for Economic Cooperation and Development EMP Environmental Management Plan ORAF Operational Risk Assessment Framework ESMF Environmental and Social Management Framework PDO Project Development Objectives EU European Union PP Procurement Plan EWHIP-4 Fourth East-West Highway Improvement Project PRAMS Procurement Risk Assessment and Management System FA Fixed Assets QCBS Quality and Cost-Based Selections FEWHIP First East-West Highway Improvement Project QER Quality Enhancement Review FBS Fixed-Budget Selection RAP Resettlement Action Plan FM Financial Management RD Roads Department FMM Financial Management Manual RMS Road Management System FPU Foreign Project Unit RPF Resettlement Policy Framework GEL Georgian Lari SEWHIP Second East-West Highway Improvement Project GDP Gross Domestic Product SDR Special Drawing Rights GIS Geographic Information System SLRP-I (First) Secondary and Local Roads Project GPN General Procurement Notice SLRP-II Second Secondary and Local Roads Project HDM-4 Highway Development and Management Model Third SLRP Third Secondary and Local Roads Project HQ Headquarters SOE Statement of Expense IBRD International Bank for Reconstruction and Development SSS Single-Source Selection IC Individual Consultants TTL Task Team Leader ICB International Competitive Bidding TOR Terms of Reference IFAC International Federation of Accountants TRRC Transport Reform and Rehabilitation Centre WB World Bank

Regional Vice President: Laura Tuck Country Director: Henry G.R. Kerali Sector Director: Laszlo Lovei Sector Manager: Juan Gaviria Task Team Leader: Joseph Melitauri Co-Task Team Leader Natalya Stankevich

GEORGIA Third Secondary and Local Roads Project

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 ...... 5

II. PROJECT DEVELOPMENT OBJECTIVE(S)...... 6 A. PDO...... 6 B. Project Beneficiaries ...... 6 C. PDO Level Results Indicators ...... 6

III. PROJECT DESCRIPTION ...... 7 A. Project Components ...... 7 B. Project Financing ...... 8 C. Lessons Learned and Reflected in the Project Design ...... 9

IV. IMPLEMENTATION ...... 10 A. Institutional and Implementation Arrangements ...... 10 B. Results Monitoring and Evaluation ...... 11 C. Sustainability...... 12

V. KEY RISKS AND MITIGATION MEASURES ...... 12 A. Risk Ratings Summary Table ...... 12 B. Overall Risk Rating Explanation ...... 12

VI. APPRAISAL SUMMARY ...... 13 A. Economic and Financial Analysis ...... 13 B. Technical ...... 14 C. Financial Management ...... 15 D. Procurement ...... 15 E. Social (including Safeguards) ...... 16 F. Environment (including Safeguards) ...... 17

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

Annex 2: Detailed Project Description ...... 22

Annex 3: Implementation Arrangements ...... 25

Annex 4: Operational Risk Assessment Framework (ORAF) ...... 36

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

Annex 6: Economic Analysis ...... 44

Annex 7: Project Contribution to Poverty Reduction and Shared Prosperity Corporate Agenda ...... 49

Annex 8: Review of Local Roads Sector Management in Georgia ...... 52

Annex 9: MAP ...... 55

. PAD DATA SHEET Georgia Third Secondary and Local Roads Project (P148048) PROJECT APPRAISAL DOCUMENT

. EUROPE AND CENTRAL ASIA ECSTR

Report No.: PAD917

. Basic Information Project ID EA Category Team Leader P148048 B - Partial Assessment Joseph Melitauri Lending Instrument Fragile and/or Capacity Constraints [ ] Investment Project Financing Financial Intermediaries [ ] Series of Projects [ ] Project Implementation Start Date Project Implementation End Date 7-May-2014 30-Sep-2018 Expected Effectiveness Date Expected Closing Date 30-Sep-2014 30-Sep-2018 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Juan Gaviria Laszlo Lovei Henry G. R. Kerali Laura Tuck

