The World Bankdocuments.worldbank.org/curated/en/...V.2.(a) X CONTINUOUS Description of Covenant...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: PAD1117

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF EURO 83 MILLION (US$90.947 MILLION EQUIVALENT)

TO THE

PUBLIC ENTERPRISE FOR STATE ROADS

WITH

A SOVEREIGN GUARANTEE FROM FYR MACEDONIA

FOR A

ROAD UPGRADING AND DEVELOPMENT PROJECT August 5, 2015

Transport and ICT Global Practice South East Europe Country Unit Europe and Central Asia Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 31, 2015)

Currency Unit = Macedonian Denar (MKD) EUR1 = US$1.096 EUR1 = MKD61.55

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS BMS Bridge Management System M&E Monitoring and Evaluation

CPS Country Partnership Strategy NPV Net Present Value DA Designated Account NRRRP National Regional Road Rehabilitation

Project ESIA Environmental and Social Impact

Assessment PESR Public Enterprise for State Roads

ESMP Environmental and Social Management Plan

PMT Project Management Team

EBRD European Bank for Reconstruction and Development

PPE Plant Property and Equipment

ECA Europe and Central Asia POM Project Operations Manual EIB European Investment Bank PSIA Poverty and Social Impact Analysis EU European Union QCBS Quality and Cost Based Selection FDI Foreign Direct Investment RAMS Road Asset Management System GDP Gross Domestic Product RAP Resettlement Action Plan HDM-4 High Development and Management

Tool RFP Request for Proposal

IBRD International Bank for Reconstruction and Development

RLRPSP Regional and Local Roads Program Support Project

ICB International Competitive Bidding RPF Resettlement Policy Framework

IFI International Financial Institution TEN-T Trans-European Transport network

IFR Interim Un-audited Financial Report ToR Term of Reference IPA Instrument Pre-Accession Assistance UNDB United Nations Development Business

MOTC Ministry of Transport and Communications

VAT Value Added Tax

MOF Ministry of Finance

Regional Vice President: Cyril E. Muller

Country Director: Ellen A. Goldstein

Senior Global Practice Director: Pierre Guislain

Practice Manager: Juan Gaviria Task Team Leader: Rakesh Tripathi, Liljana Sekerinska

Contents

I. STRATEGIC CONTEXT ..................................................................................................... 7

A. Country Context ............................................................................................................. 7 B. Sectorial and Institutional Context ................................................................................. 8 C. Higher Level Objectives to which the Project Contributes. ......................................... 11

II. PROJECT DEVELOPMENT OBJECTIVES .............................................................. 12

A. PDO .............................................................................................................................. 12 B. Project Beneficiaries ..................................................................................................... 12 C. PDO Level Results Indicators ....................................................................................... 13

III. PROJECT DESCRIPTION ............................................................................................ 13

A. Project Components ...................................................................................................... 13 B. Project Financing .......................................................................................................... 14 C. Project Cost and Financing ........................................................................................... 14 D. Lessons Learned and Reflected in the Project Design ................................................. 15

IV. IMPLEMENTATION ..................................................................................................... 16

A. Institutional and Implementation Arrangements .......................................................... 16 B. Results Monitoring and Evaluation .............................................................................. 16 C. Sustainability ................................................................................................................ 17

V. KEY RISKS AND MITIGATION MEASURES .......................................................... 17

A. Overall Risk Rating Explanation .................................................................................. 17 VI. APPRAISAL SUMMARY .............................................................................................. 17

A. Economic and Financial (if applicable) Analysis ......................................................... 17 B. Technical ....................................................................................................................... 19 C. Financial Management .................................................................................................. 19 D. Procurement .................................................................................................................. 20 E. Social (Including Safeguards) ....................................................................................... 20 F. Environment (including safeguards) ............................................................................. 21 G. World Bank Grievance Redress ................................................................................... 22 Annex 1: Results Framework and Monitoring .................................................................. 23

Annex 2: Detailed Project Description ................................................................................................. 29

Annex 3: Implementation Arrangements ............................................................................................ 33

Annex 4: Economic and Financial Analysis .......................................................................................... 46

Annex 5: Implementation Support Plan .............................................................................................. 51

Annex 6: Map ....................................................................................................................................... 53

1

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PAD DATA SHEET

Macedonia, former Yugoslav Republic of

Road Upgrading and Development Project (P149955)

PROJECT APPRAISAL DOCUMENT.

EUROPE AND CENTRAL ASIA

0000009080

Report No.: PAD1117 .

Basic Information

Project ID EA Category Team Leader(s)

P149955 A - Full Assessment Rakesh Tripathi, Liljana Sekerinska

Lending Instrument Fragile and/or Capacity Constraints [ ]

Investment Project Financing Financial Intermediaries [ ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date

30-Sept-2015 31-Dec-2020

Expected Effectiveness Date Expected Closing Date

20-Nov-2015 31-Dec-2020

Joint IFC

No

Practice Manager/Manager

Senior Global Practice Director

Country Director Regional Vice President

Juan Gaviria Pierre Guislain Ellen A. Goldstein Cyril E. Muller .

Borrower: Public Enterprise for State Roads

Responsible Agency: Public Enterprise for State Roads

Contact: Aleksandar Stojanov Title: Acting Director

Telephone No.: 3892 3118044 Email: [email protected] .

Project Financing Data(in USD Million)

[ X ] Loan [ ] IDA Grant [ ] Guarantee

[ ] Credit [ ] Grant [ ] Other

Total Project Cost: 91.00 Total Bank Financing: 91.00

Financing Gap: 0.00 .

2

Financing Source Amount

Borrower 0.00

International Bank for Reconstruction and Development

91.00

Total 91.00.

Expected Disbursements (in USD Million)

Fiscal Year

2016 2017 2018 2019 2020 2021 0000 0000 0000 0000

Annual 7.00 10.00 20.00 20.00 20.00 14.00 0.00 0.00 0.00 0.00

Cumulative

7.00 17.00 37.00 57.00 77.00 91.00 0.00 0.00 0.00 0.00

.

