Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 47069-YF

PROJECT APPRAISAL DOCUMENT

O N A

PROPOSED L O A N

IN THE AMOUNT OF EUR 275.2 MILL ION (US$388 MILL ION EQUIVALENT)

TO THE

REPUBLIC OF SERBIA

FOR A

CORRIDOR X HIGHWAY PROJECT

June 12,2009

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

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 3 1,2009)

C A D C E M CIP CPAR CPS EAR EBRD EC EIA EIB EIRR EMP EU FIDIC FMS FY F Y R O M GAC GDP GI S GRSF HiPERB IBRD I C B IFIs IFR I P A IPFMA iRAP IRR ISDS

CurrencyUnit = EUR EUR0.70914 = US$1 US$ 1.40981 = EUR 1

RSD (Republic o f Serbia Dinar) 94.4313 = EUR 1

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS

Current Account Deficit Country Economic Memorandum Transportation Institute, Belgrade Country Procurement Assessment Report Country Partnership Strategy European Agency for Reconstruction European Bank for Reconstruction and Development European Commission Environmental Impact Assessment European Investment Bank Economic Internal Rate o f Return Environmental Management Plan European Union International Federation o f Consulting Engineers Financial Management System Fiscal Year Former Yugoslav Republic o f Macedonia Governance and Anti-Cormption Gross Domestic Product Geographic Information System Global Road Safety Facility Hellenic Plan for Economic Reconstruction o f the Balkans International Bank for Reconstruction and Development International Competitive Bidding International Financial Institutions Interim Financial Reports Instrument for Pre-Accession Integrated Public Financial Management Assessment International Road Assessment Program Internal Rate o f Return Integrated Safeguards Data Sheet

K lODOO MIGA M o F M o I LGPD N G O N P V NRSC PEFA PER PEPS P F M PP PIFC P IT P I U PPIAF PPP RAP RFP RPF RSL RSMCR S A I SDR SEETO TTFSE W B G W H O i s

Koridor 10 DruStvo sa OgraniEenom OdgovornoSCu Multilateral Investment Guarantee Agency Ministry o f Finance Ministry o f Infrastructure Local Government Property Department Non-Governmental Organization Net Present Value National Road Safety Council Public Expenditure and Financial Assessment Public Expenditure Review Public Enterprise ‘Putevi Srbije’ Public Financial Management Procurement Plan Public Internal Financial Control Project Implementation Team Project Implementation Unit Public-Private Infrastructure Advisory Facility Public-Private Partnership Resettlement Action Plan Request for Proposals Resettlement Policy Framework Road Safety L a w Road Safety Management Capacity Review State Audit Institution Special Drawing Rights South East Europe Transport Observatory Trade and Transport Facilitation in SEE The World Bank Group World Health Organization Zelenice Srbije (Serbian Railways)

Vice President: Shigeo Katsu Country Director: Ms. Jane Armitage

Sector Director: Peter D. Thomson Sector Manager: Henry Kerali

Task Team Leader: Richard Mart in Humphreys

FOR OFFICIAL USE ONLY SERBIA

CORRIDOR X HIGHWAY PROJECT

CONTENTS

Page

I . STRATEGIC CONTEXT AND RATIONALE ................................................................. 2 Country and sector issues .................................................................................................... 2

Higher level objectives to which the project contributes .................................................... 7

PROJECT DESCRIPTION ................................................................................................. 8

A . B . C .

Rationale for Bank involvement ......................................................................................... 7

I 1 . A . B . C . D . E .

I11 . A . B . C . D . E . F .

I V . A . B . C . D . E . F . G . H .

Lending instrument ............................................................................................................. 8

Project components ............................................................................................................. 9

Lessons learned and reflected in the project design .......................................................... 10

Alternatives considered and reasons for rejection ............................................................ 11

Partnership arrangements .................................................................................................. 12

Institutional and implementation arrangements.. .............................................................. 13

Monitoring and evaluation o f outcomes/results., .............................................................. 14

Sustainability ..................................................................................................................... 14

Critical risks and possible controversial aspects ............................................................... 14

Loadcredit conditions and covenants ............................................................................... 16

APPRAISAL SUMMARY ............................................................................................. 19 Economic and financial analyses ...................................................................................... 19

Technical ........................................................................................................................... 20

Governance and anti-corruption action plan ..................................................................... 20

Fiduciary ........................................................................................................................... 21

Environment ...................................................................................................................... 25 Safeguard policies ............................................................................................................. 26

Policy Exceptions and Readiness ...................................................................................... 27

Project development objective and key indicators .............................................................. 9

IMPLEMENTATION .................................................................................................... 12

. . .

Social ................................................................................................................................. 23

Annex 1: Country and Sector or Program Background ......................................................... 28

T h i s documen t has a restr icted d i s t r i bu t i on and may b e used by recipients only in the per formance of the i r official dut ies . I t s contents may not b e otherwise disclosed without World Bank authorization .

Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies ................. 35

Annex 3: Results Framework and Monitoring ........................................................................ 38

Annex 4: Detailed Project Description ...................................................................................... 42

Annex 5: Project Costs ............................................................................................................... 46

Annex 6: Implementation Arrangements ................................................................................. 47

Annex 7: Financial Management and Disbursement Arrangements ..................................... 48

Annex 8: Procurement Arrangements ...................................................................................... 55

Annex 9: Economic and Financial Analysis ............................................................................. 65

Annex 10: Safeguard Policy Issues ............................................................................................ 80

Annex 11: Governance and Anti-Corruption Action Plan ..................................................... 97

Annex 12: Project Preparation and Supervision ................................................................... 103

Annex 13: Documents in the Project File ............................................................................... 104

Annex 14: Statement o f Loans and Credits ............................................................................ 106

Annex 15: Country at a Glance ............................................................................................... 108

Annex 16: M a p IBRD 36855 .................................................................................................... 109

SERBIA

Borrower International Bank for Reconstruction and

CORRIDOR X HIGHWAY PROJECT

60.00 0.00 60.00 388.00 0.00 388.00

PROJECT APPRAISAL DOCUMENT

Development Total:

EUROPE AND CENTRAL ASIA

448.00 0.00 448.00

ECSSD

Date: June 12,2009 Country Director: Jane Armitage Sector ManagedDirector: Henry G. R. Kerali

Team Leader: Richard Martin Humphreys Sectors: Roads and highways (1 00%) Themes: Infrastructure services for private sector development (67%);Trade facilitation and market access (33%) Environmental screening category: Full Assessment

Project Financing Data

Project ID: P108005

Lending Instrument: Specific Investment Loan

[XI Loan [ 3 Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 388.00 Proposed terms: The variable spread loan has a final maturity o f twenty years including a grace period o f eight years.

Financing Plan (USSrn)

Borrower: Ministry o f Finance Kneza Mi losa 20 Serbia 11000 Tel: +38 1 1 136205 19 www.mfin. ,sr.gov. yu

Responsible Agency: K 1 0 D 0 0 19a Vlajkoviceva Street Belgrade Serbia

Estimated disbursements (Bank N/US$m) F Y I 10 I 11 I 12 I 13 I 14 I 15 I Annual Cumulative

25.00 50.00 75.00 150.00 60.00 28.00 25.00 75.00 150.00 300.00 360.00 388.00

Expected effectiveness date: September 30,2009 Expected closing date: December 3 1, 201 5 Does the project depart f rom the CAS in content or other significant respects? Ref: PAD I. C. Does the project require any exceptions from Bank policies? Ref: PAD I K G.

I s approval for any policy exception sought from the Board? Does the project include any critical r isks rated “substantial” or “high”? Ref: PAD III. E. Does the project meet the Regional criteria for readiness for implementation? Ref: PAD I K G.

[ ]Yes [XINO

[ ]Yes [XINO

[ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

Have these been approved by Bank management? [ ]Yes IN0

~

Project development objective Ref: PAD IL C., Technical Annex 3 The Project Development Objective i s to increase transport efficiency and improve traffic safety on the three project sections o f Corridor X, between N i s and Dimitrovgrad and Grabovnica and Donj i Neradovac respectively, and to improve road management and road safety in Serbia.

Project description [one-sentence summary of each component] Ref: PAD ILD., Technical Annex 4 Component 1 - The M-1 road to FYR Macedonia (E-75) - Corridor Xd. This component involves the construction o f two sections o f motonvay totaling 3 1.9 km between Grabovnica and Gradelica, and between Vladicin Han and Donj i Neradovac (Corridor Xd), together with consultant supervision o f the works;

Component 2 - The M 1-12 Road to Bulgaria (.E-80) N i s to Dimitrovgrad - Corridor Xc. This component involves the construction o f 8.67 km o f motonvay on a section o f the corridor between Dimitrovgrad and the border with Bulgaria, together with consultant supervision o f the works;

Component 3 - Road Safety: This component wil l support, inter alia, plans for: (i) road safety capacity building to support the establishment o f a Lead Agency in the form o f the National Road Safety Council (NRSC); (ii) creation o f a road safety performance framework; (iii) developing and launching a national road safety strategy; and

Component 4 - Implementation Assistance and Institutional Support: This component will include project management and implementation assistance, inter alia, the fol lowing sub- components: (i) independent environmental and social supervision directly reporting to the client; (ii) project managerial support to K10D00 to assist in the implementation o f the project; (iii) independent technical audit o f the c iv i l works; (iv) procurement assistance, and other necessary technical assistance, in the form o f individual consultants to K 1 ODOO; and (vi) technical assistance to support institutional strengthening in PEPS through the development o f a

Reform Action Plan.

Which safeguard policies are triggered, if any? Ref: PAD IKF . , Technical Annex 10 OP 4.01 Environmental Assessment;

OP 4.04 Natural Habitats; and OP 4.12 Involuntary Resettlement.

Significant, non-standard conditions, if any, for: Ref: PAD IIL F. Board presentation: There are no conditions for Board Presentation.

Loadcredit effectiveness: (i) The Borrower, through PEPS, has provided evidence satisfactory to the Bank, confirming, for al l road sections for which works are planned for calendar year 2009 under the Project, the availability o f adequate compensation amounts for the purposes o f expropriation; and

(ii) The Project Implementing Entity has procured and established accounting software, satisfactory to the Bank, for the purposes o f Project accounting and reporting.

Covenants applicable to project implementation: (i) the Project, under the guidance and supervision o f the Steering Committee. The Project Implementing Entity shall be responsible for handling the day-to-day management o f the Project including procurement, financial management, Project monitoring and evaluation, and reporting arrangements, as wel l as management o f environmental and social issues under the Project.

The Project Implementing Entity shall be responsible for the overall implementation o f

(ii) The Borrower shall, at a l l times throughout the duration o f the Project, maintain, adequately fund and cause the Project Implementing Entity to comprise qualified staff, including procurement and financial management specialists and an environmental safeguards expert, in adequate number and with terms o f reference satisfactory to the Bank;

(iii) The Borrower, through the Project Implementing Entity, shall monitor and evaluate the progress o f the Project and prepare Project Reports in accordance with the provisions o f Section 5.08 o f the General Conditions and on the basis o f monitoring and evaluation indicators agreed with the Bank. Each Project Report shall cover the period o f one (1) calendar quarter, and shall be furnished to the Bank not later than one (1) month after the end o f the period covered by such report. In addition, semi-annual reviews shall be conducted joint ly by the Borrower, the Project Implementing Entity and the Bank to review progress in Project implementation;

(iv) The Borrower, through the Project Implementing Entity, shall ensure that the Project Reports referred to in the preceding paragraph 1 report on the monitoring and implementation o f the requirements set forth in the Environmental Impact Assessments and the Resettlement Policy Framework;

(v) The Borrower shall, and shall cause PEPS and the Project Implementing Entity to ensure that: (a) the Project i s carried out in accordance with the respective terms o f the Environmental Impact Assessments and the Resettlement Policy Framework, and the policies, procedures and arrangements therein set forth are applied and implemented; and (b) the Environmental Impact Assessments and the Resettlement Policy Framework, or any provision thereof, shall not be amended, suspended, abrogated, terminated or waived or permitted to be amended, suspended, abrogated, terminated or waived, except with the prior written approval o f the Bank;

(vi) For purposes o f Components 1 and 2 o f the Project and prior to the commencement o f works for each proposed road section, the Borrower shall cause PEPS and the Project Implementing Entity to: (a) submit to the Bank for its approval: (i) the related section specific Resettlement Action Plan, including the relevant social assessment, in form and substance satisfactory to the Bank; and (ii) the related section specific Environmental Management Plan and Checklist, in form and substance satisfactory to the Bank; (b) ensure that the provisions o f said Resettlement Action Plan and Environmental Management Plan and Checklist are adequately included in the proposed contract(s) for said works; and (c) ensure that said Resettlement Action Plan i s disclosed and, unless the Bank shall otherwise agree, al l related, adequate compensation amounts are paid in full, al l in accordance with the related section specific Resettlement Action Plan and Environmental Management Plan and Checklist, the Resettlement Policy Framework and the Environmental Impact Assessments;

(vii) The Borrower, through the Project Implementing Entity, shall: (a) prepare, under terms o f reference satisfactory to the Bank, and furnish to the Bank on or about September 30,2012, a report integrating the results o f the monitoring and evaluation activities and setting out the measures recommended to ensure the efficient carrying out o f the Project and the achievement o f the objectives thereof during the period following such date; and (b) review with the Bank, on or about December 3 1,201 2, the report referred to in the preceding sub-paragraph (a), and thereafter take al l measures required to ensure the efficient completion o f the Project and the achievement o f the objectives thereof, based on said report and the Banks view on the matter;

(viii) For purposes o f Section 5.08 (c) o f the General Conditions, the report on the execution o f the Project and related plan required pursuant to that Section shall be furnished by the Borrower, through the Project Implementing Entity, to the Bank not later than six (6) months after the Closing Date;

(ix) The Project Implementing Entity shall provide to the Borrower not later than one (1) month after the Closing Date, for incorporation in the report referred to in Section 5.08 (c) o f the General Conditions al l such information as the Borrower or the Bank shall reasonably request for the purposes o f that Section.

(x) Prior to the signing o f each contract for works under the project, the Borrower shall take the necessary measures to submit to the Bank, evidence, satisfactory to the Bank, confirming the availability o f appropriate compensation amounts for the purposes o f expropriation;

(xi) The Borrower shall cause PEPS to submit to the Bank, by March 1 o f each calendar year throughout the duration o f the Project, for i t s prior review, the proposed road sections for which

works are planned to be undertaken by PEPS under its annual business plan in the course o f the same calendar year;

(xii) The Borrower shall ensure that the Project is carried out in accordance with the provisions o f the Anti-Corruption Guidelines;

(xiii) To facilitate the carrying out o f the Project and to accomplish the purposes o f the Loan, the Borrower shall make the appropriate arrangements to make the proceeds o f the Loan available to the Project Implementing Entity;

(xiv) The Project Implementing Entity shall, prior to the commencement o f works under the Project, procure a firm o f independent consultants, with qualifications and terms o f reference satisfactory to the Bank, to monitor the compliance o f each contract for works with the relevant section specific Environmental Management Plan and Checklist; and

(xv) The Borrower shall, not later than June 30,2010, adopt and submit to the Bank an action plan, in form and substance satisfactory to the Bank, for the reform o f PEPS.

Financial Covenants:

(i) The Borrower shall cause the Project Implementing Entity to maintain a financial management system in accordance with the provisions o f Section 5.09 o f the General Conditions;

(ii) The Borrower shall, and shall cause the Project Implementing Entity to, ensure that the Project i s carried out in accordance with the Financial Manual;

(iii) The Borrower/Project Implementing Entity shall have its Financial Statements audited in accordance with the provisions o f Section 5.09 (b) o f the General Conditions. Each audit o f the Financial Statements shall cover the period o f one (1) Fiscal Year o f the Project Implementing Entity. The audited Financial Statements for each such period shall be furnished to the Bank not later than six (6) months after the end o f such period; and

(iv) The Borrower, through the Project Implementing Entity, shall prepare and furnish to the Bank, not later than forty five (45) days after the end o f each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Bank.

I. STRATEGIC CONTEXT AND RATIONALE

A. C o u n t r y and sector issues

1. The political environment in Serbia has been eventful in recent years. O n January 20, 2008, Serbia held a first round o f presidential elections. Opposition parties resistant to reform earned a s l ight plurality o f votes, but short o f a majority needed to win outright. In February’s second round, President Tadic managed to win a majority with just over 50 percent o f the vote. But barely two weeks later, Kosovo declared independence. Parliament was dissolved and new parliamentary elections were scheduled for May, 2008. In late April, 2008 Serbia signed the European Union Stabilization and Accession Agreement (SAA), a major step toward European Union (EU) membership. On M a y 1 1, the Democratic Party scored a significant victory; and by June 2008 had assembled a governing coalition. After the election, Serbia has pressed forward on the path to EU integration. In October 2008, Parliament ratified the S A A , and i s moving forward to implement its trade liberalization elements ahead o f the EU, including-and despite mounting fiscal pressures-the unilateral elimination o f export tariffs.

2. The economy grew strongly until 2008, fuelled by aggregate demand, and on the back of significant economic changes since 2000. Real GDP growth averaged 6.2 percent in 2007 and 2008. Growth was fueled by high demand linked to a significant credit boom, expansionary fiscal policies, increases in real wage levels, and rapid increases in exports. Although exports grew rapidly, domestic demand grew even faster which resulted in very high import levels, and thus a widening current account deficit and private sector debt. Overall investment levels have remained roughly constant in recent years at about 24 percent o f GDP, while public investment has risen from 2.7 percent o f GDP in 2005 to an estimated 3.9 percent in 2008.

3. High fiscal and current account deficits, further aggravated by rapid credit growth (mostly foreign-currency denominated) left Serbia vulnerable to the current global crisis. Economic activity fel l sharply in the final quarter o f 2008 and slumped in the first few months o f 2009 and external adjustment has started. Growth in the last quarter declined to 2.8 percent (year-on-year) as compared to an average growth rate o f 6.5 percent in the previous three quarters. Estimates for the f i rs t quarter o f 2009 are even more negative: industrial output i s 16.9 percent lower and exports and imports declined by 33.5 and 35.2 percent respectively (in dollar terms) in the f i rst quarter o f 2009 compared to the same period the previous year. The banking system has weathered the external shocks so far, although credit has largely stagnated, although the large share o f foreign exchange or foreign exchange-indexed loans in the portfolios o f Serbian banks i s a cause o f concern and non-performing loans are increasing.

4. On January 16 2009, the Executive Board of the International Monetary Fund approved afifteen month SBA for SDR350.8 m. (about $516 m). In the following weeks, the continued deterioration o f the macroeconomic environment led the authorities to seek a strengthened economic program that could be supported by an extension and augmentation o f the Stand-By Arrangement. On March 26 2009, the Government and an IMF staff mission reached agreement o n an enhanced arrangement for some SDR 2.6 b i l l ion (around EUR 3 billion), equivalent to 560 percent o f Serbia’s quota or close to 10 percent o f i ts GDP. This was approved by the Executive Board o f the International Monetary Fund on M a y 15, 2009. The program period would be extended to 27 months and the arrangement would no longer be considered

2

precautionary. The Government’s program includes two main new elements: First, a large and balanced fiscal adjustment package to contain the 2009 deficit to 3 percent o f GDP. Adjustments will come from cuts in recurrent expenditure and nominal freezes-though capital and social spending will be largely protected-and mostly temporary revenue increases. Second, foreign banks have been asked to provide voluntary assurances to broadly maintain their commitment to Serbia and keep their subsidiaries wel l capitalized.

5. As in most emerging economies, medium-term growth prospects have been severely dampened, and the economy will be in recession in 2009. Serbia’s growth i s projected to decline to -2 percent o f GDP in 2009 and no growth in 201 0 (as per the macro-framework agreed between the IMF and the GoS urider the ongoing IMF’s SBA). As a supplement to the revised SBA for Serbia, the IMF also developed a downside macro scenario, in which growth for 2009 i s projected at -6 percent (and for 2010 the forecast i s -2.5 percent). This reflects a possible sharper contraction in aggregate demand as the impact o f the international crisis i s more severe and prolonged than init ial ly thought. The fiscal deficit i s also larger, equivalent to 4.6 percent o f GDP this year and 5.1 percent o f GDP next year. Additional budget financing and further adjustment measures would be needed under this scenario.

B. Transport Sector Background

6. The integration of the Serbian transport network with the core regional transport network is recognized as a key policy objective’ for the economic and social development of the country. Serbia i s crossed by the fol lowing segments o f the important Pan-European networks: (i) Corridor X with i t s branches Xb (Belgrade-Budapest) Xc, (NiS-Sofia), and Xd (NiS-FYROM), and forms part o f the SEETO regional ‘core network’, which together represent the most significant road and railway routes in Serbia. On Corridor X in Serbia, there are 792 km o f roads and 760 km o f railway lines; and (ii) Corridor VII, the Danube River, which flows through Serbia for a length o f 600 km connecting Central Europe via Serbia with the Black Sea, and forming part o f the South East multimodal axis.

7. The government has recently prepared a transport strategy, and an investment and action plan is now being prepared with support from the EU. The Ministry o f Infkastructure, following earlier support from the European Agency for Reconstruction (EAR), has defined a sustainable transport strategy.* The broad objectives o f the strategy are the following: (i) Integrate the transport network in Serbia into the Trans-European network; (ii) ensure the efficient use of each mode to reflect its comparative advantages; (iii) upgrade the service quality o f the transport system; (iv) increase traffic safety and security; (v) strengthen the transport market and its gradual deregulation; (vi) decrease the environmental impact o f the transport sector in accordance with the principles o f sustainable development; and (vii) establish stable financing for the transport sector. The next step i s the preparation o f a detailed Masterplan3 for each o f the sub-sectors, consistent with current and projected traffic volume for each o f the modes. Currently sector development plans and investment priorities are prepared with l i t t le consideration for the plans in other sub-sectors, or the overall fiscal envelope.

Government o f Serbia, (2007). Ministry o f Infrastructure (2007). Funding i s being provided by the European Union to prepare such a study.

3

8. Transport demand in Serbia is growing rapidly, reflecting the structural changes in the economy and the realignment of trade flows in the region. Road traffic in Serbia has been increasing annually at a rate o f between f ive and seven percent since 2000, with higher growth in and around the main urban areas. This trend i s expected to continue, exacerbating problems o f congestion in and around the main urban areas and road safety more generally. One study predicted that i t would increase by 2.5 times by 2025,4 and the estimate for road traffic growth on regional SEETO ‘core’ network i s sixty percent growth by 201 3. On the railways, from a l o w o f 5.4 mi l l ion tons in 1999 (compared to 29.5 mi l l ion in 1990), freight traffic has increased steadily to 14.9 mi l l ion tons in 2007 and, despite the current downturn, i s projected to increase in coming years. Rail freight transit traffic, carried largely o n Corridor X, has grown at over twenty percent per year in 2005-2006 and grew by fifteen percent in 2007. By contrast, passenger traffic on the railways, measured in passenger km, has nearly halved between 2001 and 2007. Air traffic has been growing strongly and i s predicted to continue, more than tripling by 2025.

THE ROAD SECTOR IN SERBIA

9. The number of registered road vehicles has been increasing annually since 1999, but at a modest rate. There are approximately 1.8 mi l l ion registered road vehicles in Serbia, with private cars representing about eighty three percent o f the total. The total fleet has been increasing by an average annual rate o f just over four percent since 1999 although actual growth i s l ikely to be much higher in and around the main urban areas where incomes have been growing faster. Motorization rates are compared here in terms o f number o f vehicles per 1,000 inhabitants and also in terms o f the number o f passenger cars per 1,000 inhabitants. On the former scale, the average motorization rate i s now estimated at about 235 vehicles per 1,000 inhabitants, in contrast to an average o f about 534 vehicles per 1000 inhabitants in the OECD countries in 2006 and in most o f the European Union coun t r i e~ .~ Comparing the motorization in terms o f passenger cars, Serbia at 15 1 passenger cars per 1,000 inhabitants i s lower than the EU- 25 motorization index o f 463 passenger cars per 1,000 inhabitantsa6 In addition, the vehicle fleet i s comparatively old, with an average age o f 15 years.

10. The road network in Serbia represents a major asset for the country, but the condition of the network remainspoor. It extends for some 38,600 km in Central Serbia, including 15,500 km of primary and secondary roads (and approximately 634 km o f motorways and semi- motorways), together with just over 23,000 kilometers o f tertiary, or local, roads. The primary road network also contains 2,638 bridges (with a total surface area o f approximately 800,000 m2) and 78 tunnels (of a total length o f 10,053 m). It i s estimated that the total value o f the asset i s about US$ 17.5 b i l l i ~n .~ A recent survey revealed that whilst thirty percent o f the total network was found to be in good condition, primarily main and regional roads, fifty three percent was in poor or very poor condition. The comparative figures for Croatia and Bosnia and Herzegovina, respectively, are thirty two percent good and twenty two percent, poor or very poor, and forty three percent good and twenty two percent poor or very poor respectively.

COWI, (2003). OECD Factbook 2008. European union Road Federation (2007) latest motorization figures for 2005 compared to Serbian motorization

Estimate f iom the official website o f the Serbian Government I). figures for 2006.

4

11. I n addition, Serbia’s ranking in international comparisons of the quality of infrastructure reveals that it scores poorly compared to regional comparators. The Global Competitiveness Report 2008-2009, published annually by the World Economic Forum, presents rankings from user surveys o f the quality o f infrastructure in 134 countries. The rankings indicate that infrastructure i s seen as placing Serbia at a competitive disadvantage in doing business, compared to selected regional comparators. Serbia i s ranked 83rd out o f 134 countries for the overall quality o f infrastructure, with only FYR o f Macedonia (8Sth), Bosnia and Herzegovina (1 07th) and Albania (1 08*) performing worst for South East European countries.’ In the 2009 Doing Business, a World Bank/IFC publication, Serbia was ranked 94th out o f 181 countries, down from 9 1 ” out o f 18 1 countries in the 2008 edition.

12. The level of injuries and fatalities caused by traffic accidents is a growing social and economic cost for the country. In the years 2003-2008, there were 5,232 fatalities and over 100,000 injuries resulting from road traffic crashes on the road network in Serbia. Injury and fatality on this scale makes this an economic and social problem, as wel l as a human tragedy. The latest available data for 2008 shows a total o f 16,651 road accidents on Serbia roads with 22,275 injuries and 897 fatalities. Fatalities from road traffic crashes have decreased from a peak o f over 1300 in 1998, but the number o f injury accidents and the number o f injuries have been growing markedly, growing by ten percent and thirty percent respectively since 2005. This i s a worrying trend for the authorities. In addition, although the fatality rate has been improving over the last 10 years to nearly f ive casualties per 10,000 vehicles, from the twelve casualties per 10,000 vehicles in 1998, i t remains about five times higher than that o f the best performing European Union countries. Whi le there i s no official estimate o f the socio-economic costs o f road crashes, a recent study has estimated these at 1.7 percent o f GDP.9

13. The Government has recognized the importance of road safety. The Road Safety Law (RSL) was adopted by the Serbian Parliament on May 29, 2009, the f i rst major update in legislation since the 1980s and incorporates many aspects o f the Acquis Communautaire. The new law, which will come into force in approximately six months to allow time to complete the necessary secondary legislation, envisages the establishment o f a new State multi-sectoral coordinating body, the National Road Safety Council, to bring together the key government stakeholders. The Ministry o f Interior has also recently increased enforcement o n the road network and introduced “hunters” in the form o f unmarked cars on open roads, and the Traffic Police have made several awareness campaigns l ike “School”, “Use o f helmets”, “Use o f Seat Belts”, among others.

14. The Government requested the assistance of the Global Road Safety Facility for support to undertake a road safety management capaci review. This study which was completed in 2007, presented a broad implementation plan.”The GRSF has also contributed to the costs o f a comprehensive International Road Assessment Program (iRAP) survey in Serbia, to achieve stakeholder consensus on a multi-sectoral strategy and an action plan for road safety,

* World Economic Forum (2008), The Global Competitiveness Report 2008-2009. ’ Antic B, The Costs of Traflc Accidents in the Republic of Serbia, Faculty of Transport and Traflc Engineering, University o f Belgrade, 2006. lo Vic Roads Intl./Jean Breen (2007).

5

and key c iv i l works improvements, to be financed through this project. As a result o f these studies, the Government, through the Ministry o f Infrastructure, has also requested the cooperation o f the World Bank to support the plans for: (i) road safety capacity building; (ii) creation o f a road safety performance framework; (iii) developing and launching a national road safety strategy; and (iv) the preparation and pi lot ing o f multi-sectoral road safety pilots." The implementatiofi o f these activities will represent a substantive start to improving road safety in Serbia.

15. Although expenditures in the road sector have increased markedly in nominal terms in the last four years, they remain inadequate. Total expenditures in the road sector have increased from approximately US$553 mi l l ion in 2005 to US$951 mi l l ion in 2008. Recurrent expenditure on maintenance activities remained largely unchanged, rising slightly from US$3 80 mi l l ion in 2005 to US$383 mi l l ion in 2008 - close to what i s estimated to be the required level for normal maintenance. However, total road financing needs for main and regional roads, excluding network upgrades and proposed new development expenditures, have been estimated to amount to US$806 mi l l ion per year12, equivalent to a projected 1.7 percent o f 2009 GDP, reflecting the existence o f a significant maintenance backlog amounting to US$1.45 billion. These figures also exclude the development o f the network and proposed upgrades for Corridor X-including Corridor Xb, Corridor Xc, Corridor Xd and the Belgrade Bypass, estimated to amount to some EUR 1.58 b i l l ion in total.

16. Recent w0rk13 by the Bank revealed that the limitations in financial resources do not solely account for the inadequate performance and unsatisfactory outcomes in the sector. The institutional arrangements and management structures, and their performance are themselves deficient. Whi le the provision o f additional financing wil l be important, and improving the predictability in the provision o f that financing, there are also significant concerns about the effectiveness and efficiency o f current expenditures in the sector, which will require significant commitment to overcome, notably: (i) inappropriate management system and structures; (ii) a lack o f clear goals and performance targets; (iii) an uncoordinated planning framework; (iv) inappropriate design standards and practices; (v) inadequate and under-motivated technical staffing; and (vi) a lack o f an operationally established proper Asset Management System. l4

THE GOVERNMENT'S PLANS FOR THE COMPLETION OF CORRIDOR x. 17. The Government regards the development of Corridor X as its key priority and wishes to develop and complete the core road infrastructure on Corridor X within the next 4 years. The objective i s to facilitate sustainable economic development and ensure that the country capitalizes on i ts geographical position to continue i t s development as a key transit country on the Trans-European Network. The National Infrastructure Council prepared the plan for infrastructure construction in the 2008-20 12 period which calls for an investment approximating EUR 1.58 b i l l ion for the completion o f the missing l inks on the road Corridor X in Serbia.

l1 Letter o f July 14,2008 by Minister o f I&-astructure to the World Bank. l2 Assuming the maintenance backlog i s cleared over a five year period. l3 World Bank (2008a).

being addressed with components in the ongoing World Bank project. The harmonization o f design and construction standards and the establishment o f an asset management system are 14

6

18. network in Serbia, as outlined in the broad Strategy:"

The following represent a summary of the key missing links on Corridor X on the road

The construction o f the second 2-lane carriageway o n 118 km o f motonvay between HorgoS - N o v i Sad (Corridor Xb); The construction o f a motonvay o n 98 km o f the section o f corridor between NiS and the border with Bulgaria at Dimitrovgrad (Corridor Xc); The construction o f a motonvay o n the corridor between Grabovnica and the border with FYR Macedonia (Corridor Xd); and The completion o f Sections 1-6 o f Belgrade Bypass, which would form an important section o f Corridor X.

B. Rationale for Bank involvement

19. There are three main reasons for the involvement o f the World Bank in this project:

0)

(ii)

(iii)

The Bank was asked to act as the Lead IFI for the preparation of the entire program for the two southern sections of Corridor X. The Government also asked the World Bank to contribute financing in parallel to the other IFIs and the Hellenic Plan for the Economic Reconstruction o f the Balkans (HiPERB). During project preparation, the Bank led the review o f the assessment o f technical and economic viability, the review o f the preparation o f the Resettlement Policy Framework, the two Corridor Level environmental impact assessments, and the review o f the proposed engineering design;

The Bank together with the World Health Organization (WHO) have taken a leading role internationally to improve road safety. The Bank hosts the Global Road Safety Facility (GRSF) that has been utilized in several countries to conduct a road safety management capacity review and to prepare second generation road safety projects. The GRSF has financed a road safety management capacity review and contributed to the costs o f a comprehensive iRAP survey in Serbia, to achieve stakeholder consensus o n a multi-sectoral strategy and an action plan for road safety, to be financed through this project; and

The Bank is well placed to define and implement support for institutional capacity building. There are significant needs for institutional support and capacity building in the areas o f road safety, and the management bodies in the sector. Building on i t s considerable experience worldwide and earlier in the region, the World Bank has the required expertise, and i s the Borrower's choice, to provide such support within or in parallel to the Bank financed project.

C. Higher level objectives to which the project contributes

20. The Government in Serbia has been explicit in its desire to complete the core road and rail infrastructure on Corridor X within its mandate.16 The objective i s to facilitate sustainable

l5 Government o f Serbia (2007). l6 As stated in Press Reports o f the 16" July 2008.

7

economic development and ensure that the country capitalizes on i ts geographical position to continue i t s development as a key transit country on the Trans-European Network. On February 5, 2009, the Government adopted an Action Plan17 for railroad and highway construction along the Corridor 10 route that calls for investing EUR 473 mi l l ion on roads and EUR 136 mi l l ion in railways in 2009.