. Borrower: GEORGIA Responsible Agency: Road Department of the Ministry of Regional Development and Infrastructure Contact: Mr. Irakli Litanishvili Title: Deputy Chairman Telephone No.: 99532-376603 Email: [email protected]

. Project Financing Data(in USD Million) [ X ] Loan [ ] Grant [ ] Guarantee [ ] Credit [ ] IDA Grant [ ] Other Total Project Cost: 93.75 Total Bank Financing: 75.00 Financing Gap: 0.00

. Financing Source Amount Borrower 18.75

International Bank for Reconstruction and 75.00 Development Total 93.75

. Expected Disbursements (in USD Million) Fiscal 2014 2015 2016 2017 2018 2019 0000 0000 0000 Year Annual 0.00 10.00 15.00 20.00 25.00 5.00 0.00 0.00 0.00 Cumulati 0.00 10.00 25.00 45.00 70.00 75.00 0.00 0.00 0.00 ve

. Proposed Development Objective(s) The Project Development Objectives (PDO) are to reduce transport costs on project roads and improve the sustainability of road asset management in the secondary and local project road network.

. Components Component Name Cost (USD Millions) Component 1. Rehabilitation and Improvement of Secondary 90.36 and Local Roads Component 2. Capacity Building and Strengthening in Local 1.00 and Secondary Roads Management Component 3. Road Safety Technical Assistance 2.20

. Institutional Data Sector Board Transport

. Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Transportation Rural and Inter-Urban 98 Roads and Highways Public Administration, Law, and Public administration- 2 Justice Transportation Total 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project.

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

Trade and integration Trade facilitation and market access 25 Rural development Rural services and infrastructure 25 Trade and integration Regional integration 25 Financial and private sector development Infrastructure services for private sector 25 development Total 100 . Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [ X ] respects? . 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 Agreement Schedule 2, Section I, 30-Oct-2014 A. 2 Description of Covenant By not later than one month as of the Effective Date, the MRDI, RD and TRRC shall duly amend the Project Implementation Agreement

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Name Recurrent Due Date Frequency Loan Agreement Schedule 2, Section I, 1-Sep-2014 A. 6 Description of Covenant The Borrower shall cause TRRC to maintain a financial auditor under terms of reference and conditions satisfactory to the Bank Name Recurrent Due Date Frequency Loan Agreement Schedule 2, Section I, X CONTINUOUS C. 1 Description of Covenant The Borrower shall ensure that the Project is carried out in accordance with the provisions of the ESMF, EMP(s), RPF and RAP(s). The Borrower shall not assign, amend, abrogate or waive the ESMF, EMP(s), RPF and/or RAP(s) or any provision thereof, without the prior approval of the Bank. . Conditions Source Of Fund Name Type IBRD Project’s Operations Manual Condition of Effectiveness Description of Condition The Borrower shall submit to the Bank the Project’s Operations Manual in form and substance acceptable to the Bank. Team Composition Bank Staff Name Title Specialization Unit Marie Antoinette Laygo Program Assistant Program Assistant ECSSD Deepal Fernando Senior Procurement Procurement Specialist ECSO2 Specialist Darejan Kapanadze Senior Environmental Environmental Specialist ECSEN Specialist Vera Dugandzic Senior Operations Social Development ECSSO Officer Specialist Ghada Youness Senior Counsel Legal LEGLE Joseph Melitauri Senior Operations Task Team Leader ECSEG Officer Natalya Stankevich Transport Specialist Co-Task Team Leader ECSTR Galina Alagardova Financial Management Financial Management ECSO3 Specialist Specialist Mustapha Benmaamar Sr. Transport Specialist Program Team Leader ECSTR Militsa Khoshtaria Program Assistant Program Assistant ECCGE

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Oceane Keou Junior Professional Transport Specialist ECSTR Associate Sandro Nozadze Procurement Specialist Procurement Specialist ECSO2 Marinos Skempas Consultant Highway Engineer ECSTR Sergo Tsipa Consultant Roads Engineer ECSTR Ekaterine Imerlishvili E T Consultant Social Development ECSSO Specialist Jasna Mestnik Finance Officer Finance Officer CTRLA Joseph Paul Formoso Senior Finance Officer Finance Officer CTRLA Robert Charles Seekings E T Consultant Highway Engineer ECSTR . Locations Country First Location Planned Actual Comments Administrative Division Georgia Tbilisi Tbilisi