Institutional Data

Practice Area (Lead)

Transport & ICT

Contributing Practice Areas

Cross Cutting Topics

[ ] Climate Change

[ ] Fragile, Conflict & Violence

[ X ] Gender

[ ] Jobs

[ ] Public Private Partnership

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Transportation Rural and Inter-Urban Roads and Highways

90

Public Administration, Law, and Justice

General public administration sector

10

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project.

.

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Trade and integration Regional integration 50

3

Trade and integration Trade facilitation and market access 50

Total 100 .

Proposed Development Objective(s)

The Project Development Objectives are to improve transport connectivity for road users along Corridor VIII between Skopje and Deve Bair, and to improve the asset management and planning functions of Public Enterprise for State Roads.

.

Components

Component Name Cost (USD Millions)

Construction along Corridor VIII: Rankovce - Kriva Palanka 85.50

Institutional and Project Implementation Support 5.50.

Systematic Operations Risk- Rating Tool (SORT)

Risk Category Rating

1. Political and Governance Moderate

2. Macroeconomic Moderate

3. Sector Strategies and Policies Moderate

4. Technical Design of Project or Program Moderate

5. Institutional Capacity for Implementation and Sustainability Moderate

6. Fiduciary Low

7. Environment and Social Substantial

8. Stakeholders Low

9. Other Moderate

OVERALL Moderate .

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ].

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ X ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ ] No [ X ].

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

4

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X .

Legal Covenants

Name Recurrent Due Date Frequency

Loan Agreement, Schedule 2, Section V.1.(a)

X CONTINUOUS

Description of Covenant

Except as the Bank shall otherwise agree, beginning March 31,2015, the Borrower shall not incur any debt unless a reasonable revenues and expenditures forecast shows Borrower’s estimated net revenues for each fiscal year during the term of the debt to be incurred shall be at least 1.2 times the Borrower’s estimated debt service requirements in such year on all debt including debt to be incurred


Loan Agreement, Schedule 2, Section V.2.(a)

X CONTINUOUS


Except as the Bank shall otherwise agree, beginning March 31, 2015, the Borrower shall maintain a ratio of current assets to current liabilities of not less than 1 (one).


Loan Agreement, Schedule 2, Section V.2.(b)

X Yearly


Before June 30 in each of its fiscal years, the Borrower shall, on the basis of forecasts prepared by the Borrower and satisfactory to the Bank, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Bank the results of such review upon its completion.


Loan Agreement, Schedule 2, Section V.2.(c)

X Yearly


If any such review shows that the Borrower would not meet the requirements set forth in paragraph (a) for the Borrower's fiscal years covered by such review, the Borrower shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its rates) in order to meet such requirements.


Guarantee Agreement, Article II. Section 2.03 (a)

X CONTINUOUS

5


The Guarantor further specifically undertakes to ensure the Borrower maintains adequate staff and resources and adequate management, in a manner and with terms of reference and a composition satisfactory to the Bank.


Guarantee Agreement, Article II. Section 2.03 (b)

X CONTINUOUS


The Guarantor specifically undertakes to transfer to the Borrower no less than 20 per cent of the total excise tax on oil derivatives, collected within each calendar quarter; transfers shall be made on a regular basis, but at least four times a year, in intervals not exceeding three calendar months, and as needed to guarantee performance of all the Borrower’s obligations set forth in the LA.

.

Conditions

Source Of Fund Name Type

IBRD Additional Condition of Effectiveness in Article V, 5.01

Effectiveness

Description of Condition

The Project Operational Manual has been adopted by the Borrower in a manner satisfactory to the Bank.

Team Composition

Bank Staff

Name Role Title Specialization Unit

Rakesh Tripathi Team Leader (ADM Responsible)

Sr Transport. Spec. Engineering and bridge management

GTIDR

Liljana Sekerinska Team Leader Sr Transport. Spec. Asset management and sector dialogue

GTIDR

Blaga Djourdjin Procurement Specialist

Procurement Specialist

Procurement GGODR

Anneliese Viorela Voinea

Financial Management Specialist

Financial Management Analyst

FM management GGODR

Aleksandar Crnomarkovic

Team Member Sr Financial Management Specialist

Financial management

GGODR

Bekim Imeri Safeguards Specialist

Senior Social Development Specialist

Social Development and Safguards

GSURR

Gulana Enar Hajiyeva Safeguards Specialist

Senior Environmental Specialist

Environmental Specialist

GENDR

Jasna Mestnik Team Member Finance Officer Finance and Disbursement

WFALA

6

Jimena Garrote Counsel Senior Counsel Legal issues LEGLE

Luan Aliu Team Member Program Assistant Team Assistant ECCMK

Robert Charles Seekings Team Member E T Consultant Engineer GTIDR

Rodrigo Archondo-Callao

Team Member Sr Highway Engineer

Engineer GTIDR

Steven Farji Weiss Team Member E T Consultant Poverty and impact assessment

GTIDR

Wei Wang Team Member Young Professional

Asset management GTIDR

Extended Team

Name Title Office Phone Location

.

Locations

Country First Administrative Division

Location Planned Actual Comments


Kriva Palanka Kriva Palanka X


Opstina Rankovce Opstina Rankovce X

.

Consultants (Will be disclosed in the Monthly Operational Summary)

Consultants Required ? Consulting services to be determined

7

I. STRATEGIC CONTEXT

A. Country Context

1. FYR Macedonia is a small, open economy with a sound track record of macroeconomic stability. Landlocked, with a population of only 2.1 million, the country’s GDP per capita1 is a third of the average of the European Union (EU) members that have joined since 2004 and 15 percent of the EU average as a whole.

2. FYR Macedonia’s growth has been above the South East Europe (SEE) regional average since 2009. Between 2002 and 2008, FYR Macedonia grew an average of 4.3 percent annually in real terms, which was 0.7 percentage points below the regional average. Nevertheless, since 2009, FYR Macedonia’s average growth has been 1.5 percent, exceeding the regional average of 1.3 percent. Real GDP growth contracted by 0.4 percent in 2009 but recovered quickly, reaching 3.4 percent in 2010 and 2.3 percent in 2011. Real GDP growth contracted again in 2012 by 0.5 percent and climbed to 2.7 percent in 2013 and 3.5 percent in 2014, driven by exports and buoyant construction.

