Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 66735-GE

PROJECT PAPER

ON A

PROPOSED ADDITIONAL CREDIT AND RESTRUCTURING

IN THE AMOUNT OF SDR 27.7 MILLION

(US$43 MILLION EQUIVALENT)

TO

GEORGIA

FOR THE

THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT

May 3, 2012

Sustainable Development DepartmentSouth Caucasus Country UnitEurope and Central Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS(Exchange Rate Effective February 29, 2012)

Currency Unit = Georgian Lari (GEL)GEL 1.66 = US$ 1.00

US$ 1.552 = SDR 1.00

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMSADB Asian Development Bank ISR Implementation Status and Results

ReportsAF Additional Financing JBIC Japanese Bank for International

CooperationCPS Country Partnership Strategy JICA Japan International Cooperation

AgencyCY Calendar Year LA Loan AgreementEBRD European Bank for Reconstruction and MoED Ministry of Economic Development

DevelopmentEDPRP Economic Development and Poverty NPV Net Present Value

Reduction ProgramEIB European Investment Bank MRDI Ministry of Regional Development and

InfrastructureEIRR Economic Internal Rate of Return PAD Project Appraisal DocumentEMP Environmental Management Plan PDO Project Development ObjectiveFEWHIP First East-West Highway Improvement PP Project Paper

ProjectFM Financial Management RAP Resettlement Action PlanFMR Financial Monitoring Report RD Roads DepartmentFPU Foreign-funded Projects Unit PRSP Poverty Reduction StrategyGDP Gross Domestic Product SDR Special Drawing RightsGEL Georgian Lari (Currency Unit) SEWHIP Second East-West Highway

Improvement ProjectGNI Gross National Income SIL Specific Investment LoanIBRD International Bank for Reconstruction TEWHIP Third East-West Highway

and Development Improvement ProjectIDA International Development Association TRRC Transport Reform and Rehabilitation

CenterIFR Interim-unaudited Financial Report VOC Vehicle Operating Costs

Vice President: Philippe H. Le Houerou

Country Director: Asad AlaPj

Sector Director Laszlo LoveiSector Manager: Henry Kerali

Task Team Leader: Rodrigo Archondo-Callao

GEORGIATHIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT

ADDITIONAL FINANCING

CONTENTS

PROJECT PAPER DATA SHEET

PROJECT PAPER

I. Introduction...................................................... 1

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

III. Proposed Changes..................................................... 4

IV. Appraisal Summary ............................. 7..... ............. 7

ANNEX 1: RESULTS FRAMEWORK AND MONITORING. .......... ............ 14ANNEX 2: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF) ............ 19ANNEX 3: PROCUREMENT PLAN . ................................ ........ 24ANNEX 4: MAP......................................................... 25

GEORGIA

THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECTADDITIONAL FINANCING

ADDITIONAL FINANCING AND RESTRUCTURING DATA SHEET

Basic Information - Additional Financing (AF)Country Director: Asad Alam Sectors: Rural/Inter Urban (98%), PubSector Manager: Henry Kerali Administration (2%)Team Leader: Rodrigo Archondo-Callao Themes: Infrastructure Services, TradeProject ID: P128863 Facilitation, Regional IntegrationExpected Effectiveness Date: August 1, 2012 Environmental category: ALending Instrument: SIL Expected Closing Date: June 30, 2015Additional Financing Type: Scale Up Joint IFC: NAand Restructuring Joint Level: NA

Basic Information - Parent ProjectProject ID: P112523 Environmental category: AProject Name: Third East-West Highway Expected Closing Date: June 30, 2013Improvement ProjectLending Instrument: SIL

AF Project Financing Data[ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other:Proposed terms: IDA terms of 25 years maturity with 5 years grace.

AF Financing Plan (US$m)Source Total Amount (US $m)

Total Project Cost: 53.75 53.75Co-financing:

Borrower: 10.75

Total Bank Financing: 43.00IDA 43.00NewRecommitted

Client InformationRecipient: GeorgiaResponsible Agency:

Roads Department of the Ministry of Regional Development and Infrastructure (MRDI)Contact Person: Mr. Nugzar GazvianiTelephone No.: (995 32) 237 50 68Fax No.: (995 32) 313-052Email: ngasviani@yahoo.com

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AF Estimated Disbursements (Bank FY/US$m)FY 2012 2013 2014 2015 Total

Annual 10.75 19.35 10.75 2.15 43.00Cumulative 10.75 30.10 40.85 43.00 43.00

Project Development Objective and Description

The Project Development Objectives are: (i) to contribute to the gradual reduction of roadtransport costs and to improve access, ease of transit, and road safety along the central part ofGeorgia's East-West Corridor; and (ii) to strengthen the capacity of the Roads Department andrelevant government entities to plan and manage the road network and to improve road safety.

The Project development objectives incorporate a change in the text from improving "traffic" safetyto improving "road" safety, reflecting the broader impact of project activities. The resultsframework and the outcome indicators have been updated to reflect the added scope of theAdditional Financing.

Project Description: The Project consists of the Parent Project with the following modifications:

Part A: Sveneti-Ruisi-Agara Road Link

1. Upgrading the existing E60 East-West Highway from Sveneti to Ruisi to a dual carriagewayroad including: (i) partial rehabilitation of the existing road; (ii) realignment and construction ofnew carriageways; (iii) construction of surface drainage, culverts and underpasses; (iv) constructionof bridges, including approach roads, particularly a bridge of about 877 meters long over theLiakhvi River and an existing railway line; (v) construction of two tunnels of about 800 meterslong; (vi) installation of safety barriers, road signs and markings; (vii) demolition of existingstructures and relocation of various utilities; (viii) construction supervision services; and (ix) designservices for future investments in the road sector, all through the carrying out of civil works and theprovision of goods and consultants' services.

2. Upgrading the existing Ruisi-Agara road section and the construction of the Agara bypass as adual carriageway road and conducting a technical quality review of such works through the carryingout of civil works and the provision of goods and consultants' services.

Part B: Institutional Strengthening

1. Strengthening the capacity of the RD to improve its operational effectiveness through: (i)carrying out a functional analysis for establishing the appropriate organizational structure for theRD to meet its current and anticipated future needs; (ii) improving the capacity of the RD to plan,design, manage and maintain the road network; and (iii) strengthening the RD capacity inenvironmental monitoring, through provision of goods, consultants' services and training.

2. Developing a framework for the introduction of performance based contracts (PBC) formaintenance of main roads, through the provision of consultants' services.

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3. Improving road safety along the entire E60 East-West Highway corridor by: (i) preparing andimplementing a corridor road safety management plan to cover engineering, enforcement,emergency response and publicity campaigns; and (ii) establishing a road crash database, throughthe provision of goods, consultants' services, and training.

4. Strengthening the curriculum and training at the technical university, including provision oftraining for lecturers, twinning with overseas universities, as well as the provision of consultants'services and goods.

Part C: Project Management

1. Institutional support to the RD and the TRRC related to Project management, financial auditsand Project monitoring and evaluation.

Safeguard and Exception to PoliciesSafeguard Policies Triggered:Environmental Assessment (OP/BP 4.01) [X]Yes [ ] NoNatural Habitats (OP/BP 4.04) [ ]Yes [X] NoForests (OP/BP 4.36) [ ]Yes [X] NoPest Management (OP 4.09) [ ]Yes [X] NoPhysical Cultural Resources (OP/BP 4.11) [X]Yes [ ] NoIndigenous Peoples (OP/BP 4.10) [ ]Yes [X] NoInvoluntary Resettlement (OP/BP 4.12) [X]Yes [ ] NoSafety of Dams (OP/BP 4.37) [ ]Yes [X] NoProjects on International Waterways (OP/BP 7.50) [ ]Yes [X] NoProjects in Disputed Areas (OP/BP 7.60) [ ]Yes [X] No

Does the project require any waivers of Bank policies? [ ]Yes [X] NoIf so, have these been endorsed or approved by Bank management? [ ]Yes [ ] No

Conditions and Legal CovenantsFinancing Agreement Description of Condition/Covenant Date Due

ReferenceSchedule 2 The Recipient shall carry out the Project through the RD with ProjectSection I.A. I due diligence and efficiency and in conformity with appropriate Duration

administrative, financial, engineering, public utility,environmental practices and in accordance with the OperationsManual and shall provide the RD with the resources and staffnecessary for implementing the Project. The Recipient shall notassign, amend, abrogate or waive the Operations Manual or anyprovision thereof, without the prior approval of the Association.The RD shall be responsible for the overall coordination andoversight of the Project implementation.