21. The proposed project is consistent with the current Country Partnership Strategy (CPS) for Serbia, The 2007-201 1 CPS for Serbia outlines potential assistance across the Bank Group. Within the overarching framework o f European integration, the CPS supports three Government identified priorities: (i) encouraging dynamic private sector led growth to ensure incomes continue to converge with European levels through, inter alia, infrastructure investment; (ii) providing opportunities and broadening participation in growth; and (iii) managing emerging environmental and disaster r isks. For FY 1 0-FY 1 1 a road safetykighways project was planned in the CPS, without specifically mentioning Corridor X. However, in September 2008 the newly elected Government o f Serbia requested that the Bank reallocate the available resources in the CPS to provide technical and financial support for the construction o f the missing l i n k s on Corridor X. The rationale for the request was twofold: (i) upgrading the road infrastructure on this key corridor was expected to make a significant contribution to economic development both for Serbia and the region more generally; and (ii) this major infrastructure project was considered to have an important potential role in stimulating domestic demand, creating employment and mitigating, at least in part, the effects o f the unfolding economic crisis. Given the importance allocated to this project, and the support o f a l l stakeholders in the ruling coalition, the Bank agreed to meet the request.

22. The project also supports the implementation of conclusions of recent analytical work undertaken by the Bank The project wil l also assist the Government in implementing the recommendations o f the (FY08) Policy Notes on Options for the Development o f Corridor X and Improving the Management o f the Road Sector in Serbia, the (FY07) Road Safety Management Capacity Review, and the (FY09) iRAP Survey o f the Road Network. The recommendations from the Review were: (i) establishment o f a Lead Agency; (ii) creation o f a road safety performance framework; (iii) developing and launching a national road safety strategy; (iv) preparation and pi lot ing o f multi-sectoral road safety pilots; and (v) selected c iv i l works to address the most dangerous sections o f the primary network as revealed by the iRAP survey. In terms o f the former, the project wil l support technical assistance to develop an Action plan to continue institutional strengthening in the Public Enterprise Putevi Srbije (PEPS).

11. PROJECT DESCRIPTION

A. Lending instrument

23. The lending instrument proposed for the World Bank contribution to the program i s a Specific Investment Loan (SIL) in the amount o f EUR 275.2 m i l l i on (US$388 mi l l ion equivalent). The Borrower i s the Republic o f Serbia and the Implementing Entity i s Koridor 10 DruStvo sa .OgraniEenom OdgovornoiCu (K1 ODOO). The Borrower selected an IBRD Flexible Loan at 6 month LIBOR for Euro, plus variable spread with twenty (20) years o f maturity

~~

l7 Government o f Serbia (2009).

8

including eight (8) years o f grace period, level repayment pattern, commitment linked, and all conversion options.

B. Project development objective and key indicators

24. The Project Development Objective i s to increase transport efficiency and improve traffic safety on the three project sections o f Corridor X, between NiS and Dimitrovgrad and Grabovnica and Donj i Neradovac respectively, and to improve road management and road safety in Serbia. The project proposes to achieve this objective through the activities detailed in the following section. Progress towards the attainment o f the Project Development Objective wi l l be assessed through the fol lowing indicators:

Project Outcome Indicators: 0

0

0

0

0

Reduction in road user costs on the project section between NiS and Dimitrovgrad; Reduction in road user costs on the project sections between Grabovnica and Donji Neradovac; Reduce the rate (per vehicle km) o f road traffic death and serious injury on the project road sections; Action plan for the reform o f the Public Enterprise ‘Putevi Srbije’ adopted; and National road safety strategy and action plan with targets and monitoring indicators developed and launched.

Number o f km o f motonvay constructedupgraded. Lead Agency for road safety established and operational; Action plan for the reform o f the Public Enterprise ‘Putevi Srbije’ defined; and Two road safety pilot projects implemented.

Intermediate Outcome Indicators: 0

0

0

0

C. Project components

25. The total cost o f the Corridor X program i s estimated at EUR 1.3 billion, before taxes and contingencies, o f which the Wor ld Bank will be contributing EUR 275.2 mi l l ion (US$388 mi l l ion equivalent) in a parallel financed project with the Government o f Serbia. In addition, a number o f other sources have provisionally confirmed their commitment to provide parallel financing in the same manner: The European Bank for Reconstruction and Development (EBRD) has provisionally committed to lend EUR 150 million, and the European Investment Bank (EIB) has provisionally committed to lend EUR 600 million, and Greece wil l grant EUR 100 mi l l ion under i t s Hellenic Plan for the Economic Reconstruction o f the Balkans (HiPEREl) which wil l be allocated to one section o f the E-75 between Donj i Neradovac and Levosoje.

26. The Wor ld Bank fbnded project wil l consist o f the four components:

a) Component 1 - The M-1 road to FYR of Macedonia (E-75) - Corridor Xd. This component involves the construction o f two sections o f motonvay totaling 31.9 km between Grabovnica and Grdelica, and between Vladicin Han and Donj i Neradovac (Corridor Xd), hal f on new alignment, ha l f involving an upgrading o f the existing road. The component includes the relevant electrical and mechanical (E&M) facilities, annex areas, to l l plazas and buildings, interchanges, and some interconnecting roads to improve integration with the local road network. A full prof i le motonvay with four 3.75m traffic lanes and design speed o f 120 km/h i s planned for both sections. This component will

9

also include the procurement o f a consulting firm to act as the 'Engineer' for the c iv i l works o n the project, together with additional sections, in accordance with FIDIC contracts. Estimated total cost:" EUR 149.1 mi l l ion (US$ 210.2 mi l l ion equivalent);

b) Component 2 - The M 1-12 Road to Bulgaria (E-80) - Nis' - Dimitrovgrad - Corridor Xc. This component involves the construction o f 8.67 km o f motorway on a section o f the corridor between Dimitrovgrad and the border with Bulgaria. The component includes the relevant electrical and mechanical (E&M) facilities, annex areas, toll plazas and buildings, interchanges, and some interconnecting roads to improve integration with the local road network. The motorway wil l be built with four lanes, 120 km/hour design speed (100 km/hr per hour in the tunnels). This component wil l also include the procurement o f a consulting firm to act as the 'Engineer' for the c iv i l works on the project, to ether with additional sections, in accordance with F I D I C contracts. Estimated total cost:" EUR 113.3 mi l l ion (US$ 159.7 mi l l ion equivalent);

c) Component 3 - Road Safety: This component wil l support plans for: (i) road safety capacity building to support the establishment o f a Lead Agency in the form o f the National Road Safety Council (NRSC); (ii) creation o f a road safety performance framework; (iii) developing and launching a national road safety strategy; (iv) preparation and pi lot ing o f two multi-sectoral road safety pilots; and (v) the procurement and establishment o f road safety database and other road safety equipment. Estimated total cost: EUR 2.1 mi l l ion (US$ 2.9 mi l l ion equivalent); and

d) Component 4 - Implementation Assistance and Institutional Support: This component wil l provide project management and implementation assistance to Koridor 10 DruStvo sa OgraniEenom OdgovornogCu (K1 ODOO). It will include the fol lowing sub-components: (i) the procurement o f a separate independent environmental and social supervision directly reporting to K 1 0 D 0 0 for the implementation o f the project, together with additional sections; (ii) the procurement o f a firm to provide project managerial support to K 1 0 D 0 0 to assist in the implementation o f the project, together with additional sections; (iii) the procurement o f a firm to undertake an independent technical audit o f the c iv i l works for the implementation o f the project, together with additional sections; (iv) the procurement o f procurement assistance, and other necessary technical assistance, in the form o f individual consultants to K 1 0 D 0 0 for the implementation o f the project, together with additional sections; (v) the procurement o f vehicles for K1 ODOO; (vi) necessary training for K l OD00 staff; (vii) incremental operating expenses for K 1 OD00 over the l i f e o f the project; and (viii) technical assistance to support institutional strengthening in PEPS through the development o f a Reform Action Plan, and technical assistance to implement the plan subsequently. Estimated total cost: EUR 9.98 mi l l ion (US$ 14 mi l l ion equivalent).

D. Lessons learned and reflected in the project design

27. Over the past years, the Bank has assisted the Government of the Republic of Serbia in the road sector through a number of interventions: (i) the Transport Rehabilitation Project

'* Including works supervision, but net o f a l l taxes and duties, and a l l contingencies. l9 Including works supervision, but net o f a l l taxes and duties, and a l l contingencies.

10

(ongoing); (ii) Trade and Transport Facilitation Project (Closed); (iii); a Road Safety Management Capacity Review, funded by the Global Road Safety Facility (FY07); (iv) a Policy Note o n Improving the Management and Financing o f the Road Sector (FY08); (v) a Policy Note on the Options for Developing Corridor X (FY09); (v) A PPIAF funded study to examine the options for E-Tolling on the Highway Network (FY09); and (vi) a Public Expenditure Review (Ongoing for late FY09 delivery). The main lessons learned from these activities and other relevant projects can be summarized as follows:

a. The need to implement allprojects through existingpublic sector structures. There is a considerable amount o f evidence that the use o f self-standing Project Implementation Units, whilst reducing the r isks to lenders and donors, do l i t t le to build capacity or transfer knowledge to the hosting implementing agencies. The Wor ld Bank has taken the decision, wherever possible, that al l new bank financed projects should be mainstreamed within existing public sector bodies. This project wil l be implemented by KlODOO, a daughter company o f the Public Enterprise Putevi Srbije (PEPS). The expectation i s that, with some necessary training in Bank processes, financial management and procurement, al l necessary sk i l ls wil l exist in the company;

b. Improving the overall management of the national road network remains a priority. This can be achieved through the introduction o f modern road management systems and design standards, improved management and procurement o f civil works contracts. The Bank financed Transport Rehabilitation Project has been instrumental in reforming road management, road maintenance practices, and introducing output and performance based contracting o n a pi lot basis - strengthening capabilities to implement, inter alia, measures to plan and budget road maintenance expenditures, improve road safety, to undertake an extensive program o f road maintenance and rehabilitation, involving the private sector, using the latest developments and technologies, and to mitigate the adverse effects on the environment; and

c. Greater efforts are required to reduce road traf$c accidents. Addressing this problem will require increased resources, greater co-ordination between stakeholders to improve road conditions, driver behavior and enforcement, and increased awareness o f safety at each stage o f the project cycle. The revitalization o f the National Road Safety Council, a new Lead Agency supported by a small secretariat, will be essential for an appropriate and coordinated response to the road safety problem. In addition, a recent iRAP survey o f 3,000 km o f the road network (or eleven percent o f the total) found significant risk ratings for considerable lengths o f the network, and recommended a major program o f improvements involving: (i) shoulder sealing; (ii) introduction o f signalized crossings; (iii) introduction o f overtaking lanes; (iv) road surface improvements; and (v) the introduction o f roundabouts.

E. Alternatives considered and reasons for rejection

28. A half motorway was considered and rejected. At feasibility stage, the prospect o f transverse phasing, either only constructing ha l f a motorway, or constructing ha l f structures, and normal profile road way, was investigated by the consultant working on the E-75. One section o f Corridor X between Horgog and N o v i Sad was constructed in this manner and so there was

11

country experience. However, the consultants rejected both options, as the incremental discounted net benefits were found to be modest. In addition, greater knowledge about the safety implications for a ha l f motonvay vis-a-vis a full motonvay in Serbia and elsewhere, means that this option was rightly rejected.

29. A reduced profile cross-section was considered. The relatively modest traffic volumes on both the Corridor X c and Corridor Xd suggested that the appropriate technical solution for both sections might be a four lane motonvay for l o w traffic volume (defined as less than 10,000 vehicles per day), proposed in the French Motonvay Standards.*' The actual lane width provisionally proposed was 3.75m in the two outer lanes, 3 meters in the two overtaking lanes, with a 1 meter paved shoulder and a median o f 4 meters. This options was provisionally estimated to reduce the costs by between fifteen and seventeen percent. However, this option was rejected for two reasons: (i) strong Borrower preference for the full prof i le despite greater cost and slightly reduced economic viability; and (ii) the proposed narrow inner lane i s currently incompatible with Serbian law.

30. The original technical alignment for the E-80 was rejected at public consultation stage. The original alignment for the E-80 along 28 km in Pirot area (from KP 52 to KP SO), and along 7 km in Dimitrovgrad area ( f iom KP 94 to KP l O l ) , was rejected during consultation for the Spatial Plan. The fol lowing changes were proposed, accepted, and finally adopted in 2006: (i) instead o f constructing the motonvay along the existing road along Nisava river in Pirot, a new alignment in the mountains to the south was selected - although the Government i s currently considering reopening discussions on the alignment; (ii) instead o f constructing the motonvay to the south o f Dimitrovgrad, a new alignment was selected to the north o f the town. These changes reflected the concern o f affected municipalities, who based on the information presented, felt that their water supply might be affected by the proposed alignment. As a result, a new alignment was identified through dif f icult terrain, with unstable slopes, raising costs markedly. Several other revisions o f the proposed alignment were made to reduce environmental and social impacts, for example creating a new alignment adjacent to the Sicevo Gorge Nature Park, rather than fol lowing the existing road which passes through the Park.

111. IMPLEMENTATION

A. Partnership arrangements 3 1. The project is part of a larger parallel financed investment program for the Corridor. This project will be implemented as part o f a larger program for Corridor X development, and parallel financing has been pledged by the EIB in the amount o f EUR 600 mi l l ion for the E-75 and E-80, the EBRD in the amount o f EUR 150 mi l l ion for the E-80. The provisional dates for EBRD and EIB Board submission are July and September 2009, respectively. The last 15.8 km o f the E-75 between Levosoje and Donj i Neradovac wil l be financed jo int ly by HiPERB and the Government o f Serbia. European Union procurement guidelines will be used on this section.

32. The use of harmonized procurement documentation and guidelines, financial management, reporting, and safeguard policies and procedures have been agreed among the IFIs. The Government asked the World Bank to act as lead IF1 in the preparation o f the entire

*' French Ministry o f Public Works, Transport and Housing, Paris (2000).

12

program, and contribute in parallel to the IF1 financed program. During project preparation, the Bank led the assessment o f technical and economic viability, the review o f the necessary social safeguards and the environmental impact assessments, and the review o f the proposed design. Under implementation, the Bank wil l be formally responsible only for the supervision o f those sections where it is contributing to the financing. At the request o f the Government, i t i s expected that harmonized bidding documents, financial management requirements, reporting requirements, safeguard policies and procedures, and World Bank Procurement Guidelines, will be used by the other IFIs for their respective parallel financed sections. Bank financing wil l also pay for the supervision consultants, reporting to K 1 0 D 0 0 , for works, environmental and social aspects, and other implementation assistance and institutional support for the project and other sections as agreed with the Bank. The Wor ld Bank’s formal supervision will be restricted to only those sections where it i s contributing to the financing.

B. Institutional and implementation arrangements

33. Koridor 10 DruStvo sa Ogranitenom Odgovornogh (KlODOO) has been established to implement the program. K 1 0 D 0 0 has been delegated the responsibility for managing the construction o f the entire Corridor X program, which comprises five main components: (i) the north section o f Corridor X from N o v i Sad to HorgoS o n the border with Hungary; (ii) the completion o f the Belgrade bypass; (iii) the E-75 from Grabovnica to Levosoje 20 km north o f the border with the FYR o f Macedonia; (iv) the 22 km section o f the E-75 between Levosoje and Presevo on the border with FYR o f Macedonia, which i s currently under construction with domestic financing and will be completed in June 2009; and (v) the E-80 from Prosek to Dimitrovgrad on the Bulgarian border.

34. KlODOO is a daughter company of Public Enterprise Putevi Srbije (PEPS), It was created by the decision o f the Management Board o f the Public Enterprise Roads o f Serbia (PEPS) o n January 22, 2009, after the earlier authorization o f the Government.21 The Company was registered on February 4, 2009, and established with a budget o f RSD 125 mi l l ion for 2009 and a similar amount in 2010. The plan i s that i t will have a total staff o f approximately 31, and wil l be supported by both PEPS and external specialists. A Board o f Management consisting o f a President and two Directors has been appointed to lead the new company. The three directors function as a team and share al l responsibilities at the same level. Formally, the Directors report to the PEPS Board once a year. K 1 0 D 0 0 was established in partial response to concerns over the efficiency and effectiveness o f expenditures in PEPS (see paragraph 15).

35. The implementation of the E-75 and E-80 will be undertaken by employees of the newly established company. K1 OD00 will have the overall responsibility for project implementation. These responsibilities wil l include day-to-day management o f the project, procurement, financial management, reporting and liaison with the Bank. K 1 0 D 0 0 will be staffed with specialists familiar with Wor ld Bank procurement and financial management requirements. A firm will be hired to assist K 1 0 D 0 0 with the management o f the project, together with an individual consultant to act as a procurement advisor in the short term. A Steering Committee has been established under the Office o f the Deputy Prime Minister, with representation from al l the stakeholders: Ministry o f Infrastructure, Ministry o f Finance, the Prime Minister’s Office, PEPS, and i t s daughter company, K 1 ODOO.

*’ Decision o f the Government 05 No. 340-582012008 o f December 19,2008.

13

C. Monitoring and evaluation of outcomes/results

36. Monitoring and evaluation of results and outcomes of the Project will be carried out by the staff of the implementing agency, KIODOO. This wil l include review and monitoring o f the Project performance according to the established Results Framework and Monitoring indicators (see Annex 3). Project performance wil l be assessed through a number o f quantitative indicators and qualitative assessments. Indicators wil l be measured against the agreed targets and will be compared to the defined baselines. Baseline data i s either available, or easily obtainable at l i t t le expense. Project progress reports, including monitoring indicators and reporting on the implementation o f the requirements set forth in the Environmental Impact Assessments and the Resettlement Policy Framework, wil l be prepared by KlODOO on a quarterly basis and submitted for Bank review. In addition, semi-annual reviews shall be carried out each year, jo int ly by the Borrower and the Bank together with other participating IFIs and bilateral donors, to measure progress made in implementing the Project. The semi-annual reviews shall cover, inter alia: (a) progress made in meeting the Project objectives; and (b) overall Project performance against Project monitoring indicators. A Mid-Term Review wil l be undertaken on or about December 3 1, 2012 reviewing the implementation o f the project and setting out the measures recommended to ensure the continued efficient implementation o f the Project and the achievement o f the objectives by the formal closing date.

Rating

S

S

D. Sustainability

37. The risks to the sustainability of the constructed sections of motorway in the project are considered to be low. The proposed investments will contribute to the development o f the Corridor X, the key axis in the Serbian road network, and the major priority for the Government o f the Republic o f Serbia. The improvement o f the road infrastructure on these corridors, and the sustainability o f the improvement, i s seen as a key contributor to improving the economic competitiveness o f the Serbian economy, and poverty alleviation in i t s broadest sense. The constructed sections wil l be handed back to PEPS to be maintained upon formal handover after the completion o f the works, and PEPS wil l collect revenues and maintain the sections o f motonvay, as it currently does for the existing motonvay network. The Government i s committed to reform the management o f the road sector, and there i s support in the project both to develop a reform action plan, and after adoption, assist in the implementation.

Risk Minimization Measure Residual Risk Rating

M The World Bank provided a policy note for “Improving the Management and Financing o f the Road Sector” in July 2008. Technical assistance i s included in the project to develop a Reform Action Plan for PEPS. In addition, a Road Database i s currently being prepared under the existing project and should be complete at the end o f 2008, and fully established in m id 2009.

International consultants w i l l be hired to undertake M random technical audit o f completed works to ensure

E. Critical risks and possible controversial aspects

38. The fol lowing have been identified as the main risks in the implementation o f the project:

Table 1 - Critical project-related risk ratings Risk

Public Enterprise ‘Putevi Srbije’ (PEPS) was established following the passage o f the Roads Law in 2005. W h i l s t institutional reform has started, i t has not been completed, and the performance o f the institution in terms o f strategic planning, budgeting and management o f the network has not been strong. Governance in the country and the sector i s a concern - and large investment

14

projects increase the incentives for stakeholders to collude to the detriment o f the sustainability o f the investments.

Belgrade, was established on January 22, 2009 to take over from PEPS the overall responsibility for the development o f Corridor X - this company has no track record o f workin with the IFIs. The sheer scale o f this project, together with the Government’s other plans on Corridor X, and the unfolding economic crises, engenders a serious risk o f crowding out o f necessary expenditures in other sectors and within the sub-sector.

The sheer scale o f this project, together with the Government’s other plans on Corridor X, and the unfolding economic crises, means that counterpart funds may not be available for expropriation or for construction to proceed to schedule.

The parallel finance from the other financing bodies - the EBRD, the EIB and HiPERB may not materialize, threatening the technical and economic viability o f the Bank financed section. The capacity o f the local design institutes i s good, but management o f the design process has been weak up to this point - leading to a low quality preliminary design. In addition, modern approaches to incorporating environmental or road safety issues in the design are not strong. There i s also a related risk that the preparatory work for existing bank financed work and government funded work could be crowded out

Internal controls. Since the implementing entity i s newly established, appropriate system o f internal controls i s s t i l l in the process o f instituting.

M

S

S

quality and sustainability o f investments; A second layer o f independent technical audit, as pan o f and funded by, the World Bank for normal supervision o f the project; Procurement controls to ensure the reliability o f cost estimates, detect over-pricing through bid analysis, supervision control over contract variations and dissemination o f the complaints handling mechanism in bidding documents; and Enhanced supervision by the Bank through field-based fiduciary, safeguards and technical staff, with frequent missions by staff from headquarters.

KlODOO will work closely with PEPS and hire professionals, paying the market rate, with experience o f working with IFIs. In addition, the project will finance technical assistance to S U ~ ~ O K KlODOO in any area where i t i s considered that there are capacity limitations.

The transport team i s working to provide timely and substantive advice on priority expenditures both within the sector and in other sectors, to allow the project to go forward. A transport chapter for the Programmatic PER was recently completed (FY09).

The investment program i s seen by the Government as a key part o f i ts response to the unfolding economic crisis, and i s expected to provide a substantial stimulus to the Serbian economy. However, the risk o f a marked deterioration in the budget could engender a delay in implementation. The Government i s asked to confirm the availability o f expropriation monies and counterpart funds covenant in the project. In th is regard, the passage o f the new expropriation law, scheduled for March 2009, i s likely to reduce the financial cost o f expropriation, as i t allows for the possibility o f offering comparable public lands in lieu o f financial compensation.

The other three institutions have provisionally committed their finance to the project, and in the case o f EBRD expect to go to their Board in July 2009. EIB wil l follow in September 2009. T h i s has been confirmed in writing. K1 OD00 i s hiring a firm o f international consulting engineers to manage the design process, review the quality o f the design, assist in the evaluation process, and assist in the management o f the project and the supervision o f the works. In addition, short term consultants are being provided by the EIB to review the design and the tunnels.

Appropriate system o f internal controls i s institllted for the project. System o f internal controls developed generally within K10D00, are supplemented by controls and procedures to be applied for the project in a financial manual to be prepared. There i s no history o f

L

M

M

M

*M

S

15

Financial accounting and reporting. The Company does not have accounting software at the moment.

the level o f the entity’s compliance with instituted controls.

used for project accounting and reporting. The software needs to produce the quarterly IFRs to be submitted to

S Acceptable accounting software wi l l be acquired to be M

F. Loadcredit conditions and covenants

39. Additional conditions for Effectiveness: (i) The Borrower, through PEPS, has provided evidence, satisfactory to the Bank, confirming, for a l l road sections for which works are planned for calendar year 2009 under the Project, the availability o f adequate compensation amounts for the purposes o f expropriation; (ii) There is one financial management condition o f effectiveness as presented in the table below:

Overall Risk Rating S M

40. Project Covenants: the fol lowing represent the agreed covenants for the project:

Description Acquisition and establishment o f acceptable accounting software to be used for project accounting and reDortine

The Project Implementing Entity shall be responsible for the overall implementation o f the Project, under the guidance and supervision o f the Steering Committee. The Project Implementing Entity shall be responsible for handling the day-to-day management o f the Project including procurement, financial management, Project monitoring and evaluation, and reporting arrangements, as wel l as management o f environmental and social issues under the Project.

Responsible entity Koridor 10 DruBtvo sa OgraniEenom OdgovomoBCu (K1 ODOO)

The Borrower shall, at al l times throughout the duration o f the Project, maintain, adequately fund and cause the Project Implementing Entity to comprise qualified staff, including procurement and financial management specialists and an environmental safeguards expert, in adequate number and with terms o f reference satisfactory to the Bank;

The Borrower, through the Project Implementing Entity, shall monitor and evaluate the progress o f the Project and prepare Project Reports in accordance with the provisions o f Section 5.08 o f the General Conditions and on the basis o f monitoring and evaluation indicators agreed with the Bank. Each Project Report shall cover the period o f one (1) calendar quarter, and shall be furnished to the Bank not later than one (1) month after the end o f the period covered by such report. In addition, semi- annual reviews shall be conducted jo int ly by the Borrower, the Project Implementing Entity and the Bank to review progress in Project implementation;

The Borrower, through the Project Implementing Entity, shall ensure that the Project Reports referred to in the preceding paragraph 1 report on the monitoring and implementation o f the requirements set forth in the Environmental Impact Assessments and the Resettlement Pol icy Framework;

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The Borrower shall, and shall cause PEPS and the Project Implementing Entity to ensure that: (a) the Project i s carried out in accordance with the respective terms o f the Environmental Impact Assessments and the Resettlement Policy Framework, and the policies, procedures and arrangements therein set forth are applied and implemented; and (b) the Environmental Impact Assessments and the Resettlement Policy Framework, or any provision thereof, shall not be amended, suspended, abrogated, terminated or waived or permitted to be amended, suspended, abrogated, terminated or waived, except with the prior written approval o f the Bank;

For purposes o f Components 1 and 2 o f the Project and prior to the commencement o f works for each proposed road section, the Borrower shall cause PEPS and the Project Implementing Entity to: (a) submit to the Bank for its approval: (i) the related section specific Resettlement Act ion Plan, including the relevant social assessment, in form and substance satisfactory to the Bank; and (ii) the related section specific Environmental Management Plan and Checklist, in form and substance satisfactory to the Bank; (b) ensure that the provisions o f said Resettlement Action Plan, Environmental Management Plan and Checklist are adequately included in the proposed contract(s) for said works; and (c) ensure that said Resettlement Action Plan i s disclosed and, unless the Bank shall otherwise agree, al l related, adequate compensation amounts are paid in full, al l in accordance with the related section specific Resettlement Action Plan and Environmental Management Plan and Checklist, the Resettlement Policy Framework and the Environmental Impact Assessments;

The Borrower, through the Project Implementing Entity, shall: (a) prepare, under terms o f reference satisfactory to the Bank, and furnish to the Bank on or about September 30, 2012, a report integrating the results o f the monitoring and evaluation activities and setting out the measures recommended to ensure the efficient carrying out o f the Project and the achievement o f the objectives thereof during the period following such date; and (b) review with the Bank, on or about December 31, 2012, the report referred to in the preceding sub-paragraph (a), and thereafter take al l measures required to ensure the efficient completion o f the Project and the achievement o f the objectives thereof, based on said report and the Bank’s view on the matter;

For purposes o f Section 5.08 (c) o f the General Conditions, the report o n the execution o f the Project and related plan required pursuant to that Section shall be furnished by the Borrower, through the Project Implementing Entity, to the Bank not later than six (6) months after the Closing Date;

The Project Implementing Entity shall provide to the Borrower not later than one (1) month after the Closing Date, for incorporation in the report referred to in Section 5.08 (c) o f the General Conditions al l such information as the Borrower or the Bank shall reasonably request for the purposes o f that Section.

Prior to the signing o f each contract for works under the project, the Borrower shall take the necessary measures to submit to the Bank, evidence, satisfactory to the Bank,

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confirming the availability o f appropriate compensation amounts for the purposes o f expropriation;

(xi) The Borrower shall cause PEPS to submit to the Bank, by March 1 o f each calendar year throughout the duration o f the Project, for its prior review, the proposed road sections for which works are planned to be undertaken by PEPS under i t s annual business plan in the course o f the same calendar year;

(xii) The Borrower shall ensure that the Project i s carried out in accordance with the provisions o f the Anti-Corruption Guidelines22;

(xiii) To facilitate the carrying out o f the Project and to accomplish the purposes o f the Loan, the Borrower shall make the appropriate arrangements to make the proceeds o f the Loan available to the Project Implementing Entity;

(xiv) The Project Implementing Entity shall, prior to the commencement o f works under the Project, procure a firm o f independent consultants, with qualifications and terms o f reference satisfactory to the Bank, to monitor the compliance o f each contract for works with the relevant section specific Environmental Management Plan and Checklist; and

(xv) The Borrower shall, not later than June 30, 2010, adopt and submit to the Bank an action plan, in form and substance satisfactory to the Bank, for the reform o f PEPS.

41. Financial Covenants:

The Borrower shall cause the Project Implementing Entity to maintain a financial management system in accordance with the provisions o f Section 5.09 o f the General Conditions;

The Borrower shall, and shall cause the Project Implementing Entity to, ensure that the Project i s carried out in accordance with the Financial Manual;

The Borrower/Project Implementing Entity shall have i t s Financial Statements audited in accordance with the provisions o f Section 5.09 (b) o f the General Conditions. Each audit o f the Financial Statements shall cover the period o f one (1) Fiscal Year o f the Project Implementing Entity. The audited Financial Statements for each such period shall be furnished to the Bank not later than six (6) months after the end o f such period; and

The Borrower, through the Project Implementing Entity, shall prepare and furnish to the Bank, not later than forty five (45) days after the end o f each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Bank.

22 “Anti-Corruption Guidelines” means the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15,2006.

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IV. APPRAISAL SUMMARY

A. Economic and financial analyses

42. The Economic Analysis of the E-75 and the E-80. The economic evaluation has been undertaken at a corridor level for the whole IF1 funded program; the construction o f 83 km o f motonvay on the E-80 corridor and the construction o f 74 km o f motonvay on the E-75 corridor, and at a section level for the three World Bank funded sections. The economic analysis was undertaken using the HDM-4 model, using the conventional approach o f comparing the estimated road users and agency benefits and costs in the ‘do-something’ scenario, when the new road i s constructed, against the ‘do-minimum’ scenario, involving the status quo, and the continuation o f the current maintenance regime. I t i s worth noting that the traditional emphasis on the ‘narrow’ direct project costs and benefits under the static equilibrium model are l ikely to result in a conservative estimate o f economic viability, as it overlooks the wider impacts o n the production and distribution patterns, locational and employment impacts, and the indirect, second round, effects f rom the increased expenditures in the domestic economy.

43. Component 1: The M-1 road to F Y R of Macedonia (E-75) - Corridor Xd. This component involves the construction o f 31.9 km o f motonvay in two sections between Grabovnica and Levosoje (Corridor Xd), hal f on new alignment, ha l f involving an upgrading o f the existing road. The actual sections to be financed by the Wor ld Bank are the Grabovnica to Grdelica section o f 5.6 km, and the Vladicin Han to Donj i Neradovac section o f 26.3 km. This component accounts for approximately 46 percent o f total project costs and the Net Present Value (NPV), using a 12 percent discount rate, has been estimated at EUR 25.9 mi l l ion with an Economic Internal Rate o f Return (EIRR) o f 12.6 percent at the corridor level, and an N P V o f EUR 64.5 mi l l ion and EUR -0.27 million, and EIRR o f 18.3 percent and 11.9 percent respectively for the two sections.

44. Component 2 - The M 1-12 Road to Bulgaria (E-80) - Nis’ - Dimitrovgrad - Corridor Xc. This component involves the construction o f 8.67 km o f motonvay on a new alignment to the north o f the town o f Dimitrovgrad close to the border with Bulgaria. The proposed new motonvay wil l form part o f the new motonvay o f 83.45 km from Prosek al l the way to the Bulgarian border. This component accounts for approximately 37 percent o f total project costs and the Net Present Value (NPV), using a 12 percent discount rate, has been estimated at EUR 32.6 mi l l ion with an EIRR o f 12.7 percent for the entire corridor, and a N P V o f -31.21 million, and an EIRR o f 5.9 percent for the specific section.

45. Appropriate sensitivity analysis has been undertaken for both components. The sensitivity analysis has tested the impact o f a 10120 percent increase/decrease in certain key parameters in the economic appraisal, such as accident costs, the value o f time, the amount o f diverted traffic, and the capital costs for the project. The impact o f a delay in the completion o f the project, by one and two years, was also tested. The results, which are presented in Annex 9, suggest that the economic viability o f the project i s relatively robust, with the defined changes in the key parameters having little impact on overall viability.

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B. Technical

46. The preliminary engineering designs for the E-75 and E-SO were prepared for each sub-corridor by two institutes, the Highway Institute and the Transportation Institute (CIP). Both o f these institutes are located in Belgrade, and all works was undertaken under the supervision o f PEPS. The project was submitted to public consultation and the alignment o f the E-80 was amended, as noted earlier, in accordance with the outcomes o f this consultation. The main design i s being prepared by the same institutes, and the main designs for three sections will be completed by the end o f June 2009.

47. For the E-75 Corridor to FYR of Macedonia. A full prof i le motonvay with four 3.75m traffic lanes and design speed o f 120 km/h i s planned for the sections between Grabovnica- Grdelica and between Vladicin Han and Levosoje; four 3.5m traffic lanes and a design speed o f 100 km/h is planned for the more dif f icult gorge section between Grdelica and Vladicin Han and within the tunnels. The proposed motonvay wil l include five tunnels: 1804 m, 11 12 m, 325 m, 200 m, 150 m long. Long tunnels wil l be equipped with electrical and mechanical works in accordance with European standards for tunnel safety conditions. Monitoring centers wil l be implemented. About ha l f o f the missing section i s a new alignment, the other ha l f i s a widening o f the existing road (works to be done under traffic conditions). The Bank financed section will involve two sections between Grabovnica - Grdelica (5.6 km) and between Vladicin Han and Donj i Neradovac (26.3 km).