3. FYR Macedonia is a trade-dependent economy with road transport as a dominant mode. Exports account for 48 percent of GDP in 2014. To promote its exports and foreign direct investment (FDI), the Government has focused on infrastructure development and particularly transport infrastructure to enhance options for connectivity to EU markets and access to the sea ports in both Greece and Bulgaria. Road infrastructure in particular is an important priority for the country since most goods, including exports, are transported by road (roads carried 98 percent of passengers and 93 percent of exported and internally transported goods in 2013).2 Road transport is also the key mode for inter-urban passenger travel, as the rail network, which has a total length of 700 km, serves mostly the large urban areas along transport corridor X. Consequently, the road network constitutes the primary transport mode for internal mobility and trade.

4. Developing an alternate and uninterrupted access to deep-sea ports is a priority in the National Transport Strategy3 (2007-17). Currently, the country’s economy depends primarily on Corridor X and the Port of Thessaloniki. Investments in the ports on Corridor VIII, especially in the Black Sea ports open new potential transport routes and this leads to the impetus to improve and upgrade alternative connecting Corridor VIII, to efficiently access Bulgarian Black Sea ports but also to access potential markets in the East.

5. FYR Macedonia’s track record of poverty reduction was poor during most of the 2000s and is ranked as the most unequal country compared to its regional peers in South East Europe. Between 2002 and 2009, FYR Macedonia grew at 3.9 percent annually in real terms which enabled the country to reduce its income gap with the EU. Notwithstanding these achievements, poverty

1 According to World Development Indicators, GDP per capita in current US$. 2 According to State Statistical Office. 3 National Transport Strategy, available at http://star.mtc.gov.mk/new_site/en/storija.asp?id=1782

8

continued to remain high in the last years: In 2013, poverty4 was estimated at 24.2%, still very close to 2012 (26.2%), 2011 (26.8%) and 2010 (27.3%) as reported by FYR Macedonia Statistical State Office. Similarly, with a Gini coefficient of nearly 0.38, FYR Macedonia still ranked as the most unequal country compared to its regional peers in South East Europe. Perhaps more problematic, is the share of population who, while not situated below the poverty line, are still at risk of falling into poverty.

B. Sectorial and Institutional Context

6. FYR Macedonia is crisscrossed by two main international corridors critically important for its connectivity and trade with the EU and with the Western Balkans. Corridor X, over 1,500 km long (of which 176 km are in the country) runs north-south and connects the country to the Port of Thessaloniki in Greece in the south and to Austria and Hungary in the north, and Corridor VIII which is 660 km long (304 km in the country), runs east-west and connects the country to the sea ports in Albania and Bulgaria. The 2013 EU guidelines5 for the development of the Trans-European Transport Network (TEN-T) confirmed the priority that Corridors VIII and X continue to have as these are considered an extension of the core network providing linkages to the neighboring countries and better integrating Europe. As a result, development of these corridors continues to receive a significant share of the country’s effort and financing.

7. The development of the two main international corridors is however unbalanced. On Corridor X, the completion of the construction works on the Demir Kapija-Smokvica section (started in 2012 with EBRD and EIB loans and EU grant assistance) will result in a full Corridor X motorway by 2016. Corridor VIII is only 36 percent upgraded and is in need of further upgrading. This big imbalance in the development of these two main corridors in the country and the current reliance on Corridor X are of great economic and strategic concern. The western section of Corridor VIII (to Albania) is currently being expanded to a motorway standard with financial assistance from the Chinese Exim Bank, with plans for substantial completion by 2019. Consequently, the continuation of construction of the eastern section of the Corridor VIII road link is considered a priority as well.

8. Upgraded road Corridor VIII will contribute to a strengthened country’s integration in the region and the EU and could lead to new market opportunities. Currently, the road connection is the only connection toward Bulgaria, as railway operations are available until Kumanovo, approximately 30km east from the capital Skopje. While there are tentative plans to eventually complete the railway connection to Bulgaria, this requires substantial resources and investments on both sides of the border, and it is therefore expected that road transport will remain to be the single mode on east Corridor VIII in the foreseeable future. Investments in the road networks on the territories of Bulgaria and Romania have been significantly ramped up in the last 10 years and present an alternative transport route to Western and Eastern Europe and also to Turkey. This applies to alternative connections to Corridors IV and IX both of which have a high service level. Specifically, Bulgaria has invested heavily in upgrading key European corridors to a four lane divided motorway, notably the 350 km of the international Corridor VIII (locally referred to as

4 According to State Statistical Office, based on SILC (Survey on Income and Living Conditions) done by State Statistical Office according to Eurostat methodology. 5 http://ec.europa.eu/transport/themes/infrastructure/ten-t-guidelines/corridors/doc/ten-t-corridor-map-2013.pdf .

9

Trakia motorway) connecting Sofia to the strategically important Black Sea Seaport of Burgas. In addition, the Corridor VIII portion from the FYR Macedonia border to Sofia has been substantially rehabilitated and is in good condition. This stretch is envisaged to be further upgraded in the long range plan of Bulgaria.

9. Institutional Context. The Ministry of Transport and Communications (MOTC) is in charge of developing and implementing transport strategies and policies. In the road sector, under MOTC, there are two main bodies directly responsible for the road sector: Public Enterprise for State Roads (PESR) and Public Enterprise Makedonija Pat (road maintenance contractor).

10. The management of the national and regional roads (state roads) is entrusted to the PESR which reports to MOTC. PESR prepares the road development programs and financing plans. It receives financing from the fuel excise tax revenue, annual motor vehicle registration fees, motorway tolls, and loan financing from international financial institutions (IFIs). As per the projections of PESR’s Annual Program, the first two sources of revenues for PESR will continue to be: (i) no less than 20 percent of the excise tax on oil derivatives to be transferred from the State Budget at least on a quarterly basis, and (ii) motorway tolls. As of 2014, toll rates and vehicle registration rates have been increased by 30 percent. Despite the increased revenues, substantial debt obligations by PESR require a continuous and close look at the financial sustainability of PESR’s operations. An important majority (about 260) of the present 320 PESR employees is involved in toll collection activities. Fifteen of the remaining 60 employees are civil engineers managing the road network.