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Schedule 2 By not later than one month as of the Effective Date, the RD One monthSection I.A. 2 and TRRC shall duly amend the Project Implementation after

Agreement for the purposes of setting forth the obligations of Effectivenessboth parties in relation to the Project implementation in amanner satisfactory to the Association. Pursuant to the termsand conditions of the Project Implementation Agreement, theRD shall be assisted in Project-related financial managementand disbursement by the TRRC. The Recipient shall: (i)maintain the TRRC with terms of reference, resources and staffnecessary for proper Project implementation and satisfactory tothe Association; and (ii) require TRRC to carry out thefinancial management and disbursement for the Project inaccordance with the Project Implementation Agreement.

Schedule 2 During Project implementation, the RD shall maintain the FPU ProjectSection I.A. 3 with terms of reference, resources and staff necessary for Duration

proper Project implementation and satisfactory to theAssociation to assist RD in Project-related procurement,monitoring and evaluation and Project reporting.

Schedule 2 The Recipient shall permit the use of standards for ProjectSection I.A. 4 construction, planning and design of highways adopted by the Duration

European Union (in addition to the national standards),acceptable to the Association, in the design, construction andmaintenance of road works under the Project.

Schedule 2 The Recipient shall ensure that adequate budgetary resources ProjectSection I.A. 5 are made available for the Project in the Recipient's annual Duration

budget for the duration of the Project.Schedule 2 By not later than July 1,2012, the Recipient shall, through the July 1,2012Section I.A. 6 TRRC, recruit a financial auditor under terms of reference and

conditions satisfactory to the Association.Schedule 2 The Recipient shall ensure that the Project is carried out in ProjectSection I.C 1 accordance with the provisions of the EIA, EMP, RPF and Duration

RAP. The Recipient shall not assign, amend, abrogate or waivethe EIA, EMP, RPF and/or RAP or any provision thereof,without the prior approval of the Association.

Schedule 2 The Recipient shall, prior to the commencement of works under Prior toSection I.C 2 the Project, ensure that: (i) the provisions of the EMP are commence-

adequately included in the proposed contract(s) for said works; ment ofand (ii) the owners and users of the land where said works are worksto be implemented are fully compensated in accordance withthe provisions of the RAP.

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I. Introduction

1. This Project Paper seeks the approval of the Board of Executive Directors to provide anadditional credit in the amount of SDR 27.7 million (US$43.0 million equivalent) to Georgia forthe Third East-West Highway Improvement Project (TEWHIP) (Loan IBRD-77410 GE). Theproposed Additional Financing (AF) would finance the costs associated with upgrading theexisting E60 East-West Highway' from Ruisi to Agara and construction of the Agara Bypass (19km in total) to a dual carriageway standard, as well as additional institutional strengtheningactivities. The AF includes a scale-up and restructuring of the activities under the TEWHIP. Therestructuring is required to accommodate a revision of the results framework and monitoringindicators, an increase in the Project scope, a slight change to the text of the ProjectDevelopment Objectives, and an extension of the Project closing date. The ImplementationStatus and Results Reports (ISR) of the TEWHIP are generally satisfactory. By December 2011,83 percent of the TEWHIP funds had been disbursed.

2. There is no co-financing from other donors for this Project per se. However, there is closecoordination among the various donors supporting the upgrade of the E60 East-West Highway inGeorgia - of which TEWHIP is an important part. Those donors include the Asian DevelopmentBank (ADB), the European Investment Bank (EIB), and the Japan International CooperationAgency (JICA).

II. Background and Rationale for Additional Financing and Restructuring

3. Original Project: The TEWHIP was approved by the Board on September 10, 2009 foran amount of US$147 million, and became effective on November 3, 2009. The projectdevelopment objectives are: (i) to contribute to the gradual reduction of road transport costs, andto improve access, ease of transit, and road safety along the central part of Georgia's East-WestCorridor; and (ii) to strengthen the capacity of the Roads Department (RD) and relevantGovernment entities to plan and manage the road network and to improve road safety. TheTEWHIP upgrades the existing E60 East-West Highway from Sveneti to Ruisi to a dualcarriageway road including: (i) partial rehabilitation of the existing road; (ii) realignment andconstruction of new carriageways; (iii) surface drainage, culverts and underpasses; (vi)construction of bridges - in particular, a bridge of about 877 meters over the Liakhvi River; (v)construction of two tunnels, each of which is about 800 meters long; (vi) safety barriers, roadsigns and marking; (vii) demolition of existing structures and relocation of various utilities, (viii)construction supervision services; and (ix) design services for future investments in the roadsector. The TEWHIP also supports road sector institutional development and capacity-building.The civil works for the upgrading of the Sveneti-Ruisi road sections have been largelycompleted. The construction of the Liakhvi River Bridge has been delayed by 5-6 months due toquality control problems experienced during the construction of the bridge deck - which is notunusual for these types of civil works. Thus, the bridge completion date is now expected to besometime between August and October 2012. Overall, progress on the construction of the twotunnels is good - and the completion date is estimated to be in April 2012. The institutionaldevelopment component is under implementation.

1 The East-West Highway is a part of the European route E-60, which runs from Brest, France to Irkeshtam,Kyrgyzstan (on the border with China).

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4. Project Performance: The implementation of the TEWHIP has been well-managed, andratings in all of the ISRs have been moderately satisfactory or better. The latest ISR indicatesthat: (i) the development objectives - which are essentially linked to the road construction - arelikely to be met; (ii) the environmental compliance of the Project has improved, and institutionalsupport activities are now under implementation; (iii) progress towards achievement of the PDOis satisfactory; and (iv) overall implementation progress (IP) is moderately satisfactory. The ISRrating over the past 12 months for overall implementation progress is moderately satisfactory; forprogress towards achievement of the PDO, it is satisfactory. The TEWHIP does not haveunresolved fiduciary, environmental, social, or other safeguard problems.

5. Institutional Strengthening: The main activities undertaken by the TEWHIP are: (i)improvement of road safety along the entire E60 East-West Highway Corridor; (ii) developmentof a framework for introduction of performance-based contracts (PBCs); (iii) strengthening thecapacity of the RD to improve its operational effectiveness; and (iv) strengthening thecurriculum and training at the Georgian Technical University. There are a number of outstandingroad safety issues on the E60 Corridor - including the absence of central crash barriers on somesections - which will be addressed with financing from the TEWHIP. A contract withinternational consultants is ongoing to assess the readiness and capacity of the constructionindustry in Georgia and to develop a framework for the introduction of PBCs. The TEWHIPfinanced the installation at the Georgian Technical University of: (i) laboratories for asphalt andconcrete testing; (ii) textbooks for the library; and (iii) software for the computer laboratory.

