Document o f The World Bank

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. -

FOR OFFICIAL USE ONLY

Report No: 42990 - AZ

PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING

IN THE AMOUNT OF US$300 MILLION

TO THE

REPUBLIC OF AZERBAIJAN

FOR THE

HIGHWAY 2 PROJECT (LOAN N0.7356-AZ)

March 20, 2008

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CURRENCY EQUIVALENTS

AH2P AH2PAF ARS CPS CY EIA EIRR EMF EMP HDM NPV PAD PDO PIU MOT VAT VPd

(Exchange Rate Effective March 2008)

CurrencyUnit = AZN 0.85 AZN = US$1

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

The Highway 2 Project The Highway 2 Project Additional Financing Azer Road Service JSC Country Partnership Strategy Calendar Year Environmental Impact Assessment Economic Internal Rate o f Return Environmental Management Framework Environmental Management Plan Highway Development and Maintenance Model Net Present Value Project Appraisal Document Project Development Objective Project Implementation Unit Ministry o f Transport Value Added Tax vehicles per day

Vice President: Shigeo Katsu, ECAVP

Sector Manager: Motoo Konishi, ECSSD Olivier L e Ber, ECSSD

Country Director: D-M Dowsett-Coirolo, ECCU3

Task Team Leader:

FOR OFFICIAL USE ONLY

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V . V I .

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Annex

AZERBAIJAN HIGHWAY 2 PROJECT . ADDITIONAL FINANCING

CONTENTS

Page

Introduction ................................................................................................................... 1

Background and Rationale for Additional Financing .................................................... 1

Proposed changes .......................................................................................................... 3

Consistency with CPS ................................................................................................... 4

Appraisal o f scaled-up project activities ....................................................................... 4

Expected outcomes ........................................................................................................ 8

Benefits and risks ........................................................................................................... 9

Financial terms and conditions for the additional financing ....................................... 10

Revised Arrangements for Results Monitoring ........................................................... 11

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 .

Project Paper Data Sheet

Date: March 20, 2008 Country: Azerbaijan Project Name: Azerbaijan Highway 2 - Additional Financing (AH2PAF)

Task Team Leader: Olivier L e Ber Sector Manager: Motoo Konishi Country Director: D-M Dowsett-Coirolo Environmental category: A

Borrower: Republic o f Azerbaijan Responsible agency: Azer Road Service JSC

Current closing date: February 28, 201 1

oYes @ N o

Revised project development objectives/outcomes [If applicable]

There i s no change in the Project's Development Objectives. The expected outcomes are a further reduction o f transit time and vehicle operating costs along these highways. Does the scaled-up or restructured project trigger any new safeguard policies? N o

[XI Loan [ ] Credit [ ] Grant For Loans/Credits/Grants:

For Additional Financing

Total Bank financing (US$m.): $300 million Proposed terms: U S Dollar denominated Fixed Spread Loan (FSL), Commitment Linked, with a 17 year maturity and 4 years grace with annuity repayment o f

' Combined disbursement schedule based on actual and expected disbursement under AH2P and expected disbursement under the additional financing. Additional financing only.

I. Introduction

1. This Project Paper seeks the approval o f the Executive Directors to provide Additional Financing in an amount o f US$300 mi l l ion equivalent to the Republic o f Azerbaijan for the Highway 2 Project (AH2P) (Loan: IBRD-7356 AZ). The additional financing would mainly finance (i) upgrading o f the remaining 112 km o f the M 3 highway between Alat and Masalli which was anticipated but not included in the AH2P and (ii) the reconstruction o f the R6 highway Tagiyev - Sahil(41 km) which connects the M 3 to the M 1 (Baku - Russian border) and bypasses Baku. The additional financing would also finance the following activities: (i) rehabilitation o f about 200 km o f local roads; (ii) technical assistance and (iii) monitoring and evaluation and financial audits.

2. There would be no co-financing from other donors for this project.

11. Background and Rationale for Additional Financing

3. The original AH2P was developed based on the request from the Government to finance the upgrading o f the entire Alat-Masalli section (143 km) o f North-South corridor (M3) and the rehabilitation o f Baku-Shamakhi section (124 km) o f the East-West corridor (M4). The project development objective i s to reduce road transport costs and improve access, transit and road safety by upgrading and rehabilitating selected sections o f the existing East-West (M4) and North-South (M3) corridors. The AH2P has two components. Component 1 finances the upgrading o f some sections o f the M 3 highway between Alat and Masalli, and the rehabilitation o f the existing M 4 road between Baku-Shamakhi as well as o f key access roads. Component 2 supports technical assistance, training and goods to support the capacity development o f the Ministry o f Transport and Azer Road Service JSC (ARS)3 and project implementation.