11. The implementing entity in January 2013 changed from a governmental agency to a public enterprise (PESR), and two new financial covenants have been agreed with the counterparts for the ongoing two Loans in order to monitor and enhance the financial status and sustainability of the entity: (a) Entity audit, starting 2013; (b) Two financial ratios, beginning December 31, 2013: (i) Debt service coverage ratio of not less than 1.2. This ratio is defined as the ratio of net revenue to debt service for the year (principal and interest); and (ii) Current ratio of not less than 1. Given the operating profile of the entity which finances non-current assets through current liabilities, this ratio is defined as the ratio of current assets including estimated net revenues for the next year to current liabilities.

12. Makedonija Pat is the public enterprise responsible for the regular and winter maintenance of the national and regional road networks, installation and maintenance of signalization and traffic counting. Makedonija Pat is responsible for the maintenance of 4,100km of paved roads, and includes in its activities a small share of road construction. Annual maintenance contracts are established between Makedonija Pat and PESR. Makedonija Pat is also responsible for two major kinds of road maintenance: 1) periodic maintenance; and 2) routine maintenance.

13. The Project continues to build and complement activities carried out under a transport program supported by the World Bank and other IFIs through PESR which focus on asset preservation, improved connectivity, and enhanced road safety. Such focus is reflected in the long-term Bank engagement which balances investments in preservation through rehabilitation and new construction directed to improved regional connectivity and transport corridors. All of these investments are underpinned by capacity building activities to introduce a comprehensive road asset management system in PESR and streamline road safety in engineering practices. The Project builds on these past and ongoing efforts and further expands the engagement on asset

10

management by adding the bridge management considerations to result in an overhaul of road planning in the country.

14. Road safety is a continued effort by PESR. Under the ongoing operations Regional and Local Roads Program Support Project (RLRPSP) and the National and Regional Roads Rehabilitation Project (NRRRP), the country is increasingly looking into improved capacity to improve road safety on the network. Recent years have witnessed more than 4,000 crashes annually and an annual total in injuries and deaths nearing 7,000 persons, or 6.3 road fatalities per 100,000 inhabitants. The National Road Safety Council, appointed through consensus by the Parliament is also actively working on launching education events to increase public awareness, improve coordination between national agencies as well as support enforcement to ensure safer travel environment. Complementing these educational and enforcement targets, the ongoing RLRPSP and NRRRP concentrate on investments in necessary safety infrastructure and policy and capacity enhancement for PESR to handle the issue. In this Project, priority is placed on continuously introducing infrastructure safety management measures which are binding for contractors and road authorities in all stages of planning and execution, proper and efficient road maintenance, and ensuring visibility on roads by eliminating physical and illegal obstacles. All of these are reflected in the project design.

15. Planned increase in public spending in the road sector represents a very important development opportunity for the country, both in terms of infrastructure and of employment, and needs to be efficiently managed and executed. Public expenditure on transport infrastructure (including both capital and maintenance) has averaged 1 percent of GDP between 2005 and 2013. Estimates based on the PESR Five-Year Strategic Program 2013-2017 suggest an increase in road sector public spending to around 2 percent of GDP over the next four-year period. This scaling up is largely due to new construction. The success of this program will be to a significant degree determined by the quality of investment and maintenance planning.

16. The Government recognizes the importance of enhancing the institutional and technical capacity of PESR. Through the ongoing RLRPSP and NRRRP, the World Bank is supporting PESR in: (i) introducing an asset management system in PESR’s operation; (ii) improving capacity for financial management; (iii) enhancing technical and contract management knowledge of engineering staff and (iv) enhancing internal engineering practices to improve consideration of sustainability and road safety. The first two priorities emerge from the wider managerial and financial independence stemming from its status as a public enterprise and also the extensive investment program initiated after the 2013 restructuring. Their aim is to equip PESR to have regular and precise financial monitoring and also have an empirical tool to identify economically efficient investments. The other two priorities target the engineering and construction practices in the country and make an effort to enhance these practices to incorporate road safety and sustainability considerations.

17. The road sector development plans are primarily guided by nationally set priorities, as a data and analysis-based evaluation mechanism is under development with Bank assistance: In the absence of a road asset management system that would provide a holistic view of the current network condition, currently PESR develops the program primarily on the basis of nationally set priorities, as outlined in the Government program and the National Transport Strategy, and taking into account recommendations from PESR’s network supervision engineers. Under the RLRPSP, the PESR has been working on developing a country wide road asset management system which entails the collection of detailed road condition data. So far, PESR has procured equipment for

11

pavement condition measurement and completed the first road condition survey of the state road network. This will be used by PESR to prepare the update to its Five-Year Strategic Program using RAMS before the end of 2015. In order to provide guidance to PESR in the initial period of working with RAMS, a key element of the NRRRP declared effective in December 2014 is devoted to RAMS and ensuring PESR has the resources to maintain the system in the initial years and ensure proper human recourses and internal procedures to sustain the system on the long term.

18. The proposed Bridge Management System (BMS) under this Project is a logical addition to the Road Asset Management System (RAMS) to improve road and bridges investment planning. This will further increase the efficiency of maintenance investments and will be key for the country to reap the full benefits of its scaled up investment program. Accurate and detailed information about the condition of the bridges would ensure the completeness of RAMS. PESR recognized the need to strengthen the methods applied to investment prioritization, and has already moved to multi-year road investment targets through the development of the Five-Year Strategic Program. RAMS and BMS will ensure that these planning approaches do improve the efficiency of public spending because BMS will ensure better prioritizing and efficient investments in the upkeep and expansion of bridges in the country.

C. Higher Level Objectives to which the Project Contributes. 19. The proposed Road Upgrading and Development Project is consistent with the National Transport Strategy (2007-2017), which sets out (1) the completion of motorway corridors, and (2) the efficient connection of the road network to the corridors as its short term priorities. The proposed focus on east Corridor VIII will enhance the country’s connectivity and will assist the country to fulfil its EU commitments to strengthen and further develop the Trans-European networks as well as address the national priority of developing an alternate upgraded access to sea ports in light of the past geo political disruption of their main access. Building on the RAMS that is being established under the Bank’s ongoing RLRPSP, the technical capacity building in this Project will focus on establishing a Bridge Management System (BMS), which will strengthen the asset management capabilities of PESR and enhance the efficiency of resource allocation and use.