48. For the E-SO Corridor to Bulgaria. A full profile motonvay with four 3.75m traffic lanes and design speed o f 120 km/h i s planned along the entire 83.45 km. The proposed new motonvay wil l be built on a new alignment all the way, with the exception o f a 5 km long section between Pirot and Dimitrovgrad where the existing road i s used as one carriageway o f the motonvay. This section o f the IF1 funded program wil l include 12 tunnels: 1000 m, 916 m, 550 m, 347 m long, the others below 251 m. Long tunnels will be equipped with electrical and mechanical works in accordance with European standards for tunnel safety conditions. Monitoring centers wil l be implemented. The Bank financed section wil l involve 8.67 km o f motonvay on a new alignment around Dimitrovgrad at the eastern end o f the corridor.

49. The main design, bill of quantities and cost estimates, are to be reviewed by two international consultants financed by the Western Balkans Facility.23 The alignment was reviewed by the Bank appraisal team. Cost estimates reflect June 2008 prices and are based on the preliminary engineering design, validated by the initial main design works, and updated to February 2009. The prevailing unit rates for c iv i l works were checked against effective rates in similar works under Bank-financed projects in the region, recent costs o f foreign experts from highway projects and recent price quotations for equipment.

C. Governance and anti-corruption action plan

50. The GAC Action Plan for this Project (see Annex 11) is designed to strengthen the procurement and financial management systems and procedures used by the Kl ODOO, with specific actions to protect the Project. The G A C Action Plan i s based o n experience from similar Bank financed projects in Serbia, and elsewhere. The G A C Action Plan aims to reduce

23 A t rus t fund established and managed by the European Investment Bank.

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possible corruption in the Project through the application o f transparent and wel l documented procedures based on the analysis o f r isks and the governance environment. In addition, the Borrower wil l be required to implement the project in accordance with the 2006 Anti-Corruption guideline^.^^ These will be supported by improved financial management controls incorporated in Project implementation, as summarized below:

0 Hiring international consultants to support K1 OD00 to apply transparent procedures for administering the designated account and to produce more efficient, equitable and needs- based expenditure programs;

0 Hiring reputable international consultants to undertake random technical audit o f completed works to ensure quality and sustainability o f investments;

0 A second layer o f independent technical audit o n the Bank financed sections, funded by the World Bank’s supervision budget, and forming part o f the Wor ld Bank’s formal supervision, o f the project; Procurement controls to ensure the reliability o f cost estimates, detect over-pricing through bid analysis, supervision control over contract variations and dissemination o f the complaints handling mechanism in bidding documents; and

0 Enhanced supervision by the Bank through field-based fiduciary, safeguards and technical staff, with frequent missions by staff f rom headquarters.

0

D. Fiduciary

Financial Management

5 1. The financial management arrangements for the project meet the minimum Bank requirements. In order to strengthen further the financial management arrangements for the project, an effectiveness condition has been agreed that acceptable accounting software i s acquired and functioning by effectiveness. The condition o f negotiation relating to preparation o f a draft financial manual was met prior to negotiation, with the submission o f the said manual on April 9, 2009. The manual describes al l main procedures and controls relating to financial management which wil l be applied during the project implementation. The Manual will be strengthened and finalized before December 3 1,2009.

52. Koridor 10 Drugtvo sa Ogranic‘enom OdgovornoZu will be in charge of overall implementation of the project. The Company was established for the implementation o f the project, hence it did not have appropriate accounting software. The decision has been made to start the procurement o f software to enable sufficient transparency o f the project funds fi-om different financiers and preparation o f the entity financial statements in accordance with IFRS which i s the legal requirement for companies in Serbia, as wel l as preparation o f the quarterly IFRs on cash basis. There i s sufficient assurance that the Company wil l acquire the software and have it up and running by effectiveness. The estimated funds needed for acquisition o f the software have been included in the budget. The entity i s staffed by two qualified and experienced FM specialists (one o f them on a part time contract) who are assigned to perform tasks related to accounting, bookkeeping, financial reporting for the project and other duties defined in the Terms o f Reference. The loan amounts to USD 388 mi l l ion equivalent. The overall financial

24 “Anti-Corruption Guidelines” means the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15,2006.

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management risk for the project i s substantial both before mitigation measures and with mitigation measures agreed.

53. The annual audited entity financial statements providing sufficient details about project funds, will be provided to the Bank within six months of the end of each fiscal year and also at the closing of the project. The audits wil l be carried out by private audit firm acceptable to the Wor ld Bank. The implementing entity prepares financial statements in accordance with IFRS as prescribed by local legislation. The implementing entity wil l in addition prepare and submit a full set o f interim unaudited financial reports (IFRs) for each calendar quarter throughout the l i f e o f the project prepared o n cash basis. Among other things the IFRs wil l provide details regarding sources and uses o f project funds and movement o n the project’s designated account. Acceptable accounting software to be used for project accounting and reporting wil l be acquired.

54. An appropriate system of internal controls is instituted for the project. A system o f main internal controls in K 1 0 D 0 0 has been prepared in several manuals and rulebooks (such as accounting, organization, job description and reporting lines etc.), and strengthened by preparation o f a financial manual (draft has been prepared already). The latter describes al l controls and procedures relating to the financial management area (e. g. accounting, reporting, authorization paths, segregation o f duties, lines o f responsibilities, f low o f funds, f low o f documents) to be used for project implementation.

55 . Serbia has a high perceived corruption as measured by the Bank’s Business Environment and Enterprise Performance (BEEP) Survey and by Transparency International. Serbia i s ranked 85th out o f a total 180 countries in the 2008 Corruption Perception Index. An Anti-Corruption strategy has been developed spear-headed by the Anti- corruption Council, but much remains to be done and strong support from the new government i s needed for tangible progress in this area, including institutional strengthening for the Anti- Corruption Council, establishment o f the Supreme Audit and audit o f government’s financial statements, improvements for institutions overseeing procurement, improvements o f protection o f “whistle-blowers”, improvements in the judiciary system etc. On the project level, measures to be taken in order to mitigate the risk o f corruption and ensure use o f funds for intended purposes include describing in details key controls and procedures to be applied under the project. This will minimize risk o f an error, safeguard project’s assets and ensure use o f funds for intended purposes. Application o f the controls and procedures in practice will be verified by the Bank’s supervision. Further measures include use o f private audit firm for auditing the project and regular supervision by the Bank’s Financial Management Specialist.

56. A Designated Account for administering the project funds will be opened in a commercial bank acceptable to the Bank. This wil l be a separate account used for withdrawals and payments o f IBRD funds only. I t will be a EUR account.

Procurement

57. Procurement activities will be carried out by the recently established KlODOO.

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K 1 0 D 0 0 wil l be responsible for the implementation o f the project. An assessment o f the implementing agency's capacity to implement project procurement was concluded by the Bank procurement team during March 2009. The recently established implementing agency, K1 ODOO, has recruited four procurement staff, al l o f whom attended formal World Bank procurement training in Skopje (April 6-9, 2009). Some o f the procurement staff have general knowledge of public procurement according to Serbia public procurement system; however, they have l imited or no experience in rocurement according to Bank procurement guidelines andor consultants' selection guideline^!^ K1 OD00 will be strengthened by the procurement o f an international procurement advisor.

58. The r isks associated with procurement and the mitigation measures were identified in the assessment o f K1 OD00 procurement capacity and rated the overall procurement risk as Moderate after mitigation. Further details on the procurement arrangements and an init ial procurement plan can be found in Annex 8.

E. Social

59. The entire Corridor Xprogram is estimated to require expropriation of approximately 566 ha of mostly agricultural land along 74. 3 km of road on E-75 and 1,022 ha of mostly agricultural land along about 83.45 km road on E-80. The amount o f expropriation required for the Bank financed sections amounts to 50 ha on the E-80 Dimitrovgrad Bypass, 50 ha on the Grabovnica-Grdelica section o f the E-75, and 130 ha on the Vladicin Han- Donj i Neradovac section o f the E-75. Since the final engineering designs for the two road corridors were not complete at appraisal, a Resettlement Pol icy Framework (RPF) has been prepared in accordance with Serbian expropriation law and the OP/BP 4.12.

60. This RPF in draft form was officially disclosed in both English and Serbian on the website o f the Beneficiary o f Expropriation on April 2,2009, and a f i rs t round o f consultation on March 11 and 12, 2009. The final version was disclosed on M a y 20 2009, after a second round o f consultation on June 2 and 3, 2009. In addition, hard copies o f the RPF, both in English and Serbian, were posted in the affected municipalities. The draft was also disclosed on the WB Infoshop on April 2, 2009, and a final version disclosed on M a y 28,2009. However, only 78 km o f the total 83.45 km between ProseWDimitrovgrad i s covered by the Resettlement Pol icy Framework (RPF) since the f i rs t 5 km has been started prior to project preparation. This section wil l not be subject to the policies detailed in the RPF, nor form part o f the Bank financed sections. However, as part o f the normal due diligence, the Bank team confirmed that this expropriation has been carried out in accordance with Serbian law and in a manner consistent with OP 4.12.

61. The RPF: (i) describes the project areas and the justification for not preparing a Resettlement Action Plan (RAP) and defines information necessary for the preparation o f such a R A P for each sub-section; (ii) sets out the legal basis for land acquisition, resettlement and land use; (iii) sets out resettlement principles, resettlement entitlements o f different categories o f

25 All procurement for the Corridor X Highway Project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004 and revised in October 2006 (Procurement Guidelines); and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004 and revised in October 2006 (Consultant Guidelines).

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impact, describes procedures for valuation, compensation and other assistance provided to the project affected people, the grievance process, and delineates responsibilities for the development and implementation o f the section specific RAPs. As the main design for each sub- section i s produced, a section specific RAP, as per policies and procedures set forth in the RPF, wil l be prepared, disclosed, and project affected persons compensated as per the following principle: All project affected persons (private and public, individual and businesses) entitled to be compensated for land acquired, losses, structures or damages must be paid in full at the time of the acquisition of the land, or their grievance registered in accordance with the RPF, before any works or construction activities are allowed to commence on the land plots in question. In the case o f any disagreement over ownership and/or compensation amounts, PEPS, on behalf o f K 1 0 D 0 0 , should transfer the sum corresponding to the assessed fair compensation, which must also be satisfactory to the Wor ld Bank, to either the account o f the relevant local authorities, or to a court account, or arrange a bank guarantee with a commercial bank in the name o f the project affected person, while the case is pending, prior to starting any construction activities on the affected land plots; and (iv) presents an indication o f the estimated scale o f land acquisition.

62. PEPS is in charge of land expropriation and resettlement on behalf of the implementing agency, Kl ODOO. PEPS has extensive experience in land expropriation and has been working closely with K 1 0 D 0 0 . In order to start the expropriation process, PEPS sends the proposal for expropriation to the r e l e v k t local municipalities who implement the expropriation processes. Public consultation is done through the relevant municipalities who are in charge o f negotiations and consultation and final agreement with the affected people. During the consultation, affected people were informed about the project, their entitlements and their r ights, including the right o f appeal to an independent grievance commission init ial ly and, if necessary, then to the normal judicial process.

63. Even though the affected communities are informed about the road construction, no social or beneficiary assessment was conducted. for the project preparation. As part o f the preparation o f the section specific RAPs, PEPS wil l conduct a socio-economic study in the affected areas, as required under Serbian Law. In addition, a beneficiary assessment (an assessment o f project affected persons) wil l be conducted as part o f the regular monitoring o f the project during the implementation to: a) get the views o f users o f the motorways as wel l as those living and working along the Corridor X regarding the issues they face during construction; b) assess the impact o f the project on the lives, safety and livelihoods o f those living along the road and those affected directly by the construction o f the road, including users and those who lost land; and c) collect needed information for designing proper mitigation measures to be used during project implementation in case there would be some negative impacts which could not be foreseen during the project design.

64. The program and the project will bring significant benejits, but potentially some costs. Though the program, and the Bank financed project, wi l l improve accessibility in all the communities located along or near the new motorway, and improve road safety and environmental conditions in many o f the newly bypassed communities, these benefits may also potentially come with some costs. For those directly affected by land take, the RPF i s detailed enough to ensure that no one will be worse o f f after the project and al l affected people are compensated in compliance with OP 4.12. However, the removal o f through traffic from

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communities could have a negative impact on those businesses that depend on the passing trade. Accordingly, a number o f measures wil l be taken to address the broader social impact on these groups, e.g., those whose homeshusinesses wil l be bypassed by new road alignments. For these groups, the implementing entity K1 ODOO, to the extent possible, wil l commission connecting roads between the new proposed motonvay and the old road along which some o f these communities and businesses are located. In addition, the socio-economic study which is prepared at the t ime o f the individual section specific R A P wil l explicitly consider these groups, to assess any possible negative impacts and recommend appropriate mitigation measures.

F. Environment

I n line with the World Bank’s OP 4.01, the Project has been categorized as Category A for environmental impact. PEPS on behalf o f KlODOO has already prepared twelve section- specific Environmental Impact Assessments (EIAs) - seven for corridor E-75, Grabovnica to FRY Macedonian border; and five for corridor E-80, NiS to the Bulgarian border. The national disclosure process encompassed four rounds o f public consultations for each sub-section (on TOR for environmental consultant, on scope o f environmental assessment, on draft EIA and o n draft final EIA) and were carried from 2006 to 2009. Ten o f these have been formally approved by the Ministry o f Environment, two await formal approval.

. 65.

66. PEPS, on behalf of KlODOO, engaged an independent consultant to prepare two Corridor Level EUs (one for E-75 and one for E-80). Besides consolidating the site-specific EIAs, the Corridor Level EIAs also take a strategic perspective, considering the cumulative, induced, indirect and transboundary impacts, which are expected to be minor. The two documents were disclosed in draft during the period from February 25, 2009 (when the documents were made publicly available o n site and PEPS web site) to March 11 and 12, 2009 (when the public meetings were held in Bela Palanka (for E-80) and Vranje (for E-75). The draft EIAs were published by the World Bank Infoshop on April 10, 2009, and made publicly available in both Serbian and English in country o n the PEPS website on the same date. The two Corridor Level EIA documents were then finalized and the final versions, acceptable to the Bank, were disclosed on the PEPS web site on M a y 20 2009, and at Infoshop o n M a y 28, 2009. During project implementation, local public consultations wil l be held on site-specific EMPs prior to their being finalized.

67. The Corridor Level EIAs present overviews of the policy, legal and administrative framework; project description; the baseline data covering geology, soils, air quality, noise, flora, fauna and visual impact, surface and ground water, social and cultural environment; the environmental impacts, covering geology and soils, air quality, noise, flora, fauna and visual impact, surface and ground water, social and cultural environment, cumulative environmental impacts and transboundary effects; analysis o f alternatives; and the environmental management plans, including mitigation measures, monitoring and institutional responsibilities.. The Corridor level EIAs identify and analyze potential environmental impacts and set out mitigation and monitoring measures at the level o f detail which is possible at this stage o f project design. In accordance with Serbian law, they incorporate information from, and the preconditions set by the Institute o f Nature Protection and the Institute for Protection o f Cultural Monuments in order to minimize and manage risks to biodiversity and cultural assets, respectively. They also specify further investigations which wil l need to be carried out as part o f the detailed design stage, as

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part o f the preparation o f the site-specific EMPs, with costs to be paid by PEPS/KlODOO.

68. The Corridor Level EL4s provide the base for the preparation of the site specific EMP. As part o f the detailed design stage for any section, PEPS, on behalf o f K 1 0 D 0 0 , will prepare site-specific Environmental Management Plans and Checklists acceptable to the World Bank. These site-specific EMPs will also reflect the additional baseline refinement data work required prior to works commencing. The site-specific EMPs and Checklist wi l l be included as part o f the bidding documents to ensure the contractors are aware and meet their formal obligations in this respect. After contract signing, the contractor wil l then prepare his implementation plan, to be approved by the Borrower's Supervision Consultant, containing the detailed information on meeting the requirements detailed in the contractual EMP.

69. During project implementation, the Bank will ensure that there is strong supervision of all safeguards. Bank supervision wil l ensure that implementation i s in full compliance with the national environmental and social regulations o f Serbia as wel l as Bank safeguard policies. In this respect, the Bank will require that the K 1 0 D 0 0 procures a firm o f independent consultants, paid out o f the l o k and who wil l report directly to K10D00, to monitor whether and how wel l each contractor complies with the safeguards measures as outlined in the EMPs. The monitoring results wil l be included in the Quarterly Progress Reports to be submitted to the Bank. The Bank will review the reports and verify their contents through periodic site visits. Any non-compliance with the EMPs or any other safeguards wil l require immediate remediation. Contractors vis-a-vis the borrower, and the borrower vis-a-vis the Bank wil l need to present reasons for non- compliance, propose a detailed and time-bound action plan to achieve compliance, and obtain the no objection o f the Bank for the action plan. The cost o f proposed corrective measures wil l be borne by the responsible contractor.

G. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OP/BP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) 11 1x1

70. The main activity supported by the Project concerns the construction o f three sections o f motorway between Grabovnica and Grdelica, and Vladicin Han and Donj i Neradovac totaling 31.9 km on the E-'15, and the bypass around Dimitrovgrad o f 8.67 km on the E-80. Three safeguard policies have been triggered: Environment Assessment (OP/BP 4.0 1) policy, Natural

' By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas.

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Habitats (OP/BP 4.04) and the Involuntary Resettlement (OP/BP 4.12) policies. The selected alignment o f the new motorway from N i s to Dimitrovgrad includes construction at the edge o f the Sicevo Gorge Nature Park, just to the south o f the current boundary o f the park, with a buffer zone in between. The selected alignment o f the new motorway E-75 from Grabovnica to Levosoje includes construction through Grdelica Canyon, which i s not protected but has ecological and biodiversity significance. Both are outside the Bank financed sections, but following the precautionary principle, OP 4.04 i s triggered. Appropriate mitigation and monitoring measures wil l be included in the site-specific EMPs where the additional detailed site assessments to be undertaken by PEPS indicate this i s necessary. OP 4.12 i s triggered due to the requirement for land acquisition and possibly some relocation. W h i l s t the safeguard pol icy on Cultural Property (OP/BP 4.1 1) was not triggered as the road alignment was selected to prevent any impact on any known cultural site, this will be confirmed through additional site investigations carried out as part o f preparation o f detailed designs and appropriate mitigation and monitoring measures wil l be included in the site-specific EMPs, in case the construction process reveals any chance finds.

H. Policy Exceptions and Readiness

71. The Project complies with all applicable Bank policies and readiness is good. Engineering design and bidding documents for first-year activities are under preparation to allow tendering for works to commence on the init ial sections as soon as possible.

27

,

Annex 1: Country and Sector or Program Background

SERBIA: CORRIDOR X HIGHWAY PROJECT

A. Country and sector issues

72. The political environment in Serbia has been eventful in recent years. O n January 20, 2008, Serbia held a f i rst round o f presidential elections. Opposition parties resistant to reform earned a slight plurality o f votes, barely outpacing incumbent President Tadic from the Democratic Party, but short o f a majority needed to win outright. In February’s second round, President Tadic managed to win a majority with just over 50 percent o f the vote. But barely two weeks later, Kosovo declared independence. Parliament was dissolved and new parliamentary elections were scheduled for May, 2008. In late April, 2008 Serbia signed the EU Stabilization and Accession Agreement (SAA), a major step toward European Union (EU) membership. On M a y 11, the Democratic Party scored a significant victory; and reached out to smaller, reform- minded parties (including the Socialist party o f Serbia), and by June 2008 had assembled a governing coalition.

73. The economy grew strongly until 2008, fuelled by aggregate demand, and on the back of significant economic changes since 2000. Real GDP growth averaged 6.2 percent in 2007 and 2008. Growth was fueled by high demand l inked to a significant credit boom, expansionary fiscal policies, increases in real wage levels, and rapid increases in exports. Although exports grew rapidly, domestic demand grew even faster which resulted in very high import levels, and thus a widening current account deficit and private sector debt. Overall investment levels have remained roughly constant in recent years at about 24 percent o f GDP, while public investment has risen from 2.7 percent o f GDP in 2005 to an estimated 3.9 percent in 2008.

74. High fiscal and current account deficits, further aggravated by rapid credit growth (mostly foreign-currency denominated) left Serbia vulnerable to the current global crisis. Economic activity fel l sharply in the final quarter o f 2008 and slumped in the f i rs t few months o f 2009 and external adjustment has started. Growth in the last quarter declined to 2.8 percent (year-on-year) as compared to an average growth rate o f 6.5 percent in the previous three quarters. Estimates for the f i rst quarter o f 2009 are even more negative: industrial output i s 16.9 percent lower and exports and imports declined by 33.5 and 35.2 percent respectively (in dollar terms) in the f i rs t quarter o f 2009 compared to the same period the previous year. The banking system has weathered the external shocks so far, although credit has largely stagnated, although the large share o f foreign exchange or foreign exchange-indexed loans in the portfolios o f Serbian banks i s a cause o f concern and non-performing loans are increasing.

75. On January 16 2009, the Executive Board of the International Monetary Fund approved a fifteen month SBA for SDR350.8 m. (about $516 m). In the following weeks, the continued deterioration o f the macroeconomic environment led the authorities to seek a strengthened economic program that could be supported by an extension and augmentation o f the Stand-By Arrangement. On March 26 2009, the Government and an IMF staff mission reached agreement on an enhanced arrangement for some SDR 2.6 bi l l ion (around EUR 3 billion), equivalent to 560 percent o f Serbia’s quota or close to 10 percent o f i t s GDP. This was approved by the Executive Board o f the International Monetary Fund on M a y 15, 2009. The program

28

period would be extended to 27 months and the arrangement would no longer be considered precautionary. The Government’s program includes two main new elements: First, a large and balanced fiscal adjustment package to contain the 2009 deficit to 3 percent o f GDP. Adjustments will come from cuts in recurrent expenditure and nominal freezes-though capital and social spending wil l be largely protected-and mostly temporary revenue increases. Second, foreign banks have been asked to provide voluntary assurances to broadly maintain their commitment to Serbia and keep their subsidiaries wel l capitalized.

76. As in most emerging economies, medium-term growth prospects have been severely dampened, and the economy will be in recession in 2009. Serbia’s growth i s projected to decline to -2 percent o f GDP in 2009 and no growth in 2010 (as per the macro-framework agreed between the IMF and the GoS under the ongoing IMF’s SBA). As a supplement to the revised SBA for Serbia, the IMF also developed a downside macro scenario, in which growth for 2009 i s projected at -6 percent (and for 2010 the forecast i s -2.5 percent). This reflects a possible sharper contraction in aggregate demand as the impact o f the international crisis i s more severe and prolonged than init ial ly thought. The fiscal deficit i s also larger, equivalent to 4.6 percent o f GDP this year and 5.1 percent o f GDP next year. Additional budget financing and further adjustment measures would be needed under this scenario.

B. Transport Sector Background

77. Transport demand in Serbia is growing rapidly, reflecting the structural changes in the economy and the realignment of trade flows in the region. Road traffic in Serbia has been increasing annually at a rate o f between 5-7 percent since 2000, with higher growth in and around the main urban areas. This trend i s expected to continue, exacerbating problems o f congestion in and around the main urban areas and road safety more generally. One study predicted that i t would increase by 2.5 times by 2025,26 and the estimate is for traffic on the ‘core’ network to grow sixty percent by 201 3. On the railways, from a l o w o f 5.4 mi l l ion tons in 1999 (compared to 29.5 mi l l ion in 1990), freight traffic has increased steadily to 14.9 mi l l ion tons in 2007 and, despite the current downturn, i s projected to increase in coming years. Rai l freight transit traffic, carried largely on Corridor X, has grown at over 20 percent per year in each o f the last 3 years. By contrast, passenger traffic on the railways has been broadly static since 2001. Air traffic has been growing strongly and i s predicted to continue, more than tripling by 2025.

78. Serbia is often referred to as the cross-roads of South East Europe. The international roads and railways crossing Serbia represent the shortest link between Western and South Eastern Europe and Greece, Turkey and further east. After decades o f neglect, Serbia’s transport infrastructure i s in poor condition and unsuited to the needs o f the country. In addition to damage from conflict, inadequate expenditures have led to curtailed periodic and routine maintenance activities; building significant maintenance backlogs. Government efforts over recent years have been geared towards making a recovery o f this vital component as a means o f retaining a competitive advantage for the country. Aspirations for integration into the wider European markets have also introduced significant pressures for new road constructions especially o f trans- national corridors.

26 COWI, 2003, The Regional Balkans Infiastructure Study (REBIS), a study undertaken for the EU.

29

79. Serbia is at the center of the South East Europe Transport Observatory (SEETO) Core Network. A Memorandum o f Understanding (MoU) was signed between the European Union and the governments o f the SEE countries in June 2004 to define a ‘Core Network’, encompassing the TEN corridors in the region, together with other strategic routes connecting national capitals, regional centers and the main ports and border crossings. The Corridor X route defined above i s one part. The remainder o f the SEETO core network in Serbia constitutes Routes 3,4,5,6, and 7 for a total length o f 671 km. Core network routes in Serbia include: Route 3 from the Bosnia and Herzegovina border to Uzice (Serbia); Route 4 from the Romanian border to Belgrade to the Montenegrin border; Route 5 from Paracin (Serbia) to the Bulgarian border, Route 6 from the Montenegrin border to Ribarice (Serbia) in the direction o f Kosovo and Route 7 from Doljevac (Serbia) in the direction o f Kosovo. The South East Europe Transport Observatory (SEETO) was established under the same MoU, to develop and update a multi- annual investment plan for the core network in the region.

80. The integration of the Serbian transport network with the core regional transport network is recognized as a key policy objective27 for the economic and social development of the country. The SEETO core network amounts to 5,980 km o f roads, 4,584 km o f railways, 1,185 km o f inland waterways, 11 airports, 7 sea ports and 2 r iver ports. Serbia i s crossed by the following segments o f the important Trans European networks (TEN): (i) Corridor X with its branches Xb (Belgrade-Budapest) and Xc, (Ni5-Sofia), which i s the most significant road and railway route in the Republic o f Serbia. It is part o f the Core Regional Transport Network (hereinafter: Core Network), and it connects AustridHungary, SlovenidCroatia, the Republic o f Serbia and BulgaridMacedonidGreece. On this Corridor in the Republic o f Serbia, there are 792 km o f roads and 760 km o f railway lines; and (b) Corridor VI1 (the Danube River) which connects Central Europe through the Republic o f Serbia with the Black Sea, and a part o f the South East multimodal axis. I t is a border river and on i t s watercourse through the Republic o f Serbia has the length o f almost 600 km.

’

81. The institutional framework of the sector remains incomplete. A number o f new laws have been enacted in the last f ive years (Law o n Railways and L a w on Public Roads), which represent progress in the harmonization process. But full implementation has not yet happened, awaiting, in some cases, the necessary secondary legislation. In addition, primary legislation needs preparation and enactment in important areas such as international road transport, the transport o f dangerous goods, and road safety. In the road sector, the manager o f the primary and secondary road network i s the Public Enterprise ‘Putevi Srbije’ (PEPS). PEPS was established by the passage o f the Road law in November 2005, with effect from January 1,2006, when the former Serbian Road Directorate was transformed into a public enterprise. However, the reform has not been completed and the performance o f PEPS i s the subject o f widespread criticism.

82. Despite recent improvements, the organizations in the sector remain weak with limited capacity. There have been a number o f capacity building initiatives to strengthen the differing institutions in the sector, and whilst there have been recent improvements, capacity in many cases remains limited. The limited use o f asset management systems in the sector reflects the

27 The Government o f Serbia, (2007) Strategy of Railway, Road, Inland Waterway, Air and Internodal Development in the Republic of Serbia, 2008 - 20 15.

30

l imited managerial capacity. In addition, many o f the institutions in the sector have lost considerable numbers o f staff and have had difficulties, 'at current public sector salary levels, finding suitably qualified personnel to replace them. There is also little consistent use o f formal project appraisal techniques in the operational agencies, or in the sector Ministry, which raises concerns about the efficiency o f spending.

83. The government has recently prepared a transport strategy, and an investment and action plan is now being prepared with support from the European Union. The Ministry o f Infrastructure, fol lowing earlier support from the European Union, has defined a sustainable transport strategg'. The broad objectives o f the strategy are the following: (i) Integrate the transport network in Serbia into the Trans-European network; (ii) ensure the efficient use o f each mode to reflect i t s comparative advantages; (iii) upgrade the service quality o f the transport system; (iv) increase traffic safety and security; (v) strengthen the transport market and its gradual deregulation; (vi) decrease the environmental impact o f the transport sector in accordance with the principles o f sustainable development; and (vii) establish stable financing for the transport sector. The preparation o f this strategy i s an important step, but the next step involves the preparation o f a detailed m a ~ t e r p l a n ~ ~ for each o f the sub-sectors in an integrated manner, consistent with current and projected traffic volume for each o f the modes. Currently sector development plans and investment priorities are prepared with little consideration for the plans in other sub-sectors, or for the overall fiscal envelope.

ROAD SECTOR

84. The road network in Serbia represents a major asset for the country? but the condition of the network remainspoor. I t extends for some 38,600 km in Central Serbia, including 15,500 km o f primary and secondary roads (and approximately 634 km o f motorways and semi- motorways), together with just over 23,000 kilometers o f tertiary, or local, roads. The primary road network also contains 2,638 bridges (with a total surface area o f approximately 800,000 m2) and 78 tunnels (o f a total length o f 10,053 m). I t i s estimated that the total value o f the asset i s about US$ 17.5 billion.30 A recent survey revealed that whilst thirty percent o f the total network was found to be in good condition, primarily main and regional roads, fifty three percent was in poor or very poor condition. The comparative figures for Croatia and Bosnia and Herzegovina, respectively, are thirty two percent good and twenty two percent, poor or very poor, and forty three percent good and twenty two percent poor or very poor respectively.

85. I n addition, Serbia's ranking in international comparisons of the quality of infrastructure reveals that it scores poorly compared to regional comparators. The Global Competitiveness Report 2008-2009, published annually by the World Economic Forum, presents rankings from user surveys o f the quality o f infrastructure in 134 countries. The rankings indicate that infrastructure i s seen as placing Serbia at a competitive disadvantage in doing business, compared to selected regional comparators. Serbia i s ranked 83rd out o f 134 countries for the overall quality o f infrastructure, with only FYR o f Macedonia (8Sth), Bosnia and Herzegovina (1 07th) and Albania (1 08th) performing worst for South East European c~un t r i es .~ '

28 Ministry o f Infrastructure (2007). 29 Funding i s being provided by the European Union to prepare such a study. 30 Estimate from the official website o f the Serbian Government (ht t~: / /~~~.~rbi ia.gov,rs/~ages/art ic le. t~h~?id=97). 31 World Economic Forum (2008), The Global Competitiveness Report 2008-2009.

31

In the 2009 Doing Business, a Wor ld Bank/IFC publication, Serbia was ranked 94th out o f 18 1 countries, down from 91St out o f 181 countries in the 2008 edition.

86. Although expenditures in the road sector have increased markedly in nominal terms in the last four years, they have declined as a proportion of GDP. Total expenditures in the road sector have increased from approximately US$553 mi l l ion in 2005 to US$951 mi l l ion in 2008. Recurrent expenditure on maintenance activities remained largely unchanged, rising slightly from US$380 mi l l ion in 2005 to US$383 mi l l ion in 2008. However, these figures exclude arrear payments made to contractors for work carried out in 2006 and 2007. In other words, actual maintenance activities and expenditures in a given year do not match, and this divergence i s quite large. In 2008, the amount that PEPS paid contractors for maintenance carried out in earlier years almost exceeded expenditures for maintenance undertaken in 2008.32 Given that the bulk o f arrears are for past maintenance expenditures, i t i s clear that these expenditures rose considerably over 2006 and 2007. Despite additional financing from the National Investment Plan (NIP), the narrowly defined construction and reconstruction expenditure rose moderately, from US$79 mi l l ion in 2005 to US$125 mi l l ion in 2008. As a percentage o f GDP, total expenditures o f PEPS fel l from 2.36 percent o f GDP in 2005 to 2.19 percent o f GDP in 2008. Meanwhile, maintenance, rehabilitation, and construction expenditures as a whole fel l from 1.96 percent o f GDP in 2005 to 1.17 percent o f GDP in 2008.

87. The number of registered road vehicles has been increasing annually since 1999, but at a modest rate. There are approximately 1.8 mi l l ion registered road vehicles in Serbia, with private cars representing about eighty three percent o f the total. The total fleet has been increasing by an average annual rate o f just over four percent since 1999 although actual growth i s l ikely to be much higher in and around the main urban areas where incomes have been growing faster. Motorization rates are compared here in terms o f number o f vehicles per 1,000 inhabitants and also in terms o f the number o f passenger cars per 1,000 inhabitants. O n the former scale, the average motorization rate i s now estimated at about 235 vehicles per 1,000 inhabitants, in contrast to an average o f about 534 vehicles per 1000 inhabitants in the OECD countries in 2006 and in most o f the European Union countries.33 Comparing the motorization in terms o f passenger cars, Serbia at 15 1 passenger cars per 1,000 inhabitants i s lower than the EU- 25 motorization index o f 463 passenger cars per 1,000 inhabitant^.^^ In addition, the vehicle fleet i s comparatively old, with an average age o f 15 years.