Original proiect:

4. I t was, however, estimated that an additional US$200 mi l l ion would be necessary to complete the upgrading o f the entire Alat - Masalli section o f the M3 Highway as requested by the Government. I t was therefore agreed that the AH2P would finance only the f i rst 84 km section o f the M 3 and that additional financing would be sought to finance the remaining part o f the road (see original P A D paragraph B2).

The original loan amount was US$200 million.

5 . The project was restructured in December 2006 to include the upgrading o f the Ujar- Kurdemir part (41 km) o f the M 2 East-West highway, which has been estimated to cost about US$50 million (Bank financing US$40 million). Subsequently, the portion o f financing from the Bank that was earmarked for the section on M 3 Alat-Masalli was reduced to 3 1 km.

6. Over the past few years Azerbaijan has been rehabilitating and developing the non-oil sector infrastructure needed to realize rapid growth, benefiting from increasing o i l and gas revenues, and also putting in place a credible framework to effectively manage the increase in resource flows, With the o i l boom expected to last only for a finite period, it i s critical to develop the non-oil economy and reduce poverty with special

Rationale o f the additional financing:

ARS i s under the Ministry o f Transport (MOT) and was established in February 2007 to succeed to the Road Transport Service Department LLC (RTSD) within MOT.

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attention to rural areas and secondary cities. The poor condition o f the national road network poses a significant challenge in this respect. Indeed, the development o f road transport infrastructure i s part o f the six major strategic pillars o f the State Program on Poverty Reduction and Economic Development (SPPRED), and considered to be critical for the expansion o f the non-oil sector and the improvement o f the living standards o f the low-income population.

7. Approximately 56% o f the main road network i s in a poor state and in need o f urgent repair, and the majority o f lower category roads are in an extremely poor condition. Among other road sections, the East-West road corridor (Baku-Ganja-Kazakh-Georgian border through Alat and a more direct route through Shamakhi) and the North-South road corridor (Russian border-Baku-Alat-Astara-Iranian border), as well as feeder roads connecting rural areas with the main corridors, are considered to be key to addressing the transport bottleneck to nationwide development and poverty alleviation. The Government recently prepared the State Program for Rehabilitation and Development o f Azerbaijan Republic Highways (2006-20 15), which calls for a considerable increase o f funding to rehabilitate and upgrade critical road l inks , both from loans from international financial institutions and the state budget. The program anticipates the Bank to finance the upgrading o f the entire Alat-Masalli section o f M3 Highway, as discussed when AH2P was prepared.

8. Over the last two years, the original AH2P has provided critical support to meet transport sector challenges. The project i s performing well. The loan i s implemented by ARS with the support o f a Project Implementation Unit (PIU) in ARS. More than hal f o f the funds under the original project have already been committed and the second hal f wil l be fully committed by June 2008, well before the closing date o f February 28, 201 1. As o f January 2008, US$26.0 million, or 13% o f the loan amount o f US$200 million, has been disbursed. Disbursement pace will pick up in spring 2008 as the next construction season starts.

9. Works started in 2006 for the f i rst section on M 3 (a 22 km section south o f Alat - completion expected by end 2008). As for the rehabilitation o f M4, the contractor will be fully mobilized in March 2008 and complete the civil works in July 2009. The design o f Ujar- Kurdemir road i s completed, and the works are expected to start in June 2008 and to be completed by December 2009. The works inspected by the task team are o f good technical quality. Design, environmental and social studies on the other sections o f M 3 are progressing according to the plan and several bidding documents will be available in the coming months. Prequalification i s already ongoing.

10. The AH2P has also been supporting critical institutional development and sector reforms. The consultant submitted the first report on the draft new road law. Alternative norms and standards in line with European standards are under development. A new expropriation law to ensure expedient and transparent land acquisition has been drafted and i s expected to be submitted to the parliament in March. All in all, AH2P has been providing comprehensive support for the development o f the road sector in Azerbaijan not only through civil works but also critical institutional development to support the sustainability o f road assets that are fast developing in Azerbaijan.