20. The Project has a high governmental priority: Development of transport infrastructure is one of the key Government Strategic Priorities 2014-2018, as a contributor to increased competitiveness of the national economy, stronger economic growth and a more equitable regional development within the country. Upgrade of Corridor VIII has been identified in the referenced Strategy.

21. The Project is aligned to the World Bank Group’s overarching country goals and the FY 2015-2018 Country Partnership Strategy (CPS), to reduce poverty and provide more and better jobs. To address this objective, one of the two CPS pillars is to foster growth and competitiveness since these are a prerequisite to achieve poverty reduction and increased shared prosperity. The CPS identifies the improvement of road infrastructure as necessary in order to overcome the disadvantages of its landlocked economy and support the country to become a more attractive destination for FDI. In addition, the CPS acknowledges the need for improving capacity for evidence based investment choices in the road sector.

22. By enhancing access to employment opportunities and services, the Project will promote the productive inclusion of the poor and other vulnerable groups along the corridor of impact.

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A Poverty and Social Impact Analysis (PSIA)6 carried out for the NRRRP showed that the poor and bottom 40 percent spend longer time commuting and devote a large share of their resources to transport, foregoing consumption of other basic goods. Furthermore, the study found that the local population encounters several difficulties in terms of finding a job (unemployment rates are particularly high for the bottom 40 percent) and expanding their markets and business activities, and part of this results from poor road conditions and access. For communities that are disconnected from education, larger job markets, and social services, improving their physical connection to these markets may increase opportunities for income generation and investment in human capital. The upgrade of the country’s two main transport corridors can have long lasting job creation effects on specific sectors that are vital to the national economy such as construction, logistics, agriculture, and trade. By removing transport bottlenecks in the eastern Corridor VIII to the Bulgarian border (border crossing Deve Bair), it is expected that poor and disadvantaged communities will enjoy improved connectivity to engage more intensively in national and regional value chains potentially promoting productive inclusion of the poor and other vulnerable groups in the project area.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

23. The Project Development Objectives are to improve transport connectivity for road users along Corridor VIII between Skopje and Deve Bair, and to improve the asset management and planning functions of Public Enterprise for State Roads.

B. Project Beneficiaries 24. Improved accessibility to the Bulgarian border will have a positive impact on logistics costs, attracting more international road users and increasing economic opportunities for long distance truck drivers and local road users.

25. The improvement of east Corridor VIII will bring better and safer connectivity. Main project beneficiaries include more than 4,000 daily road users who would have improved connectivity from/to the border crossing to Bulgaria, public amenities and services, reduced travel time, reduced vehicle operating costs and reduced road accident risks. In addition, the construction and upgrade of the corridor can improve the welfare of a population in a catchment which is home to 132,000 inhabitants through better access to jobs and services. Finally, the envisaged works may lead to second order effects in firm level productivity, specifically through the price and wage effects of reduced transport costs and increased competition in specific industries.

26. This Project will contribute to strengthening the technical capacity of PESR: A national Bridge Management System building on the Road Management System that is under development will strengthen the asset management capabilities of PESR and would be a catalyst for data driven

6 The PSIA for the NRRRP project was carried out in FY15. It sought to explore the poverty and social inclusion impact of improvements to the regional and national road network while engaging key stakeholders and promoting public participation in a way that will build capacity and guide decision makers on future policy decisions.

13

decisions to create national bridge maintenance and investment plans. This would enhance the efficiency of resource use benefitting the economy at large.

27. Improved mobility of people along corridor and cross border interaction: The upgrading of the road section on Corridor VIII would benefit cross-border road-users between FYR Macedonia and Bulgaria. The secondary beneficiaries would include the local communities along the upgraded road. They would have better access to the Corridor and improved connectivity to employment, trade, education, and social opportunities. This is of significant relevance considering that the project’s area of influence, the north east planning region is one of the poorest regions in FYR Macedonia.

28. The Project will create both direct and indirect job opportunities. During road construction, the Project will provide jobs for hundreds of skilled and non-skilled men and women from the area, helping them learn skills, increase their income, and lower unemployment rate for a fixed period of time. Indirectly and in the medium to longer term, enhanced connectivity may improve value chains in priority sectors, leading to wider technology diffusion and expanded job opportunities.

C. PDO Level Results Indicators

29. The indicators related to the connectivity component of the PDO are: (a) Volume of freight along Corridor VIII (section Rankovce - Kriva Palanka), (b) Market accessibility index along Corridor VIII (section Rankovce - Kriva Palanka) and (c) Vehicle operating cost for road users, in Euro per vehicle-km, along the project road section. The indicator (a) should be read as a proxy.

30. The indicator related to improved asset management and planning is: Bridge maintenance and investment program developed based on Bridge Management System. The Project will target to improve a specific part of road asset management (the management of bridges and similar structures), and would aim at integration with the Road Asset Management System, currently under development. This would result in an overall improved asset management.

III. PROJECT DESCRIPTION

A. Project Components 31. Component 1: Construction along Corridor VIII: Rankovce - Kriva Palanka (estimated cost of EUR 78 million, which will be financed by IBRD loan). This component will upgrade the east section of the corridor VIII by financing the construction of the express road along the east section of the corridor which connects to Bulgaria. This segment is currently in poor condition. It carries around 3,000 vehicles per day, is narrow (around 6.4 meters) with many places without shoulders, and passes along many villages, which will make its rehabilitation with partial widening difficult. The new road is on a hilly terrain, thus around 10 bridges will need to be constructed with a total length of about 1.5 km. The new road section will be 24.64 km long, one lane in each direction with a width of 11m to 12m. The road design will take into account road safety considerations.

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32. Component 2: Institutional and Project Implementation Support (estimated cost of EUR 5 million, which will be financed by IBRD loan). Component 2 will have two sub-components:

(i) Sub-component 1: Establishment of Bridge Management System (BMS): This sub-component will further strengthen asset management by expanding the road asset management system (RAMS) currently under implementation by PESR to include also bridge asset management. The core focus of this activity would be to support PESR to introduce a BMS to be integrated in RAMS. This will entail: provision of equipment and software, diagnostic assessment of bridge condition, creation of a national roads and bridges linear referencing system to digitize roads and bridges, supporting the preparation of a bridge maintenance and investment plan using BMS, and training for technical and administrative staff.