88. The level of injuries and fatalities caused by traffic accidents is a growing social and economic cost for the country. In the years 2003-2008, there were 5,232 fatalities and over 100,000 injuries resulting from road traffic crashes on the road network in Serbia. Injury and fatality on this scale makes this an economic and social problem, as wel l as a human tragedy. The latest available data for 2008 shows a total o f 16,651 road accidents on Serbia roads with 22,275 injuries and 897 fatalities. Fatalities from road traffic crashes have decreased from a peak o f over 1300 in 1998, but the number o f injury accidents and the number o f injuries have been growing markedly, growing by ten percent and thirty percent respectively since 2005. This is a

32 Note that maintenance i s defined relatively broadly, as under the law i t encompasses some interventions that would normally be categorized as capital expenditures, as discussed in more detail in Paragraph eleven. 33 OECD Factbook 2008. 34 European union Road Federation (2007) latest motorization figures for 2005 compared to Serbian motorization figures for 2006.

32

worrying trend for the authorities. In addition, although the fatality rate has been improving over the last 10 years to nearly five casualties per 10,000 vehicles, f rom the twelve casualties per 10,000 vehicles in 1998, i t remains about five times higher than that o f the best performing European Union countries. Whi le there i s no official estimate o f the socio-economic costs o f road crashes, a recent study has estimated these at 1.7 percent o f GDP.35

89. The authorities have recognized the importance of road safety, as not only a matter of growing national social concern but also an economic concern. The Road Safety Law (RSL), adopted o n M a y 29, 2009, represents first major update in legislation since the 1980s and addresses ‘many aspects o f the EU Transport Acquis and recommendations given in the RSCR. In the R S L a new State multi-sectoral coordinating body to bring together the key government stakeholders and a coordination agency wil l be established. The transport strategy sets out road safety goals, although i t does not address key road safety strategic issues. Traffic Police have made several awareness campaigns l ike “School”, “Use o f helmets”, “Use o f Seat Belts”, etc. The Ministry o f Interior have also increased enforcement and introduced “hunters” on open roads.

90. The authorities requested the assistance of the Global Road Safety Facility for support to undertake a road safety management capacity review. This study which was completed in 2008, presented a broad implementation plan36. In consequence, the Government, through the Ministry o f Infrastructure, has also requested the cooperation o f the World Bank to support the plans for: (i) road safety capacity building, (ii) creation o f a road safety performance framework, (iii) developing and launching a national road safety strategy, and (iv) the preparation and piloting multi-sectoral road safety pilots37. Fol low through o n these important activities wi l l represent a substantive start to start to improving road safety in Serbia.

The Development of Corridor X

91. The new Government in the Republic of Serbia considers development of Corridor X as its key priority and wishes to develop and complete the core road infrastructure on Corridor X within the next 4 years. The objective i s to facilitate sustainable economic development and ensure that the country capitalizes o n i t s geographical position to continue i t s development as a key transit country o n the Trans-European Network. The National Infrastructure Council prepared the plan for infrastructure construction in the 2008-2012 period which calls for some EUR 1.58 bi l l ion for the completion o f the missing l i n k s on the road Corridor 10 in Serbia.

92. Serbia is also crossed by 850 km of railway forming part of Corridor X. The total railway network in Serbia amounts to about 3,809 km o f railways, o f which 33 percent are electrified, mainly the key corridors, and 7 percent i s double-tracked. The railway network i s aging, with an average age o f the track at 38 years. Driven by the downward spiral o f the railway’s output together with the insufficient maintenance, the physical condition o f the railway infrastructure, facilities and equipment has deteriorated and reached unsustainable level. 56

35 Antic B, The Costs of Traflc Accidents in the Republic of Serbia, Faculty of Transport and Traflc Engineering, University o f Belgrade, 2006. 36 See Vic Roads-Jean Breen (2007) Final Report on Serbia Road Safety Management Capacity Review, prepared under World Bank/ Global Road Safety FacilityBerbia Government collaboration. 37 Letter o f July 14,2008 by Minister o f Infrastructure to the World Bank.

33

percent o f the main lines last had a major overhaul more than 35 years ago. About 52 percent o f the lines restrict operating speeds to below 60 kmihour, 19 percent o f the lines permit operating speeds between 60 - 80 km/hour, 26 percent o f lines - 80- 100 km/hour, and only 2 percent o f the lines permit operating speeds o f 1 00- 120 km/hour.

93. the road network in Serbia, as summarized in the broad Strategy3':

The following projects represent a summary of the key missing links on Corridor X on

e) The construction o f the second 2-lane carriageway on 11 8 km o f motonvay between Horgoi - N o v i Sad (Corridor Xb);

f ) The construction o f a motonvay on 98 km o f the section o f corridor between NiS and the border with Bulgaria at Dimitrovgrad (Corridor Xc);

g) The construction o f a motonvay on the corridor between Grabovnica and the Macedonian border (Corridor Xd); and

h) The completion o f Sections 1-6 o f Belgrade Bypass, which would form an important section o f Corridor X.

94. The Government requested the assistance of the World Bank to lead the preparation, and contribute to the firtaming for the construction of the two southern sections of Corridor X in one program: (i) The construction o f a motonvay on the corridor between Grabovnica and Presevo near the FYR o f Macedonia border (Corridor Xd); and (ii) the construction o f a motonvay on 98 km o f the section o f corridor between Nii and the border with Bulgaria at Dimitrovgrad (Corridor Xc). The authorities have also increased domestic to l l levels on the corridor to ensure that domestic and international tar i f fs are the same. The authorities have also signed a Memorandum o f Understanding with Bulgaria to co-ordinate their border controls and reduce waiting times. They intend to fol low this template with other neighboring countries. On February 5, 2009, the Government adopted an Act ion Plan for railroad and highway construction along the Corridor X route.

38 Republic o f Serbia (2007) Strategy o f Railway, Road, Inland Waterway, Air and Intermodal Transport Development in the Republic o f Serbia, 2008 - 2015.

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Annex 2: Major Related Projects Financed by the Bank andor other Agencies

SERBIA: CORRIDOR X HIGHWAY PROJECT

The World Bank

95. Transport Rehabilitation Project. In M a y 2004, the Transport Rehabilitation Project (TRP; US$55 million) was approved by the World Bank Board with supplemental financing approved in 2007 (US$50 million). The project, which has a closing date o f June 2012, aims to improve the effectiveness o f the policies o f the Serbian road agency, PEPS, through the introduction o f new contracting arrangements with the private sector in two pi lot areas, and enhance the sustainability o f the use o f network analysis, in the selection o f road sections to be rehabilitated under the project. In addition, measures to improve traffic safety are included in the project, including improvements in road markings and signs, modifications to dangerous intersections, and road safety design principles.

96. World Bank Global Road Safety Facility and Road Safety Management Capacity Review. The World Bank Global Road Safety Facility approved in April 2007 fimding for a Road Safety Management Capacity Review for Serbia, linked to the ongoing TRP. The main objective o f this technical assistance, carried out in 2007, was to conduct a capacity review o f road safety management in Serbia and to set out a strategy for the short to long term to address road safety, based on information provided and discussions held with the key road safety stakeholders. The review reflected a consensus with Government and senior officials on a multi- sectoral investment strategy for improving safety management capacity and short-term measures to overcome revealed capacity weaknesses.

97. Trade and Transport Facilitation in Southeast Europe. This project (US$6.76 million) was approved by the World Bank in 2002 and successfully completed in 2007. The project was part o f a regional program in Southeast Europe, which aimed at supporting the efforts o f these countries in modernizing border agencies and in particular their Customs Administrations in line with EU practice. Under the project, the Serbian Customs Administration has defined comprehensive strategies to modernize services and align itself with the EU. The project supported the implementation o f these strategies and focused on integrated solutions at selected major pi lot sites. These pilots increased the productivity o f border agencies, enabling shorter processing time at border crossings and inland terminals. Indicators established within the project are still closely monitored by the custom administration and are used as a feedback mechanism for further improvement o f their operation. The project also contributed to improve the interagency cooperation within the country.

35

Donor Completed Projects Currency Amount

I Donor I Ongoing Projects I Currency I Amount I World Bank

(last 3 years) Trade and Transport Facilitation Project U S $ 6.76

World Bank EBRD/EIB EBRD/EIB EBRD/EIB EBRD/EIB EBRD/EIB

Other Agencies

Transport Rehabilitation Project U S $ 105 Air Traffic Control EUR 34 Belgrade to Nov i Sad to Motonvay Project EUR 212 Railway Rehabilitation Project I1 EUR 162 Belgrade Gazela Bridge EUR 77 Regional Roads Bridge Rehabilitation EUR 33

98. European Agency for Reconstruction (EAR). EU accession i s a strategic priority for the Republic o f Serbia and the EU has been the major donor and driver o f reform to this end. Through the European Agency for Reconstruction (EAR), whose mandate ran until the end o f 2008, the EU managed the ‘Community Assistance for the Reconstruction, Development and Stabilisation’ (CARDS) program. Within the CARDS program in Serbia, the EAR has supported institutional capacity building and technical assistance for road transport in recent years, including the twinning project, First Alignment with the Transport Acquis, which closed during the f i rs t quarter o f 2008. As a result o f the project, a working methodology o n the transposition o f the EU Acquis into national legislation was developed and transferred to Serbia. Between 2005 and 2006, the EAR supported the development o f a transport strategy for Serbia to 201 5, and has produced recommendations o n institutional capacity building in the transport sector. Recent work has included financing project management and supervision o f Belgrade Corridor X rehabilitation, including Gazela Bridge and related road network to increase traffic flows on this European road corridor.

Donor

EBRD

99. Instrument for Pre-Accession (PA) . I P A stands for the Instrument for Pre-accession Assistance and is the new financial instrument for al l pre-accession activities funded by the European Commission as o f January lSt 2007; Serbia has been receiving pre-accession financial assistance under the I P A program. The European Commission and the OSCE Mission in Serbia are helping the police implement the national integrated border management strategy through a regional I P A 2007 project. The project, to be implemented in 2009-2010, wil l assist Serbia in developing i t s capacities to manage their borders in an efficient, coherent and appropriate manner, speeding up the f low o f goods and people across Serbian frontiers and reducing smuggling and other criminal activity. In 2008, I P A financed (i) a project for facilitating intermodal transport by establishing the institutional framework for development o f intermodal transport and logistic centers in Serbia; (ii) a project to harmonize Serbian transport legislation with the EU Acquis; (iii) and technical assistance to support implementation o f infrastructure

Planned Projects Currency Amount

Railwav Project EUR 100

36

projects. The 2009-201 1 indicative multi-annual I P A plan, foresees: (i) support to transport authorities to meet requirements o f the EU relevant Acquis and implement commitments taken under the Memorandum o f Understanding o n Development o f the South East Europe Core Regional Transport Network and the Addendum for a South East European Railway Transport Area; (ii) support regional infrastructure investments (SEETO Multi-annual Plan 2008-201 2), (iii) multi-modal transport network and transshipment facilities; and (iv) facilitation o f IF1 investment through project preparation and implementation on the Core Regional transport Network.

100. EBRD and EIB. In 2004 the EBRD approved a EUR 112 mi l l ion project, with parallel EIB financing, for the rehabilitation and upgrading, to motorway standard, o f a 65 km section o f road from Belgrade to N o v i Sad and construction o f a bridge across the Danube, together with support for the transformation o f the Serbian Roads Directorate to a Public Enterprise. In 2006, a EUR 80 mi l l ion loan was approved by the EBRD board, to maintain the railway’s capacity and increase its operating efficiency to enable it to handle current and projected demand as economically as possible, with additional financing from EIB. For 2009 the EBRD has just negotiated a EUR 100 mi l l ion loan to Serbian Railways for the financing o f both rol l ing stock and infrastructure.

101. South Eastern Europe Transport Observatory (SEETO). The aim o f the SEETO i s to promote cooperation o n the development o f the main and ancillary infrastructure on the multimodal South East Europe Core Regional Transport Network and to promote and enhance local capacity for the implementation o f investment programs, management and data collection and analysis on the Core Regional Transport Network. SEETO i s assisting countries in the region in their infrastructure related investment plans. As a part o f SEETO activities, a Road Safety Audit inghspection initiative for the region i s under implementation.

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Annex 3: Results Framework and Monitoring SERBIA: CORRIDOR X HIGHWAY PROJECT

PDO

To increase transport efficiency and improve traffic safety on the project road sections o f Corridor X, between NiB and Dimitrovgrad and Grabovnica and Donj i Neradovac respectively, and to improve road management and road safety in Serbia.

Intermediate Outcomes

Component 1 - The E-75 Corridor to FYR of Macedonia -construction o f 3 1.9 km motonvay in two sections betwee Grabovnica (and Donj i Neradovac

Results Framework

Project Outcome Indicators

A reduction in road user costs (Euro 1.306lveh-km to Euro 1.00/ Veh-km) on the project road section between NiB and Dimitrovgrad;

A reduction in road user costs (Euro 1.0715/veh-km to Euro 1.002 Veh-km) on the project road sections between Grabovnica and Don j i Neradovac;

A reduction by the end o f the project in the rate o f fatalities and serious injuries f iom road traffic crashes (per 100 mill veh-km) by at least 10% on the project road section between NiB and Dimitrovgrad;

A reduction by the end o f the project in the rate o f fatalities and serious injuries f iom road traffic crashes (per 100 mill veh-km) by at least 10% on the project roads sections Grabovnica and Don j i Neradovac;

National road safety strategy and action plan with targets and monitoring indicators developed and launched; and

Action Plan for the Reform o f PEPS adopted.

Intermediate Outcome Indicators

A total o f 31.9 km o f motonvay constructedupgraded

Use of Project Outcome Information

- Information will be used by K 1 0 D 0 0 , M o I and the Banks to monitor performance and to assess the extent to which the project development objective has been attained:

Use of Intermediate Outcome Monitoring

The information w i l l be used by the KlODOO and M o I to monitor implementation progress, and by the Banks to supervise the project.

38

Component 2 - The E-80 Cowidor to Bulgaria - construction o f 8.67 km motonvay around Dimitrovgrad near to the Bulgarian border.

A total o f 8.67 km o f motonvay constructedupgraded

The information w i l l be used by the KlODOO and M o I to monitor implementation progress, and by the Banks to supervise the project.

Component 3 -Road Safety - Lead Agency for road safety established and operational; and

- Two Road safety pilot projects implemented

The information w i l l be used by the K10D00 , PEPS and M o I to monitor implementation progress, and by the Banks to supervise the project.

The information will also be used to analyze death and serious injuries fi-om road traffic crashes in Serbia, in a formal manner for the f i rs t time, and defme targeted interventions.

Arrangements for results monitoring

102. Monitoring and evaluation o f results and outcomes o f the Project will be carried out by the staff o f the implementing agency, K 1 0 D 0 0 , supported where necessary by specialists units in PEPS. This will include review and monitoring o f the Project performance according to the established Results Framework and Monitoring indicators. The Project performance wil l be assessed through a number o f quantitative indicators and qualitative assessments. Indicators will be measured against the agreed targets and wil l be compared to the baseline established during project preparation. Project progress reports including monitoring indicators will be prepared by K1 OD00 on a quarterly basis and submitted for Bank review.

39

1 D a

$ X

s x x

x

$ X

s x X

X

0

I

0 d

m

W

0

I

I

1

N

0

0

0

Annex 4: Detailed Project Description

SERBIA: CORRIDOR X HIGHWAY PROJECT

103. Component 1 - The M-1 road to FYR of Macedonia (E-75) - Corridor Xd. This component involves the construction o f a 3 1.9 km o f motonvay in two sections between Grabovnica and Levosoje (Corridor Xd), as part o f a larger parallel financed operation to construct a motonvay along the entire 74.03 km section. The E-75 motonvay presently ends at Grabovnica , about 52 km fkom the NiS motonvay node.

104. The missing motonvay section from Grabovnica to the FYROM border i s 96 km long, but 22 kilometers fkom the FYROM border are already under construction and wil l not form part o f the IF1 program, so the missing motonvay section i s 74.03 km long. The World Bank will be financing the f i rst section o f 5.6km between Grabovnica and Grdelica, and the section o f 26.3 km between Vladicin Han and Donj i Neradovac. The EIB will be financing the middle section, and the final section o f 15.8 km between Donj i Neredovac and Levosoje will be financed by HiPERB and the Serbian Government. The ending point in Levosoje corresponds to the starting point o f the motonvay section where works are ongoing with domestic budget support, to the FYR o f Macedonia border.

105. The component includes the relevant electrical and mechanical (M&E) facilities, annex areas, to l l plazas and buildings, interchanges, and some interconnecting roads to improve integration with the local road network, together with necessary c iv i l works to address utilities disturbed during the course o f the construction phase. This component also includes the consultant supervision for the c iv i l works in the project, together with additional sections. The motonvay alignment was selected to minimize the negative environmental and social impacts o f the project, while the interchanges were located based on the network needs and access requirements o f local road users. Land acquisition and road design costs wi l l be financed by the Borrower's own funds. Estimated total EUR 149.1 mi l l ion (US$ 210.2 mi l l ion equivalent);

106. Component 2 - The M 1-12 Road to Bulgaria (E-80) - Nis' - Dimitrovgrad - Corridor Xc - Dimitrovgrad Bypass. This component the construction o f one section o f motonvay o f 8.7km around Dimitrovgrad, as part o f larger parallel financed operation to construct 83.45km o f new motonvay on a section o f the corridor south o f NiS, near the town o f Prosek, to the border with Bulgaria at Dimitrovgrad. The EBRD and the EIB will be financing the section between Prosek and the Bank financed section.

107. The Bank financed section will bypass Dimitrovgrad on a new alignment to the North o f the city. There are two tunnels, respectively 550 and 1000 meters long, in very bad geological conditions. The motonvay wil l be tolled and be part o f the closed system encompassing the whole Serbian motonvay network. The tunnels wil l be equipped with electrical and mechanical works in accordance with European standards for tunnel safety conditions. Monitoring centers wil l be implemented.

108. The motonvay wil l be built with four lanes, with a design speed o f 120 W o u r

39 Including works supervision, but net o f al l taxes and duties, and al l contingencies.

42

( l O O k m / h r per hour in the tunnels). The component includes the relevant electrical and mechanical (E&M) facilities, annex areas, to l l plazas and buildings, interchanges, and some interconnecting roads to improve integration with the local road network, together with necessary c iv i l works to address utilities disturbed during the course o f the construction phase. This component also includes the consultant supervision for the c iv i l works in the project, together with additional sections. The motonvay alignment was selected to minimize the negative environmental and social impacts o f the project, while the interchanges were located based o n the network needs and access requirements o f local road users. Land acquisition and road design costs have been financed by the Borrower's own funds. Estimated total cost4': EUR 113.3 mi l l ion (US$ 159.7 mi l l ion equivalent).

109. Component 3 - Road Safety: This component wil l implement some o f the recommendations in the recent Road Safety Management Capacity Review (FY07) and the iRAP Survey (FY09) o f 3,000 km o f the road network in Serbia. More specifically, i t wil l include technical assistance, and goods that includes the following:

110. (i) Support to develop a National Road Safety Strategy and National Action Plan (preparation, implementation, promotion, monitoring and evaluation) The goal o f this subcomponent would be to prepare a national road safety strategy (NRSS) and a national action plan (NRSAP) based o n final and intermediate outcome targets and institutional output targets based on sub-project elements (a)-(c). The strategy would also aim to identify the scope for future activity to improve the safety o f land use planning, road and roadside design and operation, vehicle standards, and user standards for managing exposure to risk, crash prevention, crash protection and post impact care:

a.

b.

C.

d.

e.

f.

Develop/adopt good practice intermediate outcome data survey protocols based on average speed, levels o f seat belt use and excess alcohol in normal traffic, assessments o f fleet safety and network safety and emergency response; Conduct intermediate outcome data surveys in high-risk corridors and urban centers on indicators under (a) to allow development o f strategy targets and to provide a baseline for improving performance; Develop proposals for intermediate outcome and output targets for a national strategy taking into account potential cost-effective intervention and available resource; Identify cost-effective interventions for a national strategy to address speeding, seat belt use, excess alcohol, fleet safety quality, improving the safety quality o f the road network and access to the emergency medical system; Review legislation and justice issues needed for strategy implementation in relation to interventions and institutional arrangements; Road safety funding arrangements are inadequate and lack transparency. Government as a whole needs to devote appropriate levels o f resources o n an on- going basis if Serbia i s to improve i t s safety performance to match current good European practice. Establishing o f a road safety fund could support the national

40 Including works supervision, but net o f al l taxes and duties, and al l contingencies.

43

road safety strategy e.g. comprising 10% o f al l new road projects, and 10% o f insurance levies, etc;

g. Systematic high level promotion o f the national road safety strategy through a conference and related publicity - with Ministerial, international and NGO participation;

h. Plan the periodic monitoring and evaluation o f strategy including ‘before’ data; and

i. Establish a robust performance management framework for a l l participating agencies, to implement the findings o f al l short-term reviews and to r o l l out targeted safety programmers systematically across the country.

1 1 1. Country-wide computerized crash injury data systems and vehicle license plate and driver violations, etc. registries are organized by the police, but urgently need updating. Current data do not differentiate sufficiently between key road user types and are not collected according to the best EU practice. GIS i s not used to allow roads authorities to carry out crash analysis and dangerous spot identification, in order to meet their key responsibilities for road network safety. There i s l i t t le sharing o f the data that exists. There i s l i t t le or no health sector surveillance o f road traffic injury. As a result, crash injury problems are, in general, poorly identified and understood. Intermediate outcome data (e.g. on speeds, seat belt use, drinking and driving, vehicle fleet and network quality) are not collected. GIS based database, where above data wi l l be collected, with different levels o f access r ights for all relevant stakeholders i s prerequisite for implementation o f the NRSS.

(ii) Upgrading/developing of road safety related databases.

112. (iii) Emergency response Problems were identified in health sector surveillance o f road traffic injury and in the emergency medical system response. The need for improvement in access to the pre-hospital medical system, and the introduction o f national trauma care registries were acknowledged by health sector stakeholders. This component will, therefore, include a review o f provision in Serbia against the WHO guidelines (2004) for pre-hospital medical care and trauma care and recommend steps for improvements. It wil l also review emergency call out and response system for road trauma focused on Corridor X.

1 13. (iv) Education and promotion plans. Education o f al l users i s crucial for a long lasting change o f habits and, consequently, results o f the road safety strategy. Within th i s component education plans for school children and private car/motorcycle/bike/truck drivers wil l be developed. Recommendation for involvement o f c iv i l society in improvement o f road safety wil l be investigated. In addition, this component wil l assist in development adequate systematic media campaigns plan for promotion o f road safety.

114. (v) Enforcement (Speed management and Drug use). Sin& speeding i s one o f major reasons o f fatality road accidents, speed management and provision for the safer use o f the road network by motorized vehicles and vulnerable road users should receive high priority. Another, each day more present, problem i s driving under influence o f drugs. Under this component, modern speed and drug detection equipment wil l be procured. I t wi l l also include knowledge transfer on operation, training, equipment and back office operational requirements for automated enforcement.

44

115. This component wil l provide support for planning for pi lot projects, procurement o f equipment, and planning o f infrastructure works and pilots:

(vi) Road Safety Pilot projects.

a) Establish multi-sectoral group comprising al l key government stakeholders to collect data using a GIS system, and make suggestions for improvements in national data systems, carry out mean speed, drinking and driving and seat belt use surveys in traffic, vehicle fleet quality (intermediate outcome data), and make suggestions for improvements in national data systems;

b) Procure equipment for the pi lot project (video surveillance, automatic incident detection, etc.);

c) Identi fy evidence-based multi-sectoral remedial measures in high risk corridors and urban centers;

d) Set immediate outcome targets which can be pursued in the l i fe o f the project; and

e) Design multi-sectoral interventions & procure publicity materials and publication to promote pi lot objectives.

116. Estimated total cost: EUR 2.1 mi l l ion (US$ 2.9 mi l l ion equivalent);

1 17. Component 4 - Implementation Assistance and Institutional Support: This component wil l provide project management and implementation assistance to K1 ODOO. I t wi l l include the following sub-components: (i) the procurement o f a separate independent environmental and social supervision reporting directly to K1 ODD0 for the project, together with additional sections; (ii) the procurement o f a firm to provide necessary project managerial support to K 1 OD00 for the project, together with additional sections; (iii) the procurement o f a firm to undertake an independent technical audit o f the c iv i l works for the project, together with additional sections; (iv) the procurement o f procurement assistance, and other necessary technical assistance, in the form o f individual consultants to K 1 OD00 for the project, together with additional sections; (v) the procurement o f vehicles for K1 ODOO; (vi) necessary training for K1 OD00 staff; (vii) incremental operating expenses for the K10D00 over the l i fe o f the project; and (viii) technical assistance to support institutional strengthening in PEPS through the development o f a Reform Action Plan, and technical assistance to implement the plan subsequently. Estimated total cost: EUR 9.98 mi l l ion (US$ 14.0 mi l l ion equivalent).

45

Annex 5: Project Costs

SERBIA: CORRIDOR X HIGHWAY PROJECT

IBRD GoS Total EUR mil l ion EUR mil l ion EUR mil l ion Project Cost By Component andor Activi ty

Component 1: Construction o f 3 1.9 km o f Motorway between Grabovnica and Donj i Neradovac, including supervision o f works:

149.1

Component 2: Construction o f 8.9 km o f motorway at Dimitrovgrad bypass, including supervision o f works:

113.3

149.1

113.3

Component 3: Road Safety 2.1 2.1

Component 4: Implementation Assistance and Institutional Support:

9.98 9.98

Total Baseline Cost 274.5 274.5 10 percent Physical Contingencies 21.5 21.5 10 percent Price Contingencies 21.5 21.5

Total Project Costs' Interest during construction

Front-end Fee 0.69 0.69 Total Financing Required 275.2 43 .O 318.2

'Identifiable taxes and duties are EUR 42.lmillion, and the total project cost, net o f taxes, is EUR 3 18 million. Therefore, the WB share o f project cost net o f taxes i s 88%.

46

Annex 6: Implementation Arrangements

SERBIA: CORRIDOR X HIGHWAY PROJECT

118. Koridor 10 DruStvo sa Ogranic‘enom OdgovornoEu (KlODOO) has been established to implement the project. K1 OD00 has been delegated the responsibility for managing the construction o f the entire Corridor X program, which comprises five main components: (i) the north section o f Corridor X from N o v i Sad to Horgog o n the border with Hungary; (ii) the completion o f the Belgrade bypass; (iii) the E-75 from Grabovnica to Levosojo 20km north o f the border with the FYR o f Macedonia; (iv) the 22km section o f the E-75 between Levosoje and Presevo on the border with FYR o f Macedonia, which i s currently under construction with domestic financing to be completed in June 2009; and (v) the E-80 from Prosek to Dimitrovgrad on the Bulgarian border.

119. KlODOO is a daughter company of Public Enterprise ‘Putevi Srbije’ (PEPS). It was created by the decision o f the Management Board o f the Public Enterprise Roads o f Serbia (PEPS) on January 22, 2009, following the earlier decision o f the G ~ v e r n m e n t . ~ ~ The Company was registered o n February 4,2009, and established with a budget o f RSD 125 mi l l ion for 2009 and a similar amount in 2010. The plan i s that i t will have a total staff o f approximately 31, supported by PEPS specialists. A Board o f Management consisting o f a President and two Directors has been appointed to lead the new company. The three directors function as a team and share al l responsibilities at the same level. Formally, the Directors report to the PEPS Board once a year. They report to the Corridor X Steering Committee established under the Ministry o f Economy and Regional Development, with representation from al l the stakeholder bodies.

120. The implementation of the E-75 and E-80 will be undertaken by employees of the newly established company. K 1 OD00 will have the overall responsibility for project implementation. These responsibilities will include day-to-day management o f the project, procurement, financial management, reporting and liaison with the Bank. K 1 0 D 0 0 wil l be staffed with specialists familiar with the Bank procurement and financial management requirements. A firm will be hired to assist K10D00 with the management o f the project, together with an individual consultant to act as a procurement advisor in the short term.

41 Decision o f the Government 05 No. 340-5820/2008 o f December 19,2008.

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Annex 7: Financial Management and Disbursement Arrangements

SERBIA: CORRIDOR X HIGHWAY PROJECT

121. Risk analysis. The overall financial management r isk for the project i s substantial both before mitigation measures and after agreed mitigation measures. The table below summarizes the financial management assessment and risk ratings o f this project:

Risk

1. Inherent Risk

Country level. Perceived corruption in the country i s high. State Audit Institution ( S A I ) has only recently been established and it i s not functional yet. Internal audit s t i l l has relatively l ow capacity and need to gain experience. Time bound plan for modernizing Treasury s t i l l has to be fully implemented in order to accomplish measurable and specific results. Internal controls are not always applied in practice.

Entity level. KlODOO which will act as the implementing entity for the project i s a newly established entity with systems, processes, controls and procedures s t i l l to be instituted. The staff has no prior experience in the implementation o f World Bank supported projects.

Project level. This i s a large size project (US$ 388 million) with relatively l ow number o f large contracts, thus instituting appropriate procedures to safeguard the funds i s vital.

Risk Rating

H

Risk Mitigation Measures

Risks described on the left inhibit use o f country systems. Risk imposed by the SAT not being hnctional yet will be mitigated by using private auditor acceptable to the Bank for the project audit. N o reliance i s placed on internal audit. Designated Account will be opened in a commercial bank acceptable to the Bank. Accounting software to be acquired by KlODOO w i l l be used for project accounting and reporting. System o f internal controls instituted in the KlODOO will be used as a basis for the project implementation, and will be supplemented by controls and procedures to be described in the financial manual to be prepared for the project. The risk w i l l be mitigated by the World Bank team providing training and advice to the entity until they gain sufficient knowledge o f the World Bank procedures, and subsequent monitoring o f the implementation practices and results through on site supervision and continuous communication wi th the entity. I t w i l l be ensured that the entity institutes internal procedures and systems, and those are supplemented by preparation o f the financial manual. There i s no history o f the entity’s compliance with instituted controls. There i s no internal audit department within the implementing entity.

Appropriate system o f internal controls i s instituted for the project. System o f internal controls in K lODOO which i s described in several manuals and rulebooks (such as accounting, organization, job description and reporting lines etc.) currently in draft version, i s strengthened by preparation o f a financial manual, which describes al l controls and procedures (eg. accounting, reporting, authorization paths, segregation o f duties, lines o f responsibilities, f low o f funds, f low o f documents) to be used for project implementation. There i s no history o f the level o f the entity’s compliance with instituted controls.

Risk rating af er mitigation measures

S

48

Risk

Overall Inherent Risk

2. Control Risk

1. Budgeting and Planning. Capacity for budgeting and planning i s adequate. 2. Accounting. The Company does not have accounting software at the moment.

3 . Internal controls. Since the implementing entity i s newly established, appropriate system o f internal controls i s s t i l l in the process o f instituting.

4. Fundsflow.

5. Financial reporting. The Company does not have accounting software at the moment.

6. Auditing.

7. Stafing. Although there i s sufficient capacity among staff in terms o f general experience and qualifications, the s taf f does not have experience with implementation o f WB supported projects, hence no knowledge o f the WB procedures.

Overall Control Risk

Overall FM Risk

Risk Rating

s

M

s

s

s

s

S

S

S

S

~ ~

Risk Mitigation Measures

N o mitigation measures needed.

Acceptable accounting software will be acquired to be used for project accounting and reporting. . The software needs to produce the quarterly IFRs to be submitted to the Bank automatically and to provide reliable data. Appropriate system o f internal controls will be instituted for the project. System o f internal controls developed generally within K 1 ODOO, are supplemented by controls and procedures to be applied for the project in a financ.ia1 manual to be prepared. There is no history o f the level o f the entity’s compliance with instituted controls. Designated Account will be opened in a commercial bank acceptable to the Bank. Acceptable banks need to have sound financial position and reliable controls mechanisms and procedures internally. Acceptable accounting software will be acquired to be used for project accounting and reporting. The software needs to produce the quarterly IFRs to be submitted to the Bank automatically and to provide reliable data. Private audit firm acceptable to the Bank will perform audit o f the entity. Acceptable audit f i rms are assessed to apply appropriate audit methodology (applying ISA in their work entirely), have sufficient capacity, regular quality control and adequate procedures for various phases o f audit work. Since the entity has been just established, there i s no prior audits track record. Training and advice will be provided by the World Bank team. Progress and- performance o f the K1 OD00 sta f f will be continuously monitored by the Bank.

Risk rating af2er mitigation measures

S

M

M

M

s

S

S

S

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122. Country Issues. The Bank’s recent assessment o f the PFM in the PEFA report i s that the credibility o f the budget, the comprehensiveness and transparency, and the policy-based budgeting are performing relatively well, as measured through the PEFA indicators. Variances between original budgets and outturns are small, whi le arrears remain significant. Internal audit i s now starting to function, the capacity in terms o f staff assigned i s l ow and the Public Internal Financial Control (PIFC) environment that includes the internal audit needs to be developed in l ine with the EU requirements. Annual financial statements have not been published since 2001 and have not been externally audited as no supreme audit institution (SAI) i s yet in place although the law to establish it was approved in November 2005. The possibility o f hiring a private sector auditor to audit the government’s financial statements while waiting for the SA1 to be established has also not materialized yet. The lack o f a SA1 as wel l as the fact that the internal audit i s only just starting, point clearly to weaknesses in post-control over budget execution to ensure integrity and enhance efficiency in the use o f government funds. This i s a serious problem for the credibility o f the public spending and may in part be an explanation for the high perception o f corruption because an important part o f the “checks and balances” in the public financial management is missing.

123. Based on the PEFA assessment, the risk for the Bank portfolio i s assessed to be significant to high. Although the aim i s that new project implementation units are kept within the organizational hierarchy o f the implementing agencies, the considerable risk that the current lack o f a functioning external audit i s having, effectively makes use o f country systems in financial management impossible for the time being. The PEFA framework and the expected discussions between the government and donors on the remaining issues would provide for the continuation o f the P F M reform.