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111. Proposed changes

11. The table below summarizes the proposed changes to the project under the additional financing. The section Ujar-Kurdemir was introduced by Amendment in January 2007. The additional financing would complement the financing o f the road Alat-Masali (only partially financed under AH2P and add the road Tagiyev - Sahil (R6). It also includes a contingency fund that amounts to US$48 million, to accommodate the increase o f cost due to high inflation in Azerbaijan (about 15% a year) which i s expected to continue for the next few years and the (unforeseen) depreciation o f the US$ over the past years.

Proposed additional

Bank financing only, figures rounded to the nearest US$ million I t is expected that the Government wi l l also request Highways 3 and 4 in the near future to jnance other roads for which the design has been contracted recently under AH2P

12. There will be no change to the Project Development Objectives (PDO). The additional financing will finance the upgrading and rehabilitation o f those sections o f the North-South corridors which are not financed under AH2P. Specifically, the additional financing will (i) upgrade the remaining 112 km o f the M3 highway between Shorsulu and Masalli and the rehabilitation o f Tagiyev - Sahil section (41km) o f the Baku bypass that connect M3 with the M 1 highway that forms the northern part o f the North-South corridor leading to Russian border, and (ii) continue to support the modernization o f the road sector. The components are detailed below. The results framework and the monitoring indicators (see below section VI), have been updated to reflect the addition o f these road sections. The total financing required to complete the project i s about US$505 million with the Government providing about US$205 mi l l ion and the Bank US$300 million.

13. Component 1: Upgrading o f the remaining sections o f the M3 highway between Alat and Masalli and rehabilitation o f the existing R6 Baku bypass between Tagiyev and Sahil, as well as about 200 km o f secondary and local roads (US$348.50 million). This component comprises the civ i l works for the above roads as well as the consultancy services for engineering design and the supervision o f the works. Land acquisition and resettlement costs required for acquiring the Right o f Way o f about 500 hectares would be solely financed by the Government.

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14. Provision o f technical assistance, training and goods to support strengthening o f MOT and ARS and carry out project implementation (US$9.30 million). This component wil l finance continued capacity development o f ARS through provision o f support to the development o f standard documents for domestic investment projects, a Traffic Safety Strategy, a Road Development Master Plan, seminars and training to the investment divisions o f the ARS, support to technical universities for curriculum development, equipment such as weighing scales and installation o f automatic traffic counters; P I U salaries, incremental operating costs, vehicles and project auditing.

Component 2:

IV. Consistency with CPS

15. As pointed out in the Country Partnership Strategy (CPS) FY07-10, “Significant investment in infrastructure and transit corridors; . , J.. . will be needed to develop Azerbaijan’s non-oil growth potential.” For this reason the CPS includes developing essential Transit Corridors as well as access roads in order to enhance accessibility from villages and small towns as part o f i t s second pillar, “supporting sustainable and balanced growth o f the non-oil economy”. AH2P as well as the proposed additional financing address these issues and are part o f the stream o f road projects foreseen in the CPS.

V. Appraisal of scaled-up project activities

16. Economic and financial: The economic analysis was carried out for the upgrading o f the entire Alat-Masalli road when AH2P was prepared, and the additional financing, which will finance only the remaining part o f the road not financed under AH2P, will not affect the result. The preliminary economic analysis o f Tagiyev - Sahil road, however, given the assessment of the current traffic volume and o f the expected future increase o f traffic, indicates that the economic rate o f return will not be less than 12%. The economic analysis o f the yet to be identified secondary and local roads as well as other roads will be carried out as they are identified, however, they should meet the following criteria: (a) for roads with traffic above 250 vehicles per day (vpd), the Economic Internal Rate o f Return (EIRR) should be at least 12%; (b) if the traffic i s between 150 and 250 vpd, the EIRR should be at least 10%; and (c) if the traffic i s below 150 vpd, the EIRR should be at least 8%. For very low volume roads, (less than 100 vpd) the Bank could consider the use o f the producer surplus method or simpler methods based on relevant thresholds.

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17. The economic analysis o f Alat-Masalli road was carried out using the Highway Development and Maintenance Model (HDM IV). The cost benefit analysis carried out compared the “without project” case, assumed to be a “do l i t t le” case, with the proposed project. Since the upgrading o f the Alat-Masalli road was planned to be carried out in two stages, the economic analysis was conducted separately for Alat-Shorsulu section (85 km), which was to be financed under AH2P, and for the remaining Shorsulu-Masalli section (94 km4). The cost benefit analysis yielded the EIRR o f 25% for the f i rst section and 29.2% for the second section. The estimated EIRR for the entire Alat-Masalli road i s 26.6%.