(ii) Sub-component 2: Capacity Development and Project Implementation Support: This Project will build on earlier institutional capacity activities in road management planning, road safety, resilience and other transport management areas as the need arises throughout the project implementation. Supervision of works will be financed by PESR. Independent technical audits of civil works will be financed from this component. It will also finance technical assistance, equipment, and operational costs associated with the implementation of the Project. This would include: beneficiary satisfaction survey, as well as mid-term and impact evaluation surveys; and carrying out the annual financial audits of the Project. A study evaluating the Project’s socio-economic impacts (i.e., benefits to local population and communities), and evaluating institutional capacity improvements shall be conducted.

B. Project Financing 33. The total cost of the Project is EUR 83 million. The Bank will finance the Project through an IBRD Investment Project Financing Loan with the total loan amount of EUR 83 million to PESR with a guarantee from FYR Macedonia. The Project will be implemented over a five year period from January 2016 to December 2020. The borrower will cover any Value Added Tax (VAT) that may be applicable for this Project.

34. Additional Financing (AF): Additional financing could be eventually considered for instance to scale up the development effectiveness of the Project, e.g., through implementation of additional activities such as increased length of the corridor section under consideration, and/or to include additional road links taking into account technical, economic, environmental, and social considerations.

C. Project Cost and Financing 35. The detailed costing for each component are provided in Table 1 below:

Table 1: Project costing (in millions) and financing

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Components Project Cost

(in EUR)

IBRD Financing (in EUR)

Borrower Financing (in EUR)

% of IBRD Financing in Total Project

Cost Component 1: Construction along Corridor VIII: Rankovce - Kriva Palanka

78 78 0 100%

Component 2: Institutional and Project Implementation Support

5 5 0 100%

TOTAL 83 83 0 100%

D. Lessons Learned and Reflected in the Project Design 36. Implementation arrangements. The implementation experience from the ongoing Regional and Local Roads Program Support project - RLRPSP and National and Regional Roads Rehabilitations Project - NRRRP supported by the Bank confirms that project implementation by regular PESR staff continues to represent the most adequate arrangement because it allows palpable capacity-building for the institution. This mechanism has strengthened the long term technical capacity within PESR that is also critical for the EU accession process and the IPA absorption capacity. However, due to the large investment portfolio of PESR and in order to ensure a quick project start up and smooth implementation, this internal capacity will be strengthened with technical experts through a Project Management Team (PMT) already established under the NRRRP. Additionally, PESR staff will receive periodic targeted procurement and contract management training to ensure strong implementation.

37. Quality of detailed design. An important lesson from the Second Trade and Transport Facilitation Project and from other Bank projects in the Western Balkans, as reported in IEG evaluations, was that quality control for meticulous preparation of the detailed design is critical to the implementation experience during the construction. This lesson is incorporated in the project preparation process which aims to have the detailed design reviewed by independent consultants hired by PESR. Additionally, consultations on road design should be strengthened to produce a better design and build a better road. In this Project, wider engagement of stakeholders is proposed and is one of the key responsibilities of the monitoring and evaluation specialist in the PMT.

38. Institutional strengthening is a long term process more effectively addressed through consecutive projects. The Project is an element of a long term Bank engagement in the road sector in FYR Macedonia, which involves a complex and key restructuring related to the asset management and investment planning by PESR. This restructuring was started in 2013 under the RLRPSP with the first condition survey and road asset management database. The work is being continued under the NRRRP, which involves activities to support the continuous and regular monitoring of the road network by PESR in the first years of its operation. This Project will further expand the scope of RAMS by adding to it the bridge management system and enabling better maintenance and investment also in the case of hydraulic structures. This long term engagement approach is fully in line with IEG’s recommendation7 referring to complex reforms that suggests

7 IEG REPORT – Improving Institutional Capability and Financial Viability to Sustain Transport, An Evaluation of World Bank group Support Since 2002, March 2013.

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a ”continuous and sequential engagement” in the sector and also “support [to] appropriate government-led reform programs in a realistic time frame, taking into account the capacity of the government to carry out the Reforms”.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

39. The Project will be implemented over a five-year period by PESR, who is the Borrower. PESR is an experienced entity with teams that have been working on World Bank financed projects for two decades. Implementation under past and ongoing projects has been satisfactory, with need for additional staffing due to the heavy workload of the enterprise. Throughout the implementation of these projects, the capacity within PESR to prepare, implement and supervise road contracts has been further strengthened.

40. The internal capacity in PESR has been strengthened with technical experts engaged as part of the PMT established under the NRRRP. The same PMT is expected to implement the Project, including the consultants specialized in procurement and financial management, monitoring and evaluation and contract management. The PMT will undertake all roles and tasks required for project administration and implementation.

41. The Unit for Environmental Protection and Social Aspects (UEPSA) in PESR has two employees who manage environmental and social safeguard compliance with national law and IFI safeguards. The implementation of RLRPSP and NRRRP has confirmed that the PESR staff are knowledgeable in the environmental and social management practices and the requirements under the World Bank policies, and is able to carry out proper supervision of the implementation of environmental and social mitigation measures. Both staff have took the World Bank offered safeguard training courses. Additional staffing is necessary to ensure closer monitoring regarding social safeguards and PESR’s organizational plans include staff enhancement plans for additional two specialists, one of which should be a social development specialist to be hired in the next month. Additionally, before project effectiveness PESR will hire a monitoring and evaluation specialist to work in the PMT and to assist in citizen’s engagement.

B. Results Monitoring and Evaluation

42. Monitoring and evaluation of results will be the responsibility of PESR and will include: (i) monitoring of the Project’s physical progress (i.e. length of constructed road), (ii) evaluation of the Project’s socio-economic impacts (i.e., benefits to local population and communities), and (iii) evaluation of institutional capacity improvements. In order to identify the channels through which the project can accelerate real income growth of the poor and the bottom 40 percent, adequately measuring the relevant transport-induced effect on their livelihoods, baseline data collection will take place before project implementation. Mid-term and end of project survey data would also be collected and compared against a control group in an effort to capture project-related impacts on selected welfare and accessibility indicators. Under the NRRRP, the Bank team secured funds from Poverty and Social Impact Analysis (PSIA) and conducted a pilot study of “Assessing the Impact on Poverty Reduction and Social Inclusion through Improved Connectivity along Newly Rehabilitated/Upgraded Roads and Capacity Building to Streamline Poverty Reduction

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Consideration in Investment Planning”. The findings and methodologies as well as capacity built for PESR staff during the collaboration will benefit the Monitoring and Evaluation of the project.