6. Country Context: Over the past five years, Georgia has achieved significant economicprogress. Due to sustained reforms, Georgia's economy rapidly grew from 2004 through July2008 - with an average growth rate of over 9 percent per year. Georgia also managed toovercome the 2008 double shock caused by the August conflict and the global economic crisis.Growth did contract in 2009 - by 3.8 percent. However, this was followed by a strong recovery:growth was 6.3 percent in 2010, and an estimated 7.0 percent in 2011. The recovery and growthduring 2010 and 2011 was driven by an uptick in exports, tourism, commercial bank lending, andcontinued high levels of public investment and foreign direct investment. The government ofGeorgia (Government) has sustained public investments in infrastructure - focusing on the roadnetwork. In order to counter global risks and to create jobs, the Government developed a 10-point economic action plan in December 2011. The plan outlined key points to make Georgia"successful and prosperous". The Plan includes investment in transport infrastructure andlogistics capacity. The success of the investment described above rests on improved connectivityand accessibility to local and international markets.

7. Transport Sector Overview: Transit and bilateral trading with its neighbors is importantto Georgia's economy. To maximize benefits from transit and trade, the Government has focusedon two areas: (i) rehabilitation and modernization of the neglected transport infrastructure alongthe main transit East-West Corridor, through increased investment into the East-West Highway;and (ii) improvement of countrywide accessibility, through increased investment in therehabilitation of the secondary and local road network. Two Ministries are responsible for thetransport sector. The Ministry of Economy and Sustainable Development (MESD), through itsTransport Policy Department, determines the transport sector policy and regulates transportation.

2

The Ministry of Regional Development and Infrastructure (MRDI) implements roadinfrastructure policies and decisions pertaining to all roads infrastructure investments. The RoadsDepartment (RD) of the MRDI manages and administers the entire road network except for non-core local and all municipal roads. The latter are managed by local governments andmunicipalities. The RD is also responsible for implementing all donor-funded projects in theroad sector. The Foreign Projects Unit (FPU) of the RD, established by Ministerial Decree, isresponsible for technical, procurement, monitoring and reporting, contract management, andother implementation matters. The Transport Reform and Rehabilitation Center (TRRC),established in 1995 to help implement Bank-supported transport projects, is responsible for theflow of funds, accounting, budgeting, financial reporting, and auditing.

8. Roads are the lifeline for economic activity for most Georgians. Even in the main foreigntrade corridors, local movement represents up to 90 percent of the traffic. The transport costs andthe risk of accidents are often high due to: (i) challenging topography; (ii) low-capacity highways(often only 7 meters wide without shoulders); (iii) inadequate maintenance regimes; (and (iv)other adverse conditions. Consequently, there is a need to improve the road network. The twomain transit corridors are the E60 East-West Highway (Senaki-Tbilisi-Red Bridge) and the E70(Senaki-Poti-Batumi-Sarpi/Turkish Border). The E60 is the major road - it carries over 60percent of the total foreign trade that uses the road network in Georgia. Transit on this corridor isassociated with flows connecting European trade with Caucasus and Asian regions.

9. Consistency with the Country Partnership Strategy (CPS): Improving roadinfrastructure has been the Government's declared priority since 2004. Investments in essentialinfrastructure and service delivery represent the central components for supporting Georgia'sreforms and development in the CPS covering 2010-2013. In terms of road infrastructureinvestments, the focus is on strengthening internal connectivity and on strengthening Georgia'srole as a transport corridor within the South Caucasus. The Bank has been involved in theGeorgian road sector since the early 1990s. In 2004, the Bank started to support the upgrade ofthe East-West Highway. The Bank's strategy for engagement with Georgia is based on: (i)meeting post-conflict and vulnerability needs; and (ii) building long-term competitiveness. Theproposed AF supports both of the above priorities.

10. Rationale for the Additional Financing: The proposed AF would scale-up the TEWHIPin order to cover: (i) the upgrading of the Ruisi-Agara road section and the construction of theAgara Bypass; and (ii) additional institutional-strengthening activities. The Bank has beenfinancing three projects along the East-West Highway that are focused on the section betweenTbilisi and Rikoti. The First East-West Highway Improvement Project (FEWHIP) was approvedin 2006; it upgrades the E60 from Agaiani to Igoeti, a 13 km section. In 2011, the Bank - throughthe AF for the FEWHIP - rehabilitated the Rikoti Tunnel, which is a crucial link on the highwaybetween East and West Georgia. That Project was followed by the Second East-West HighwayImprovement Project (SEWHIP), which was approved in 2007; it continues the upgrade fromIgoeti to Sveneti, a 25 km section. The TEWHIP, which was approved in 2009, continues theupgrade from Sveneti to Ruisi, a 15 km section. Thus, the upgrading of the Ruisi-Agara roadsection and the construction of the Agara Bypass under the AF is a logical extension of theGovernment's Program to upgrade the E60 Highway to a dual carriageway standard from Tbilisito Rikoti.

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11. Rationale for Project Restructuring: The Level II restructuring is required in order toslightly revise the Results Framework and the PDO indicators to incorporate the upgrading of theRuisi-Agara road section and the construction of the Agara Bypass, to include additionalinstitutional-strengthening activities, and to extend the Project closing date from June 30, 2013 toJune 30, 2015.

III. Proposed Changes

12. TEWHIP PDO: The AF and restructuring incorporates a change to the text of the PDOfor the original TEWHIP from improving "traffic" safety to improving "road" safety, reflectingthe broader impact of project activities. The updated PDO is:

(i) To contribute to the gradual reduction of road transport costs and to improve access,ease of transit, and road safety along the central part of Georgia's East-Westcorridor; and,

(ii) To strengthen the capacity of the Roads Department and relevant Governmententities to plan and manage the road network and to improve road safety.

13. The Results Framework and PDO Indicators have been updated to include the additionalinvestment for upgrading from Ruisi-Agara road section and the construction of the AgaraBypass and institutional-strengthening activities (see Annex 1).

Table 1. PDO Indicators

RevisedOriginal TEWHIP Revised TEWHIP TEWHIP

Indicator Indicator Target in 2015Transit time from Sveneti to Ruisi Transit time from Sveneti to the Agara(minutes) Bypass (minutes) 20Vehicle operating costs from Vehicle operating costs from Sveneti toSveneti to Ruissi (cars in US$/km) the Agara Bypass (cars in US$/km) 0.18Vehicle operating costs from Vehicle operating costs from Sveneti toSveneti to Ruissi (trucks in the Agara Bypass (trucks in US$/km) 0.72US$/km)Percentage reduction in road Unchanged 30%fatalities on E60 East-WestHighway from Senaki to Tbilisi

Improvement in road capacity from Ruisito the Agara Bypass (passenger car space 8,000equivalent - PCSE/hour)International roads in good or fair 85%condition as a share of total Internationalroads (percentage)

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14. The proposed Additional Financing will scale up the existing TEWHIP by financing thefollowing activities:

* Upgrading of the Ruisi-Agara road section and the construction of the Agara bypass(19 km in total) to a dual carriageway standard, and consultancy services for atechnical quality review (US$51.1 million equivalent). A technical quality consultantfirm will be employed to review if the works have been carried out in accordancewith the technical specifications and standards and the working relationship betweenRD, the contractor and the supervision engineer.

* Employment by the RD of a Road Safety Adviser, and financing of thepurchase/development of a road crash database (US$0.50 million equivalent).

* Additional staff for the FPU comprising a Contract Manager, an EnvironmentalSpecialist, and a Monitoring and Reporting Specialist consultants; and procurementof vehicles and office equipment (US$0.66 million equivalent).

* TRRC salaries and operating costs, and additional Project financial audits (US$0.42million equivalent).

15. Project Components: The restructured TEWHIP incorporating the AF will thereforecomprise the following components:

Component A: Sveneti-Ruisi-Agara Road Link

(a) Upgrading the existing E60 East-West Highway from Sveneti to Ruisi to a dualcarriageway road including: (i) partial rehabilitation of the existing road; (ii)realignment and construction of new carriageways; (iii) construction of surfacedrainage, culverts and underpasses; (iv) construction of bridges, including approachroads, particularly a bridge of about 877 meters long over the Liakhvi River and anexisting railway line; (v) construction of two tunnels of about 800 meters long; (vi)installation of safety barriers, road signs and marking; (vii) demolition of existingstructures and relocation of various utilities; (viii) construction supervision services;and (ix) design services for future investments in the road sector, all through thecarrying out of works and the provision of goods and consultants' services.