Section EIRR Alat-Shorsulu 25%

Shorsulu-Masalli 29.2% Total Alat-Masalli 26.6%

18. The project cost o f upgrading the M 3 highway between Alat - Masalli i s now estimated at $341.3 mi l l ion (price o f September 2007) versus $221.2 mi l l ion (price o f June 2005) when the AH2P was prepared, a 46% increase o f the price per km in US$, a 33% increase if expressed in local currency (which appreciated by 10% over the same period). This 33% increase compares well with the increase o f the Consumer Price Index’ o f 27% between June 2005 and September 2007. This significant cost increase does not impact the economics o f the projects because the price increase i s due to inflation and US$ depreciation. It i s not due to underestimating o f the works (or the quantities), While costs are increasing, so i s the value o f the benefits (whether it i s value o f time or vehicle operating costs). Furthermore, the economic analysis done when appraising the whole project in 2005 was very robust. The sensitivity analysis indicates that, even if the traffic i s 20% less than assumed and the project costs 20% more than anticipated, the upgrading o f the entire Alat-Masalli road will yield an EIRR o f 17.7% and a N e t Present Value (NPV) o f US$125.3 million. For more information, please refer to the Annex 9 o f the AH2P PAD.

N P V ~ (US$ million) 136.4 141.1 277.5

19. The main focus under this project i s on modernizing the road network through road improvements. There are no technical issues with the proposed investments. However, the Kura-Talysh area i s known for seismic activity with earthquakes registering magnitudes o f between 6 and 7 on the Richter scale; the design shall take this constraint in consideration. Design standards for al l the investments are well established by reputable consultants and there are plenty o f quality contractors to carry out the works. N o trial or experimentation i s involved and there are no r isks related to technology, design or installation, and future maintenance o f the roads.

Technical:

20. Procurement: Procurement capacity o f the P I U and the project procurement system have been strengthened during the implementation o f AHP and AH2P. Implementation has been without any anomalies. The P I U established within the ARS under the A H P and AH2P will continue to implement the proposed additional financing. Procurement under AHP i s almost

85 km and 94 km are the length o f the existing road. The project roads wil l be about 36 km shorter. ’ No relevant road construction cost index exists. But during the same period, price indexes for road construction items such as liquefied h e l , wage and construction materials increased respectively by 85.3%, 59%, and 25.2%.

The NPV i s computed with an annual discount rate of 12%. The NPV i s a June 2005 value.

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completed. Under AH2P, procurement o f contract packages i s on-going. Given the substantial sizes o f the contract packages under AH2P, almost al l procurement are subject to prior review. N o procurement fiduciary problems have occurred. The P I U procurement officer and his two assistants are fully knowledgeable in Bank procurement policies. The P I U has established systems for record keeping, filing, and reporting. The existing procurement capacity and the established systems are acceptable to the Bank for the implementation o f the additional financing. Bank procurement and consultant guidelines dated May 2004 and revised October 2006 wil l be applicable to the procurement under the additional financing. Accordingly, al l activities under the Project which are financed out o f the proceeds o f the Additional Financing will be carried out in accordance with the provisions o f the Anti-Corruption Guidelines dated October 15, 2006. A procurement plan for the additional financing has been developed. In view o f the ongoing implementation o f the projects and the mitigation measures enforced, the procurement risk i s considered to be moderate.

2 1. Financial: The existing P I U will have the overall responsibility for financial management o f the additional financing. The existing project Financial Management System (FMS) i s acceptable to the Bank. N o significant delays in the counterpart funds had been identified. The P I U has in place a 1C accounting system which i s customized to automatically generate the required interim Financial Monitoring Reports (IFRs). The same system would be used for the additional financing. Although the additional financing would run in parallel with the ongoing AH2P, the current financial management staff will be able to manage the financial management aspects o f the additional financing as most o f the contracts are large c iv i l works contracts disbursed through direct payments. Overall financial management risk i s assessed as moderate.

22. There are no outstanding audit reports. The current project auditing arrangements are satisfactory to the Bank, and the same arrangements will be adopted for auditing the Project Financial Statements under the additional financing. The annual audited project financial statements will be submitted to the Bank within six months o f the end o f each fiscal year audited. An independent operational review will also be carried out at the mid-term o f project implementation, which will assess and verify that the accounting and financial management systems and the controls adopted for the implementation o f the project, including accounting and administrative controls, budgeting, procurement, contracts administration, f low o f funds and financial reporting are adequate and follows the Operational Manual and Loan Agreement.