124. Strengths. The project i s characterized by relatively l o w complexity in terms o f institutional design (having only one implementing entity), fairly simple f low o f funds and disbursement, as wel l as accounting and reporting. The funds wil l be utilized for a relatively l ow number o f large contracts.

125. Weaknesses. Systems o f internal controls in state owned enterprises in Serbia are relatively weak, which would represent a potential weakness for the project and would be mitigated by instituting separate system o f internal controls and procedures for the project. In addition, the fact that the project i s large size carries additional degree o f risk.

126. Implementing Entity. K 1 0 D 0 0 will act as the overall implementing agency for the project. It has been established as a daughter company o f Public Enterprise Roads Serbia, with a purpose o f construction o f the highway on Corridor X. The sole income o f the company wil l come from financing o f the construction by IBRD, EIB, EBRD, HiPElU3 and the Government o f Serbia. The overall project wil l be parallel financed from the various financiers. The company has 10 staff current with plans to expand to 3 1, among which two qualified and experienced FM specialists (one o f them o n a part time contract). It i s managed by a Board o f Management o f three people, a l l o f whom have executive powers. The company has an audit committee which provides additional assurance regarding the quality and timeliness o f the audit process.

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127. Planning and Budgeting. The company’s capacity for planning and budgeting in terms o f human resources and availability o f quality information i s adequate. I t is also facilitated by the fact that al l revenues are determined (financing from IFIs and the Government), and expenditures wil l be based on l o w number o f large contracts, thus facilitating estimates. Plans and budgets should be entered in the accounting software, once acquired. I t i s important that there i s sufficient capacity for planning and budgeting, in order to manage project funds in an optimal manner from aspects o f funds allocation, liquidity and overall performance. Variances o f actual versus budgeted figures should be monitored on regular basis, appropriately analyzed and corrective actions taken.

128. Accounting. The financial management function o f the project wil l be met by two experienced professionals (chief accountant and accountant). They do not have prior experience in the implementation o f World Bank projects, but they have substantial experience in accounting and finance in general, as wel l as in working with other IFIs. There i s a plan to hire one more person in the finance department by the year end.

129. Terms o f Reference for the financial management staff with detailed descriptions o f duties are agreed and attached to the financial manual. The implementing entity i s responsible for the project’s financial management arrangements and its accountant wil l provide supplementary expertise and time, as required for the specificity o f Wor ld Bank procedures for accounting, reporting, disbursement, and procurement procedures.

130. Information Systems K10D00, which will act as the implementing entity for the project, i s a newly established company with systems, processes, controls and procedures to be finalized. Acceptable accounting software wil l be acquired to be used for project accounting and reporting. The estimated funds needed for acquisition o f the software have been included in the budget. The software needs to enable sufficient transparency o f the project funds from different financiers and preparation o f the entity financial statements in accordance with IFRS which i s the legal requirement for companies in Serbia, as wel l as preparation o f the quarterly IFRs on cash basis. The software needs to provide reliable accounting information, and be transparent with easily accessible information. Until the software i s purchased and functional, operating costs (such as salaries) need to be recorded in Excel spreadsheets. There should be sufficient safeguards o f information (passwords, access etc.) and back up o f the accounting data kept in Excel spreadsheets. There i s clear organizational structure created within the entity. Lines o f responsibilities and segregation o f duties have been determined and represent good basis for efficient operating.

13 1. Accounting Policies and Procedures. Entity financial statements wil l be prepared in accordance with IFRS, as prescribed by prevailing local legislation. Project financial statements wil l be prepared on cash basis and presented in EURO. Accounting rulebook i s in the process o f preparation by the implementing entity and it wil l describe accounting policies and procedures in further details.

132. following major assumptions:

Additional accounting policies to be applied for the project wil l include the

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cash accounting as the basis for recording transactions; reporting should be done in EURO (reporting currency); IFRs should be prepared to reflect sources and uses o f the IBRD funds; and counterpart funds, if any, should be reflected in the financial reports.

Internal controls. Appropriate system o f internal controls for the project will be instituted for the project. System o f internal controls in the implementing entity has been assessed during appraisal. The main controls and procedures are described in the draft manual developed. Additional detailed procedures wil l be included in the updated manual. Key internal controls to be applied for the project include:

- appropriate authorizations and approvals; - segregation o f duties; - - different persons being responsible for different phases o f transaction;

reconciliations between records and actual balances, as wel l as with third parties should be performed on regular basis; and complete original documentation should exist to support project transactions. -

134. The company publishes tenders and signs the contracts under the project. After receiving an invoice, i t is forwarded for verification to technical staff within the implementing entity responsible for checking the quality and quantity o f the delivery covered by the invoice. Independent consultants may be contracted to perform verification that goods, services or works have been delivered to acceptable level prior to payments.

135. After the technical staff has approved the invoice in terms o f quality and quantity o f the WorWservice, the invoice is sent to the accounting department where it i s registered by the Archives. The Accountant registers the invoice in a simple l og f i le with name o f supplier, amount, and date o f payment. After putting hisher initials on, the invoice i s given to project procurement staff. The procurement staff checks the invoice against the relevant contract number, if necessary attaches a copy o f the relevant paragraph on which the invoice i s based f i o m the contract, and signs.

136. All relevant documentation shall be attached to the invoice, enabling the Board o f Management to immediately see that the necessary checks have been performed. The approved invoice by the Board o f Management i s sent back to the project accountant. The receipt o f the approved invoice i s registered in the registry mentioned above ensuring that payment can be made as per the payment terms. The Payment order and the invoice with al l designated approvals and signatories (all three members o f the Board o f Management are designated and need to s i g n each payment order) are submitted for payment.

137. There i s no internal audit department in the implementing entity.

138. A detailed description o f controls and procedures i s included in the Financial Manual. The Manual sets out the financial management and internal control policies and procedures and is intended to guide staff and minimize the r isk o f errors and omissions, as wel l as delays in recording and reporting. These written standards also clarify

52

responsibilities, including level o f authority, clear control over assets, cash, and bank accounts, and ensure timely and accurate financial reporting.

139. Reporting and Monitoring. Project management-oriented interim un-audited financial reports (IFRs) will be used for project monitoring and supervision. The format o f the IFRs was agreed during negotiation and attached to the Minutes o f negotiation. The Implementing Entity will produce a full set o f IFRs for each calendar quarter throughout the l i fe o f the project. They wil l be due 45 days after each quarter ends. The IFRs will comprise the following reports presented in the agreed format:

- Statement o f Sources and Uses o f Funds; - Uses o f Funds by Activity; - Designated Account statement; - Unit o f Output by Activity; and - Narratives to the reports.

140. for commitments on signed contracts.

The accounting for the project i s cash basis with additional information provided

141. External Audit. The entity financial statements, providing sufficient details about project funds, wil l be audited in accordance with terms o f reference acceptable to the Bank by a private sector audit firm acceptable to the Bank, and the audit report will be submitted to the Bank at the latest six months after the end o f the period audited. The annual cost o f the audits wi l l be covered by the entity. Entity financial statements are prepared in accordance with IFRS as prescribed by local legislation. Audits should be conducted in accordance with International Standards o f Auditing. Financial audits wil l be supplemented by technical audits under Terms o f Reference prepared by the Bank.

142. Funds Flow and Disbursement Arrangements. Project funds wil l f low from: (i) the Bank - either as an advance, v ia a Designated Account to be opened in a commercial bank acceptable to the Bank, which wil l be replenished under transaction based disbursement method, and managed as described below in the section on disbursement arrangements, or by direct payment on the basis o f direct payment withdrawal applications; or (ii) K1 OD00 own funds if such arrangement i s agreed.

143. Kl OD00 will be administering the Designated Account. This will be a separate account used for withdrawals and payments o f IBRD funds only. I t wi l l be a EURO account. The entity wil l prepare withdrawal applications for replenishment o f the Designated Account, to be simed by designated signatories (three members o f the Board o f Management, who al l need to sign each application). Payments from the Designated Account are executed by the means o f payment orders. After al l the procedures with respect to f low o f documents, verifications and authorizations described in internal controls section are applied, payment order signed by designated signatories (three members o f the Board o f Management, who a l l need to s i g n each application) i s submitted to the commercial bank where the Designated Account i s opened for payment. In the case o f Direct Payment, the application form for such method payment i s submitted to the Bank with the same authorized signatories as described above.

53

144. Applications for replenishment o f the Designated Account will be submitted monthly or when one-third o f the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would fol low standard Bank procedures as described in Disbursement Handbook. Monthly bank statements o f the Designated Account, which have been reconciled, would accompany al l replenishment requests.

145. strengthen the financial management arrangements.

Action plan. The fol lowing actions need to be implemented in order to further

Description I Responsible entity The financial manual needs to be additionally I KlODOO detailed and finalized by December 3 1 20091 The manual should be revised for updates annually.

146. Supervision Plan. During project implementation, the Bank wil l supervise the project’s financial management arrangements in two main ways: (i) review the project’s interim un-audited financial reports for each calendar quarter, as wel l as the project’s and entity’s annual audited financial statements and auditor’s management letter; and (ii) perform on-site supervisions, review the project’s financial management and disbursement arrangements to ensure compliance with the Bank’s minimum requirements. The on-site supervision wil l include monitoring o f agreed actions, review o f randomly selected transactions, review o f internal controls, and other specific supervision activities. Supervision wil l be performed by the Bank accredited Financial Management Specialist.

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Annex 8: Procurement Arrangements

SERBIA: CORRIDOR X HIGHWAY PROJECT

A. General

147. All procurement for the Corridor X Highway Project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004 and revised in October 2006 (Procurement Guidelines); and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004 and revised in October 2006 (Consultant Guidelines) and the provisions stipulated in the Loan Agreement (LA). The various procurement actions under different expenditure categories are described in general below. For each contract to be financed under the LA, the various procurement or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) was published o n M a y 27, 2009 on UNDB on-line and in its printed version as wel l as in dgMarket online. Specific Procurement Notices (SPN) wil l be published for all I C B procurement and Consulting contracts as per the Guidelines as the corresponding bidding documents and the W P s become ready and available.

B. Assessment of the Agency's capacity to implement procurement

148. A Country Procurement Assessment Report (CPAR) wasprepared in June 2002 and was updated in October 2005. In March 2006, an Integrated Public Financial Management Assessment (IPFMA) was conducted and has assessed the risks (legal framework, regulatory functions, enforcement regime, public sector institutions and corruption) that may negatively affect the ability o f the implementing agencies to carry out procurement and have rated the r isk to be significant.

149. An assessment of the implementing agency, KIODOO, capacity to implement project procurement was concluded by the Bank procurement team during March 2009 and it wil l be included in the project file. The recently established implementing agency, K 1 0 D 0 0 , has recruited four procurement staff. Some o f the procurement staff have general knowledge o f public procurement according to Serbia public procurement system; however, they have either very l imited or no experience in procurement according to Bank procurement guidelines and/or consultants' selection guidelines.

150. Within the parent company, PEPS, there is previous experience in procurement according to Bank procurement guidelines and consultants' selection guidelines under the ongoing Transport Rehabilitation Project. However, PEPS experience i s not with large contracts such as those under this proposed project. One o f the main lessons learned under the Transport Rehabilitation Project i s that the preparation o f the bidding document for small works, which are not directly compatible with the works envisaged under this project, including the design, bill o f quantities and specification was a challenging task, resulting in large value variation orders due to issues in design. This was found to be a systemic issue in PEPS, which i s being addressed, rather than a

55

comment on the capacity o f the design institutes.

C. Procurement Risk Assessment 15 1. The overall procurement risk is rated Moderate after mitigation. The risks associated with procurement and the mitigation measures were identified in the assessment o f K1 OD00 procurement capacity and are summarized in the table below:

Table 2: Summary Risk Assessment

Description of risk

More variation order than normal due to weak preparation o f bidding documents including preparation o f design, bill o f quantities and specifications.

Delays in preparation o f quality bidding documents, evaluation reports, and delays in making quality procurement decisions in accordance with Bank procedures because K lODOO procurement staff have either very limited or no previous experience with Bank procurement procedures.

Delays in the preparation o f bidding documents due to delays in completing the detailed design especially for those segments the preparation o f detailed design i s not yet contracted out.

Rating' oj risk

S

Mitigation measures

Two international consultants w i l l be hired by the EIB to assist in the review o f the design. The international supervision consulting f m s to be hired under the project will have as part o f their TOR to review the design, bil l o f quantities and specification prepared by the local institutions before the contracts are tendered.

Training o f procurement staff o f K lODOO will be planned during the project launch workshop as well as afterword.

All procurement staff in K lODOO wi l l plan to attend the procurement regional workshop in Skopje, FYR o f Macedonia during the period April 7- 10.2009.

An international procurement advisor w i l l be hired by KlODOO before project effectiveness to provide on the job training and assist in the preparation o f procurement documents and evaluation as well as updating the relevant sections in the project operation manual.

Before negotiation, a clear plan shall be presented to the Bank on the time schedule for completing the detailed design for the segments contracted with the two local design institutions as well as presenting a clear plan for contracting the designers and completing the detailed design and bidding documents for the sections o f the two roads which are not yet zontracted. The Government shall

Ratinga o f

residual risk

M

M

M

56

allocated budget for the preparation o f the detailed design for the two roads.

Quality o f construction may be uneven or not up to the required standards unless works are properly supervised by technical f m s .

Challenges such as landslides during construction may arise due to oversight o f designers o f these issues or due to capacity and experience o f contractors.

Delays in signing contracts with proposed winners due to delays o f the Government to f inish the expropriation o f land needed along the routes o f the two roads.

M

H An expropriation and resettlement plan shall be presented to the Bank at the time o f seeking no objection to issue tender documents.

International consulting f m s will supervise the construction o f the roads sections and an independent consulting fm will be hired by the employer to conduct independent technical audit during construction period.

L

H

I

l M Average

D. Procurement Implementation and Arrangements

152. Procurement activities will be carried out by the recently established KlODOO which is dedicated for the implementation of the project. K l OD00 will be responsible for the implementation o f the project. K 1 0 D 0 0 has employed four procurement staff recently and will be strengthened by an international procurement advisor (at least for the f i rst year) before project effectiveness to provide on the j ob training on preparation o f bidding documents, evaluation reports, filing and records keeping system, management o f complaints and contract management.

S

153. Procurement of Works: Works contracts to be procured under this project will include construction o f a) the two sections o f the M-1 road to FYR o f Macedonia (E-75) between Grabovnica - Gradelica, and Vladicin Han and Donj i Neradovac b) the 8.67 km road section around Dimitrovgrad on the (E-80) -Ni&Dimitrovgrad-Corridor X c and c) small works for relocation o f public utilities during construction stage. Prequalification will be conducted for al l packages on E-75 road sections. Post qualification will be conducted on package 1 o f E-80 road section.

154. include accident analysis software and hardware and vehicles.

Procurement of Goods: Goods contracts to be procured under this project wil l

155. Selection of Consultants: Consultants’ services contracts to be procured under this project wi l l include technical assistance in roads safety, construction supervision services, technical audit; international procurement adviser services, project financial audit, independent supervision o f environmental and social aspects o f activities under the project, technical assistance for the reform o f PEPS and technical assistance for the

57

reduction o f border crossing delays.

156. Training: Training wil l include staff o f K10D00 and PEPS. K10D00 will establish the training needs and who wil l provide the training for the Bank review.

157. Incremental Operating Costs: means expenditures incurred by the Project Implementing Entity in relation to the management and implementation o f the Project as per the annual budget, including the cost o f communications, translations, meetings, local travel, consumables, financial audits, and day-to-day office maintenance and administration, including office rental, operation and maintenance o f equipment provided to the Project Implementing Entity under the Project, and excluding salaries o f government officials and civ i l servants.

158. Technical issues as part of procurement decisions: The main design, bill o f quantities and specifications are being prepared by the PEPS-Sector for Strategy in cooperation with the Transportation Institute-CIP and the Highway Institute Belgrade. Two individual international consultants are being provided to K 1 OD00 with grant support from the EIB to assist in the review o f the detailed design and technical specifications. An international consulting firm will be recruited by K10D00 to conduct an independent technical audit during the construction stage. Qualified construction supervision firms wil l also be hired to supervise the construction o f the roads.

159. The procurement staff o f K10D00 wil l be responsible for the filing and records keeping o f procurement activities. The K10D00 wil l dedicate a place for the safe storage o f the procurement files in i t s premises before project effectiveness.

Filing and records keeping:

160. Procurement Plan. K1 OD00 has developed a draft ini t ial Procurement Plan (PP) for the entire project scope consistent with the implementation plan, which provides information on procurement packages, methods and Bank review method. Since this would cover the entire project completion period it wi l l be tentative. However, a firm procurement plan for f i rs t 18 months o f the project was prepared and agreed upon between the Borrower and the Bank project team at negotiations, and wil l be made available at the implementing agency’s project database and o n the Bank’s external website. The PP will be updated in agreement with the Bank project team annually or as required to reflect the actual project implementation needs and improvements in the implementing agency institutional capacity. The updated PP wil l also be published as above.

161. Frequency of Procurement Supervision. In addition to the prior review supervision to be carried out by the Bank team, the capacity assessment o f the Implementing Entity recommends post reviews to be carried o n at least 10 percent o f the contracts subject to post review. It i s expected that a Bank supervision mission in the field will be conducted every six months during which post reviews will be conducted. As a minimum one post review report which includes physical inspection o f sample contracts including those subject to prior review will be prepared each year. N o t less than 10% o f the contracts will be physically inspected.

58

162. In order to ensure economy, efficiency, transparency and broad consistency with the provisions o f Section I o f the Guidelines, the fol lowing criteria shall be followed in procurement under National Competitive Bidding procedures:

Additional Provisions for National Competitive Bidding.

(a) Registration

(i) (ii)

Bidding shall not be restricted to pre-registered f i rms. Where registration i s required, bidders (1) shall be allowed a reasonable time to complete the registration process, and (2) shall not be denied registration for reasons unrelated to their capability and resources to successfully perform the contract, which shall be verified through post-qualification. Foreign bidders not from the territory o f the Borrower shall not be precluded from bidding. If a registration process i s required, a foreign bidder declared the lowest evaluated bidder shall be given a reasonable opportunity to register.

(iii)

(b) Advertising

163. Invitations to bid in Serbian shall be advertised in at least one widely circulated local daily newspaper available over the territory o f the Borrower allowing a minimum o f 30 days for the preparation and submission o f bids.

(c) Participation by Publicly-owned enterprises

164. Publicly-owned enterprises 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 o f the contracting authority. Furthermore, they wil l be subject to the same bid and performance security requirements as other bidders.

(d) Bidding Documents

165. procurement o f works or services, acceptable to the Bank.

Procuring entities shall use the appropriate standard bidding documents for the

(e) Bid Opening and Bid Evaluation

(i) Bids shall be submitted in a single envelope containing the bidder’s qualification information, technical and price bids, which shall be opened simultaneously at the public bid opening.

59

Bids shall be opened in public, immediately after the deadline for submission o f bids. The name o f the bidder, the total amount o f each bid and any discounts offered shall be read aloud and recorded in the minutes o f the public bid opening.

Evaluation o f bids shall be made in strict adherence to the monetarily quantifiable criteria declared in the bidding documents. No merit point system wil l be used.

Extensions o f bid validity will be allowed once only for not more than thirty (30) days. N o further extensions shall be requested without the prior approval o f the Bank.

Contracts shall be awarded to the qualified bidder having submitted the lowest-evaluated, substantially responsive bid and no negotiation shall take place.

( f ) Price Adjustment

166. appropriate price adjustment clause.

C iv i l works contracts o f long duration (more than 18 months) shall contain an

(8) Rejection o f Bids

(i) All bids shall not be rejected and new bids solicited without the Bank’s prior concurrence.

(ii) When the number o f bids received i s less than three, re-bidding shall not be carried out without the Bank’s prior concurrence.

(h) Securities

167. Bid security shall not exceed three percent (3%) o f the estimated cost o f the contract and performance security not more than ten percent (10%) o f this cost. No advance payment at the amount o f more than ten percent (1 0%) o f the contract price shall be made to contractors without a suitable advance payment security. These securities shall be included in the bidding documents in a text and format acceptable to the Bank.

168. Region o f the Bank, modified as acceptable to the Bank, shall be used.

The Regional Sample Bidding Documents for the Europe and Central Asia

Bid security and performance security should fol low the generally accepted practice used in the local market.

60

Alternative methods such as bid securing declaration may be acceptable, in which case the Borrower may require bidders to s i g n a declaration accepting that if they withdraw or modify their bids during the period o f validity or they are awarded the contract and they fai l to s i g n the contract or to submit a performance security before the deadline defined in the bidding documents, the bidder will be suspended for bidding in any contract with the implementing unit.

(i) Right to inspect and audit

169. Each contract financed from the proceeds o f the Loan shall provide that the suppliers, contractors and subcontractors shall permit the Bank, at i t s request, to inspect their accounts and records relating to the procurement and Performance o f the contract and to have said accounts and records audited by auditors appointed by the Bank. The deliberate and material violation by the supplier, contractor or subcontractor o f such provision may amount to obstructive practice.

0') Fraud & Corruption

170. The Bank shall declare a firm or individual ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Bank, if it at any time determines that the firm or individual has, directly or through an agent, engaged in conkpt, fraudulent, collusive, coercive or obstructive practices in competing for, or in executing, a contract financed by the World Bank Group.

61

Initial Procurement Plan Dated June 9,2009

Republic of Serbia: Corridor X Highway Project

Section: Grabovnica-Grdelica (Gornje Polje) 868+100 - 8731714

......................................................................................................................................................................................................... Prequalification for package 1

......................................................................................................................................................................................................... LOT 1: Road and bridges Grabovnica-Grdelica (Gomje Polje)

Section: Vladicin Han - Donji Neradovac ..................................................................................................................................................................................................

900+100 - 926400 ............................................................................................................................................................................................... Prequalification for package 2 and 3

....................................................................................................................................................................................................... load and bridges from Vladicin Han to Mostanica

......................................................................................................................................................................... and bridges from Mostanica to Donji

......................................................................................................................................

......................................................................................................................................................................................................... Construction of Motorwav E-SO

a) Works and Goods

1

2

2 1

1

Preq

ICB

Preq

.......................................... prior

prior ........................................

..........................................

........................................ prior

19.01.10

37.07.10

.......................................................................... 05.03.10

05.09.10 ......................................................................

02.1 1.10 ..........................................................................

................................................................................ 07.12.10

3.10.10 ......................................................................

17.11.10

ICB

ICB

prior

prior .......................................

..........................................

33.09.10

36.03.10

02.11.10

05.05.10 .....................................................................

....................................................................... 02.07.10 06.08.10

.............................................................................

........................................

..........................................

25.06.09

25.06.09

22.08.09

22.08.09 ................................................................

12.10.09

12.10.09

12.10.09

26.1 1.09

26.11.09

26.11.09

..........................................................................

...............................................................................

ICB

ICB

ICB

prior

prior

prior

........................................

.......................................

................................... 25.06.09 22.08.09 ...........................................................................

Zomvonent 3 ................................................................................................................................................................................................. .................................................................. " .......................................... ...........................................................................................................................................................................................

................................................................................................................................................................................................................................................................8� .......................................................................................................................................................................................... Road Safety Equipment SH prior

Road Safety Database softwardhardware I C B prior ................................................................................................................................................................................................................................................................� ........................................................................................................................................................................................

~ Prequalifica 7- Contract

Date Date Description/ Location Package No.

7- 1. WORKS

Comvonent 1 Construction of Motorway E-75 I Package 1 .........................................................

....................................................... ................................. 07.12.12

Package 2 & 3

05 07 13 Package 2

Package 3 05.12.12

.......................................................... Component 2 '

Package 1 ......................................................... .......................................................................................................................................................................................

Section: Dimitrovgrad Bvnass -Border Crossing k 95-905 -i61+578

LOT 1 : Road Dimitrovgrad Bypass - Border ................. 1 .......................

2708 11

2708 11 I Crossing (incl.loop) LOT 2: Bridges: Dimitrovgrad Bypass

......................................................................................................................................................................................................

.................................................................................................................................................................................................... 1 LOT 3: Tunnels Progon & Paojna Padina 27.08.11

Total 1. for works I

Total 2. for goods

'International Competitive Bidding (in accordance with section 2 o f the Guidelines) ICB =i

: For all civil works contracts more than USD 1,000,000. For goods contracts valued more than US%lOO,OOO.

................................................... * ................................................................................................................................................................................................................................................................»� NCB=iNational Competitive Bidding: For civil works contracts at or less than USD 1 .OOO.OOO

DC=,Direct Contracting (in accordance with section 3.6 of the Guidelines)

SH =/Shopping (in accordance with section 3.5 of the Guidelines) ......................................................... j ..................... F~r..works.c~~t~cts..na!~.~..~~..~r..!~~~..t~~..US%10P,P00 ................................................................................................................................................................................................................................................................��

.......................................................... " ................................................................................................................................................................................................................................................................� I For goods contracts valued at or less than US$lOO,OOO

Aggregate Shopping amount for the project: US$500,000 to be monitored during the project period

Prior review! .............................................................. ' ................................................................................................................................................................................................................................................................Ù� ;For Works contracts: All ICB contracts. First NCB contract regardless of value and all NCB contracts more than USD 1,000,000. First Shopping contract regardless of value and all Shopping contracts more than USD 100,000.

'For Goods contracts: All ICB Contracts. All NCB contracts of more than USD 100,000 equivalent including the first contract regardless of ivalue o f contract. First shopping contract regardless o f value will be subject to prior review.

QualificationiAll civil works contracts under construction of motorway E-75-will be subject to prequalification. (Preq)=j ........................................................... * ................................................................................................................................................................................................................................................................Ö� .............................................................. L ................................................................................................................................................................................................................................................................Õ�

Domestic! Preference=iw~l not apply.

63

Initial Procurement Plan Dated June 9,2009

Republic of Serbia: Corridor X Highway Project

b) Consultants' Services

Description of hsignmentl Location Package No.

I I 5. C O N S U L T A N T S ' S E R V I C E S

Review by Bank Prior I Post Date

Constxuction Supervision for E-75 QCBS ~ prior 15.06.09 04.10.09 ' 08.01.10 19.02.10 ' 20.02.14

Construction Supervision for E-80 QCBS pnor 300509 170809 13 1009 17 11 09 1906 15

Consultant Supervision o f the EMP QCBS pnor 300509 170809 06 1009 10 1109 1305 15

'Independent technical Audit iQCBS : prior 01.09.09 27.11.09 24.02.10 07.04.10 : 07.11.15

'Road safety technical assistance 'QCBS prior ' 10.01.10 : 07.04.10 . 05.07.10 ' 16.08.10 ~ 16.08.12 ..................................................................... i ................................................................................................................................................................................................. / ................... ................................................................................................. " ...................................... ~ ..........

15.01.10 : 12.02.10 : 14.05.10 IPreparation of Reform Action Plan for PEPs ~ IC ' prior 09.12.09

ITechnical assistance for PEPs reform QCBS: prior , 10.09.10 13.12.10 12.03.11 23.04.11 , 22.10.12

'International Procurement Advisor : IC : prior i25.05.09 i 15.07.09 i29.07.09 i29.07.10

iTechnica1 assistance for CXLLC : OCBS prior 30.06.09 17.09.09 06.11.09 18.12.09 20.06.15

............................................................................................................................................................................... ...................

T"""""""""'"""""""""" ......................................................................... ..................................... .............................................................. ,.. ..... ..................................... ............................... :. .......................................................................

'Financial Audit L C S pnor 150609 020909 22 1009 22 11 09 2905 15

Tota l 3. for Consultancy Services

GRAND TOTAL

Legend .......................................................................................................................................................................................................................... * .......................................................... ....* ............................................................. .......................................................................................... ...................................

QCBS ='Quality and Cost-based Selection (in accordance with sections 2.1 - 2.28 o f the Consultant's Guidelines)

QBS=IQuality Based Selection (in accordance with section 3.2 of the Consultant's Guidelines) ............................................................... ............................................................ ...................................................................................................................................................................................................... .....................................................................................................

CQ,jConsultants Qualifications (in accordance with section 3.7-8 o f the Consultant's Guidelines)

L C S =jLeast-Cost Selection (in accordance with section 3.6 of the Consultant's Guidelines)

SSS=/Single source Selection (in accordance with section 3.9-13 of the Consultant's Guidelines)

IC = j Individual Consultant (in accordance with section V of the Consultant's Guidelines)

Prior Review ................................................................................................................................................................................................................................................................Þ� ;For firms: Al l contracts equal to USD 200,000 equivalent or more. First contract regardless of value of any selection method and ;all SSS contracts.

For individual consultants: All contracts equal to USD 50,000 equivalent or more. First two contracts regardless o f value and all 'SSS contracts.

64

Annex 9: Economic and Financial Analysis

SERBIA: CORRIDOR X HIGHWAY PROJECT

A. INTRODUCTION

171. This annex presents the economic and financial evaluation of the Corridor X Highway Program. The economic analysis was undertaken for the entire length o f the 157 km o f the proposed motonvays, E-80 and E-75, to provide the authorities with an assessment o f the viability o f the program as a whole. In addition, the economic analysis was undertaken for the three sections o f Corridor X financed by the Wor ld Bank: (i) Section 5, Dimitrovgrad Bypass, o f the E-80 (Dimitrovgrad-Gradina); (ii) Section 1 o f the E-75 (Grabovnica-Grdelica); and (iii) Section 4 o f the E-75 (Vladicin Han-Donji Neradovac). The E-80, between NiS and Dimitrovgrad, involves the construction o f a motonvay o n a new alignment for a length o f 83.45 km. The E-75, between Grabovnica and the border with FYR o f Macedonia, involves the construction o f a new motonvay on 74.03 km o f the corridor between Grabovnica and Levosoje on about ha l f the length and a widening o f the existing road for the remaining half. The 22 km section between Levosoje and PreSevo i s being taken forward with budget support and i s outside the IF1 funded program.

172. The economic analysis was undertaken using the World Bank Highway Development and Management Model (HDM-4). The economic analysis was undertaken using the conventional approach o f comparing the estimated road users and agency benefits and costs in the ‘do-something’ scenario, when the new road i s constructed, against the ‘do-minimum’ scenario, involving the status quo, and the continuation o f the current maintenance regime. The main inputs for the evaluation are: (i) capital investment and maintenance costs; (ii) the benefit stream, comprising savings in VOC, travel time savings, reduction in accident rates and costs, and the residual value o f the infrastructure at the end o f the appraisal period; (iii) implementation o f investments during 2010-2014, and an evaluation o f benefits over a 25 year appraisal period; and (iv) scheme opening year 2015. The emphasis on the ‘narrow’ direct project costs and benefits within the traditional static equilibrium model are l ikely to result in a conservative estimate o f economic viability, as it overlooks the wider impacts on the production and distribution patterns, locational and employment impacts, and the indirect, second round, effects from the increased expenditures in the domestic economy.

B. TRAFFIC FORECAST 173. Overview. Corridor X i s one o f the pan-European corridors. I t runs between Salzburg in Austria and Thessaloniki in Greece. The corridor passes through Austria, Slovenia, Croatia, Serbia, the FYR o f Macedonia and Greece. I t has four branches: Xa, Xb, Xc, and Xd. The Government o f Serbia wishes to complete the core road infrastructure on Corridor X c and Xd, the branches o f Corridor X that cross the country, within the next four years. This wil l facilitate sustainable economic development and ensure that the country capitalizes on i t s geographical position to continue i ts development as a key transit country on the Pan-European Network.

174. Current Condition and Traffic on Existing Roads. The proposed motonvay, E-

65

80, wil l replace the existing road, M1-12. After bypassing the junction with the M1, the M1-12 motorway continues to the east for a distance o f some 18 km, bypassing NiS. The existing road crosses mountains and passes through a narrow valley and has l o w characteristics-pavement width o f only 6 meters for ha l f o f the length, 7 meters for the other half. The current road bypasses the settlements o f Bela Palanka, Pirot and Dimitrovgrad. It i s a two lane highway along 47.4 km, but i s narrower along 42.6 km where the lanes are 3 my the speed i s l imited to 60 or 40 km/h.

175. The proposed motorway, the E-75, when constructed, will amount to some 74.03 km in length running from Grabovnica to Levosoje. The existing road i s the M1-12 which separates from the branch o f Dimintrovgrad at a junction, just north o f NiS, some 237 km south o f Belgrade. The M1-12 road continues from the above junction to the border with FYR o f Macedonia. The M1-12 has 56 km constructed to motorway standard, bypassing NiS and continuing until the entrance o f Grdelica gorge, where i t becomes a two lane highway until the section close to the border. This road was built in the 1960s as a two lane, access controlled highway with a design speed o f 80 km/h, avoiding al l cities and villages. The current paved road is 8.2 meters wide, with an additional 1 meter unpaved shoulder on each side. About ha l f o f the missing section i s a new alignment, the other ha l f a widening o f the existing road, with works to be done under traffic conditions. The current pavement conditions o f these existing roads are fair. Located in a mountainous area, the alignment results in l o w speeds and high safety risks.

Table 3: Length of Existing Roads and New Highway

Length of Existing Road Length of New Highway

. , Section 1: Prosek-Bela Palanka 30.20 28.33 Section 2: Bela-Palanka-Pirot West 30.22 18.82 Section 3: Pirot West-Pirot East 5.25 14.39 Section 4: Pirot East-Dimitrovgrad 18.77 13.81 Section 5: Dimitrovgrad-Gradina 5.56 8.10 Total 90.00 83.45 M1 (E-75) Section 1: Grabovnica -Grdelicia 5.60 5.53 Section 2: Grdelicia-Vladicin Han 27.14 26.40 Section 3: Vladicin Han-Levosoje 41.34 42.10 Total 74.08 74.03 Note: Section 1 o f Corridor Xc has been split into two sections, with a length o f 7.2 km and 21.13 lun. Section 2 o f Corridor Xd i s split between two sections, with lengths o f 12.3 km and 14.1 km, while Section 3 o f Corridor Xd i s split with sections o f length 26.3 1 km and 15.79 km. Source: The Highway Institute and Bank Staff.

