Major Change of Batumi Bypass Road Project (GEO 50064) ECONOMIC AND FINANCIAL ANALYSIS A. Background and Scope 1. This document contains an updated economic and financial analysis of the Batumi Bypass Road Project, inclusive of the proposed major change in scope. The original scope centers on the construction of a 14.3 kilometer (km) bypass around Batumi, currently under construction and with expected completion in late 2022 (Batumi Bypass component). The existing road through Batumi carries significant flows of transit and domestic long haul traffic, causing congestion, road safety and environmental problems. It carries substantially all merchandize trade between Georgia and Turkey, Turkey and Azerbaijan, and Turkey and Armenia. Arriving transit traffic passes through the Sarpi border, 18km south of Batumi, making its way through Batumi before proceeding towards Tbilisi and further east. The bypass will, when complete, form part of the E60-E70-E692 East-West Highway network. 2. The proposed increase in scope is made possible without additional financing, due to lower than expected contract prices for the Batumi Bypass. It extends the project to include two additional components which are strategically important to enhance Georgia’s role as a transport hub: (a) relocation of the bridge carrying the E60 (Georgian designation: S2) over the Rioni river just north of the city and port of Poti, plus 2 km of approach roads (the Poti bridge component), and (b) a new 16.2 km two lane bypass road, between Bakurtsikhe and Tsnori on the S5 highway between Tbilisi and Azerbaijan via the border crossing point (BCP) at Lagodekhi (Bakurtsikhe-Tsnori road component). 3. Poti bridge component. The existing road crossing the Rioni river is carried on a 180m diversion weir, one of a pair of hydraulic structures built in the late 1950s to reduce the risk of flooding to Poti city. The carriageway is 6.2m wide, insufficient for two-way truck-trailer traffic. The weir structure itself underwent emergency rehabilitation from 2004 to 2006.1 Traffic on the E60 between Senaki and Poti in 2015 was approximately 5,500 vehicles per day (vpd), of which 600 were heavy goods vehicles (i.e. trucks with at least three axles).2 The relocation of the Poti bridge is part of a planned longer term upgrade of the Poti-Grigoleti road. 4. Bakurtsikhe–Tsnori road component. The existing Bakurtsikhe–Tsnori road carried approximately 4,100 vpd in 2017 (of which 240 were heavy goods vehicles) through around 24 settlements. The existing two lane road is in poor condition and hazardous for pedestrians. The proposed bypass will divert approximately half of total traffic. 5. Economic benefits arising from the three road components are to a close approximation independent. B. Economic Analysis at Appraisal 6. The estimated economic internal rate of return (EIRR) of the Batumi bypass road at appraisal in 2017 was 16.1%.3 The appraisal was undertaken at 2016 prices. 1 The weir is owned by Georgian Amelioration Ltd, the irrigation and drainage service agency of the Ministry of Environmental Protection and Agriculture. Repairs to the weir are described in Spasic-Gril, L, 2006, Emergency Underwater Rehabilitation of the Poti Main Diversion Weir, Georgia. Thomas Telford, London 2 Roads Department, Ministry of Regional Development & Infrastructure, Georgia, 2017. Feasibility Study for the Construction of Poti-Grigoleti-Kobuleti Bypass. Tbilisi 3 Batumi Road Bypass Road Project (RRP GEO 50064), Economic and Financial Analysis, March 2017 2 7. As a new alignment, the benefits quantified at appraisal depended on an estimate of traffic diverted from the existing road through Batumi city. The scope of benefits included (i) vehicle operating cost (VOC) savings, (ii) journey time savings, (iii) generated traffic benefits and (iv) crash cost savings. Journey time savings accounted for approximately two-thirds of total benefits. C. Economic Reevaluation 8. This economic re-evaluation brings the 2016 evaluation of the Batumi bypass to 2019 prices, reflects currently expected outturn costs, and extends it to include the Poti bridge and Bakurtsikhe–Tsnori road components. In order to harmonize the evaluation of the three components, each has 2042 as its final year and in each case the residual value is taken as 20% of the initial investment cost. Both the Poti bridge and the Bakurtsikhe–Tsnori bypass components are assumed to be constructed during 2020-21, with first benefits in 2022. 