23. Disbursement: The Bank loan will finance 70% o f project cost excluding VAT for al l categories, rather than 80% without VAT under the existing AH2P, following the decision by the Government to lift the VAT exemption that has been applied to projects financed by loans from the International Financing Institutions (IFIs). Because all contracts are being implemented in parallel, and no commitment fee applies to the additional financing, it i s in the interest o f the Government to f i rst fully disburse the original loan before drawing on the additional financing loan’. Furthermore, it i s not expected that the packaging o f the works would allow assigning each contract to a single loan. Therefore, most likely each contract tendered after February 1, 2008 would be f i rst financed under the original loan and then completed under the additional financing. The expected disbursement period i s four years (CY2009 - C Y 2012).

However, only contracts procured under the Bank Procurement and Consultant Guidelines dated May 2004 and revised October 2006 wil l be eligible for disbursement under the additional financing.

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Expenditure Category Amount in US$ mi l l ion Financing Percentage Works, goods, consultancy services, training 299.25 70% and incremental operating costs

Total Project Costs 299.25 Front-end Fee 0.75

24. The Operational Manual will be amended as a condition o f project effectiveness to (i) make it applicable to the AH2PAF, (ii) clarify that invoices submitted for disbursement will be without VAT (VAT will be paid separately by the Government funds) and (iii) to be eligible for funding under the additional financing loan, contracts will have to be awarded using the Bank Procurement and Consultant Guidelines dated May 2004 and revised October 2006. For the reasons mentioned above, it i s expected that the government will use immediately the new guidelines even for contracts which were part o f the original project.

25. Considering that the project i s already under implementation, the Designated Account for the AH2PAF will have an authorized allocation set to US$24 million. The Borrower will open a Project Account with a minimum deposit o f US$5 mi l l ion equivalent within one month o f the first withdrawal. The Project Account will be replenished on a monthly basis.

26. Social: The upgrading o f the entire Alat-Masalli roads will entail expropriation o f about 800 ha o f land. The Resettlement Policy Framework has been developed and disclosed during the preparation o f the AH2P. I t covers road sections to be financed under the additional financing. The draft Resettlement Action Plan (RAP) for Alat-Salyan section o f M 3 i s under development. A separate RAP will be developed for each section o f roads' to be financed under the additional financing as per policies and principles set forth in the RPF and OP 4.12. The capacity o f the P I U in land acquisition has been strengthened during the AH2P, however, continuous support will be provided to ensure land acquisition and physical relocation will be carried out as per Bank safeguard policies.

27. Environment: the upgrading o f 112 km section o f the M 3 that will be financed under the additional financing has been classified as Category A. The rehabilitation o f Tagiyev-Sahil road i s Category B. A Regional Environmental Review (RER) has been prepared during the preparation o f AH2P which covers the entire Alat-Masalli road and describes the existing environment, discusses and compares project alternatives, and identifies r isks and issues to be addressed during project implementation. An Environmental Management Framework (EMF) has also been developed and disclosed that outlines the procedures for the environmental screening, management, consultation and disclosure related to the proposed Category A and B sub-projects. The EMF i s compatible with the national Law on Environmental Protection and the guidelines contained in Azerbaijan's Environmental Impact Assessment (EIA) Handbook,

* Southern part o f the road i s heavily populated agricultural lands and physical relocation o f households wil l be necessary. The Consultant has determined the number o f households that need to be relocated.

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which, while not legally binding, contains a framework for EIAs that i s consistent with international environmental assessment practices.

28. The additional financing will finance the new construction o f four lane roads through the Madmudchala and Akhchala wetlands, which provide natural habitats for numerous rare and endangered wildlife species and have significance as a buffer zone for the adjoining wetlands that form part o f the Gizilagach State Reserve, an official Ramsar site located 3 - 5 km from this area. The water balance in the Akhchala wetland i s unstable and under constant threat o f drying out. Controlled hunting i s permitted here and there i s pressure from poaching and fishing.

29. An EIA has been carried out for the entire Alat-Masalli roads that compared the environmental impact o f different alternatives, and helped identify alignments with least environmental impact as well as critical environmental risks. Environmental Management Plan (EMP) are developed for each section. Indeed, the “railway alignment”, which runs in parallel o f the existing railway through the wetland, has been selected based on the EIA which anticipates l i t t le lasting impact on the environment in and natural habitat o f the wetland. All other environmental issues identified during project preparation have been addressed as per policies and procedures laid out in the EMF. The draft EIA report and EMPs has been reviewed and commented by the Bank. The Borrower carried out public consultation o f the draft EIA and EMPs in July - August 2007, which were attended by representatives o f local Non-governmental Organizations (NGOs), local governments, municipalities and villages. The minutes o f the consultation meeting has been attached to the draft EIA report. It i s expected that the final EA report be ready and final consultation meetings be carried out in the next few months for each section. The environmental analysis will also be carried out for Tagiyev-Sahil road as per EMF, and the necessary EMP will be developed.