I. STRATEGIC CONTEXT

A. Country Context

1. Georgia's economy has recovered strongly since the double shocks of the financial crisis and conflict of 2008. The steep decline in economic growth from 12.3 percent in 2007 to 2.3 percent in 2008, led to a reduction in employment and a rise in poverty. However, the country's economic growth rebounded strongly to 7.2 percent in 2011 and 6.2 percent in 2012, mainly due to an increase in exports and tourism and the continued high levels of public investment. Public investment during this period has mainly focused on infrastructure, including an important effort to improve main road corridors and local connections. The rebound in the growth of the service sector was supported heavily by revenue from transit-related transport (particularly to and from Turkey, Armenia, Azerbaijan, and Central Asia). However economic growth in 2013 was much weaker at 3.2 percent due to the adverse impact of policy uncertainty on investment and consumption.

2. Despite this economic recovery, between 2006 and 2011, poverty remained between 17 and 21 percent (using a line set for national poverty analysis). The recent drop in poverty to 14.8 percent in 2012 was led by social assistance, as well as a decline in food prices favoring the poor. Strong social transfers and falling food prices have also led to a noteworthy reduction in the extreme poverty rate to 3.7 percent1. Unlike previous years when the consumption of the bottom 40 did not grow, between 2010 and 2012, the bottom 40 enjoyed a consumption growth of 5.4 percent per year. Despite the recent gains in poverty reduction, unemployment remains high at 15 percent in 2012 (urban unemployment rate is particularly high at 26 percent). Inequality has also remained high with the Gini coefficient remaining close to 0.41. Cross- country comparisons show that Georgia has one of the highest poverty rates in the ECA region. Going forward, growth is expected to be driven more by domestic savings and tradables. Increased spending on roads, water and rural development are needed to catalyze private investment and create jobs.

B. Sectoral and Institutional Context

3. Over the last eight years Georgia has followed a very dynamic policy to develop its transport sector. This policy is centered on: (i) maximizing private sector involvement in management and investment for rail and ports; (ii) more strategic prioritization of government sector investments including, for instance, concentration of investments on the East-West Highway transit corridor and improving rural access; and (iii) increasing expenditure on maintenance, particularly on secondary and local roads. Recent efforts in urban transport have focused on improving the efficiency and sustainability of transport services mostly driven by municipalities, including Tbilisi and the main cities in the regions. Investment and management of ports are now undertaken by private operators under concession agreements, or as full owners of facilities. Transport services have been liberalized in the railway sector and the Georgian Railways operates as a semi-autonomous entity. Georgian Railways’ sound financial basis is the result of the profitable transport of oil products transiting from Azerbaijan to the Black Sea.

1 IBRD, IDA, IFC. “Country Partnership Strategy for Georgia FY2014-2017”. World Bank. Washington, DC. 2014.

1 Government investments have therefore focused on the road sector, with rail and port sectors financed largely by the private sector.

4. A policy-based, efficient, and long-term strategic investment is the main priority of the government. The government continues to be strongly committed to infrastructure improvement. The Ministry of Regional Development and Infrastructure (MRDI) has developed an Action Plan for 20142, which has allocated roughly GEL875 million for infrastructure development, including GEL500 million for road improvements. The government uses two main criteria for the investment: (i) infrastructure investments are to be prioritized in accordance to economic efficiency and need to be part of the overall sector investment policy; and (ii) strategic and long-term investment commitments made by the previous government (2008-2012) will be respected and funding continued. The continuation of funding for the East-West Highway corridor improvement is one of the priorities of the Action Plan. Maintenance of the road infrastructure is one of the government’s priorities.

5. The government aims to create a favorable environment for regional socio-economic development and for improving living standards. These objectives, outlined in the Georgia Regional Development Strateg