66

Table 4: Traffic on Existing Roads (2007) - M1-12 (E-80) AA5'T/dity Section 1: Prosek-Bela Palanka Section 2: Bela-Palanka-Pirot West Section 3: Pirot West-Pirot East Section 4: Pirot East-Dimitrovgrad

4,817 5,926

4,326 4,543

Section 5: Dimitroverad-Gradina 3.405

Section 1 : Grabovnica-Grdelicia Section 2: Grdelicia-Vladicin Han

5,548 7,255

Section 3: Vladicin Han-Levosoje 7,154 Source: The Highway Institute and Bank Staff.

176. Traffic on the existing M1-12 shows considerable variation in sections, from 3,405 AADT/day on the Dimitrovgrad-Gradina section to 5,926 in the Bela Palanka-Pirot West section in 2007. Traffic i s much higher on the M1-1 to Dimitrovgrad, varying from 5,548 to 7,255 AADT/day in 2007, the base year for the economic appraisal.

177. Estimated Traffic Growth on the E-80 and E-75. Estimated future traffic on the E-80 and E-75 were projected on the basis o f conventional growth forecasts and income elasticity o f demand, with the exception o f the f i rs t two years o f highway opening, where additional generated traffic growth was assumed. The income elasticity o f the entire Corridor X in 2006-08, including sections not covered in the existing project, was 1.35, with considerable variation from year to year and on different sections. The income elasticity for the M1-12 (E-80) over this period was 1.28 and 0.93 for the M1 (E-75). A conservative value o f 1.2 was used for both corridors. Real GDP i s projected to grow by 6 percent over 2015-2019, decreasing to 5 percent in 2020-25, 4.5 percent in 2025-2030 and to 4 percent in the last 9 years o f the appraisal period.

Table 5: Income Elasticity along Corridor X (percentages)

Batrovci-Ruma Ruma Simanovci Simanovci-Zmaj Zmaj-Bubanj Potok Bubanj Potok-Batocina Batocina-NiS NiS-Presevo (E-75) Horgos-Novisad Novi Sad-Belgrade NiS Dimitrovgrad (E-80)

2006 2.12 1.97 4.50 1.11 0.3 1 0.95 2.42 1.59 1.18 0.66

2007 1.05 0.63 4.73 1.19 1.73 1.52 0.18 1.52 0.77 1.73

2008 0.87 0.67 0.65 0.35 0.45 0.20 0.20 1.91 1.90 1.44

2006-08 135 1.09 3.29 0.89 0.83 0 89 0.93 1.67 1.28 1.28

Average for Corridor X 1.68 1.51 0.86 1.35 Sources: IMF and Bank staff estimates

67

In s W e Q 0

W 9 P 2

4

M EI .I c, m .I

L. 0 e

b Q

s: .I

s .. \o 0 E

i-t

m 0 c1

c

00 d

m mi

m 0 N

3

-

m m

2

B r 9 9 x 7 m

5 Y 3 e,

.. N E

0 Q n

P 4-

10

3 N

,.-

-

d 2 b-

Table 7: Annual Traffic Growth on the M-12, M1, E-SO and E-75 (percent ages)

2009 2010 201 1 2012 2013 2014 Un.Wt-12andM-1 Real GDP growth 3.5 4.5 6.0 6.5 7.0 6.0 Traffic growth (av) 4.2 5.4 7 2 7.8 8.4 7.2

2015 2016 2017-19 2020-25 2025-30 2030-39

Real GDP growth 6.0 6.0 6.0 5.0 4.5 4.0 Traffic growth (av) 12.5 12.5 7.2 6.0 5.4 4.8 Note. Traffic growth in 2015 and 2016 i s not based on the calculated income elasticitv, but higher prowth

I I

based on the a&mption o f higher growth driven by induced and diverted traffic from C&ridor IV. Source: Bank staff.

178. The E-80 and E-75 are scheduled to open along their entire length in 2015, scheme opening year. Diversion from existing roads took into account financial V O C for road users, the level o f proposed tolls o n the new expressway, and experience from other projects. The results o f the analysis suggest that about 80 percent o f motorized vehicles may be diverted to the new highways. In addition, traffic at the opening o f the highways i s expected to be boosted by a further 12.5 percent in the first and second year, reflecting both pure induced and diverted traffic from Corridor IV, which l i n k s Western Europe to FYR o f Macedonia, Greece and Turkey v ia Bulgaria and Romania.

Table 8 : Forecast Traffic on the E-SO and E-75 (AADT/day)

Length 20 15 2020 2025 2030 2039 (km)

Section 1 NiS-B. Palanka

28.3 6,555 9,620 12,814 16,573 25,273

Section 2 B. Palanka-Pirot West

18.8 8,064 11,847 15,764 20,388 31,091

Section 3 14.4 6,182 9,082 12,085 15,630 23,835 Pirot West-Pirot East Section 4 13.8 5,887 8,648 11,508 14,884 22,697

Pirot East-Dimitrovgrad 8.1 4,633 6,806 9,057 11,714 17,863 Section 5

Dimitrovgrad-Gradina

Section 1 Grabovnica -Grdelica

5.53 7,549 11,090 14,757 19,086 29,105

Section 2 Grdelica - C Dolina

12.3 9,872 14,503 19,298 24,959 38,062

Section 3 14.1 9,872 14,503 19,298 24,959 38,062 C. Dolina-Vladicin Han Section 4 26.1 9,735 14,301 19,030 24,613 37,533

Vladicin Han-Donji Neradovac Section 5 15.79 9,735 14,301 19,030 24,613 37,533

Donj i Nerodovac-Levosoj e Sources: Highway Institute, Bank staff.

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C. ECONOMIC ANALYSIS 179. Economic Costs. Financial costs have been converted into economic costs by eliminating physical and price contingencies, VAT and other taxes and duties, and exclude land acquisition, design and supervision costs. Costs include construction o f the highways, the relevant electrical and mechanical (E&M) facilities, annex areas, to l l plazas and buildings, interchanges, and some interconnecting roads to improve integration with the local road network. In addition, costs have been calculated for an alternative reduced profile for l ow volume highways (henceforth reduced profile), using a pro-rata calculation that involves the utilization o f a correction factor that reduces prices downwards in l ine with the reduced profile.42

180. Economic Benefits. The economic analysis includes the benefits derived from: (a) V O C savings o n the two project corridors, (b) time savings f rom reduced journey times o n the new motorways; (c) cargo time costs; (d) lower accident costs; and (e) reduced agency costs. The value o f passenger time savings, working and non-working, were estimated based on the net wage rate per hour in 2007 and increases o f GDP per capita over the appraisal period.43 Cargo costs per hour were based on estimates f rom a recent HEATCO study and adjusted to reflect the context.44 In addition, the residual value o f the investment in structures at the end o f the appraisal period was assumed to be 60 percent.

18 1. Accident costs and rates. The cost o f fatalities and injuries were calculated using the International Road Assessment Program (iRAP) suggested economic appraisal values.45 After estimating GDP per capita over the appraisal period, fatalities were calculated as 80 times average GDP per capita and injuries as 24 times GDP per capita. Material damage was calculated at a cost o f about 0.66 percent o f a fatality.46 The frequency o f accidents, per 100 million vehicle km, was based on 2008 data for the M1-12 (E-80) and M-1 (E-80), as wel l as from a study completed by Roads o f Serbia and the Faculty o f Transport and Traffic Engineering in July 2007.

182. This study included 2005 data regarding accident rates on existing highways. For the purposes o f the economic analysis, accident data f rom the existing NiS-Belgrade M-22 highway were used as proxies for future accident rates in the E-80 and E-75. As the table below indicates, injuries are projected to decline sharply once the new motorways are operational, whi le fatalities are projected to decline on the E-75.

42 The carriage way width for a full profile highway i s 21.4 meters, while for the reduced profile it i s 17.4 meters. 43 Non-working time was calculated at 30 percent o f passenger working time. 44 HEATCO, Developing Harmonized European Approaches for Transport Costing and Project Assessment, Proposal for Harmonized Guidelines, February 2006. 45 Dahdah S. and McMahon, P (2008). The True Cost ofRoad Crashes- Valuing Life and the Cost of a Serious Injury, iRAP. 46 This figure i s based on the UK Department o f Transport Highway Economic Note No. I: 2005 Valuation of the Benefts of Prevention of Road Accidents and Casualties, January 2007.

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Table 9 : Frequency of Accidents

Accidents (per 100 million vehicle km)

Road M1 (E-75) M1-12 (E-80) E-75 and E-80

Fatalities Injuries Material damage 3.8 49.5 43.1 0.6 43.5 51.1 1.3 8.5 37.8

Table 10: Value of Time - Economic Unit Costs

- Passenger car Heavy bus Medium truck (3.5 to 12 tons) Medium truck (2 axle rigid truck) Medium truck (1 2 tons) Articulated truck

(Euros per hour)

4.63 1.39 0 4.63 1.39 0

0 0 6.3 0 0 6.3 0 0 6.3 0 0 6.3

Passenger car

Table 11: Vehicle Operating Costs - Economic Unit Costs (2008 Euros)

9,000 I 38 0.61 2.9 3.9 I. 0

Maintenance Lubricating Crew wages 1 New Vehicle 1 , Replace Tire 1 $:a) I oil(per1iter) 1 ::& 1 (perhour) 1 Heavy bus 115,000 1 185 0.61 2.9 3.9 7.8

tons) Medium truck (2 axle rigid truck) Medium truck ( 12 tons) Articulated truck

28,425 150 0.61 2.9 3.9 7.8

25,800 78 0.61 2.9 3.9 7.8 30,172 172 0.61 2.9 3.9 7.8 95,000 230 0.61 2.9 3.9 7.8

183. Economic Evaluation. Total costs and benefit streams, Economic Internal Rate o f Return (EIRR) and economic net present value (NPV) were calculated for the E-80 and E- 75 separately, for both full-profile and reduced profi le for l o w volume highways, as wel l as for the World Bank financed sections for a full-profile highway. The EIRR for the E-80 i s estimated at 12.7 percent for a full profile highway and at 15.7 percent for a reduced profile (Table 12). Meanwhile, the EIRR for the E-75 i s estimated at 12.6 percent for full-profile and 15.8 percent for reduced profile, with significantly higher reduction in accident costs than the E-80, given higher existing fatality and injury rates. The EIRR for the E-80 sub- section financed by the World Bank, Dimitrovgrad-Gradina, i s estimated at 5.9 percent, reflecting the relatively high economic cost o f the section (Euro 95.5 million), combined with the lowest traffic o f both the E-75 and E-80-the AADT in this section in 2007 was 3,405. In contrast, the two sections o f the E-75 have much higher returns: the EIRR for

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Grabovnica-Grdelica i s estimated at 1 1.9 percent, while that o f the Vladicin-Han-Donji Neradovac i s estimated at 18.3 percent (Table 13). For the f i rs t sub-section o f the E-75, this reflects a combination o f lower economic costs (Euro 30.7 million) and higher traffic, while for the second sub-section o f the E-75, the high return i s driven by high base traffic, at 7,154 AADT in 2007, despite high economic costs (Euro 105.9 million).

Undiscounted Discounted

Table 12: Economic Appraisal Summary: E-SO and E-75 for Full & Reduced Profile (Euro millions)

197.5 1.2 802.5 1,850.5 1,479.2 3,933.5 15.8 261.7 0.1 77.1 150.2 162.4 128.0

Discounted 347.1 -0.5 153.5 99.8

L‘ndiscounted -6.6 1.216.0 I 1.754.9 884.3 3.662.1 15.7 E-80: Rmhxd Protile

Undiscounted Discounted

I Undiscounted I 235.1 I 1.4 1 744.4 I 1,831.4 I 1,457.7 I 3,797.0 I 12.6 I

48.40 0.47 298.21 666.05 519.19 1,434.57 18.3 60.19 0.03 21.12 50.17 53.42 64.48

Table 13: Economic Appraisal Summary: E-SO and E-75 Sections Financed by the Wor ld Bank

(Euro millions)

Discounted 0.00 1.54 6 81 8.92 E-75: Vtailicin Man- Donji h’eradovac

I

184. Sensitivity Analysis. The basic evaluation o f the project shows that the investment i s economically viable for a full prof i le motonvay, for both sub-corridors E-80 and E-75. Sensitivity tests with respect to lower value o f time, lower average accident costs, lower traffic diverted from the existing road, higher investment costs, and delays in project completion were conducted. The results show acceptable economic returns and are robust to

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reduced accident costs and value o f time (Table 14). With regard to traffic diversion, both a 10 percent and 20 percent reduction from the base scenario-which assumes 80 percent diversion from the existing roads in 2015, the first year o f operation o f the new highways- reduces the rate o f economic return to less than 12 percent for both the E-80 and E-75, although i t remains above 10 percent. Given the 12 percent discount rate used, a delay in the start o f construction leads to a significantly higher rate o f return. For a one year delay-with construction starting in 201 1 as opposed to the base scenario o f 2010-the economic rate o f return raises to over 16 percent for both the E-80 and E-75, increasing to over 20 percent in the case o f a two year delay.

12.3 12.1 10.3

185. Similar sensitivity tests were conducted for the three sections financed by the World Bank. As for the E-80 and E-75, the sub-section EIRR is most sensitive to changes in traffic diversion from the base scenario. In the case o f Vladicin Han-Donji Neradovac (E- 75), the EIRR exceeds 15 percent for al l sensitivity test scenarios, while for Grabovnica- Grdelica the EIRR exceeds 12 percents if (i) accident costs, value o f time, and diversion are higher; (ii) capital costs are 10 or 20 percent lower; and (ii) if construction i s delayed. In the case o f the E-80 sub-section, the economic rate o f return does not vary greatly, but remains below 10 percent in al l sensitivity scenarios.

12.5 Accident costs 12.9 13.1 12.4 Value o f time 13 13.4 11.6 Diversion 13.8 14.9

Table 14: Sensitivity Tests on the Economic Evaluation of E-80, E-75 and World Bank Financed Sections

12 10.4

12.3 Value o f time 12.9 13.2 11.3 Diversion 13.6 14.6

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3.8 8.4 16.6

Source: Bank staf f ,

.E-80: Dimitrovgrad-Gradina’ 8.0 9.9 E-75: Grabovnica-Grdelica 15.9 20.6

E-75: Vladicin Han-Donji Neradovac 25.0 35.0

D. FINANCIAL ANALYSIS 186. Approach. The Corridor X projects will be constructed under the newly formed daughter company o f the Public Enterprise for Roads o f Serbia (PEPS) called “Koridor 10” d.o.0, also referred to as Koridor 10 DruStvo sa OgraniCenom O d g o v o r n o h (KlODOO). However, after the completion o f the works and operational permits are submitted for finished highway sections, the management and operation functions wil l revert back to PEPS. As such, the financial analysis o f the road entity PEPS has been undertaken, with the understanding that the agency has not incurred the init ial investment. In such a situation, the financial analysis would focus o n (i) ensuring that PEPS remains financially sustainable and (ii) the operations and maintenance o f the roads result in a positive financial N P V for the agency. In the analysis, the direct financial impacts on the agency o f the corridor sections to be financed are taken into account; and the benefits to the other stakeholders (such as resulting f i om the reduction in travel time) are not considered. The fol lowing parameters are taken into consideration: revenues, road agency capital costs, operating costs, and maintenance costs. These are dealt with below.

187. Key Assumptions used in the analysis: Operating and maintenance costs are considered inclusive o f a l l additional costs related to the project. The assumptions on traffic and allocation by type o f vehicles are the same as for the economic analysis. Whi le the financial IRR should in principle be compared to the cost o f capital o f PEPS, the decision o f the Government to take on the debt servicing supported the use o f something closer to the sovereign cost o f borrowing. At the same time, it was considered important to use a higher cost o f capital given the residual debt that PEPS could end up servicing. As a result, i t was decided to calculate the financial N P V with a financial discount rate o f 12% for this project, but the financial IRR has also been calculated.

188. PEPS Revenues. Road tolls are the single most important source o f PEPS revenue, amounting to about sixty eight (68) percent o f actual revenues in 2007. The allocation o f a share o f the fuel excise tax amounted to twenty four (24) percent o f total revenue in the same year, whilst transit fees on foreign vehicles amounted to just under three (3) percent. A detailed breakdown o f the revenues to PEPS, by source, is provided in Table 15 below. Tol l rates in Serbia are different for domestic vehicles f i om those for foreign vehicles in the ratio o f 1:1.4. This i s contrary to European directive 1999/62/EC and may be partly accountable for foreign vehicles routing away from using Serbia’s roads.

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Table 15: PEPS Revenues by Source (RSD million), 2005- 2008

Total I 28,077 I 27,971 I 31,752 I 40,579 I Source: PEPS, Bank Estimates

189. as wel l as credit repayments are as shown in Table 16:

PEPS Expenses: PEPS expenses o n maintenance, construction and reconstruction

Table 16: PEPS Expenditures (RSD million), 2005-2009

2005 2006 2007 2007 2008 2008 2 0 Actual Actual Planned Actual Planned Actual Planned

Use of Funds Maintenance and periodic rehabilitation % of GDP

Construction and reconstruction % o f GDP

Other Credit repayments Arrears payments to suppliers

TOTAL % o f GDP

27468 1.62%

5,677.7 0.34%

3162 3655

0 0.00% 39,962

28,658 1.44% 6,777

0.34% 2,398 1,45 1

10,159 0.51% 49,444

27,333 1.17% 17,448 0.75% 4,041 2,843 8,000

0.34% 59,665

26,692 1.15% 6,333

0.27% 1,996 2,684

16,140 0.69% 53,845

23,073 0.84% 13,507 0.49% 3,923 2,911

3 1,570 1.15% 74,984

24,101 0.88% 7,899

0.29% 2,640 2,969

22,262 0.81% 59,870

20,767 0.69% 12,933 1.07% 9,302 1,318

22,325 0.75% 66,646

% o f GDP 2.36% 2.49% 2.56% 2.31% 2.74% 2.19% 2.22% Source: PEPS, Bank Estimates

190. PEPS’ revenue has grown markedly over the period 2005 to 2007, but there i s considerable uncertainty about the future revenue stream and concern about debt servicing. Whi le the adopted budget for PEPS in 2008 amounts to RSD 74,983 mi l l ion (US$ 1,400 million), over RSD 30,000 mil l ions o f this i s intended for debt servicing. Over the period 2005 to 2008, actual PEPS revenues in nominal terms, excluding variable capital contributions from foreign loans, grants or allocations f rom the NIP, have almost doubled. The majority o f this increase results from the increase in revenue f rom road tolls, which contribute almost two-thirds o f own source revenues excluding N I P funds, loans, grants and donations. However, there are a number o f reasons why the future revenue stream might be uncertain and insufficient to sustain the needs o f PEPS.

191. Firstly, the revenues f rom road tolls are currently collected o n some 603 km o f motonvays and semi-motonvays. Potential implementation o f planned PPP projects will see

75

a considerable length o f the existing tolled road network handled over to the concessionaire, with a corresponding reduction in PEPS tol l revenue, estimated to amount to approximately forty (40) percent o f current to l l revenues - whilst there wil l be a reduction in operational and maintenance costs, i t i s expected to be markedly less than the decline in revenues;

192. Secondly, the number o f foreign trucks crossing Serbia dropped 30 percent in 2007, leading to a corresponding reduction in revenues both f rom foreign transit fees and road tolls. International hauliers heading to and from Greece and Turkey are diverting from Corridor X, through Serbia and Macedonia, to Corridor IV, which transits Hungary, Romania and Bulgaria. One newspaper report at the end o f 2007 noted that less complicated procedures, and lower costs explained the diversion. The passage o f a heavy goods vehicle (HGV), involving a tractor unit and one trailer through Serbia and Macedonia was reported to cost a total o f about EUR 155, while Bulgaria and Romania were reportedly much cheaper and Croatia for a similar HGV, charged EUR 44.75. There are questions whether these latter figures actually cover the social and economic costs o f the truck’s usage o f the network.

193. The harmonization o f to l l rates for foreign vehicles in l ine with those for domestic registered vehicles was made in February 2009. This change i s expected to allow the rerouting o f foreign vehicles to Serbian roads and thus improve the financial position o f PEPS. The harmonized tol l structure i s as shown in Table 17 below.

Table 17: Harmonised Toll Structure on Tolled Road Sections

Source : PEPS latest February 2009; with conversion at RSD 95 t o IEUR.

Financial Analysis for the E-75: Grabovnica to Levosoje

194. Toll revenue. The tol l revenue impact i s calculated solely for the two corridors in question, and not for the whole tolled road network. This i s because i t i s important to delineate clearly the financial impacts that can be directly attributed to the project road sections on their own. Since the current road corridor sections are not tolled, the financial impact in revenue terms i s calculated as the total expected revenue using the traffic forecast figures on the two road sections. The impact o n traffic o f the introduction o f tolls has been taken into consideration in the traffic forecasts. The same to l l rate i s used for the f i rs t ten years, and a twenty (20) percent uplift i s applied for the final 15 years o f operation.

195. The to l l revenue calculated for Corridor Xd (E-75), over the 25 year period i s an estimated EUR 1,186 mi l l ion undiscounted. Discounting at 12% per year results in projected tol l revenues o f EUR 157million at 2009 prices.

196. Road Agency Capital Costs. Road agency capital expenditure costs, as derived from the H D M - 4 for the E-75 are at some EUR 235 mi l l ion undiscounted, and discount at

76

12 percent to some EUR 47 mi l l ion current prices.

Item

197. Operating Costs. Operating costs for the E-75 road especially with regards to to l l collection and safety operations are derived from the estimates used by the Highway Institute47. An estimate o f some EUR 5.2 mi l l ion as o f 2014 was approximated in that work. Here, it i s projected into the h t u r e forecasts to grow with Euro inf lat ion per year for the assumed operation period. In this analysis, a projected inflation rate o f 7.5 percent i s used. For the 25 year period, this cumulates to some EUR 353 mi l l ion undiscounted, equivalent to an NPV o f EUR 47 mi l l ion with a 12 percent discount rate.

Amount (EUH millions) Amount (EUR miHions) Undiscounted Discounted

198. Maintenance Costs. Maintenance costs for the 74.03 km are calculated at a unit rate estimate o f about EUR 19,842 per kilometer per year48. Taking into account projected inflation o f 7.5 percent, this results in undiscounted costs o f EUR 152 mi l l ion over the 25 year period, which when discounted amounts to some EUR 26 mil l ion.

Road Agency Capital Costs Operating Costs

Net Benefit (NPV)

Maintenance Costs Revenues

199. Summary Financial Impact of the E-75. The overall financial impact o f constructing, maintaining and operating the E-75 road sections over the projected l i fe cycle i s as shown in Table 18 below.

23 5 47 353. 47 152 26 1186 157 446 37

Table 18: Overall Financial Impact of Project Component E-75: Grabovnica - Levosoje

200. The results o f th is analysis demonstrate the financial viability o f the E-75: Grabovnica to Levosoje project component with discounted net benefits to the agency o f an estimated EUR37 mi l l ion with a discount rate o f 12 percent. This i s equivalent to a financial IRR o f 16 percent.

201. Sensitivity analysis: Sensitivity analysis i s carried out on the key parameter o f traffic (with a range o f +lo%, +20% and -lo%, -20%) to investigate the financial performance under these varied circumstances. The results are as shown in Table 19 below. Note that a similar investigation on the to l l rate yields the same sensitivity results as the traffic tests and i s therefore not repeated.

47 Highway Institute (2008) “Feasibility Study for the Motorway E-SO Nis-Dimitrovgrad”. 48 Based on World Bank Road Costs Knowledge System (ROCKS) database maximal unit rate o f U S $ 8,685 at 2000 prices, corrected to current prices using IMF World Economic Outlook Inflation data for Serbia.

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Table 19 Sensitivity Analysis of E-75 Grabovnica - Levosoje (traffic)

+20% -10% -20%

68 25% 21 14% 5 12%

Item I Amount (EUR millions) j Uncliscountd

Financial Analysis for the E-80: Prosek to Dimitrovgrad

Amount (EUR millions) Discounted

203. projected to l l revenues on the E-80.

Toll revenue: The same approach used for the E-75 i s applied for estimating the

Operating Costs Maintenance Costs

204. The tol l revenue calculated for Corridor X c (E-80), over the 25 year period i s an estimated EURl,O57 mi l l ion undiscounted. Discounting at 12 percent per year results in projected tol l revenues o f EURl40mi l l ion at current prices.

353 47 171 29

205. Road Agency Capital Costs. Road agency capital costs, as derived from the HDM- 4 for the E-80 are at some EUR 266 mi l l ion undiscounted, discounting at 12 percent results in some EUR 53 mi l l ion at current prices.

Revenues Net Benefit (NPV)

206. Operating Costs. Given the same operation strategy for both the E-75 and E-80, the operating costs for the E-80 road are based on the same operating cost estimates as used for the E-75. For the 25 year period, this cumulates to some EUR353 m i l l i on undiscounted, discounting to some EUR47 mi l l ion

1057 140 266 10

207. Maintenance Costs. Maintenance costs for the E-80 are based on the same approach and unit rates used for the E-75. Taking into account projected inflation o f 7.5 percent, this results in undiscounted costs o f EUR171 mi l l ion over the 25 year period, which when discounted amounts to some EUR29 million.

208. Summary Financial Impact o f the E-80: The overall financial impact o f constructing, maintaining and operating the E-80 road sections over the projected l i fe cycle i s as shown in Table 20 below.

Table 20: Overall Financial Impact of Project Component E-SO: Prosek - Dimitrovgrad

209. The results o f this analysis demonstrate that the E-80: Prosek - Dimitrovgrad project

78

component i s also financially viable with discounted net benefits to the agency o f an estimated EURlO mi l l i on with a discount rate o f 12 percent. This i s equivalent to a financial IRR o f 13 percent.

+ lo%

210. Sensitivity analysis: As with the E-75, sensitivity analysis i s carried out on the key parameter o f traffic (with a range o f +lo%, +20% and -lo%, -20%) to investigate the financial performance under these varied circumstances. The results are as shown in Table 21 below. Note that a similar investigation on the to l l rate yields the same sensitivity results as the traffic tests and i s therefore not repeated.

24 14%

Table 21 Sensitivity analysis of E-80 Prosek - Dimitrovgrad (traffic)

+20% 38 16% -10% -20%

(4) 12% (1 8) 11%

211. s t i l l in the 11 percent to 12 percent range.

The financial sustainability o f the E-80 i s only marginally with the financial EIRR

i Item ~

Overal l Financial Impact of both the E-75 and E-80 components

Amount (EUH miuions) Amount (EUR millions) Undiscounted Discounted

212. The overall financial impact o f constructing, operating and maintaining the two project components: E-75: Grabovnica to Levosoje and E-80: Prosek to Dimitrovgrad i s as shown in Table 22 below.

Road Agency Capital Costs Operating Costs Maintenance Costs

Table 22: Overall Financial Impact of both the E-75 and E-80 components

50 1 100 707 94 323 55.

Revenues 2243 296 Net Benefit (NPV) 712

2 13. The overall financial impact o f constructing, maintaining and operating the two road sections over the projected l i fe cycle i s therefore approximated to a discounted amount o f about EUR47 mi l l ion with a financial N P V o f 15 percent. On a financial basis, the project c iv i l works components are therefore viable and are worth undertaking.

47

79

Annex 10: Safeguard Policy Issues

SERBIA: CORRIDOR X HIGHWAY PROJECT

Social Safewards

214. acquisition and potentially resettlement:

The project has four components, out o f which component 1 and 2 require land

215. Component 1 - The M-1 road to FYR of Macedonia (E-75) - Corridor Xd. This component involves the construction or upgrading o f the existing road to motonvay for two sections totaling 31km out o f a total parallel financed length o f 74.03 km kilometers running between Grabovnica and Levosoje, 22.14 km north o f the border with the FYR o f Macedonia (Corridor Xd). The construction o f the entire motonvay requires acquisition o f approximately 566 ha in total for the entire section between Grabovnica and the border with FYR o f Macedonia. This section includes the sections, to be financed by the Government and by HiPERB. Under the World Bank financed project, the amount o f expropriation required i s 50 ha o n the Grabovnica-Grdelica section o f the E-75, and 130 ha on the Vladicin Han- Don j i Neradovac section; and

216. Component 2 - The M 1-12 Road to Bulgaria (E-80) - Nis' - Dimitrovgrad - Corridor Xc. This component involves the construction o f a motonvay on a new alignment for a length o f 8.9km out o f a longer parallel financed program for 83.45 km f iom Prosek to 1 kilometer short o f the Bulgarian border. Under the Wor ld Bank financed project, the amount o f expropriation required i s 50 ha on the E-80 Dimitrovgrad Bypass. However, only 78 km o f the total 83.45km between ProseWDimitrovgrad i s covered by the Resettlement Pol icy Framework (RPF) since the f i rs t 5.9 km has been started prior to project preparation. This section wil l not be subject to the policies detailed in the RPF, nor form part o f the Bank financed sections. However, as part o f the normal due diligence, the Bank team confirmed that this expropriation has been carried out in accordance with Serbian law and in a manner consistent with OP 4.12. The estimated amount o f land under IFIs financing, including the section to be financed by the WB, subject to this RPF is about 1022 ha o f land in E-80.

217. Justi$cation for not preparing detailed Resettlement Action Plan (RAP): The detailed designs for al l the road sections on Corridor X that comprise the WB financed project, as part o f the broader IF1 parallel financed program, are not yet finalized: As a result, the exact amount o f land required, the actual number and identities o f project - affected people, both with and without legal title, and the extent o f the loss for each project- affected individualhousehold i s not known. In the absence o f such information, i t is only possible to prepare a Resettlement Policy Framework (RPF) that lays down the resettlement policies, principles, procedures and institutional arrangements that must be followed for al l expropriation in the project.

218. The RPF has been prepared in accordance with Serbian law, with additional provisions for full compliance with OP/BP 4.12 (particularly relating to entitlements for project-affected people who are using but do not own or rent the land to be acquired). As detailed engineering plans become available on a section by section basis, detailed section-

80

specific Resettlement Action Plans (RAP) will be prepared on the basis o f this RPF. These wil l be prepared by the legal department o f Public Enterprise Putevi Srbije (PEPS), the Beneficiary o f E ~ p r o p r i a t i o n , ~ ~ the public enterprise legally in charge o f expropriation for the WB financed project, and the entire IF1 financed Corridor X program, on behalf o f Koridor 10 Drugtvo sa OgraniCenom OdgovornoSCu (K1 ODOO). PEPS are currently collecting detailed information on the section o f the E-80, Dimitrovgrad Bypass, in conjunction with the preparation o f the detailed design on this section. As soon as sufficient information i s collected on this and each subsequent sub-section, the legal department within PEPS wil l prepare a R A P for this and each subsequent sub-section in accordance to this RPF and disclose it in the manner detailed in the RPF.

2 19. basis for the RPF:

Legal Basis for Resettlement Policy Framework. The fol lowing represent the legal

0

0

0

0

0

0

The Republic o f Serbia Expropriation Law (passed in 1995 and enacted on January 1,1996, amended in March 2001, amended on March 19, 2009); Law on Fundamentals o f Property Relations (1980, applicable f rom lSt September 1980, amended 1990, and 1996); Administrative Code (Passed in 1996, amended June 26, 1997 Law o f Planning and Construction (Passed on M a y 5, 2003, enacted on M a y 13, 2003); Law o f Agricultural Land (Passed on July 19,2006, enacted July 27,2006); and The World Bank Policy on Involuntary Resettlement” (OP/BP 4.12).

220. Land Acquisition & Resettlement Impacts in the Corridor X Program. Along the E-75 route, a section o f 74.03km between Grabovnica to Levosoje, wil l be the subject to this RPF (reflecting the intention o f the Government that this RPF wil l apply to the entire IF1 parallel financed program). About ha l f o f the missing section i s a new alignment, the other ha l f i s a widening o f the existing road. The construction o f the motonvay requires approximately 566 hectares (ha) o f land in total for the entire IF1 and HiPERB financed program, out o f which 452 ha i s required for the section between Grabovnica and Levosoje, which encompasses the WB, and EIB financed sections. The expected amount o f expropriation required on the Wor ld Bank financed sections on the E-75 i s 50 hectares on the section between Grabovnica-Grdelica, and 130 hectares on the section between Vladicin Han- Donj i Neradovac.

221. Along the E-80 route, the new motonvay wil l extend for a total distance o f 83.45 km

49 The Beneficiary o f Expropriation here i s consistent to the definition under the Law on Expropriation: i s the entity which is performing the expropriation on behalf o f the implementing entity for a particular scheme or project. In the case o f the Corridor X Highway projectiprogram, the Beneficiary o f Expropriation’ i s the Public Enterprise Putevi Srbije (PEPS), on behalf o f the implementing entity, K10D00 , or in h ture the latter directly on i ts own account.

http://web.worldbank.org/WB SITE/EXTEWALPRO JECTS/EXTPOLICIES/EXTOPMANUAL/O,,contentM DE200646 1 O-isCURL:Y-menuPK:6470 1637-pagePK: 64709096-piPK: 64709 108-theSitePK: 502 184,OO.ht ml

Available for download from the following link:

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between Prosek and Dimitrovgrad, within the IF1 financed program. The current estimates indicate that approximately a total o f 1022 ha o f land i s affected along the entire corridor. The number o f project affected households i s not known at this stage. In general, the effect o f the land acquisitiodexpropriation on project affected individuals and project affected households wil l vary according to the type o f impact, and the type and amount o f needed land, the location, etc. I t is known that about 10 houses, 7 to 8 in the settlement o f Jelasnica near Nis , and 2 or 3 in the settlement o f Crvena Reka wil l require resettlement. In addition, at least one retailer o f petrol and diesel will be affected.The expropriation o n the first 5.9km from Prosek towards Crvena Reka was started in late 2008, and although the process has been reviewed by the World Bank, the expropriation on this short section wil l not be subject to the policies detailed in the RPF. The WB financed section i s 8.67 km long around Dimitrovgrad, and the expected amount o f land to be expropriated for this section i s 50 hectares.