VI. Expected outcomes

Revised Results Framework

PDO

The main PDO i s to reduce road transport costs and improve access, transit and road safety within Azerbaijan‘s East-West and North- South corridors, through (i) upgrading the Alat-Masalli road o f the Baku-Iran highway (M3); (ii) rehabilitating the Baku-Shamakhi road (M4); (iii) rehabilitating the Kurdemir-Ujar road (M2); and (iv) reconstructing the R6 highway Tagiyev-Sahil which connects the M3 to the M1 and bypasses Baku

Project Outcome Indicators

Reduction in transit timehehicle operating cost from Alat to Masalli Reduction in transit timehehicle operating cost from Baku to Shamakhi Reduction in transit timehehide operating cost from Kurdemir-Ujar Reduction in transit timehehicle operating cost from Tagiyev to Sahil; Number o f road accidents in the project roads

Use of Project Outcome Information

The information will be used by MOT and ARS to monitor the condition o f the road network and to feed ARS road management policy

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Intermediate Outcomes

Component One Upgrade the M3 highway between Alat and Masall i Rehabilitation of the existing M4 road Baku-Shamakhi Rehabilitation of the existing M2 road Kurdemir-Ujar Rehabilitation o f the R6 highway Tagiyev-Sahil

Component Two Technical assistance and goods to support ARS strengthening and project implementation: Updating and modernization of the Road Transport Law

Complete the Road Data Bank (RDB)

Establish technical road classes superimposed on the functional road classification through:

Review and update geometric and structural design standards to replace the existing Soviet era standards Develop road condition norms for each technical class

Develop a new civil engineering curriculum for technical universities

Develop a Road Safety Strategy

Develop a Road Master Plan

Intermediate Outcome Indicators

Component One Number o f km upgraded for Alat- Masall i Number o f km rehabilitated for Baku-Shamakhi Number o f km rehabilitated for Kurdemir-Ujar Number o f km rehabilitated for Tagiyev-Sahil

Component Two

Preparation o f the revised Road Transport Law

Number o f km o f road data introduced in the RDB Number o f people trained in i t s use

Preparation o f new geometric and structural design standards

Preparation o f the new norms for maintenance

New curriculum developed

Road Safety Strategy developed

Road Master Plan developed

Use o f Intermediate Outcome Monitoring

Component One The information will be used by MOT and ARS to monitor implementation progress and prepare an action plan to address possible delays

Component Two The information will be used by MOT and ARS to monitor implementation progress and prepare an action plan to address possible delays

The information will be used by MOT and ARS to update the Multi Year Program

U s e o f new technical classes in annual maintenance planning, use of new standards in design.

The information will be used by MOT and ARS to monitor implementation progress and prepare an action plan to address possible delays

A revised table o f arrangements for results monitoring i s included as an annex to this document.

VII. Benefits and risks

30. N o significant additional risks have been identified. Risks previously identified during appraisal o f the AH2P have been dealt with adequately. In particular, potential delay in the land acquisition process i s mitigated by the development o f a new expropriation law (to be approved in March by the parliament) that will ensure an expedient and transparent land acquisition for public purposes. Risks related to cost increase i s taken into account and an adequate provision for price contingencies (US$lOO million, about 17% o f the cost) i s included in the financial plan. As mentioned earlier, this does not really affect the EIRR. Past missions found no significant

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issues o f either procurement or financial management. Although there are concerns about fiduciary r isks in large infrastructure projects o f this nature, the rigorous approach to procurement already being implemented in the original project wi l l be applied equally to the portion with the additional financing. With the mitigation measures already in place, the residual fiduciary risk i s moderate (please refer to the fiduciary annexes 7 & 8 o f the original AH2P PAD),

VIII. Financial terms and conditions for the additional financing

3 1. The additional financing wi l l be provided under standard IBRD lending terms. The Loan type i s a dollar denominated fixed-spread loan (FSL) with repayments linked to commitment and with a 17 year maturity, including a 4 year grace period.

10

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