Report No. 66533-AM Public Disclosure Authorized Public Disclosure Authorized IMPROVING THE SUSTAINABILITY OF ROAD MANAGEMENT AND FINANCING IN ARMENIA Public Disclosure Authorized OCTOBER 13, 2011 THE WORLD BANK Public Disclosure Authorized WASHINGTON, D.C. Abbreviations and Acronyms AADT Average Annual Daily Traffic ADB Asian Development Bank ARD Armenian Road Directorate EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia EU European Union FWD Falling Weight Deflectometer GDP Gross Domestic Product GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GIS Geographic Information System Government Government of Armenia HDM-4 Highway Development and Management Model (Version – 4) IFI International Financial Institution IT Information Technology MCF Millennium Challenge Fund MOTC Ministry of Transport and Communications NTCC National Traffic Control Centre OECD Organization for Economic Co-operation and Development PPP Public Private Partnership RDCAD Road Data Collection and Analysis Department RMS Road Management System RMU Road Maintenance Units RONET Road Network Evaluation Tools Model Table of Contents Executive Summary ......................................................................................................................... i A. Introduction .......................................................................................................................... 1 B. Overview of the Armenian Road Sector .............................................................................. 2 Road Network ....................................................................................................................... 3 Institutional Setup ................................................................................................................. 6 Road Maintenance .............................................................................................................. 10 Road Asset Management System ....................................................................................... 13 C. Expenditures in the Road Sector ........................................................................................ 17 Maintenance and Rehabilitation Requirements on Interstate and Republican Roads ........ 20 Recommendations .............................................................................................................. 24 D. Options for Sustainable Road Management Financing ...................................................... 25 Option 1: Increase Efficiency of Current Expenditures ..................................................... 25 Option 2: Develop Cost-effective Design Standards for Low-traffic Roads ..................... 26 Option 3: Increase Road-user Charges ............................................................................... 27 Option 4: Earmarking ......................................................................................................... 30 Option 5: Borrowing .......................................................................................................... 30 Option 6: Mobilizing Private Sector Resources through Public-Private Partnerships ....... 31 Conclusions and Recommendations ............................................................................................. 34 Annex 1. Public-Private Partnerships (PPPs) ............................................................................... 40 Annex 2. Performance-based Contracts (PBCs) ........................................................................... 43 Annex 3. Comparison between Traditional Contracting and Output- and Performance-based Road Contracts (OPRCs) in the Armenian Road Sector .................................................... 45 Annex 4. Review of International Experience with OPRCs ......................................................... 47 Annex 5. Success Factors for Road Asset Management Systems (RAMS) ................................. 52 Annex 6. HDM-4 Scenarios for Addressing the Interstate and Republican Road Rehabilitation Backlog ............................................................................................................................... 54 Option 1: Minimize Total Transport Costs Scenario ......................................................... 54 Option 2: Expenditures of US$110 Million per Year Scenario ......................................... 55 Option 3: Eliminate Rehabilitation Backlog in 10 Years Scenario .................................... 55 Option 4: Keep Current Condition Scenario ...................................................................... 56 Annex 7. HDM-4 Road Maintenance Works Economic Evaluation ............................................ 57 The HDM-4 Model ............................................................................................................... 57 Primary Road Works Economic Evaluation ......................................................................... 57 Local Road Works Economic Evaluation ............................................................................. 60 Optimal Periodic Maintenance Treatment ............................................................................ 62 Tables Table 1. Comparison of Different Expenditure Scenarios ............................................................. iv Table 2. High Priority Recommendations ................................................................................... viii Table 3. Road Definition and Length, 2009 ................................................................................... 4 Table 4. Trend of Road Classes Lengths in km .............................................................................. 5 Table 5. Length and Condition of the National Road Network (2009) .......................................... 5 Table 6. Road Network Condition and Asset Value ....................................................................... 6 Table 7. Investment Program on the Road Network from 2005-2011 (US$ million) .................. 18 Table 8. Consequences of Different Expenditure Scenarios ........................................................ 22 Table 9. Funding Requirements of Different Expenditure Scenarios ........................................... 25 Table 10. Gasoline and Diesel Prices (US cents per liter, unless otherwise stated) ..................... 27 Table 11. Fuel Taxes in Armenia, Effective from January 1, 2011 .............................................. 29 Figures Figure 1. Road Density ................................................................................................................... 4 Figure 2. Main Roads Asset Value ................................................................................................. 6 Figure 3. Main Roads Length and Traffic ...................................................................................... 6 Figure 4. Organizational Structure of the Road Sector in Armenia ................................................ 7 Figure 5. Present Value of Total Transport Costs (US$ million) ................................................. 23 Figure 6. Interstate and Republican Roads – Percentage of the Network in Good or Fair Condition (%)................................................................................................................. 24 Figure 7. Gasoline Price Composition .......................................................................................... 29 Figure 8. Financing Sources for Highways Funded from Government and PPPs (Concession) .. 32 Figure 9. Option 1: Minimize Total Transport Costs: Annual Road Expenditures from Years 1-20 (US$ millions) ............................................................................................. 55 Figure 10. Option 2: Eliminate Rehabilitation Backlog in 10 Years: Annual Road Expenditures from Years 1-20 (US$ millions) ...............................................................56 Acknowledgments This report was written by a Bank team comprised of Rodrigo Archondo-Callao (Sr. Highway Engineer, ECSS5 and Task Team Leader), Carolina Monsalve (Transport Economist), Mirtha Pokorny (Economist, Consultant), Cesar Queiroz (Institutional Specialist, Consultant) and Anita Shrestha (Operations Analyst, ECSS5). Essential support to the Study was provided by Arthur Kochnakyan (Economist, ECSS2), Irina Tevosyan (Program Assistant, ECCAR), Mher Hovsepyan (Consultant) and Giorgi Japaridze (Consultant). The team would like to thank Henry G.R. Kerali (Sector Manager Transport, ECSSD) and Christopher R. Bennett (Sr. Transport Specialist, EASNS and former Task Team Leader of the Study) for quality control and overall guidance and the peer reviewers Mustapha Benmaamar (Sr. Transport Specialist, EASIS), Steven Brushett (Lead Transport Specialist, LCSTR) and Shomik Mehndiratta (Sr. Transport Specialist, EASCS). The team is also thankful to Ben Gericke (Lead Transport Specialist, ECSSD) and Vickram Cuttaree (Senior Infrastructure Economist, ECSS5) for their comments. The team would like to acknowledge contributions from representatives of Government (including the Ministry of Transport and Communications, the Armenian Road Directorate, Transport Project Implementation Unit) and other stakeholders in Armenia, including the Asian Development Bank). Executive Summary As part of a wider transport sector dialogue with the Government of Armenia (Government), the World Bank conducted a performance