(b) Upgrading the existing Ruisi-Agara road section and the construction of the Agarabypass as a dual carriageway road and conducting a technical quality review ofsuch works through the carrying out of works and the provision of goods andconsultants' services.

Component B: Institutional Strengthening

(a) Strengthening the capacity of the RD to improve its operational effectivenessthrough: (i) carrying out a functional analysis for establishing the appropriateorganizational structure for the RD to meet its current and anticipated future needs;(ii) improving the capacity of the RD to plan, design, manage and maintain the road

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network; and (iii) strengthening the RD capacity in environmental monitoring,through provision of goods, consultants' services and training.

(b) Developing a framework for the introduction of performance based contracts (PBC)for maintenance of main roads, through provision of consultants' services.

(c) Improving road safety along the entire E60 East-West Highway corridor by: (i)preparing and implementing a corridor road safety management plan to coverengineering, enforcement, emergency response and publicity campaigns; and (ii)establishing a road crash database, through the provision of goods, consultants'services, and training.

(d) Strengthening the curriculum and training at the technical university, includingprovision of training for lecturers, twinning with overseas universities, as well asprovision of consultants' services and goods.

Component C: Project Management

(a) Institutional support to the RD and the TRRC related to Project management,financial audits and Project monitoring and evaluation.

16. Project Closing Date: Completion of the expanded activities is expected to be withintwo years from the current TEWHIP closing date of June 30, 2013. The revised closing datewould therefore be June 30, 2015. The closing of the TEWHIP (Loan 7741) will also beextended for the same period.

17. Project Costs: The total Project costs for all components of the AF would be US$53.75million, including US$1.09 million for contingencies. The AF will cover 80 percent of allcomponents, so that the IDA/Government financing ratio will be 80/20 for all eligibleexpenditures.

Table 2. Project Expenditures Summary

Original Revised

Project Expenditure by Components Cost Changes with Cost(US$ AF (US$

million) (US$ million) million)[A] Sveneti-Ruisi-Agara Road Link 155.86 51.082 206.94[B] Institutional Strengthening 2.60 1.16 3.76[C] Project Management 0.62 0.42 1.04Contingencies 24.67 1.09 25.76Front-end Fee 3 0.37 0.00 0.37Total 184.12 53.75 237.87

2 Includes US$3.60 million for physical and price contingencies.The front end fee is not applicable to the AF with IDA financing.

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18. Implementation Arrangements: The institutional arrangements will remain the same.All responsibilities for Project implementation are with the RD. The Foreign-funded ProjectsUnit (FPU) within the RD, is responsible for procurement, monitoring and reporting, technicalaudits, and other implementation matters under all Bank-financed road Projects. The AF willstrengthen the capacity of the FPU. The TRRC will continue to assist the RD with financialmanagement activities. The TRRC has performed this function for previous and on-goingprojects.

IV. Appraisal Summary

19. Technical: The upgrading of the Ruisi-Agara road section and the construction of theAgara Bypass raises the existing road from a two lane road to amotorway standard - i.e., to atwo-lane dual carriageway road. The Project area is located approximately 100 km northwest ofTbilisi. Most sections of the E-60 Highway between Tbilisi and Ruisi have either already beenupgraded or are under construction for upgrading to a dual carriageway road. From Ruisi toAgara (Km 95-Km 105), the first 10 km of the upgraded highway follows the existing E60alignment. From Agara to the Agara Bypass (Km 105-Km 114), the highway includes agreenfield bypass of the town of Agara of about 9 km - the alignment was selected after acomparison of four alternatives. This alignment was selected in order to avoid impacts on theagricultural land north of the existing road. The selected alignment would branch off the villageof Aradeti and make a loop around Agara - it would avoid the demolishing of buildings, but itwould cross some private land parcels. The existing Ruisi-Agara Bypass road is a two-lanecarriageway with a width of about 9 m - it crosses a relatively flat area, and is in good to faircondition. The Project adopts Class 1 standards for a design speed of 120km/hour - i.e., fourlanes 3.75 m each with paved shoulders. The total width of the platform will be 28.5 m. Thepavement will be cement concrete.

20. Economic Analysis: The analysis covers the upgrading of the Ruisi-Agara road sectionand the construction of the Agara bypass to dual carriageway. The cost-benefit analysis is basedon: (i) actual traffic volumes and forecasts; (ii) vehicle operating costs and travel time savingsfor users; and (iii) maintenance cost savings. The 2011 average annual daily traffic (AADT) onthe Ruisi-Agara Bypass road section was 12,578 vehicles per day, of which 81 percent were lightvehicles and 19 percent trucks and buses. The average annual growth rate of GDP from 2000-2009 was about 6.2 percent per year. Between 2005 and 2010, highway traffic volumes grew atan average annual rate of 6.8 percent for passenger cars and 5.0 percent for minibuses and trucks.There has been rapid growth in car ownership in Georgia over the period between 2000 - 2010.The economic analysis adopted an average annual traffic growth rate for all vehicles of 5.7percent for the period from 2012-2016; of 5.1 percent for the period from 2017-2021; of 3.7percent for the period of 2021-2031. These figures were based on the elasticity of traffic growthto forecasted GDP growth. No generated or induced traffic was considered in the analysis. Theeconomic costs of road works - net of taxes - were computed at the equivalent of US$1.79million per km. The evaluation adopted an evaluation period of 20 years and a discount rate of12 percent.

21. The economic analysis yielded an Economic Internal Rate of Return (EIRR) of 21.6percent and a Net Present Value (NPV) of US$37.6 million, which shows that the economic

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justification for the proposed investments is satisfactory. The TEWHIP had an EIRR of 16.3percent. Although they carry the same traffic, the economic justification for the AF is higher thanfor the TEWHIP, because the TEWHIP had a concentration of expensive structures in a shortlength. The sensitivity analysis for the Ruisi-Agara Bypass road section shows the followingresults: (i) a construction cost increase of 20 percent reduces the EIRR to 19.3 percent; (ii) anannual traffic growth decrease of 20 percent reduces the EIRR to 20.2 percent; and (iii) aconstruction cost increase of 20 percent plus a traffic growth decrease of 20 percent reduces theEIRR to 17.9 percent. Construction costs would have to increase by 130 percent for the EIRR toreach 12.0 percent. The table below shows the results of the economic analysis.

Table 3. Results of the Economic Analysis

Road Section Length Total Base NPV Base A: B: Traffic- A+B(km) Cost (US$ M) EIRR Costs+20% 20% EIRR

(US$ M) (%) EIRR (%) EIRR (%) (%)Km 95-Km 105 10.0 24.79 20.2 22.0% 19.6% 20.6% 18.3%Km 105-Km 114 9.0 23.69 17.4 21.2% 18.9% 19.8% 17.6%Total 19.0 48.48 37.6 21.6% 19.3% 20.2% 17.9%

22. Road Safety. The Government wishes to improve road safety in the country, and hasdeveloped a road safety strategy that is under implementation. There is a Road Safety Unit(RSU) within the RD that is responsible for: (i) implementing a blackspot improvement programon the national road network; (ii) reviewing new road designs; and (iii) approving temporarytraffic management schemes at road works. Under the World Bank Program, consultants havebeen employed to prepare a series of manuals, and to provide training to RSU staff and others.These manuals cover: (i) Road Safety Audits (RSAs); (ii) Road Safety Inspections; (iii) TrafficManagement at Road Works; and (iv) Standard Countermeasures. The AF will finance thecapacity-strengthening of the RSU. The AF will employ a Road Safety Engineering Adviser forone year to provide 'on the job' training and technical support to RSU staff, and to conductRSAs jointly with the RSU on selected sections of the road network as needed. The Adviser'srole is to provide technical advice, act as mentor to the Unit's staff, and to assist the staff in theirapplication of the guidance provided in the manuals listed above. In addition, the AF will financethe development and implementation of a road crash database that will be a country-wide systemof crash and injury data collection, storage, retrieval and analysis. A Swedish consulting firm hasalready carried out the first phase of this work, which was comprised of evaluating the existingsituation, defining options for improvements, and designing an improved system. The secondphase - which will be financed by the AF - will be comprised of the supply and installation of aroad crash data base, and its testing and validation.