C. Sustainability

43. The sustainability of the Project benefits depends on the institutional and financial capacity in the long term to provide adequate and regular maintenance of road and bridge infrastructure. The functional Road Asset Management System will provide PESR with a detailed understanding of the road assets, their condition and maintenance needs. Even more importantly, it will guide PESR in the maintenance planning process and help ensure that regular maintenance on the network is carried out, so as to ensure its longevity.

44. The functional Bridge Management System will enhance PESR’s technical and management capabilities in inspecting, reporting, managing and prioritizing investments in the maintenance, rehabilitation and construction of bridges and hydraulic structures. Overall, the technical assistance related to institutional and capacity building, in addition to the Bridge Management System, is expected to further support PESR toward better investment planning and also financial sustainability.

V. KEY RISKS AND MITIGATION MEASURES

A. Overall Risk Rating Explanation

45. As indicated in SORT in the datasheet, the overall risk rating for this Project is considered moderate based on the successful implementation of several road projects with the Bank by the MOTC and PESR and the strong government interest to carry out road

infrastructure investments. The financial, technical and managerial capacity of PESR may be

strained as they are involved in managing a large number of projects, capacity building and technical initiatives. Still, past projects have provided opportunities for on-the-job learning and have supported the introduction of better management tools for financial operations (Enterprise Resource Planning) and strengthened project management capacity (involvement of procurement, financial and contract management specialists in PMT and intensive training to technical staff). The most substantial risks are associated with the environmental and social aspects due to the difficult mountain terrain along the project road section and PESR’s capacity to complete land acquisition within the planned time schedule. The Bank is working with PESR on establishing a regular communication mechanism with communities to be potentially affected by the proposed works to ensure that any concerns are identified in a timely manner and addressed before implementation begins. These would also include discussions of any issues identified under the environmental assessments.

VI. APPRAISAL SUMMARY

A. Economic and Financial (if applicable) Analysis

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46. The project road, Rankovce – Kriva Palanka, is part of corridor VIII that interlocks the Adriatic Sea and the area of Black Sea, Russia as well Central Asia passing through Albania FYR Macedonia and Bulgaria. The Project will bring direct benefits to road users arising from a reduction in vehicle operating costs and travel time costs as a consequence of improved ride quality and reduced congestion and roadside activities that reduce vehicle speeds on the existing road. The economic analysis was conducted using the Highway Development and Management Tool (HDM-4), which simulates life-cycle predictions of road deterioration, road works effects and their costs and road user costs, and provides economic decision criteria for road construction and maintenance works. The construction period is three years, and the project road is expected to be opened to traffic at the end of 2019. The evaluation considered a 10 percent discount rate and a 25 year evaluation period.

47. The existing road is a narrow two lane road in fair condition. The project road is a new wider two lane road that will pass through a new alignment. The estimated economic investment cost is Euro 2.85 million per km. The existing road is estimated to reach 3,982 vehicles per day in 2019, the expected year of the opening of the new road. The normal traffic is estimated to grow at 5.0 percent per year during the first 10 years of the evaluation period for all vehicles types reducing thereafter to 4.0 percent per year. The evaluation considered that the generated traffic will be 20 percent of the normal traffic and included the social benefits of the reduction of road fatalities and CO2 emissions.

48. The return on the investments of the Project is satisfactory with an Economic Internal Rate of Return (EIRR) of 13.5 percent, Net Present Value (NPV) of Euro 27.78 million, at a discount rate of 10 percent, and Benefit Cost Ratio of 1.47. A severe worst case scenario with construction costs increased by 15 percent and traffic at the opening of the project road decreased by 15 percent shows an acceptable return for the Project with an EIRR of 11.3 percent. The Switching values analysis shows that construction costs would have to increase by 45 percent for the project EIRR be reduced to 10 percent. The results of the economic analysis are presented in the table below.

Table 2: Economic Analysis Results Economic Internal Rate of Return, EIRR (%) 13.5% Net Present Value, NPV (Euro million) 27.78 Present Value of Benefits (Euro million) 87.48

Present Value of Costs (Euro million) 59.70 Benefit Cost Ratio 1.47

49. Public sector financing is the appropriate vehicle for financing the construction of the proposed highway because the construction costs cannot be recovered through tariffs due to high costs of constructing a new road on a new alignment. Public investment in road infrastructure is desirable because it is a way the government plays a key role in the country’s development by handling a range of issues that can only be accomplished or implemented through government actions, such as axle weight controls and road safety regulations. The World Bank’s role is justified because of the project’s economic and social benefits and because of the value added it brings beyond financing in areas such as: construction quality control, road safety, transport planning, environmental risk management, safeguards, procurement, and financial management. With the expected growth in traffic and the completion of the corridor investments, there might be opportunities in the future for private sector participation as well.

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B. Technical

50. Close cooperation and review of construction works will be carried out from the design phase until completion of works. Engineering inputs will be provided to the design to ensure proper technical specifications and conformity with international standards, and appropriate consideration of road safety and climate resilience measures. During bid evaluation, the review will ensure fair assessment of the technical aspects of bids. During implementation, technical supervision will be provided to ensure technical, environmental and social contractual obligations are met. The team’s engineers will conduct site visits on a semi-annual basis throughout implementation.

C. Financial Management

51. An assessment of the financial management (FM) arrangements of the Project has been carried out in terms of staffing, budgeting, accounting, internal controls, flow of funds, financial reporting and external audit. The assessment concluded that the FM arrangements are acceptable subject that a financial management manual, part of the Project Operational Manual (POM) is prepared by Loan effectiveness. The overall financial management risk is assessed as moderate after application of mitigation measures, as described in Annex 3. This assessment has been updated prior to Board presentation to reflect the conclusions reached at negotiations.