222. affected persons will be governed by the following general principles:

Principles of land acquisition and resettlement. All compensation o f project

The relevant Republic o f Serbia laws and OP/BP 4.12 wil l be followed. Where there i s a conflict between the Republic o f Serbia laws and WB policy, the provisions o f this RPF and the relevant WB safeguard pol icy wil l apply;

The property and inheritance r ights o f project affected persons wil l be respected;

The public wil l be fully informed and processes wil l be transparent;

Where it can be identified, comparable agricultural land, o f the same type and quality, or appropriate value, in the same area or vicinity (as consistent with Article 15 o f the Republic o f Serbia Law o n Expropriation) wil l be offered to the project affected persons with formal title, whose agricultural land i s expropriated;

The comparability o f land i s determined on the basis o f an assessment o f the available public land, by an accredited expert hired either by the Beneficiary o f Expropriation, or the Ministry o f Agriculture;

In case o f disagreement on the comparability o f the land offered, or assessed fair value for immovable property, the project affected person can approach the independent grievance commission who can mediate and, if necessary, hire an accredited expert, at the expense o f the Beneficiary o f Expropriation to review and determine the comparability o f the land offered, or the assessed fair value for immovable property;

If the independent grievance commission determines that the offered agricultural land i s not o f comparable value, they can request the Beneficiary o f Expropriation to pay the assessed fair value, as determined by the Taxation Administration;

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0 If after mediation, the project affected person, offered comparable agricultural land or assessed fair value for immovable property, disputes either the comparability or the assessment o f fair value, they are free to enter the judicial process in a manner consistent with the current Law on Expropriation;

Where comparable agricultural land cannot be identified, the project affected person with legal title i s offered the assessed fair value for the land, as determined by the Taxation Administration. If the project affected person wishes to challenge the assessment o f ‘fair value’ they can resort to the independent grievance commission initially, and subsequently to the judicial process;

Where the project affected person without legal title i s offered the assessed fair value for any investment made on public or private land in the cost o f structures and installations5’ (under the Law on Fundamentals o f Property Relations (1980, applicable f rom IS‘ September 1980, amended 1990, and 1996) in terms o f the investment made - as determined by an accredited Expert to assess the value o f the materials used, crops, woods, trees, h i t bearing trees, vineyards, the age o f crops and the t ime needed to reproduce them;

0 If the livelihood o f the project affected persons without formal title depends on the public or private land that they are using, they will be assisted in their effort to improve their livelihoods and standard o f living to restore them to pre-displacement levels;

0 If project affected persons, without legal title, i s not satisfied with the decision, they can approach the independent grievance commission, who wil l mediate and, if necessary, hire an accredited expert, at the expense o f the Beneficiary o f Expropriation to review and determine the assessed fair value for immovable property;

0 If the remaining parcel o f land after expropriation o f part o f it i s not economically viable, i t will be expropriated, if the project affected person so desires;

0 In cases where there are persons working on the affected land or businesses, as determined by the social assessment (socio-economic study), where the project affected person does not have formal title to the land (e.g. wage earners), then compensation should be provided to these project affected persons to ensure no loss, the extent as determined appropriate by the social assessment (socio-economic study);

51 Replacement cost which i s defined as the market price after taking into account the value of land, cost of structures & installations, crops, trees, wells, age of crops, vineyards, and the time needed to reproduce them, plus the cost of any registration and transfer taxes. In the case of a house, the compensation should be as such to enable the owner to replace the house with a similar house. This also includes the transaction cost. Speculation based on the construction of the road w i l l not be a factor in valuation. In other words, the valuation i s based on the fair market value before the announcement o f the scheme.

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In cases where land i s needed on a temporary basis, project affected persons who have formal title wi l l be compensated to the assessed fair rental price for the period during which the land i s used and the land wil l be returned in the same condition as before it was rented. In the case o f agricultural land, the assessed fair rental price will be determined by an accredited expert paid by the Beneficiary o f Expropriation in a manner consistent with the Republic o f Serbia Law on Expropriation (Article 55);

0 In exceptional cases, if resettlement is unavoidable in addition to the payment o f fair market value for all land and immovable property, project affected persons wil l be provided assistance in relocation and other related expenses (i.e., cost o f moving, transportation, administrative costs etc.);

0 These r ights do not extend to individuals who commence activities, either in the form o f cultivation or the construction o f any immovable objects, after the declaration o f public interest, reflecting the introduced restriction on property transactions under current practice under the Republic o f Serbia Law on E ~ p r o p r i a t i o n ; ~ ~

0 In general, expropriation wil l be undertaken in such a way that no project affected person, with or without formal title, wil l be worse o f f after expropriation; and

0 all activities and procedures wil l have to be formally documented.

223. All project affected persons (private and public, individual and businesses) entitled to be compensated for land acquired, losses, structures or damages must be paid in full at the time of the acquisition of the land, or their grievance registered, in accordance with the RPF, before any works or construction activities are allowed to commence on the land plots in question. In the case o f any disagreement over ownership and/or compensation amounts, the Beneficiary o f Expropriation shall transfer the sum corresponding to the assessed fair value, as determined in each applicable case above, and which must also be satisfactory to the Wor ld Bank, to either the account o f the relevant local authorities, or to a court account, or arrange a bank guarantee in the name o f the project affected person with a commercial bank, while the case i s pending, before starting any construction activities on the affected land plots.

224. fol lowing categories:

Project Affected Persons. Project affected persons are defined to include the

0 Project affected persons, with formal title, who lose al l or part o f their land;

52 The declaration o f public interest was made in the case o f the E-75 in the Official Gazette o f the Republic o f Serbia Number 78 in 2008, and in the case o f the E-80 in the Official Gazette o f the Republic o f Serbia Number 84 in 2008. This date and the implications have been publicized to al l project affected people, and i t i s generally recognized as the point where the state registers i t s interest in affected land.

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e

e

e

e

e

e

e

225.

Project affected persons, with formal title, who have immovable property on the land to be expropriated; Project affected persons with formal title over businesses that are affected by the loss o f al l or part o f the land o n which the businesses are located; Project affected persons with formal t i t le over animal husbandries and agricultural processors that are affected by the loss o f al l or part o f the land o n which they are based; Project affected persons with formal title o f tenancy o n private or public land; Project affected persons with formal title over land, that will be needed during construction on a temporary basis; Project affected persons without formal title on affected land or businesses but their livelihoods are directly dependent on the affected land or businesses (e.g., those working on affected agricultural land or working in the affected businesses); and Project affected persons without formal title o f ownership or use but who have established usage o f public or private land by investing in immovable objects, crops, woods, trees, fruit bearing trees, vineyards, the age o f crops, and the time needed to reproduce them. Land Acquisition and Resettlement Plans and Procedures. When a scheme i s

declared to be ‘o f public interest,’ a concrete expropriation proposal by the Beneficiary o f Expropriation is prepared and then submitted to the relevant municipality encompassing the project affected persons. A concrete expropriation proposal i s prepared for each project affected person that contains the amount o f land involved, the justification o f the need for the specific expropriation, together with the confirmation that the scheme i s included in the relevant regional and/or spatial plan.

226. The Beneficiary o f Expropriation (PEPS), through the municipalities involved, will collect information on the socio-economic condition o f each project affected person at the time o f the preparation o f the section specific RAP. This wil l include information on employment status, income, sources o f income, land holding, type and size o f land, crops, other resources, number o f children and dependents, for al l project affected persons. This information wil l form the basis o f the required social assessment (a socio-economic study) to the satisfaction o f the Bank. These will form the basis o f the RAPs.

227. The concrete expropriation proposal also involves the Beneficiary o f Expropriation arranging a bank guarantee with a Commercial Bank for the assessed fair value. This assessment is prepared by referring to the Cadastre Register, which provides details on the title holder, the immovable property, the type o f land, and the area o f the affected land. At this stage, the concrete expropriation proposal also obliges the Beneficiary o f Expropriation to submit a request to the Cadastre Office, or other public register, to prevent any transaction (Article 32 o f the Expropriation Law) on the land to be expropriated.

228. The individual RAPs for a given section will also include; specific compensation rates; pol icy entitlements related to any additional impacts identified at the main design stage, if applicable; description o f resettlement sites, if applicable; implementation schedule for resettlement activities; and detailed cost estimates. The RAPs should be in full compliance with this framework, i t s principles and procedures. Each individual RAP must

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be disclosed, and compensation paid or grievance registered and a guarantee arranged, before commencing construction on any specific section.

229. Expropriation and organizational arrangements and Consultation. The organizations and parties involved in the process o f expropriation and resettlement are the Ministries o f Finance, Agriculture, Taxation Administration, PEPS, the Beneficiary o f Expropriation on behalf o f K 1 ODOO, and K1 ODOO, the implementing entity, municipalities, expert assessors, project affected persons, the independent grievance commission, and the court. When the scheme i s declared to be ‘o f public interest’, and approved by the Government, a concrete expropriation proposal i s prepared by the Beneficiary o f Expropriation, the legal department within the PEPS, on behalf o f K 1 0 D 0 0 , or in h t u r e K 1 0 D 0 0 directly, and submitted to the local government’s property department (LGPD), in the municipality where the scheme will be implemented. The LGPD is the body which administers the expropriation process at the local level, based on the administration law, the Law o n Expropriation, and this RPF.

230. The role of the municipality: The respective local LGPD, where properties are being expropriated, administers the expropriation process at the local level in conjunction with the Beneficiary o f Expropriation. In the first step, the municipality reviews the RAP for accuracy. Once the municipality has al l the legal and technical documents and after review, i t sends an invitation to al l project affected persons inviting them to a meeting. If the project affected area (where land i s being expropriated) i s not spread out, the municipality calls for a public meeting.

23 1. Otherwise i t invites the project affected persons to come to the municipality one by one. During the meeting, the municipality informs the project affected persons about the project, presents them with al l the information about the level o f impact on their property with maps, their entitlement based on this RPF (a copy o f the entitlement matrix and the RPF will be given to the project affected persons in the first meeting), the steps which wil l be taken afterward, provides them with legal advice and informs them about their rights, including the role o f the independent grievance commission. In this meeting, there i s no discussion o f the comparability o f the agricultural land or the concept o f fair value. I t i s only a consultative meeting, informing the project affected persons and providing them with their entitlements and rights.

232. Once the information process i s over, then the municipality and the project affected persons come to a decision on expropriation. However, if the project affected persons have a dispute about the decision o f whether the actual expropriation should start or not (or if they feel that the law was not followed), the project affected person can register their concern with the Ministry o f Finance, and the decision has to wait till the Ministry o f Finance reviews the case, which takes between 30-60 days. The review determines whether expropriation can continue or not. The latter only applies if there i s a deficiency in the RAP. In the case o f the former, the valuation process starts. In the case o f the latter, the case automatically enters the judicial procedure, and works can start.

233. The Valuation Stage. At the valuation stage, the Beneficiary o f Expropriation contacts the Taxation Administration for the assessment o f fair value for all land. In the

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specific case o f agricultural land, the Beneficiary o f Expropriation contacts the Ministry o f Agriculture, which provides an assessment o f the availability o f comparable agricultural land. In addition, the Beneficiary o f Expropriation hires, at i t s own expense, through the relevant municipality, an accredited expert ( s ) to assess the value o f the land, agricultural output, businesses, and all immovable property and structures. At the request o f the project affected persons, they can be present during the valuation process.

234. After the valuation, the Beneficiary o f Expropriation presents the offer to the project affected person. If project affected person, with or without legal title, i s not satisfied with the decision on valuation, they can approach the independent grievance commission, who will mediate in the manner described in paragraph 228. The grievance will be registered when f i rs t put to the independent grievance commission, and the monetary amount equivalent to the assessed fair value i s entered into a municipal account, in their name, in a court account in their name, or under a bank guarantee with a commercial bank arranged by the ‘Beneficiary o f Expropriation.’ At this point, the project affected person also agrees to transfer access to the land to the Beneficiary o f Expropriation for the commencement o f works.

235. If the project affected person i s unhappy with the guidance/decision o f the independent grievance commission, they can apply to the court, fol lowing the standard procedures set forth by Serbian law. The ruling o f the court also determines who pays the cost o f litigation.

236. place through two processes: negotiated settlement or court settlement.

The Transaction Stage. The expropriation o f land and immovable property can take

d. Negotiated Settlement. If the project affected person, with legal title, agrees to a negotiated settlement, either in front o f the LGPD or the independent grievance commission, then discussions between the municipality and project affected person wil l take place to finalize the transaction. If an agreement i s reached, the project affected person, with legal title, wi l l be paid within 15 days after the agreement on the monetary compensation or the replacement o f agricultural land or property. The expropriation should be registered in the land registry and cadastre office.

e. Court Settlement. A court settlement wil l occur if the negotiated settlement process fails. Prior to requesting a court settlement, r ights to due process and appeals will be explained fully by the relevant municipalities, the independent grievance commission, the Beneficiary o f Expropriation, and the implementing entity to the ownedaffected persons. The municipality wil l hand over the case to the relevant court for valuation and registration, pursuant to the Serbian Law.

237. Right of Appeal After failure or refusal to agree on the assessed fair value decided by the first degree court, the ownedaffected persons can appeal the decision stated in the judgment to the appeal, second degree, court. The ruling o f the court determines who pays the cost o f litigation.

238. Monitoring. The Beneficiary o f Expropriation PEPS, on behalf o f the

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implementation entity (K1 ODOO), wi l l monitor the implementation o f the resettlement processes, both through internal, official institutional arrangements, as wel l as by an independent, external consultant, to be appointed by implementing entity. The external monitoring and evaluation consultant wil l be appointed prior to construction starting on any section. The WB also wil l monitor the implementation o f RAPs prepared under the Project, for those sections financed in whole or in part from the Wor ld Bank loan, during the regular supervision missions.

239. Cost Estimates and Budget. Only rough estimates o f the land requirements for the two components are available at the time o f the preparation o f this RPF, and i t is not possible to estimate the exact cost o f land acquisition and resettlement. However, the Beneficiary o f Expropriation, PEPS, through its legal department, wil l be preparing RAPs including detailed cost estimates for each section when the main design becomes available.

240. Documentation Submitted to the World Bank for Review. Prior to obtaining final approval for each o f the RAPs with respect to the relevant land plots, the Beneficiary o f Expropriation, PEPS on behalf o f the implementing entity (KlODOO) will submit the plan to the World Bank for review and approval, to confirm full compliance with the Bank’s Operational Pol icy on Involuntary Resettlement (OP/BP4.12).

241. Disclosure. This RPF in draft form was officially disclosed in both English and Serbian on the website o f the Beneficiary o f Expropriation on April 2, 2009, and a f i rst round o f consultation on March 11 and 12, 2009. The final version was disclosed on M a y 20 2009, after a second round o f consultation on June 2 and 3, 2009. In addition, hard copies o f the RPF, both in English and Serbian, were posted in the relevant organizations, as wel l as affected municipalities. The draft was also disclosed o n the WB Infoshop on April 2, 2009. The final version was disclosed on M a y 28, 2009. As individual RAPs are prepared, they wil l be disclosed in the same manner.

Environmental Safeauards

242. Legal Framework. The Ministry for Environment and Spatial Planning i s the key institution in Serbia responsible for formulation and implementation o f environmental pol icy matters. The Ministry i s responsible for the protection against noise and vibration, hazardous and toxic material, air pollution, ionic and non-ionic radiation, nature protection and international co-operation. The other aspects o f natural resources management related to issues o f construction and operation o f highways in the Republic o f Serbia, are dealt with several other institutions, among which are the Ministry o f Economy and Regional Development; the Ministry o f Infrastructure; the Ministry o f Agriculture, Forestry and Water management; the Ministry o f Culture; the Public Enterprise ‘Putevi Srbije’ (PEPS); the Institute for Nature Protection o f Serbia; the Institute for Protection o f Cultural Monuments o f the Republic o f Serbia, and K 1 0 D 0 0 .

243. The environmental legislation that forms the institutional framework for the implementation o f the Project and has served as a basis for the EIAs includes:

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0 Law on planning and construction (“Official Gazette o f RS” No. 47/2003, 34/2006) which details the requirements for different phases in the planning cycle, i.e. pre- justification @re-feasibility) and justification (feasibility) studies and the application for the main (general) project permit, as wel l as the requirement for public consultation during the preparation o f master plans. According to the Law, the Pre- feasibility and feasibility studies must both include separate environmental assessments .

0 Law on environmentalprotection (“Official Gazette o f RS” No. 66/91, 83,92, 67/93, 48/94, 53/95, 135/04). The law states that ‘the use o f natural resources, construction o f structures or any other activity may be carried out under the condition that they cause no permanent change and significant change o f landscape, no pollution, no other forms o f environmental degradation’.

0 Law on Environmental Impact Assessment t‘Officia1 Gazette o f RS” No. 135/2004) and Law on Strategic Environmental Impact Assessment (“Official Gazette o f RS” No. 135/2004). Those laws have been fully harmonized with EU legislation in the area o f environmental protection in 2004. The harmonization included adjusting the EIA regulation (lists o f projects and procedures) to the EIA Directive 97/11/EEC, introducing Strategic Environmental Assessment (SEA) procedures following the Directive 2001 /42/EEC and securing public access to environmental information fol lowing the EU Directive 2003/4/EC. Regulations on permitted noise level in the environment (“Official Gazette o f RS” No. 54/92), which detail the noise and air quality standards.

0

244. Environmental Impact Assessment:

The fol lowing regulations have been established o n the basis o f the Law on

0 Decree on establishing the L i s t o f Projects for which an Environmental Impact Assessment i s mandatory and the List o f projects for which an Environment Impact Assessment can be requested (“Official Gazette o f RS” No. 84/05) Rulebook on the contents o f requests for the necessity o f Environmental Impact Assessment and on the contents o f requests for specification o f scope and contents o f the Environmental Impact Assessment (“Official Gazette o f RS” No. 69/05) Rulebook on the contents o f the Environmental Impact Assessment (“Official Gazette o f RS” No. 69/05) Rulebook on the procedure o f public inspection, presentation and public consultation about the Environmental Impact Assessment (“Official Gazette o f RS” No. 69/05) Rulebook on the w o r k o f the Technical Committee for the Environmental Impact Assessment (“Official Gazette o f RS” No. 69/05).

0

0

0

0

245. The full l i s t o f the environmental legislation, presently in force in Serbia i s summarized in Appendix C o f the Corridor Level EIAs. Those documents also contain a list o f relevant EC Council Directives and international Conventions that have been in force during the Project preparation.

246. Environmental Documentation: PEPS, o n behalf o f K 1 ODOO, commissioned the

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preparation o f two Corridor Level EIA documents, one for the E-80 and one for the E-75, from an independent consultant in full compliance with OP/BP 4.01. Each document contains two volumes: Volume 1 - The M a i n Report; and Volume 2 - Appendices. The environmental conditions o f the project are described in detail in sections 3 and 4 o f the M a i n Reports as well as Appendices E and F. These Corridor Level EIAs describe and analyze potential environmental issues and set out mitigation and monitoring requirements at the level which i s possible and appropriate for the present stage o f project design. A s part o f the preparation o f detailed designs, contractors wil l be required to carry out further local investigations as called for in the Corridor Level EIAs and in the “preconditions” set by the Institute for Nature Protection (INP) and the Serbian Institute for Protection o f Cultural Monuments (IPCM), in order to prepare detailed site-specific EMPs acceptable to both Government and the Wor ld Bank.

247. The project area for the E-80 highway belongs to the southern part of Eastern Serbia, bordered by the line created by the hills and mountains Rozanj - Rtanj - Stara Planina, valley-like watershed between Nisava and Vlasina water basins and border with Bulgaria. The highway stretches in the direction northwest - southeast, from the city o f NiS through Bela Palanka to Pirot to Dimitrovgrad. The project area is characterized mostly by continental and only in a small part by moderately-continental climate, with l o w precipitation (mean annual ranging from 586 to 633 mm). Mean monthly temperature in January i s below zero, whereas the warmest month i s July, with temperatures ranging from 20 to 22°C.

248. Over 25 different soil types, subtypes and varieties have been identified within the project area incorporating a part o f N i s valley, Bela Palanka and Pirot valleys, the River Nisava’s alluvium and i t s tributaries - among others the calcareous alluvium, alluvium developing into cambisol, waterlogged alluvium, acidified grassland, chernozem, calcic vertisol, eutric cambisol, terra rosa, rendzina, umbric leptosols, podzols including slates, degrading calcomelanolosole complex, etc. The recent alluvial deposits group i s a heterogeneous group o f soils formed as fresh deposits in the areas adjoining the rivers Nisava, Dolinska and Jerma. They take up large areas across which the newly designed motonvay wil l pass, in particular in the section between Prosek and Dimitrovgrad.

249. Morphologically, the area’s rel ief covers highlands and flatlands. The mountain slopes o f Suva Planina, Svrljiska Planina and Stara Planina belong to the highlands area, with sharp, rugged rel ief and great differences o f mountain peaks and height. Al luvial areas belonging to valleys, terraces and alluvial deposits o f Nisava, Dolinska and Jerma rivers present the flatland relief. The river Nisava cuts through the gorge known as Sicevo Gorge, which i s the most prominent morphological feature in the research area. The river made several terraces during its formation, the highest o f which i s at 508 m. The Sicevo George i s a protected Nature Park, with numerous caves, rock shelters and escarpments o f Kusaca arranged in an arched, amphiteatrical sequence. Two monasteries and remains o f several medieval fortifications are located in the gorge, as wel l as parts o f a famous Roman road V i a Militaris.

250. The width o f the river valley o f Nisava varies greatly - f i om several tenths o f meters to several kilometers. The Sicevo Gorge, which connects the N i s Hol low to the Bela

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Palanka Hollow, has specific hydrographic features. In this part, Nisava runs fast and wild, i t s river bed ranging from 15 to 25 m o f width. The width, height and depth o f the f low rise when the water levels are high. Complex geological structure, various and highly active tectonic movement, including later erosion caused by numerous and different exogenous factors, have contributed not only to the morphological variety o f the project area, but also to i t s hydro-geological complexity. The area i s characterized by diverse hydrographic network and belongs to Juzna Morava sub-basin. A large number o f tributaries to Nisava River are torrential in nature and form alluvial deposits at their confluences.

251. Processes o f the surface decomposition, landslides, dispersal, linear and planar erosion are present in most o f the project area. Numerous gullies and ravines have been recorded in the project area, although they are most frequent in hilly and highland areas. The depths o f gullies and ravines depend o n terrain composition and slope. Erosive processes o f different intensity have been recorded at the sections f rom Ciflik to Pirot. Strong erosion has also been noted northeast f rom Dimitrovgrad, in the area o f Przojna Padina, Progon and Stranje. Those processes are selectively present throughout the project area, depending on local watercourses and geotechnical soil composition. As regards stability, the area belonging to the River Nisava alluvium i s classified as a stable ground, comprising o f solid bedrock - sandstone, sand limestone, reef limestone and/or marls, without talus sediments or with a thin layer o f such sediments with a thickness o f up to lm.

252. According to the seismic area maps, the project area belongs to complex terrains where quakes rated 7, 8 and 9' o f Mercal l i Intensity Scale are possible. Seismic activity i s caused by different geological, geotechnical, hydro-geological, and geo-morphological factors. Seismic activity i s raised along the various geotectonic units, large faults, areas with active landslides, as wel l as terrain that i s flooded.

253. Demographically and socially, the project area belongs to the category o f highly underdeveloped regions o f Serbia (Nisava and Pirot disctricts). The neglected economic development o f the mountain area, which i s also a border area, contributed to mass migration from villages to N i s (macroregional center), Pirot (regional center), Bela Palanka and Dimitrovgrad (municipal centers). Nevertheless, the border Municipality o f Dimitrovgrad and neighboring Municipality o f Bela Palanka both belong to the category o f highly underdeveloped municipalities in Serbia. Between 1991 and 2002, the population in the project area decreased by 32%. The average size o f households decreased due to their division as well as migration f rom 42 villages.

254. The various plant communities in 'the area along the planned highway have developed depending on the characteristics o f the soil, rel ief and underground water levels. The vicinity o f waterways causes an appearance o f hydrophilic meadows, as wel l as o f smaller areas populated by wil lows and poplars. The areas that are more distant from the rivers are covered by oak forests. Apart from hydrophilic meadows and oak forests, which are typical for the entire Serbia, o n the salty terrains and in gorges, ceno - ecological communities o f lilac and dry oak could be found, while the forests o f Sessile oak and hornbeam are common o n higher altitudes and on hilly terrains. The natural environment i s a limiting factor for agricultural production due to i t s rel ief and altitude, except for the narrow strip in the valley o f the River Nisava. The agricultural production i s focused on

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animal husbandry, some small orchards and vineyards, while the other types o f agricultural activities are rarely practiced.

255. The project area for E-75 highway is located in the southern part of Serbia and encompasses the valleys of rivers Juzna Morava and Presevska Moravica. The project area i s characterized by moderately-continental climate. The main characteristics o f this climate are mild summers and cold winters, significant precipitation (mean annual ranging from 601 to 91 1 mm) and clearly marked transitory periods with long autumns. The average annual temperature amplitude i s 20 - 22’ C.

256. The prospective E-75 highway i s located in the valley o f the Juzna Morava River and follows the r iver flow, transferring i t s position from the lef t to the right riverside. The route crosses through different morphological forms -Grabovnica basin, Vranje basin, Presevo basin and Grdelica gorge. Grdelica Gorge i s one o f the biggest gorges in Serbia - 30 km long and 550 m wide - and connects Lescovac basin with Vranje basins. Rodopi Mountains (old block mountains) massif borders the valley o f Juzna Morava and encompass Kukavica, Grot and Oblik peaks on the western side and KruSevica, Cemernik, and Vardenik peaks o n the eastern side (elevation f rom 1323 to 1875 m. a.s.1.).

257. The soil within the project area belongs to classes o f fluvial and fluvio-glacial soils - azonal soil types whose formation has been caused by different periods o f flooding, undisturbed pedo-genetic processes and specific sub-soil material. The largest part o f the project area belongs to a soil type called “fluvisol” or simply alluvial soil, where the ephemeral herbaceous vegetation and flooding shrubbery o f grey wi l low (Salih cinerea) grow, as wel l as woods belonging to Salici - Populetum type. The soils in the planes and on the hilly terrains belong to the class called “smonica” and “metamorphed smonica”. The group o f soils in the hilly and mountainous area also includes the acid brown soil and para- podzol soil that are home to different forest communities (beech, beech-fir tree, red fir and oak tree forests). Morphologically, the project area includes the terrains that are marked by hilly-mountainous and plane relief. The most remarkable morphological form in the rel ief o f the project area i s the Grdelica Canyon. Fans o f flooded terraces are situated on the confluences o f big tributaries, where Juzna Morava River has carved terraces more than 10 meters tall. Two o f the most frequent creations o f vertical erosion are gullies and ravines with very steep and unstable sides wherefrom the material i s constantly falling. The downstream part o f the highway route i s dominated by the Vranje basin that was created by radial tectonic movements in the slate and magrna complexes o f the Rodopian mass.

258. The main hydrologic characteristic o f the area i s determined by the presence o f Juzna Morava Valley and i t s articulated river meanders. Juzna Morava’s main tributaries are mostly o f torrential nature, with wide alluvial fans near the confluence with it. The more important tributaries to the Juzna Morava River in the project area are Slatina River, Manastirska River, Predejanska River, Caricina River, Vr la River, Jelasnicka River and Dekutinska River, as wel l as a large number o f smaller and unnamed permanent or perennial water courses. The ground water regime directly relates to regime o f Juzna Morava, to which it i s hydraulically connected to. The main water-bearing layers are to be found in the river and river-lake sediment deposits in a form o f artesian or free (gravity) springs. These springs are used as sources for the water supply for al l larger settlements.

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259. Regarding the geological structure, the project area consists o f metamorphic, magma and sediment rocks o f different age. The metamorphic rocks occur as crystalline slate in various forms but always tectonically very damaged, broken and pleated. The magma rocks are very common and are represented by granite, dacite and andesite rocks and their tuffs, while the sedimentary rocks belong to conglomerates, sandstones, dolostones, limestones, clays and less pronounced layers o f tuff, coal and shale. The alluvial and diluvia drifts in the sedimentary terrains exist in the form o f gravelly-sandy clays and surface decomposition o f the rocks, especially crystalline slate. According to the maps o f seismic regions, the project area belongs to complex terrains where quakes o f 7, 8 and 9' o f Mercal l i Intensity Scale are possible. The seismic activities o f these areas depend on different geological, geotechnical, hydrogeological, engineering - geological and geo - morphological factors. Seismic activities are especially increased along different geo-tectonic units, large depressions, on unstable terrains which are jeopardized by active landslides and terrains flooded by underground and surface waterways.

260. The alignment o f the new E-75 highway cuts through several municipalities o f Jablanica and Pcinj district - the most important being Grabovnica, Vladicin Han, Vranje, Bujanovac and Presevo. Population projections up to 2021 for above municipalities show that the project area would suffer a small decrease o f total number o f inhabitants (at average annual rate o f 0.06%). According to the projections, increase o f total number o f inhabitants i s expected in municipalities Grabovnica and Vranje, while depopulation wil l continue in other municipalities.

261. Structure and spatial distribution o f ecosystems in the project area i s defined by presence o f number o f watercourses and surrounding reliefs. In i t s autochthonous form, the valleys were overgrown by hydrophilic plants, while surrounding hilly slopes were covered by Hungarian Oak and Turkey Oak, as wel l as their transitional forms. Under the anthropogenic influences these ecosystems have been changed to include the narrow zone o f white poplar forest near the river banks, while o n the higher altitudes a group o f mono- dominant ecosystems has been introduced to include red stem dogwood and Hungarian hawthorn, hawthorn and wild privet. At terrains where the above-mentioned ecosystems are not present and where land i s not brought to use as a farmland, hydrophilic meadows have developed as dominant type o f vegetation. Further away fkom the r iver zone, there are remains o f typical clima-zonal vegetation o f Serbia and xerothermic forests on hill slopes and in dry areas. Besides Hungarian Oak and Turkey Oak, there are numerous other species l ike Sorbus torminalis, Sorbus domestica, Fraxinus ornus, Tilia argentea, Pyrus pyraster, Cornus mas, Crategus monogyna, Viburnum lantana, Rosa awensis and other. Between the sylvan areas the mesothermal and xerothermal meadows developed depending on inclination o f terrain and exposition.

262. Due to favourable conditions for agriculture, at locations where the land i s close to water flows, the natural autochthonous ecosystems have been replaced by agrarian ecosystems. Arable land i s dominant in corridor E-75 highway area, while orchards, meadows, bushy and sylvan ecosystems are infrequently present. In such cases, they are in the form o f small parcels and plots, while the arable land occupies most o f the surfaces and i s concentrated in large plots. The above types o f ecosystems conditioned both a number and diversity o f fauna. As agriculture i s intensively practiced in the project area, conditions

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for presence o f bigger species o f fauna are unfavourable. Birds and small animals living on the ground are the most common species.

263. Project Impacts: Section 5 o f the main Corridor Level EIA Reports deals with environmental impacts associated with the project. The environment along the alignment o f future E-75 and E-80 highways’ i s not classified as sensitive or particularly valuable in terms o f biodiversity and ecological significance, except in the vicinity o f Sicevo Gorge and the Grdelica Gorge. The Sicevo Gorge i s a protected Nature Park, with numerous caves, rock shelters and escarpments. Two monasteries and remains o f several medieval fortifications are located in the Gorge, as wel l as parts o f a famous Roman road V i a Militaris. The new alignment for the E-80 passes some 300 m away from the southern border o f the Nature Park, and appropriate engineering measures have been designed to avoid possible negative impacts. The alignment o f the E-75 highway passes through the Grdelica Gorge which i s not a protected area but has ecological and biodiversity significance as a refuge for tertiary vegetation where significant populations o f some endangered plant and animal species are known or l ikely to be found. Construction and operation o f the highway in this area will avoid negative impacts o n these populations through compliance with conditions set by the INP, and other measures to be specified in the site-specific EMP. In the vicinity o f new highway, there are over 30 objects that belong to the category o f cultural monuments. In accordance with the conditions set by the IPCM, resources wil l be provided under the project for further local investigations needed to determine which if any o f these are vulnerable to direct or indirect impacts during the construction or operational stage o f the highway. Related mitigation and monitoring measures will be included in the respective site-specific EMPs. As required by Serbian legislation (and OP 4.1 l), preventive protection measures wil l be applied to any “chance finds” discovered during construction works. Those measures include immediate stop o f al l works in progress around the new finds, adequate fencing to prevent unauthorized access and immediate notification o f the Serbian Institute for Protection o f Cultural Monuments.