23. Strengthening the Technical Capacity of the FPU. The Project will strengthen thetechnical capacity of the implementing agency FPU, by financing the costs of individualconsultants to provide training, and to support the efficient and timely performance of FPU'stasks. The AF will support the employment of a Project Manager, an Environmental Specialist,and a Monitoring and Reporting Specialist for the remaining duration of the Project (three years).

8

24. Procurement: Procurement under the AF will be carried out in accordance with: (i) the"World Bank's Guidelines: Procurement of Goods, Works, and Non-consulting Services underIBRD Loans and IDA Credits & Grants by World Bank Borrowers" - which was published bythe Bank in January 2011; (ii) "Guidelines: Selection and Employment of Consultants underIBRD Loans and IDA Credits & Grants by World Bank Borrowers" - which was published bythe Bank in January 2011; and (iii) the provisions stipulated in the Credit Agreement. The RD -assisted by FPU - will carry out procurement activities. All procurement and disbursementarrangements for the TEWHIP will apply to the AF. The procurement risk impact is high, but thelikelihood of the occurrence of the risk is low. The procurement unit of the RD has experiencewith World Bank-financed procurement and additional procurement staff is being appointed todeal with the many ongoing Projects.

25. Works contracts to be procured under the AF will finance the upgrading of the Ruisi-Agara road section, construction of the Agara Bypass and related services. Consultants' servicescontracts to be procured will aim to: (i) increase the FPU and RD capacity for projectmanagement, environmental works and monitoring and evaluation; (ii) improve road safety inGeorgia through the provision of a Road Safety Adviser; (iii) assist with Project financial audits;and (iv) ensure proper construction quality through the services of a quality assurance consultingfirm. The Project will also include the supply and installation (or the development) of a roadcrash database, and the purchase of vehicles and office equipment. The procurement Plan for theAF (see Annex 3) sets forth those contracts that will be subject to the Bank's prior review. Allother contracts will be subject to post review by the Bank. Retroactive financing - not to exceedUS$9.9 million - will be available for eligible expenditures. This amount represents 23% of thecredit amount.4 The Table below presents the prior review thresholds.

Table 4. Prior Review Thresholds

Procurement Method Prior Review Threshold1 ICB (Goods) All2 NCB (Goods) First Contract & >U$300 thousand3 ICB (Works) All4 NCB (Works) First Contract & >US$2 million5 ICB (Non-Consultant Services) All6 SH First Contract

Selection Method Prior Review Threshold1 Competitive Methods (Firms) more than US$100 thousand All2 Single Source (Firms) All3 IC above US$50K All (First Contract regardless of value)

26. Financial Management: There will be no changes in the financial managementarrangements for the TEWHIP due to the AF. The financial management functions - includingthe flow of funds, staffing, accounting, reporting and auditing - will remain under the TRRC'sresponsibility. The financial management arrangements under the existing TEWHIP have beenperiodically reviewed as part of the Bank's implementation support and have been found to be

4 This represents an exception to standard policy that was approved by Bank management.

9

satisfactory. A comprehensive joint fiduciary review, conducted in February 2011, included theFM arrangements at the TRRC. Overall, the internal control procedures applied by the TRRC areacceptable to the Bank. The FM systems are adequate for implementation of the on-goingProjects and the TEWHIP, and are suitable for providing timely Project reporting. In themeantime, the TRRC needs to enhance the staffing arrangements in place by recruiting anadditional accountant as planned under the existing TEWHIP. The RD is in compliance with theaudit covenant: the audit reports on the Project have been received by their due dates withunmodified opinions on the Project financial statements and no serious internal control issues inthe management letters. The FM risk rating for the on-going Projects implemented by the TRRCwas previously rated as substantial. Given the significant progress with implementation of theaction plan agreed upon during the fiduciary review in February 2011 - including the recruitmentof one of the two proposed accountants - the overall financial management risk for the Projectwas assessed as Moderate.

27. The AF will adopt audit arrangements similar to those adopted for the TEWHIP. Theaudit of consolidated TEWHIP and AF financial statements will be conducted by independentprivate auditors acceptable to the Bank and contracted by the TRRC in accordance with terms ofreference acceptable to the Bank. The annual audited financial statements will be submitted tothe Bank within six months from the end of each reporting period, and also at the Project closing.The audited financial statements will be posted on the TRRC's website - or published in anational newspaper - within one month of the receipt of audited reports from the auditor. Inaddition, following the Bank's formal receipt of the financial statements from the recipient, theBank will make them available to the public in accordance with Bank Policy on Access toInformation for Bank-financed operations. The cost of the audit will be financed from theproceeds of the Project. Project management-oriented Interim Un-audited Financial Reports(IFRs) will be used for the AF monitoring and supervision. The existing formats of the IFRs willbe used. The TRRC will produce a full set of IFRs every quarter throughout the life of theProject, and will submit them to the Bank no later than 45 days from the calendar quarter end. Tofacilitate timely disbursements for eligible expenditures, the TRRC will establish a DesignatedAccount (DA) in US dollars and maintain it until the Project completion. The DA will be openedas a Treasury's foreign currency account at the NBG, on terms and conditions acceptable to theBank. The DA will be drawn upon to meet payments to contractors, suppliers, and consultantsunder the Project. The DA Statement will be audited in conjunction with the annual audit of theProject. Detailed instructions on withdrawal of IDA Credit proceeds will be provided in theDisbursement Letter.

28. The AF will adopt the same disbursement arrangements as those adopted by theTEWHIP. The AF will disburse through transaction-based disbursement methods that willinclude: (i) reimbursements with full documentation; (ii) reimbursements on the basis ofStatements of Expenditures for small expenditures with defined thresholds; (iii) paymentsagainst Special Commitments; (iv) direct payments to third parties; and (v) payments through theDesignated Account. To facilitate Project implementation, a separate DA will be opened at thesame financial institution as the TEWHIP. The DA will be managed by the TRRC; it will bereplenished on a quarterly basis, as needed. The total ceiling will be limited to US$7.0 million.The DA will be audited annually in conjunction with the audit of the Project financial statements.Disbursements will be made on the basis of full documentation for: (i) contracts for goods

10

costing more than the equivalent of US$300,000 each; (ii) contracts for works costing more thanthe equivalent of US$2,000,000 each; and (iii) services under contracts of more than theequivalent of US$100,000 for each consulting firm and more than the equivalent of US$50,000for each individual consultant. Disbursements below these thresholds and expenditures forincremental operating costs and training, would be made according to certified Statements ofExpenditures (SOEs). For all expenditures financed under SOEs, full documentation in supportof those SOEs will be retained in the FPU for at least two years after the Project closing date.This information will be available for review by Bank missions during Project supervision andby the Project auditors. SOEs will be audited in conjunction with the annual audit of the Project.Further instructions on the size of the minimum application and on the method for withdrawingfunds from this Credit will be provided in the Disbursement Letter. The following table specifiesthe category of Eligible Expenditures that may be financed out of the proceeds of the AdditionalFinancing. All disbursements will be under one Category, and the percentage of expenditures tobe financed for eligible expenditures will be 80 percent.