9. In Georgia, Gross Domestic Product (GDP) per capita has risen by 15% since 2016 at constant prices. However, journey time savings in the original appraisal already allowed for expected growth in real-term values of time, and therefore no further adjustment has been made. VOC savings and generated traffic benefits have been adjusted by use of the MUV index.4 10. Poti bridge component. The Poti bridge component forms the first of a proposed three stage upgrade and re-alignment of the Poti-Grigoleti road. The consultants’ evaluation compared three alternative alignments, including three alternative sites for the proposed bridge.2 The scope for alternatives is limited as all possible alignments must follow a narrow strip of land bordered by an environmentally sensitive area to its east and urban development to its west.5 The selected alternative was chosen principally on environmental grounds, but was also the option with the lowest cost.6 The estimated financial cost of the Poti bridge project is $21.5m including value added tax (VAT), or $18m at economic prices excluding VAT. The E60 via Poti bridge is one of two routes to Poti port.7 Traffic travelling to or from Tbilisi via Samtredia may take the southern route via Grigoleti (currently being re-built to a four lane standard between Samtredia and Grigoleti) or the shorter northern route via Senaki. Traffic counts in 2017 showed that traffic volumes on the northern route were about 30% higher than those between Grigoleti and Poti. While the carriageway width of the existing Poti bridge is unsatisfactory, the small delays arising from this do not give rise to significant diversions and therefore few economic benefits. The situation if the hydraulic structure were to fail, however, would be far more serious, both for transport and for Poti city. The need for emergency repairs carried out on the weir fifteen years ago (para 3) suggests that there is a material probability that this could happen. 4 MUV: manufacturers’ unit value index, a proxy for the price of developing country imports of manufactures in dollar terms 5 South of Poti, urban development and road connections run along a narrow line of dunes between the sea and Kolkheti National Park. The latter contains Ramsar-designated wetlands 6 The estimated cost of the selected bridge (alternative 1) was 7% below the cost of alternative 2 and 24% lower than alternative 3. 7 In terms of cargo turnover Poti port is the largest in Georgia. Its 2015 traffic was 5m tons of bulk. liquid and ro-ro freight, plus 325,000 TEUs. Expansion possibilities are highly constrained, however, and there is a risk that trade will be diverted to the new bulk and container facilities currently under construction at Anaklia, approximately 30km north of Poti 3 11. Bakurtsikhe–Tsnori road component. Evaluation of this component is based on a feasibility study prepared for the government in 2018.8 This feasibility study was done at 2018 prices and has not been adjusted for price changes. Timing has however been adjusted to be consistent with construction in 2020-21 (in place of 2019 as assumed in the original evaluation). As with the evaluation of the Batumi Bypass component, the scope of benefits includes VOC, journey time and crash cost savings. The consultants’ evaluation considered three alternative bypass alignments. The selected alternative had the lowest environmental impact and was least disruptive to existing land parcels, but no comparative economic evaluation was undertaken. Approximately 70% of benefits arise from VOC savings. D. Demand Estimation 12. Historic traffic growth on both the Kobuleti-Batumi and the Bakurtsikhe–Lagodekhi roads has been strong. From 2009 to 2015 traffic recorded at the automatic traffic counter at km95 of the Kobuleti-Batumi road grew at 8% per annum, with annual growth of heavy goods traffic at slightly over 20%. Traffic between Bakurtsikhe and Lagodekhi on the S5 from 2009 to 2016 grew at just over 4% per annum. 13. Forecast GDP growth is 5.0% and 4.9% for 2019 and 2020,9 rising to 5.2% in 2023.10 Assumed demand elasticities are 1.2 falling to 1.05 for passenger traffic and 1.0 for goods vehicles. 14. Batumi Bypass component. Base year and forecast traffic estimates are summarized in Table 1. It is estimated that around 62% of goods traffic and 43% of total traffic will divert to the bypass, based on origin and destination (OD) surveys originally carried out in 2009. 15. Bakurtsikhe–Tsnori road component. Principally based on OD survey results, between 50 and 55% of vehicles are assumed to divert. Conservatively, it is assumed that there will be no net additional traffic generated. 16. Poti bridge component. Traffic forecasts for Poti bridge as a standalone project have not been prepared. Traffic between Samtredia and Poti dependent on Poti bridge is estimated at approximately 3,000 vehicles per day.11 Table 1: Base and Forecast Traffic: Batumi Bypass Component AADT without Project AADT with Project Year Existing Road Existing Road Bypass Diverted Bypass Generated 2015a 18,245 N/A N/A N/A 2023b 27,508 15,365 12,143 1,506 2030 36,713 20,523 16,190 2,012 2040 49,960 27,953 22,006 2,742 AADT = annual average daily traffic in vehicles per day, N/A = not applicable.