264. Soil pollution and degradation in project area i s not considered as major problem during the construction phase and adequate protection measures have been proposed in EMP. Locations o f the possible licensed b o r r o w - p i t ~ ~ ~ wil l be determined during detailed design stage and standard engineering measures wil l be used to close and re-cultivate those areas after decommissioning. The analysis o f noise levels show that during the project operation the prescribed noise levels will be exceeded outside the highway corridor at certain places. For those areas the installation o f approximately 38 kilometers o f roadside noise-proof structures wil l be included in detailed design stage. Other noise abatement measures such as soundproofing o f windows and doors and prohibiting residential buildings within a certain distance o f the road may also be included in site-specific EMPs based on analyses to be carried out as part o f the preparation o f the detailed designs. There are no potential large scale negative impacts on water quality, as the project include the engineering measures to prevent temporary pollution from the road construction (by dust, physical damage to river banks and accidental spills) and closed drainage systems with retention ponds wil l reduce potential for pollution from road run-off during operation.

53 Any required materials for fill will only b e taken only from licensed borrow pits and quarries.

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265. The main potential impacts on fauna identified at this stage are: (i) a l ikely increase in fatalities due to both establishing roads in new areas and heavier and faster traffic on existing alignments, and (ii) possible restriction o f movements such as seasonal migration o f amphibians to breeding ponds. In accordance with guidance from the INP, the former impact wil l be mitigated by fencing the entire alignment with decreasing mesh size at the bottom to protect smaller species, while the latter will be mitigated as the many culverts and drainage pipes will provide a mechanism to allow movements alongside and across the road.

266. Mitigution meusures: In accordance with Serbian law, the overall road alignment has been selected at the stage o f physical planning to avoid interfering with sensitive ecological or cultural sites. Most impacts o f the highway construction projects that cannot be completely avoided wil l be offset or mitigated with standard and readily available environmental management and good c iv i l engineering practice, which have been developed specifically for the road sector and implemented on many highway construction projects. In the case o f E-80 and E-75, those measures are developed in section 8 o f the Corridor Level EIAs (Environmental Management Plan), which include a mitigation plan and monitoring plan, and institutional framework and responsibility l i s t along with some cost estimates. The measures relate to: impact on soil and vegetation, emissions in the form o f noise, dust and gasses, measures associated to borrow pits, construction activities, flora, fauna, cultural and natural heritage; mitigation measures in the event o f accident - including o i l and petrol spillage and chemical accident; technical measures - measures during construction, during operation and specific measures in tunnels; general environmental mitigation measures noise; and administrative measures.

267. Consultations: In respect to environmental safeguard issues, PEPS, on behalf o f K1 ODOO, has already prepared 12 sub-section EIAs on preliminary/ feasibility designs that comply with Serbian legislation. The national disclosure process encompassed four rounds o f public consultations for each sub-section (on TOR for environmental consultant, o n scope o f environmental assessment, on draft EIA and on draft final EIA) and were carried out in period from 2006 to 2009. Ten o f the sub-section EIAs have been approved by the Serbian Ministry of Environment, whilst approval was outstanding on the last two at the time o f the appraisal mission.

268. In accordance with O P B P 4.01 the Borrower engaged an independent consultant to prepare two Corridor Level EIAs (one for E-75 and one for E-80). Besides consolidating the sub-section EIAs, the Corridor Level EIAs also take a strategic perspective, considering the cumulative, induced, indirect and transboundary impacts, which are expected to be minor. The two documents were disclosed in draft during the period f rom February 25,2009 (when the documents were made publicly available o n site and PEPS web site) to March 11 and 12, 2009 (when the public meetings were held in Bela Palanka (for E-80) and Vranje (for E- 75). The draft EIAs were published by the Wor ld Bank Infoshop on April 10, 2009, and made publicly available in both Serbian and English in country o n the PEPS website on the same date. The two Corridor Level EIA documents were then finalized and the final versions, acceptable to the Bank, were disclosed o n PEPS web site on M a y 20, 2009. The Final Version o f the Corridor Level EIAs was posted the Wor ld Bank Infoshop on M a y 28, 2009. During project implementation, local public consultations wil l be held on site-

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specific EMPs prior to their being finalized.

269. Implementation Arrangements: The Corridor level EIAs identify and analyze potential environmental impacts and set out mitigation and monitoring measures at the level o f detail which i s possible at this stage o f project design. In accordance with Serbian law, they incorporate information from, and the preconditions set by the Institute o f Nature Protection and the Institute for Protection o f Cultural Monuments in order to minimize and manage r isks to biodiversity and cultural assets, respectively. They also specify further investigations which wil l need to be carried out as part o f the preparation o f detailed designs, and associated site-specific EMPs.

270. The Corridor Level EIAs provide a platform, o n which site-specific EMPs and Checklist, for each sub-section, are to be prepared, and approved by the Bank for those sections in the project. These wil l be required to be produced as a part o f detailed design stage for each sub-section by PEPS, on behalf o f K10D00, and will become part o f the bidding packages to ensure the contractors are aware and meet their formal obligations in this respect. The Loan Agreement wil l also require production o f these site-specific EMPs compliant with good engineering practice and acceptable and approved by the World Bank. Prior to beginning any works, the contractors wi l l prepare their own site-specific implementation plans showing how they propose to meet the requirements o f the EMP, to be approved by the Borrower’s Supervision Consultant.

271. PEPS’S, on behalf o f K10D00, capability and capacity to plan and implement the environmental protection and mitigation measures i s considered high. PEPS has a separate, wel l resourced environmental department with experience in the environmental supervision o f Bank financed projects in Serbia.

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Annex 11: Governance and Anti-Corruption Action Plan

SERBIA: CORRIDOR X HIGHWAY PROJECT

Country Governance Context 272. According to Transparency International’s 2008 Corruption Perceptions Index, Serbia ranks 85th out o f a total o f 180 countries. In the region, this ranking i s more or less at par with many o f i t s neighbors. Governance indicators have been noted to have improved markedly albeit from a l ow base particularly perceptions on issues l ike the rule o f law and the control o f corruption.54 However, as noted in the European Commission progress report for Serbia, while some progress has been made concerning corruption, i t continues to pose a serious problem for the country.55 Among the main issues raised, i s the lack o f sufficiently independent and efficient oversight bodies, with, for example, an anti-corruption agency yet to be established. Also mentioned is that while progress has been made with regards to public procurement, a consistent, effective and fully independent public procurement system with streamlined award procedures i s s t i l l lacking. The Governance and Anti-Corruption (GAC) Action Plan presented i s cognizant o f both the Serbia country situation and the road sector environment. The mitigation measures proposed are intended to support the efforts o f the Governance and Anti-Corruption Strategy Implementation Plan for the Europe and Central Asia region by uti l iz ing opportunities in the individual investment components to strengthen governance and reduce rent-seeking behavior.56

Project Governance and Anti-Corruption Action Plan 273. The G A C Action Plan i s designed to strengthen the procurement and financial management systems and procedures to be used by the project implementing entity, K10D00, with specific actions to protect the Project. The plan i s intended to mitigate r isks that may arise due to possible rent-seeking behavior or those that compromise the delivery o f the project. This i s intended to be achieved through the application o f transparent and wel l documented procedures, based on the analysis o f r isks and the governance environment. Five tenets have been identified to formulate the Governance and Anti-Corruption Act ion Plan for this project. These tenets have been built o n the notion that corruption manifests itself readily in the procurement process, quality control, and financial control,57 while governance i s directly related to institutional aspects. The tenets have been built using in part the emerging best practice for dealing with governance and corruption r isks in project lending.58 The tenets fol low the guidance in the World Bank Governance Strategy dealing with Anti-Corruption measures at the project level and the issues to be dealt with in anti-corruption action plans.59 The summary o f these elements i s as shown in Box 1 below, while the five tenets developed for the Corridor X G A C plan are described thereafter. Note: N o t al l the suggested elements in the Box are considered for

’4 See World Bank Institute (2007), “Governance Matters 2007: A decade o f measuring the quality o f Governance”. ” See European Commission (2008) “Serbia 2008 Progress Report”. 56 See World Bank (2007), “Country Partnership Strategy for the Republic o f Serbia for the period FY08-FY 1 1” ’7 See World Bank (2007), J. Edgardo Campos & Sanjay Pradhan (eds). “The Many Faces o f Corruption”:- Wil l iam D.O. Paterson & Pmki Chaudhuri in “Making Inroads on Corruption in the Transport Sector through Control and Prevention”.

’ 58 World Bank (2008), “Dealing with Governance and Corruption Risks in Project Lending: Emerging Good Practices”; Discussion Draft, Operations Policy and Country Services dated December 12, 2008. ” World Bank (2007), “Strengthening World Bank Group Engagement on Governance and Anti-Corruption”, pp 24-27.

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the Corridor X G A C plan. The G A C plan also includes measures from experiences in similar Bank financed projects.

Box 1: Smart Project Design and Anti-Corruption Plan Best Practice Elements: [Based on World Bank (2008): Dealing with Governance and Corruption Risks in Project Lending: Emerging Good Practices]’* Smart Project Des im elements: 0

0

Strengthening internal controls and accountability mechanisms:-procurement, financial management, monitoring and evaluation, and information disclosure; Strengthening participation and external accountability mechanisms- including (where appropriate) the participation o f project beneficiaries and affected communities in project design and implementation, and strengthening their “voice” in order to enhance the responsiveness o f service providers; Ensuring effective project oversight and supervision through careful project design, engagement (as appropriate) o f independent “third party” oversight, and identifying and funding the Bank’s Task Team requirements; and Implementing a well-thought-out communications plan designed to send the right signals, consistently to al l o f the players, and to avoid surprises later on.

Introduction o f e-procurement, for greater openness and transparency, and to counter collusive arrangements that undermine the competitive bidding process; Transparent budget and expenditure tracking systems; Expanded scope o f the audit function to include technical andor value-for-money audits that make it more difficult for contractors, suppliers and consultants to get away with short-changing the project during implementation; Increasing the amount o f critical information available to the public; Strengthening the voice o f consumers through consumer satisfaction surveys; Engaging with NGOs, project beneficiaries and affected communities; and Increasing the probability o f detecting irregularities through the development o f an effective complaints program.

0

0

When Smart Project Des im isn’t enough: 0

0

0

0

0

0

0

(A) Bank Procurement and Financial Management Procedures 274. First, as with al l Bank projects, the fiduciary due diligence on procurement and financial management wil l be implemented by following the Bank’s operational policies, guidelines, and procedures. Given noted fiduciary risks, further actions have been incorporated into the G A C plan. At the design stage, checks have been built in to ensure the reliability o f the bills o f quantities, cost estimates, and designs through the use o f international consultants (one highway engineering expert and one tunneling expert to be provided by the EIB). In addition to this, an international procurement advisor wil l be recruited to assist K10D00 with the preparation o f the bidding documents and in bid evaluations, as wel l as on the j ob training. They will work with K1 OD00 to detect abnormal pricing at the bidding process and possible collusion practices.

275. Further efforts wil l be made to: (i) ensure proper advertising o f al l procurement notices, pre-qualifications, Expressions o f Interest, Tenders and Requests for Proposals on the United Nations Development Business (UNDB) and dgMarket, o n the K 1 0 D 0 0 company website and in local newspapers, together with notifymg bidders o f the outcome o f the biddingselection process); (ii) monitor the bidding process, (iii) ensure that to any clarifications sought by any

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bidder/s, replies will be sent to al l bidders to avoid any unfair advantage, (iv) check the financial bids/proposals, when needed, for signs o f possible collusion, and (v) refer potential cases o f fraud, collusion, corruption and coercive practices to INT. The independent procurement expert hired by K 1 0 D 0 0 wil l also work with the evaluation committee to ensure that bids are analyzed according to the evaluation criteria stated only in the bidding document and that bids are treated in a fair manner according to the said criteria, and not influenced by other extraneous considerations.

276. As further oversight, the procurement plan sets out in detail al l procurements subject to prior review by the World Bank. As evidenced in some projects, one important issue worth mention i s the misuse o f mobilization advances by contractors through diversions to other uses, thus compromising the works as the contractors run into cash f low difficulties. To mitigate against this risk, the qualification criteria wil l be set to allow only for the selection o f reputable contracting f i r m s with proven experience in similar works and sound financial footing to undertake these works. As i s common with mobilization advances, the requirement for advance payment guarantees from Banks and financial institutions i s an extra-mitigation safeguard, if matters deteriorate further.

277. The Bank team wil l ensure the compliance with Bank procurement and financial management rules through i t s oversight with Bank procurement and financial management specialists’ reviews o f documentation, carrying out office visits, interviews and inspections; and recommending actions to be taken if any inconsistencies are identified. Bank technical experts wil l also be involved in the review o f al l documentation as deemed necessary including but not l imited to prequalification documents, requests for proposals, TORS, bidding documents, contract documents, and evaluation award reports. Last but not least, as part o f the institutional capacity building component, the Bank will ensure that training o f staff in procurement and financial management issues i s offered to strengthen internal technical capacity.

(B) Supervision Arrangements 278. Second, al l construction supervision by the Government i s to be undertaken by using reputable international engineering consulting f i rms. This i s to ensure not only the proper construction o f the project elements to the set technical specifications, but also to keep a check on unwarranted variation orders and time extensions. The contract management setup wil l be as per F ID IC arrangements, with K 1 OD00 maintaining the Employer role and the supervising engineering firm maintaining the role o f the Engineer (Employer’s Representative). As such, decisions on variation orders and time extensions wil l only be made with the express consent o f the Employer, who has an inherent desire to control costs, reducing the possibility for collusion practices between the Engineer and the Contractor. On the environmental front, environmental supervision o f the two corridor level Environment Impact Assessments, the sector-specific Environment Management Plans and the RAPS will be carried out by an independent environmental engineering consulting firm, procured under Terms o f Reference satisfactory to the Bank. This firm will report directly to the K 1 ODOO.

(C) Independent Technical Audit on the Bank’s Side 279. Complementing these efforts wil l be enhanced Bank supervision o f the implementation o f the works through physical site inspections, and careful review o f progress reports. Field based staff will also play an integral role in carrying out random supervision checks; and

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reporting observed shortcomings during the project implementation. An integral part o f the Bank supervision wil l involve the commissioning o f periodic f ield data collection, laboratory tests and analysis as part o f the normal supervision o f the project. This wi l l provide an additional professional opinion o n the efficiency, economy and transparency o f the works undertaken and supervised under the Project.

280. During supervision missions, K 1 0 D 0 0 and Bank representatives wil l joint ly select a few 100-meter road sections to be monitored, properly identified through km posts and/or GPS coordinates. Field and laboratory tests and relevant reporting wil l be prepared prior to the next Bank supervision mission, which in turn wil l review the results together with K 1 0 D 0 0 , make appropriate corrective measures (if needed), and select another set o f 1 00-meter long sections for monitoring during the successive period between Bank missions. Some sections may be selected for testing more than once for control and assessment o f parameter evolution.

281. Field Tests and Sampling. Field tests and sampling wil l include layer thickness measurements, visual condition survey, transverse profile (rut depth), macro- and micro-texture, deflection testing, roughness (using high precision rod and level technique or equivalent), as wel l as other measurement deemed necessary by K 1 0 D 0 0 and Bank supervision missions. At the same time, samples will be properly collected for laboratory testing. The accurate IRI results from profile measurements may serve as a reference (calibration) for dynamic roughness measuring equipment used to measure roughness o n other road sections.

282. Laboratory Testing. Laboratory tests wil l include empirical properties, as wel l as simulation tests and fundamental mechanical properties o f materials used in al l pavements layers, such as surfacing, base, subbase, as wel l as subgrade. Actual pavement layer thicknesses and material quality will provide the basis for a reassessment o f the adequacy o f the pavement structural design, which could eventually lead to potential corrective measures to be applied in a timely manner, wel l before the completion o f road works.

283. Test o f unbound layers will include gradation, moisture content and degree o f compaction. Testing o f asphalt binders wi l l include, but not be l imited to penetration, ductility, elastic recovery, viscosity, stiffness modulus at l o w temperatures. Testing o f fines and fine and coarse aggregates wil l include gradation, plasticity index, stiffening power, shape index, coarseness index, content o f organic materials, water absorption, density, LA abrasion value, stripping, and resistance to frost-thaw.

284. Testing o f asphalt mixes wil l include standard specification tests such as Marshall m i x design procedure, determination o f binder and air void content, bulk specific gravity and theoretical maximum specific gravity, stability and flow, and gradation o f asphalt mixes. Also recommended wil l be resistance to permanent deformation using wheel tracking device, resistance to fatigue, dynamic modulus, and stiffness modulus.

285. Reporting. Reports wil l be prepared summarizing al l the above activities carried out in the field and in the laboratory (include supporting information), analysis carried out and main findings on the quality o f works, and appropriateness o f design, monitored during the review period. The periodic report, to be delivered to the Bank and K 1 0 D 0 0 at least one week prior to each supervision mission, should also include recommendations that would lead to the road

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works to deliver the desired outcome.

(D) Financial and Independent Technical Audits on the Borrower’s Side

286. Third, extra measures to ensure oversight and proper due diligence will include the use o f external financial and technical audits. The details o f the financial audit using independent auditors fol lowing international auditing standards are discussed in Annex 7 on Financial Management and Disbursement Arrangements. The technical audit wil l include the hiring o f an independent consulting firm to carry out materials testing on drilled core samples from completed road sections to check compliance with the technical specifications. The nature o f the tests and sampling required wil l be detailed in the technical audit Terms o f Reference (TOR), which wil l be subject to formal clearance by the Bank. This independent quality check wil l be an integral part in ensuring not only that quality i s met, but also that the sustainability o f such an important asset i s maintained to yield better governance outcomes for road users and al l other stakeholders.

(E) Institutional Reforms 287. Given that corrupt practices thrive in an environment o f weak institutions6’, part o f the Governance and Anti-Corruption measures in this project are not only project-specific but also on an institutional level. Analytical work has been undertaken by the Bank on the possible reforms in the road sector in Serbia, more specifically o f the parent company responsible for main and regional roads: Public Enterprise Putevi Srbije (PEPS)61. In the recently completed report, the fol lowing issues had been identified: (i) inappropriate management system and structures; (ii) a lack o f clear goals and performance targets; (iii) an uncoordinated planning framework; (iv) inappropriate design standards and practices; (v) inadequate and under- motivated technical staffing; and (vi) a lack o f an operationally established proper Asset Management System6*. The project efforts will support technical assistance to develop an Action plan to continue the institutional strengthening in PEPS. This wil l have not only beneficial impacts for the project but for the sector overall in terms o f improved governance structures, a more accountable organization, and use o f objective criteria in projects selection to ensure the optimal use o f scarce public resources. Given that responsibility for the project roads will be reassigned to PEPS, the reform i s important to ensure the sustainability o f the assets.

(F) Civil Society Oversight 288. Independent oversight by c iv i l society i s to be achieved through a coalition o f citizens and road user groups, and implementation o f an effective system o f complaint handling, with transparent investigation and reporting o f the results. The disclosure o f project documentation as per Bank disclosure policies, and the transparent procurement mechanisms with proper advertising, and declaration o f contract awards wil l serve to equip the c iv i l society (road users, stakeholders, media, Non-governmental Organizations) with the information to ensure the project i s being conducted in a satisfactory manner. Dissemination o f information should be through a well-coordinated communications plan agreed upon by both the World Bank country

6o See Wil l iam D.O. Patterson & Pinki Chaudhuri in “Making Inroads on Corruption in the Transport Sector through Control and Prevention”.

See World Bank (2008), “Improving the management o f the road sector in Serbia”. The harmonization o f design and construction standards and the establishment o f an asset management system are

being addressed with components in the ongoing World Bank project.

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office and K10D00. The public wil l be informed through the K 1 0 D 0 0 website that representatives of c iv i l society groups are allowed to attend public bid openings. Concerns o f affected stakeholders or aggrieved parties are to be handled through a complaint register system. All supervision engineers wil l be asked to run a complaint book, with the l ist o f complaints forwarded to the responsible officials at K l O D O O for feedback or redress. Further, any party i s entitled to lodge complaints on corruption issues to the World Bank Investigation Unit (INT): details online at http://www.worldbank.org/integrity.

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Annex 12: Project Preparation and Supervision SERBIA: CORRIDOR X HIGHWAY PROJECT

Planned Actual PCN review November 19,2008 November 19,2008 Init ial PID to PIC November 25,2008 November 24,2008 Init ial ISDS to PIC November 25,2008 January 12,2009 Appraisal March 16,2009 June 9,2009 Negotiations April 14,2009 June 9,2009 BoardRVP approval May 19,2009 July 9,2009 Planned date o f effectiveness Planned date o f mid-tern review Planned closing date

September 30,2009 December 3 1,2012 December 3 1,201 5

Key institutions responsible for preparation o f the project: Implementing Agency: Koridor 10 Drugtvo sa OgraniCenom OdgovornoiCu (K1 ODOO) 19a Vlajkoviceva Street Belgrade Republic o f Serbia

Bank staff and consultants who worked on the project included: ~ ~~

Name Title Unit Martin Humphreys Program Team Leader ECSSD Jacques Bure Jean Marie Braun Svetlana Vukanovic Carolina Monsalve Majed El-Bayya Plamen Ki rov Dominque Bichara Aleksander Crnomarkovic Helen Shahriari Nikola I l le

Sr. Highway Engineer Highway Engineer, Consultant

Project Officer Transport Economist

Lead Procurement Specialist Procurement Specialist

Sr. Counsel Financial Management Specialist

Sr. Social Scientist Sr. Environmental Specialist

ECSSD ECSSD ECSSD ECSSD ECSPS ECSPS LEGEM ECSPS ECSSD ECSSD

Stephen Muzira Young Professional ECSSD

Bank funds expended to date on project preparation: 1. Bank resources: 2. Trust funds: 3. Total:

Estimated Approval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost:

US$320,000

US$320,000

us$lo,ooo US$140,000

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Annex 13: Documents in the Project File

SERBIA: CORRIDOR X HIGHWAY PROJECT

Antic B, “The Costs of Traffic Accidents in the Republic of Serbia, Faculty of Transport and Trafic Engineering”, University o f Belgrade, 2006.

COWI. (2003), The Regional Balkans Infrastructure Study (REBIS), a study undertaken for the European Union.

Dahdah S. and Mcmahon, P. (2008), The True Cost of Road Crashes - Valuing Life and the Cost of a Serious Injury, iRAP

Government o f Serbia (2009), Action Plan for Construction o f Roads and Railroads on Corridor X for 2009, Belgrade, January 30,2009.

Government o f Serbia (2009) Decision on establishment o f Koridor 10 DruStvo sa OgraniEenom OdgovornoSCu, Belgrade, January 22,2009

Government o f Serbia, (2007) Strategy of Railway, Road, Inland Waterway, Air and Intermodal Development in the Republic of Serbia, 2008 - 201 5

Government o f Serbia (2005), Law on Roads.

Ministry o f Public Works, Transport and Housing, France (2000) National Instruction on Technical Design Requirements for Rural Motorways - Circular o f December 12,2000.

OECD, 2008. Factbook 2008: Economic, Environmental and Social Statistics. Paris, April 2008.

Roads o f Serbia and Faculty o f Transport and Traffic Engineering (2007) Trafic Safety Study .with Detailed Assessment of Dangerous Micro-Locations and Proposed Measures on the Corridor 10, Belgrade, July 2007

SEETO. 2008. “SEE Core Regional Transport Network Development Plan 2009 - 2013” Volume 1. Belgrade, Serbia.

Statistical Office o f the Republic o f Serbia. 2008. “Statistical Yearbook of Serbia - 2008”. Belgrade. Serbia.

World Economic Forum (2008), The Global Competitiveness Report 2008-2009. Switzerland.

World Bank (2009), Serbia: Doing More With Less, Addressing the Fiscal Crisis by Increasing Public Sector Productivity - Public Expenditure Review, Washington DC.

World Bank (2008a). Improving the Management of the Road Sector in Serbia, - A Policy Note, Washington DC.

104

World Bank. (2008b). “Options for the Development of the Road and Rail Infrastructure on Corridor X.” Washington DC.

World Bank (2007) Improving the Management Financing of Secondary and Local Roads in the SEE Countries, ECSSD, Washington DC.

World Bank/IFC (2008~) Doing Business in 2009. A co-publication o f the World Bank, the International Finance Corporation, and Palgrave Macmillan. Sixth edition.

World Bank/IFC/MIGA (2007) Country Partnership Strategy for the Republic of Serbia for the period FY08-FYI1 (CPS), November 13,2007, Report No. 41310, Washington DC.

Vic Roads Intl./Jean Breen (2007) Final Report on Serbia Road Safety Management Capacity Review, prepared with support from the Global Road Safety Facility.

105

Annex 14: Statement of Loans and Credits

SERBIA: CORRIDOR X HIGHWAY PROJECT

Difference between expected and actual

disbursements Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. F m . Rev’d

PO96823 2008 Delivery o f Improved Local Services 46.40 0.00 0.00 0.00 0.00 46.40 3.00 0.00 PO94212 2007 PO92999 2007

PO87964 2006 PO90418 2005

PO88867 2005

PO78311 2004 PO75343 2004 PO75207 2004

PO77675 2003

TRANS AG REFORM BOR REGIONAL DEVELOPMENT PROJECT IRRIG/DRAINAGE REHAB (SERBIA)

CNSLTD COLLECT & PENS ADM REF (SERBIA) ECSEE AF’L #2 (SERBIA) REAL ESTATE CADASTRE (SERBIA)

ENERGY EFF (SERBIA) TRNSPT REHAB (SERBIA) HEALTH (SERBIA)

17.00 33.00

49.37 0.00

0.00 0.00

18.00 50.00

0.00

0.00 10.00

25.00 25.00

21.00 30.00 3 1 .OO 55.00 20.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 , 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 17.00 5.49 0.00 0.00 43.27 5.25 0.00

0.00 71.52 14.10 0.00 0.00 20.94 15.86 15.20

0.00 16.21 6.98 0.00 0.00 13.37 3.68 0.00 0.00 28.60 -0.04 0.79 0.00 61.59 2.65 0.00 0.00 0.23 -1.95 -1.95

Total: 213.77 217.00 0.00 0.00 0.00 319.13 55.02 14.04

SERBIA STATEMENT OF IFC’s

Held and Disbursed Portfolio In Mil l ions o f U S Dollars

Committed Disbursed

IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2006

2005 2006 1982

1987

2005

1985 2005 2005

2005 2005 2002 2002

2003

BANCA INTESA SPA Continental Bank

Continental Bank Gov Montenegerol Gov Montenegerol Gov Montenegro 2 HVB Serbia Jugobanka

opportunity I... Panonska Podgoricka Banka Privredna B& Procredit KSV Procredit Serbia Procredit Serbia RBKO RIB I1

0.00 2.97 25.50 7.21

3.38 1.46 38.13 0.00 4.14 4.74 6.31

1.47 0.00 1.94 5.54 12.75 50.99

51.26 76.49 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.11 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

106

0.00

1.46 0.00 0.00 0.00 0.00 0.00 1.19

0.00 2.33

0.00 0.72 0.00 0.00 0.00 0.00 0.00

0.00 2.97 0.00 7.21

3.38 1.46

12.63

0.00 2.87 4.74

6.37 1.47 0.00 1.94

5.54 0.00 3.82

. 37.24

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 1.11 0.00

0.00 0.00 0.00

76.49 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 1.46 0.00 0.00

0.00 0.00 0.00 1.19

0.00 2.33

0.00 0.72 0.00 0.00

0.00 0.00 0.00

Raiffeisen Yug 12.55 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Raiffeisen Yug 0.00 2.37 0.00 0.00 0.00 2.37 0.00 0.00 2005 Raiffeisen Yug 0.00 2.76 0.00 0.00 0.00 2.75 0.00 0.00 2006 Raiffeisen Yug 0.00 5.41 0.00 0.00 0.00 5.41 0.00 0.00 2002 Tigar M.H. 0.00 0.00 4.11 0.00 0.00 0.00 4.11 0.00 2005 Tigar M.H. 0.00 3.92 0.00 0.00 0.00 3.92 0.00 0.00 1987 Vojvodjanska 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total portfolio: 186.62 66.83 80.60 9.37 61.88 52.80 80.60 9.37

2005 Vojvodjanska 7.48 0.00 0.00 3.67 7.48 0.00 0.00 3.67

Approvals Pending Commitment

FY Approval Company Loan EsuitY Quasi Partic.

2006 Contibankaequity 0.00 0.01 0.00 0.00 2005 Vojvodjanska Res 0.01 0.00 0.00 0.00

Total pending commitment: 0.01 0.01 0.00 0.00

107

Annex 15: Country at a Glance

SERBIA: CORRIDOR X HIGHWAY PROJECT

..

POVERTY and SOCIAL Serbia

I 4 5 T

2007 Population, mid-year (millions) GNI per capita (AiYas method. US$) GNi (Afias mefhod, US$ billions)

Average annual growth, 200147

Population (%) Labor force PA) Most recent estimate (latest year available, 200147) Poverty (% ofpopulafion below nafional poverty line) Urban population (?A of fotal popuiafion) Life expectancy at birth (years) Infant modality (per 7,000 live births) Child malnutrition (“9 of children under 5) Access to an improved water source (% ofpopulation) Literacy (% ofpopulafion age 15+) Gross primary enrollment (% ofschoolage population)

Male , Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1987

GDP (US$ billions) Gross capital formatiodGDP Exports of goods and services/GDP Gross domestic savingslGDP Gross national savings/GDP

Current account balance/GDP Interest paymentslGDP Total debtlGDP Total debt service/exports Present value of debtlGDP Present value of debtlexports

1987-97 1997-07 (average annual growth) GDP .. 5.3 GDP per capita .. 5.6 Exports of goods and services .. 12.3

7.4 4,730

35.0

-0.3

52 73

7 2

99

1997

19.7 12.1 16.7 4.7 6.3

-5.8 0.0

53.9 1.3

2006

5.7 6.2 5.7

Europe 8 Central

Asia

445 6,052 2,694

0.0 0.5

64 69 23

95 97 97 98 96

2006

31.8 21.3 27.0 0.9 9.1

-1 1.5 I .6

43.5 20.4 44.5

107.7

2007

6.6 6.9

33.2

Upper- middle- income

623 6,987 5,750

0.7 I .3

75 71 22

95 93

111 112 109

2007

41.6 25.1 28.0

4.8 10.9

-13.6

2007-11

4.8

5.6

Development diamond‘ I Life expectancy

Gross primary

enrollment ;: capita

Access to improved water

-Serbia ~ UDDer-middle-income Orow

iconomlc ratios’

Trade

Capital formation

Domestic savings

Indebtedness

-Serbia ~ Upper-middle-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure .. 72.7 78.1 73.1 General godt final consumption expenditure .. 22.6 21.0 22.1 Imports of goods and services .. 24.1 46.8 46.3

1987 1997 2006 2007

Manufacturing

(average annual growth) Agriculture industry

Services Manufacturing

06 07 Household final consumption expenditure .. 5.0 General godt final consumption expenditure .. 4.8 2.9 17.7 Gross capital formation Imports of goods and services

.. 18.5 0.4 9.4 - &om +Imports .. 14.7 2.6 32.5

Note: 2007 data are preliminary estimates. This table vias produced from the Development Economics LDB database.

The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will

108

Annex 16: Map IBRD 36855 SERBIA: CORRIDOR X HIGHWAY PROJECT

109

SokoBanja

RaskaˇSjenica

Boljevac

Aleksinac

Despotovac

Zagubicaˇ

Bor

Sombor

Subotica

Zrenjanin

SremskaMitrovica

Kikinda

Pancevoˇ

Sabacˇ

Valjevo

Smederevo Pozarevacˇ

Kragujevac

Jagodina(Svetozarevo)

ZajecarˇUziceˇ

Kraljevo

Krusevacˇ

Nis

Prokuplje

Pirot

Leskovac

Vranje

Pec

Prizren

KosovskaMitrovica

Gnjilane

Pristinaˇ

Novi Sad

BELGRADE

E-7574.03 km.

COMPONENT 1VLADICIN HAN–

DONJI NEREDOVAC26.3 km.

E-8083.45 km.

COMPONENT 2DIMITROVGRAD BYPASS

8.67 km.

COMPONENT 1GRABOVNICA–GRDELICA

5.6 km.

Corridor XCorridor X

Corridor XCorridor X

CorridorXb

CorridorXc

CorridorXd

Corridor XCorridor X

S E R B I A

K O S O V O

V O J V O D I N A

H U N G A R Y

ROMANIA

ROMANIA

ALBAN IA

BULGAR IA

FYRMACEDONIA

CROA

TIABO

SNIA

AND

HERZ

EGOV

INA

MONTENEGRO

Tisa

Danube

Sava

Drina

Beli Drim

Zapadna Morava

Juzna Morava

Veliki

Velika Morava

Kopaonik M

ts

To Sarajevo

To Bijeljina

To Vinkovci

To Vinkovci

To Gorazde

To Podgorica

To Kiskoros

To Szeged

To Arad

To Timisoara

To Timisoara

To Carbunari To

Gura Vail

To Vidin

To Vidin

To Sofia

To Sofia

To Pernik

To Kumanovo

To Skopje

To Tetovo

To Kukes

19°E 20°E 21°E

22°E

19°E 20°E 21°E

43°N

42°N

44°N

45°N

46°N

43°N

44°N

46°N

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 25 50

0 25 50 Miles

75 Kilometers

IBRD 36855

JUNE 2009

SERBIA

CORRIDOR XHIGHWAY PROJECT

WORLD BANK PROJECT COMPONENTS

IFI FUNDED PROGRAM

CORRIDOR X

MAIN CITIES AND TOWNS

OKRUG (DISTRICT) CAPITALS

POKRAJINE (PROVINCE) CAPITALS

NATIONAL CAPITAL

MAIN ROADS

RAILROADS

EXISTING RAIL CORRIDOR X

POKRAJNE (PROVINCE) BOUNDARIES

INTERNATIONAL BOUNDARIES