Table 5. Percentage of Expenditures to be Financed

Amount of the Credit Percentage of ExpendituresCategory Allocated (expressed to be Financed

in US$) (inclusive of Taxes)

(1) Works, non-consultingservices, consultants' services, 43,000,000 80%Training, Goods and IncrementalOperating Costs for the Project

TOTAL AMOUNT 43,000,000

29. Safeguards: The Environmental Assessment (OP/BP 4.01), Involuntary Resettlement(OP/BP 4.12), and Physical Cultural Resources (OP/BP 4.11) policies were triggered under theTEWHIP, which was assessed as Environmental Category A. There is no change to theenvironmental category under the AF - and no new safeguard policies are triggered.

30. Social: The AF will require land acquisition and therefore the timely and faircompensation of the affected communities will be closely monitored by the Bank. The RD hasgained experience in implementing the Bank's safeguards policies on previous projects; and ithas a unit devoted to resettlement issues. The TEWHIP Resettlement Policy Framework (RPF) -which was prepared in 2009 - provides fundamental principles and standards for the Project,including the AF. The RD revised the TEWHIP RPF in December 2011, and disclosed therevised RPF on February 7, 2012. A Resettlement Action Plan (RAP) for the Ruisi-Agara Bypassroad section was prepared in December 2011, in accordance with relevant Georgian laws andregulations, and with the World Bank Operational Policy 4.12 on Involuntary Resettlement. Thedraft RAP was reviewed by the Bank, and cleared for disclosure and public consultation. Thefinalized RAP was re-disclosed in country on February 9, 2012 and submitted for publicationthrough the InfoShop on February 21, 2012.

11

31. The major social impacts stem from land acquisition associated with the highwayconstruction works. The Project will affect about 1,439 persons through the acquisition of about1,129,079m2 of land from about 489 plots. No residential houses will be affected by the Project.In addition, road construction will affect five commercial structures: four fuelling stations andone flower shop. All five owners of the affected structures will receive compensation inaccordance with compensation standard specified in the RAP. Extensive public consultationswere held during the RAP preparation in order to: (i) limit the adverse impacts on householdrelocation; (ii) confirm appropriate compensation entitlements; and (iii) identify vulnerablepersons. Out of a total of 369 affected households, 82 households (212 persons) were identifiedas vulnerable. Special attention will be given to women and other vulnerable groups who willreceive special assistance for their livelihood restoration. Resettlement costs will amount toabout US$2.3 million and will be financed from counterpart funds.

32. Environment: An Environmental Impact Assessment (EIA) of the highway sectionbetween Ruisi and the Agara Bypass was carried out, and an Environmental Management Plan(EMP) was developed. RD disclosed the EIA in-country on February 7, 2012 and organizedstakeholder consultation on the EIA report in the vicinity of Agara on February 15, 2012. Earlierpublic consultations were held to discuss the scope and methodology of the EIA. The EIA reportwas disclosed in InfoShop on February 13, 2012, and the Executive Summary of the EIA wassent to the Board of Executive Directors on February 24, 2012. The EMP will be integrated intothe civil works contract and provisions will be made to keep the contractor liable for anyinfringement of EMP requirements. The Bill of Quantities for the civil works will itemizeenvironmental mitigation costs (i.e., tree planting and hydro-seeding). In addition, theimplementation of general environmental mitigation activities and the clean-up of the work sitewill be paid from an allocation of U$500,000 in the Bill of Quantities and payable on a per-kilometer basis once the completed road work is accepted.

33. Risks: The Project implementation risk was assessed as moderate. The mainimplementation risks are as follows: (i) the capacity of the implementing agencies (the RD andthe TRRC) may be overstretched due to an increased workload - this could lead to less effectiveProject management, weaker financial management and internal controls, and inadequateattention to coordination and communication activities; (ii) fraud and corruption - risks that arealways present in large civil works projects; (iii) land acquisition and resettlement may behandled inadequately or cause delays; and (iv) Project works may fail to meet the projectedEIRR due to insufficient maintenance funding. The implementation risk is mitigated by: (i) theadded capacity for managing the increased workload; (ii) the continual technical assistance formaintenance and planning; (iii) the excellent track record of the RD in implementing roadprojects; and (iv) the experience of the Bank team in the sector. Therefore, the Projectimplementation risk is rated as moderate.

34. Implementation Readiness: The engineering design for the upgrading of the Ruisi-Agara road section and construction of the Agara Bypass has been finalized. The biddingdocuments are advertized with bid closing date of April 27, 2012. There will be noprequalification for the upgrading of the Ruisi-Agara Bypass road section; the contract will beprocessed through open competition with post-qualification including robust criteria to ensurequalifications of the winning bidder. This procurement procedure and the retroactive financing

12

will expedite the process. Thus, civil works are expected to start in June 2012 - which coincideswith the beginning of the road construction season. The land acquisition and resettlement issueson the first 10 km of the Ruisi-Agara Bypass road - where the current road will be widenedfollowing the same alignment - are minimal. Therefore, the road construction will start along thissection first, while the land acquisition and resettlement issues are being addressed on the AgaraBypass section.

13

ANNEX 1: RESULTS FRAMEWORK AND MONITORING

GEORGIATHIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT

ADDITIONAL FINANCING

Results Framework

Comments/Revisions to the Results Framework Rationale for Change

PDO

Current (PAD) ProposedProject Development ContinuedObjectives:(i) to contribute to the gradualreduction of road transportcosts and to improve access,ease of transit, and road safetyalong the central part ofGeorgia's East-West corridor;and,(ii) to strengthen the capacityof the Roads Department andrelevant Government entitiesto plan and manage the roadnetwork and to improve trafficsafety.

PDO Indicators

Current (PAD) Proposed change*Transit time from Sveneti to Transit time from Sveneti to the Agara Change reflects additional roadRuisi Bypass (hours) section to be improved with the AF

(Ruisi to the Agara Bypass)Vehicle operating costs from Vehicle operating costs from Sveneti to the Change reflects additional roadSveneti to Ruisi Agara Bypass (US$/km) section to be improved with the AF

(Ruisi to the Agara Bypass)Percentage reduction in road Continuedfatalities on the E60 East-WestHighway from Senaki toTbilisi

Improvement in road capacity from Ruisi Additional PDO indicator to reflectto the Agara Bypass measured in terms of PDO (i): ease of transitpassenger car space equivalent (PCSE) perhourInternational roads in good or fair Additional indicator to reflect PDOcondition as a share of total International (ii): strengthen the capacity to planroads (percentage). and manage the road network.

Core Indicator consistent withother World Bank financedsections of the East-WestHighway.

14

Intermediate Results Indicators

Current (PAD) Proposed change*Number of kilometers Number of kilometers upgraded Sveneti to Change reflects additional roadupgraded Sveneti-Ruisi the Agara Bypass section to be improved with the AF

(Ruisi to the Agara Bypass)Endorsement by RD of Implementation of road safety audit Scaling-up of road safety activityGeorgia road safety audit manualsmanuals for new and existingroadsAll new IBRD financed road All new World Bank financed road The focus of road safety audits willsections subject to formal road sections managed by RD will be subject to be on Bank financed road sectionssafety audit using Georgian formal road safety audit using Georgian managed by RD.manuals manuals.Percentage of E60 Corridor ContinuedSenaki to Tbilisi with roadsafety engineeringimprovements completedAnnual detailed Annual road safety actions undertaken as The Georgian National Trafficimplementation plans for specified by the Georgian National Traffic Safety Strategy identifies existingpriority investments from Safety Strategy conditions of road transportationNational Road Safety Action safety and defines priorityPlan measures for increasing road

transportation safetyCompletion of framework for ContinuedE60 performance based roadmaintenance contracts

Purchase/Development of the Road Crash For new institutional developmentDatabase activity

* Indicates if the indicator is Dropped, Continued, New, Revised, or if there is a change in the end of project target value.

