Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 48 164-AZ PROJECT PAPER ON A PROPOSED SECOND ADDITIONAL FINANCING CREDIT IN THE AMOUNT OF SDR 41.70 MILLION Public Disclosure Authorized (US$62 MILLION EQUIVALENT) AND PROPOSED SECOND ADDITIONAL FINANCING LOAN IN THE AMOUNT OF US113 MILLION TO THE REPUBLIC OF AZERBAIJAN Public Disclosure Authorized FOR THE SECOND HIGHWAY PROJECT May 29,2009 Sustainable Development Department South Caucasus Country Unit Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the Public Disclosure Authorized performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective May 25,2009) CurrencyUnit = AZN 0.81 AZN = US$l 1 AZN = US$1.24 1 SDR = US$1.49 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AADT Annual Average Daily Traffic AF Additional Financing AH2P Azerbaijan Highway 2 Project AH2PAF- 1 Azerbaijan Highway 2 Project First Additional Financing AH2PAF-2 Azerbaijan Highway 2 Project Second Additional Financing ARS Azer Road Service Joint Stock Company CPS Country Partnership Strategy CY Calendar Year EA Environmental Assessment EIRR Economic Internal Rate of Return EMF Environmental Management Framework EMP Environmental Management Plan FM Financial Management FY Fiscal Year IBRD International Bank for Reconstruction and Development IDA International Development Association ISR Implementation Status Report LIBOR London Interbank Offered Rate MTR Mid-Term Review NPV Net Present Value PAD Project Appraisal Document PDO Project Development Objective PICBP Public Investment Capacity Building Project PIU Project Implementation Unit MOT Ministry of Transport VAT Value Added Tax VPd Vehicles per day Vice President: Shigeo Katsu, ECAVP Country Director: Asad Alam, ECCU3 Country Manager Gregory T. Jedrzejczak, ECCAZ Sector Director Peter D. Thomson, ECSSD Sector Manager: Henry Kerali, ECSSD Task Team Leader: Jacques Bure, ECSSD FOR OFFICIAL USE ONLY AZERBAIJAN HIGHWAY 2 PROJECT - ADDITIONAL FINANCING CONTENTS Page I. Introduction ................................................................................................................. 1 11. Background and Rationale for Additional Financing.............................................. 1 111. Proposed changes ......................................................................................................... 2 IV. Consistency with CPS .................................................................................................. 4 V. Appraisal of scaled-up project activities ................................................................... 4 VI. Expected outcomes ...................................................................................................... 7 VII. Benefits and risks ......................................................................................................... 8 VIII. Financial terms and conditions for the additional financing................................... 9 Annex: Revised Arrangements for results monitoring ........................................................... 10 Map No. IBRD 36949 .................................................................................................................. 12 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. Project Paper Data Sheet Source Local I Foreign I Total Borrower 82.99 0.00 82.99 IBRD 56.50 56.50 113.00 IDA 3 1.OO 3 1.00 62.00 Others 0.00 0.00 0.00 Total 170.49 87.50 257.99 Combined disbursement schedule based on actual and expected disbursement under AH2P, AH2PAF-1 and AH2PAF-2. ’ AH2PAF-2 only. I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide a second additional financing in an amount of US$175 million to the Republic of Azerbaijan for the Highway 2 Project (AH2P) (Loans IBRD 7356-AZ and IBRD 7516-AZ). The proposed second additional financing (AH2PAF-2) would be financed using both an IDA Credit and IBRD Loan - the IDA Credit in the amount of $62 million equivalent and the IBRD Loan in the amount of $1 13 million. The AH2PAF-2 would finance the costs associated with scaling up the project’s impact of developing regional economies and alleviating rural poverty. It would help reduce transport costs along the M6, one of Azerbaijan’s transport corridors, by rehabilitating the road networks and removing transport bottlenecks to the socioeconomic development of the region. Major activities would include the rehabilitation of 1 16km of the highway between Hajigabul and Bahramtapa and the rehabilitation of approximately 200km of local roads connecting villages with the M6. There would be no co-financing from other donors for this project. 11. Background and Rationale for Additional Financing 2. Original project: The original AH2P (US$200 million) was developed based on the request of the Government to finance the upgrading of the North-South corridor (M3) between Alat and Masalli (143 km), and the rehabilitation of the East-West corridor (M4) between Baku and Shamakhi (124 km). The project development objective of the AH2P is “to reduce road transport costs and improve access, transit and road safety by upgrading and rehabilitating selected sections of the existing East-West (M4) and North-South (M3) corridors”. The AH2P has two components: (i)civil works, and (ii)provision of technical assistance, training and goods to build ca acity within the Ministry of Transport and Azer Road Service Joint Stock Company (ARS)P . In December 2006 the AH2P was restructured to include the rehabilitation of the Ujar-Kurdemir section (41 km) of the East-West highway (M2). The first additional financing for the project in the amount of US$300 million (AH2PAF-1) was approved by the Board on May 29,2008 to complete the construction of the M3 Highway, and also to finance the rehabilitation of the Tagiyev - Sahil section ofthe Baku bypass, which connects the M3 to the M1 Highway. The legal documents were signed on December 16, 2008. The Loan Agreement for the AH2PAF-1 became effective on April 14, 2009. 3. Rationale for the additional financing: Azerbaijan’s economy will likely maintain positive rates of growth despite the global economic slowdown. However, its growth is expected to decline from about 25 percent per annum before the crisis down to 3 percent in 2009, and this will significantly impact employment and the livelihood of the poor. It is estimated that at least 6,000 jobs had been lost in January and February of 2009 alone, and job losses are expected to increase in the next several months. 4. The rapid rehabilitation of the road network in the Hajigabul-Bahramtapa region is very relevant in this context, since it is ready for construction. The rehabilitation of the M6 ARS is under the Ministry of Transport (MOT) and was established in February 2007 to succeed to the Road Transport Service Department LLC (RTSD) within MOT. 1 Highway could help foster the development of local businesses and create local employment. In addition, there is strong evidence that the rehabilitation of roads would significantly improve the mobility of goods and services between rural areas and urban centers (including across regions), boosting existing businesses through a reduction in transport costs, increasing incomes, and reducing prices for the rural and urban poor4. The investment could also become a demonstration model for future regional development projects - an important issue on the Government agenda6. The proposed investment is also a priority of the Government’s “State Program for Rehabilitation and Development of Azerbaijan ’s Republic Highways (2006-2015)” which aims to rehabilitate more than half the major road network that is in need of repair. 5. While the country’s highway network is rapidly growing, the majority of roads connecting rural areas with main transport corridors (“connecting roads”) are still in poor condition. Decisions to finance the improvement or rehabilitation of the road network have often been made with little consideration of the geographical synergies and the role of connecting roads or with how to best trigger regional socioeconomic development. The ongoing AH2P takes these factors into consideration and finances both the upgrading of main corridors as well as their connecting roads. By strategically linking the connecting road network with the main transport corridor (here the M6), the Project would be able to better facilitate the movement of goods between points of production and consumption and thus increase the project’s impact. 6. Progress under the AH2P has been satisfactory. Over the last two years, the AH2P has helped to address critical transport challenges in Azerbaijan. The mid-term review (MTR), conducted in early October 2008, confirmed that the project would likely meet all of its objectives. As of March 2009, contracts in the amount of US$271 million (46 percent of the AH2P plus the first additional financing) have been committed. All other activities are being tendered and would be committed by the end of 2009. Disbursement is expected to reach US$250 million (50 percent of the total) by June 2010 and US$335 million (67 percent of the total) by June 201 1. 111. Proposed changes 7. Table 1 below summarizes the proposed