15

REVISED PROJECT RESULTS FRAMEWORK

Project Development Objective (PDO)

PDO Statement:(i) To contribute to the gradual reduction of road transport costs and to improve access, ease of transit, and road safety along the central part of Georgia's

East-West corridor; and(ii) To strengthen the capacity of the Roads Department and relevant Government entities to plan and manage the road network and to improve road

safety.

Baseline Cumulative Target Valuesa Unit of Parent Progress Responsibility

2012 2013 2014 2015 Data Source/PDO Level Results Indicators 0 Measure- Project To Date Frequency for Data Commentsment Start (2011)' Methodology Collection

(2009)

1. Transit time from Sveneti to the E minutes 27 24 24 24 20 20 Annually Travel time RDAgara Bypass survey

2. Vehicle operating cost from Road dataRDSVeete opAgratin Bys(rs) ED US$/km 0.20 0.19 0.19 0.19 0.18 0.18 Annually a aRDSveneti to Agara Bypass (cars) IIbank

3. Vehicle operating cost from Road data RSVeete topAgratBypasstrucs E US$/km 0.76 0.74 0.74 0.74 0.72 0.72 Annually akRDSvenety to Agara Bypass (trucks) bank

4. Percentage reduction in road Projectfatality rate per 10,000 vehicles on F % 0 30 30 30 30 30 Annually Monitoring RDE60 corridor from Senaki to Tbilisi Reports

(PMR)5.Improvement in road capacityfrom Ruisi to Agara Bypass in PCSE 2,800 2,800 2,800 2,800 2,800 8,000 Annually PMR RDpassenger car space equivalent per hour(PCSE) per hour6. International roads in good orfair condition as a share of total Z 85% 85% 85% 85% 85% 85% Annually PMR RDInternational roads (percentage)

5 For new indicators introduced as part of the AF, the progress to date column reflects the baseline values.

16

Beneficiaries

Direct beneficiaries:# of population living

Project beneficiaries Number in the area of17,240 17,240 17,240 17,240 17,240 17,240 Annually PMR RD intuence ofmnfluence of theSveneti to AgaraBypass roadDirect beneficiaries:# of female

Of which female (beneficiaries) 51.0 51.0 51.0 51.0 51.0 51.0 Annually PMR RD population living inthe area of influenceof the Sveneti toAgara Bypass road

Intermediate Results and Indicators

Baseline Target Values

Intermediate Results Unit of Parent Progress 2012 2013 2014 2015 Data Source/ Responsibilityn aMeasure- Project To Date Frequency for Data Comments

Indicators Methodologya ment Start (2011) Collection(2009)

Intermediate Result 1: Improvements to the E60 East-West Highway Corridor

1. Number of kilometersupgraded Sveneti - Agara Z Km 0 10 19 27 34 34 Annually PMR RDBypass

Intermediate Result 2: Strengthening Institutional Capacity

2. Implementation of road safety - Yes/No No Yes Yes Yes Yes Yes Annually PMR RDaudit manuals

3. All new World Bankfinancedroad sections managed by RDwill be subject to formal road F Yes/No No Yes Yes Yes Yes Yes Annually PMR RDsafety audit using Georgianmanuals4. Percentage ofE60 CorridorSenaki to Tbilisi with road safety [] % 0 50 90 100 100 100 Annually PMR RDengineering improvements

17

Intermediate Results and Indicators

Baseline Target Values

Intermediate Results Unit of Parent Progress 2012 2013 2014 2015 Data Source/ ResponsibilityMeasure- Project To Date Frequency for Data Comments

Indicators Methodologyo ment Start (2011) Collection

(2009)completed

5. Annual road safety actionsundertaken as specified by the pGnergian Natseiolrfic Safy the Yes/No No Yes Yes Yes Yes Yes Annually PMR RDGeorgian National Traffic SafetyStrategy6. Completion offramework forE60 performance based road E Yes/No No Yes Yes Yes Yes Yes Annually PMR RDmaintenance

7. Purchase/Development of the E Yes/No No No No No No Yes Annually PMR RDRoad Crash Database

18

ANNEX 2: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)

GEORGIATHIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT

ADDITIONAL FINANCING

PotStakeholder Risk sStakeholder Risk Rating Low

Description: Road Risk Management: There are no particular risk-mitigation measures envisaged, besides monitoring any possible (but unlikely)improvements in Georgia change in the Government's road investment program. The upgrading of the East-West Highway to a four-lane motorwaygenerally benefit from a strong standard is universally supported in Georgia, both by political actors and also by road-users; it is very unlikely that this supportsupport from the various will be withdrawn in the future. The Project will ensure that proper consultations are done with the Project stakeholders. Thestakeholders and the particular Project has a high economic justification, due to the high traffic on the existing road.Project has high Governmentsupport. However, locally thereis a risk that particularcategories of populations fromthe town of Agara - such asshop and facilityowners/workers - may bedissatisfied by the constructionof a bypass that may affect theirprofessional activities. There isa risk of insufficientcoordination with Projectstakeholders.

IpeetnAgny(ARik(ichangeing thecar GvRmns ras netetpora.Teugaigo)heEs-etHgwytoafu-aemtra

Capacity Rating Moderate

Description: The RD may not Risk Management: FM capacity building actions agreed upon will be implemented. Throughout the Second Secondary and

be able to retain acquired Local Roads Project negotiation the Bank and the Borrower agreed and recorded in the minutes to finalize appointment of one

capacity in Project management additional full-time M staff i The new staff will be put in charge of maintaining the software module to strengthen contract

and enviroinmental management and accounting. It was also agreed that the RD will hire an additional contract manager.management. The existing Resp: Client Stage: Preparation Due Date: March 2012 Status: In Progress

19

M/accounting staff is Risk Management: The proposed additional financing Project will finance for the duration of the Project the salaries of threeoverloaded with the current FPU/RD consultants (Project Manager, Environmental Specialist Monitoring and Reporting Specialist), and the operating costsvolume of work. During the last and salaries of the TRRC.two Bank FM missions, the RD Resp: Client Stage: Implementation Due Date: June 2015 Status: In Progresswas advised to enhance thestaffing arrangements in placeat the TRRC - it was agreedthat a full-time disbursementspecialist and a contractmonitoring officer would behired. However, this was notcarried out. Considering theincreasing workload for theexisting staff, this may result ina deterioration of FM anddisbursement arrangements(including impacting internalcontrols) under the Projects.The procurement risk impact issignificant, but the likelihood ofrisk is low. The procurementtrack records of the RDMRDIand the TRRC in the ongoingProject has been satisfactory. Inaddition, the procurement unitof the RDMRDI has experiencewith World Bank-financedprocurement.

Governance Rating Low

Description: The MRDI has Risk Management: No mitigation measure has been proposed.proven to have institutionalstaeni to hvefcti sield Resp: Bank Stage: Implementation Due Date: June 2015 Status: In Progressstanding to effectively shieldthe Projects from outsideinterference. The risk is low asthe governance structure of theProject is well-defined and hasproven to be well-functioning.

20

Design Rating Moderate

Description: The Project Risk Management: The Project road design is straightforward, and follows the design of the TEWHIP. The design of the bypassdesign risk is moderate would involve examining various technical solutions that are not complicated. The first 11 kmn is ready for implementation, andbecause, this is an additional the Team will review options of phasing the works to ensure timely implementation. Cost-saving from the on-going Project isfinancing Project extending the expected to be in the US$5-7 million range, which would go towards the contingency for the AF.upgrading of the East-WestHighway being upgraded under During Project supervision, an independent quality assurance firm will be hired to review the quality of construction and thethe ongoing TEWHIP Project, performance of the contractor, the supervision consultant and the road agency managing the Project.with similar terrain and proven Resp: Bank Stage: Implementation Due Date: June 2015 Status:In Progresstechnical design features. TheAF scope and scale are smallerthan the ongoing Project -without the construction oflarge bridges or tunnels, as isthe case on the TEWHIP.

The first 11 kmi follow theexisting alignment and havelow design risk. The designrisk for the remainder ismoderate, as it involves abypass. The contingencyamount for the AF is low.

Social and Environmental Rating Moderate

Description: The ongoing Risk Management: The RD has successfully implemented the Bank's safeguard policies on previous Projects, and has a unitThird East-West Highway devoted to resettlement issues. No residential houses will be affected, and only one commercial structure that has beenImprovement Project was operational during the past five years will be demolished. The Resettlement Policy Framework (RPF) - which sets out policiesassigned Environment and procedures to be used in determining the Project's social impacts and mitigating them - has been prepared for the ongoingCategory A, and the proposed Project; it was revised in December 2011 to address terms and definitions to compensate those defined as significantly affected.AF will also be Category A. The RD has confirmed explicitly that the revised RPF applies to the AF, and the RPF has been re-disclosed. A ResettlementThe Project will finance the Action Plan (RAP) for the AF was cleared and disclosed on February 10, 2012.addition of two new lanes tothe existing carriageway, and Resp: Client Stage: Preparation Due Date: June 2012 1Status: In Progressthe construction of a bypass.The environmental risks of theAF are typical for highwayimprovement projects thatinclude realignment. The

21

potential impacts are moderate Risk Management: An Environmental Impact Assessment (EIA) of the highway section between Ruisi and the Agara bypass- and mostly limited to the has been carried out - and an Environmental Management Plan (EMP) was developed. Both the EIA and the EMP were reviewedconstruction period. by the Bank; the EIA was disclosed in-county on February 7, 2012. The EMP will be integrated into the works contact and

provisions will be made to ensure that the contractor is liable for infringement of EMP requirements.The Project will require landacquisition and will carry therisks related to the timely andfair compensation of the Risk Management: In order to address the deficiencies identified in the environmental review, the works contact will includeaffected communities, the costs for environmental management in the bills of quantity. The environmental supervision capacity of the RD will be

strengthened by hiring an environment specialist and a social safeguards specialist. Environmental monitoring functions will beAn environmental review of included among the responsibilities of the construction supervision consultant.past road projects in Georgia ______________________________________________

countatrsevionenta Resp: Client Stage: Implementation Due Date: June 2015 Status: In Progress

Rikoaagmnttnrrertoadrsttedeiiecisidnifeeinheevionetareve,nhmwrkeonrctwllicld

performance has been a relativeweakness of the client and willbe improved.

Program and Donor Rating Low

Description: There is a low Risk Management: Continue close cooperation with other donors.risk regarding Program and Continue close cooperation with other donors.donor coordination. There is an -active coordination between Resp: Bank Stage: Implementation Due Date: June 2015 Status: In Progressdonors through regular donor-Government conferences.Donors active in the road sectorinclude: the ADB, the JICA,and the EIB. In addition, theRD supports informationexchange between donors thatfCirther supports effective donorcoordination. The execution ofthe Project is not dependent onany other project or donor.

Delivery Monitoring and ModerateSustainability

Description: The RD is Risk Management: The procurement of the Ruisi to the Agara Byapss section is in progress - thus, timely project delivery isundertaking an ambitious road expected. The risk therefore resides with the RD successfully implementing the procured contracts. Road supervision has beenrehabilitation and improvement and results monitoring will be enhanced by increased staffing and funding, as described in risk sections above.program; there is a risk that theRD's capacity will be over-

22

stretched. The previous East- Resp: Bank Stage: Implementation Due Date: June 2015 Status: In ProgressWest Highway Projects haveachieved overall success, but Risk Management: Supervision of the works will be done by an international firm in order to ensure construction quality. Inthere have been issues with.ctheructioebn suy t the addition, the RD will be supported by an independent quality assurance firm hired to review the work done by the contractor, the

RD addressed and will continue supervision engineer, the RD itself, and the quality of the road works. In order to develop capacity further, the RD technical audit

to address, team will also be provided with training.

The sustainability of the Resp: Bank Stage: Implementation Due Date: 3 Jun 2015 Status: In Progressbenefits of the proposed roadimprovement investments are Risk Management: The Bank supports the strengthening of the current RAMS under a technical assistance component of theachieved by proper First EWHIP - and through on-going policy dialogue, such as the recently completed ESW on "Improving the Sustainability ofmaintenance and operation of Road Management and Financing in Georgia".the Project road. There is a riskthat without propermaintenance the road willdeteriorate faster than expected- and that without proper roadoperation management, road-user satisfaction will decreasedue to the lack of proper roadservices. There is a risk thatwithout a proper road assetmanagement system (RAMS),maintenance and rehabilitationworks on the network will notbe properly managed by theRD.

Resp: Bank Stage: Due Date: June 2015 Status: In Progress

Preparation Risk Rating: Moderate 7.2 Implementation Risk Rating: Moderate

Description: The AF will scale up activities under the existing TEWHIP. The Preparation and Implementation Risks are both rated Moderate for the restructuredTEWHIP due to the construction of the Agara Bypass.

23

ANNEX 3: PROCUREMENT PLAN

GEORGIATHIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT

ADDITIONAL FINANCING(P0128863) - March 22, 2012

Cost Issue of Bid Evaldone- Contract Contract ContractDescription Type Method PQ PR Packs Estimate TQFP Opening Evaid Sitrat Ctrt Conre

___________________________________ _____ - ___- ____ j(U $ ) DIIQIFP peing NOissed Siged Stat inihe

Component 1: Civil Works and Associated Services

1 Ruisi-Agara Bypass Road Section CW ICB N Y 1 05-Mar-12 23-Apr-12 10-May-12 25-May-12 06-Jun-12 05-Jun-14

2 Land Acquisition and Resettlement NBF N/A N/A N/A N/A

Total Works

3 Technical Quality Consulting Firm CS ICS N Y N/A 30-Apr-12 15-May-12 05-Jun-12 10-Jun-12 15-Jun-12 30-May-14

Total Services

TOTAL COMPONENT I

Component 2: Institutional Strengthening

4 Road Safety Adviser for 1 Year CW ICS N Y 1 30-Mar-12 20Apr-12 05-May-12 15-May-12 01-Jun-12 01-Jun-12

5 Purchase\Development of Road Crash Database CS QCBS N Y 1 30-May-12 25-Jun-12 15-Jul-12 25-Jul-12 05-Aug-12 TBD

6 Project Manager for 3 Years CS ICS N/A Y 1 10-Apr-12 25-Apr-12 15-May-12 25-May-12 01-Jun-12 01-Jun-15

7 FPU Consultant Fee (Environmental Consultant) for 3 CS ICS N/A Y 1 10-Apr-12 25-Apr-12 15-May-12 25-May-12 01-Jun-12 01-Jun-15Years

8 FPU Consultant Fee (Monitoring and Reporting CS ICS N/A Y 1 10-Apr-12 25-Apr-12 15-May-12 25-May-12 01-Jun-12 01-Jun-15Consultant) for 3 Years

Total Services

9 Vehicles, Office Equipment and Computers for RD G SH N N N/A 05-May-12 25-May12 15-Jun-12 20-Jun-12 20-Jun-12 TBD

Total Goods

TOTAL COMPONENT 2

Component 3: Project Implementation

10 TRRC Salaries for 2 Years IOC N/A N N N/A N/A N/A N/A N/A N/A N/A

11 TRRC Operating Costs for 2 Years IOC N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

12 Project Financial Audits CS CQS N/A Y 1 TBD TBD TBD TBD TBD TBD

TOTAL COMPONENT 3

Unallocated/contingencies N/A N/A N/A N/A N/A N/A

TOTAL FOR ALL COMPONENTS

24

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