52. The FM performance of the ongoing RLRPSP and NRRRP is satisfactory. As detailed in Annex 3, there are no outstanding or unsatisfactory Interim Financial Reports (IFRs) or audit reports under the current projects.

53. The FM staff that is currently implementing RLRPSP and NRRRP is considered adequate and well-familiarized with the World Bank procedures and given that the activities under RLRPSP will be gradually decreasing towards the upcoming closure in December 2015, the current capacity is assessed as sufficient for the expected volume of activities. It will be regularly assessed and may be supplemented during implemented per the project needs. As detailed in Annex 3, PESR should continue to strengthen its capacity of financial planning, in particular in terms of closely monitoring its capacity to service the debt assumed and the covenants assumed under the ongoing IFI Loans. Any expected deviations from meeting the financial ratios assumed should be duly addressed through concrete time-bound measures to be shared with the Bank.

54. The Project will use the traditional disbursement mechanism, similarly as the other two ongoing IBRD Loans. A new Designated Account (DA) in the Loan currency (Euro), with a mirror account in local currency will be opened for the Loan proceeds in a commercial bank acceptable to the Bank. Loan funds will be withdrawn to the respective DA up to the account`s ceiling (as defined in the Disbursement Letter of the project) by means of signed withdrawal applications, and disbursed for eligible payments defined by the project.

55. The accounting for the Project will be kept to an adequate level of details in the new Enterprise Resource Program (ERP), financed under RLRPSP and implemented during 2014.

56. The internal controls framework instituted for the previous projects is considered reliable and will continue to be used for the upcoming Loan as well. The Project Operational Manual (POM) is being developed by PESR. The financial arrangements will be described in a

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section of the POM that has been drafted prior to negotiations and will be finalized by effectiveness.

57. Quarterly cash-based Interim-un-audited Financial Reports (IFRs) will be submitted to the Bank in 45 days after each quarter end. The format of the IFRs has been agreed at negotiations and would be attached to the POM as an annex.

58. The entity and project financial statements will be audited by independent auditors acceptable to the Bank as per terms of reference agreed with the Bank. The audit reports will be due for submission to the Bank in six months from the year end. The audit terms of reference have been agreed at negotiations and would be attached to the POM as an annex.

D. Procurement

59. A project procurement capacity assessment was performed through discussions with PESR representatives at the time of pre-appraisal. The review found that the PESR has sufficient experience on World Bank procurement procedures. The performance of the PMT established for the NRRRP is satisfactory. PESR is currently managing two Bank-financed projects, one of which is expected to be closed by Dec 31, 2015; as well as EBRD, EIB and EU financed projects. The potential issues and risks related to procurement of the project include: strain due to working on a number of IFI financed projects. Delays in finalization of the land acquisition for the second road section may delay the launch of the bidding procedure for the respective lot. The above key risks will be mitigated through: strengthening the existing PMT with additional contract management specialist; start drafting the PQ and bidding documents once the technical designs are prepared and before effectiveness; project procurement plan is prepared and will be agreed at the time of negotiations; a Project Operational Manual will be prepared including responsibilities, activities and instructions on procurement and contract administration. Details on procurement arrangements are presented in Annex 3.

E. Social (Including Safeguards) 60. The policy, OP4.12, is triggered because the detailed designs are not yet ready and so the full extent of the impact on land acquisition is not yet known. Land acquisition is assessed as a substantial social risk but there is no likelihood for displacement. PESR prepared a Resettlement Policy Framework (RPF) to address involuntary land acquisition; given that the detailed designs are not ready the exact impacts cannot be determined. Once the detailed designs are completed land surveying will determine exact impacts which will enable the preparation of the Resettlement Action Plan according to the RPF. Based on the preliminary designs the route has been chosen to avoid any resettlement or displacement.

61. Citizens Engagement and Gender Considerations. The Project will mainstream citizens engagement activities through ex-post and ex-ante beneficiary assessment. The quality assessment tools will be applied in a gender sensitive manner, which will allow to consider gender in the beneficiary feedback. In addition, the Project will utilize community based mechanism that will facilitate a dialogue between affected communities and PESR. Details are provided in Annex 3.

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F. Environment (including safeguards)

62. OP 4.01 ‘Environmental Assessment’. The new road Rankovce – Kriva Palanka is designed to cross untouched natural landscape. Due to the magnitude and significance of the anticipated impacts the project activities might cause to the landscape, surface and ground water resources, flora and fauna, and to the soils in the project area, the Project has been assigned an environmental category A which requires a full scale environmental assessment to be conducted by an independent consultant not associated with any other engineering and technical studies under the Project. The Environmental and Social Impact Assessment and Management Plan (ESIA and ESMMP) for the construction of the Rankovce – Kriva Palanka road has been prepared by the Borrower, which considers specific impacts associated with the road construction, and suggests road specific mitigation measures. The potential environmental impacts identified by the environmental studies are summarized in Annex 3.

63. The area considered for the purpose of the environmental assessment, includes not only the immediate area of the road construction but also the location of affiliated facilities such as borrow pits, material plants, construction camps, material hauling routes, etc. The identified impacts have been duly incorporated by the project design. In particular, the preferred road alignment alternative has been chosen so that to minimize habitat fragmentation in the area of the Osogovo-German Landscape Biocorridor, to ensure more distance from the Kriva River, and to cause less requirements for land acquisition. Also, the detailed design envisages location of wildlife passes to accommodate the natural existing migratory routes.

64. For component 2, it will provide Technical Assistance for the establishment of country-wide Bridge Management System (BMS), which will entail, inter alia, development of bridge maintenance and investment plan. The Project will ensure (through respective Terms of References and consultancy contracts) that the environmental aspects of proposed investment activities are duly considered and addressed in the framework of those investment plans. The respective sections of the ESIA and ESMMP have also incorporated this provision.

65. OP 4.04 ‘Natural Habitats’. Since the proposed road alignment crosses untouched natural landscapes, which involves impacts on natural habitats in the project area, OP 4.04 has been triggered for the Project. The potential impacts on natural habitats, as well as the assessment of biological and ecological value of habitats have been addressed though the ESIA, which concluded that no critical natural habitats that might be impacted by the project activities exist in the project area. The anticipated impacts are those to occur in the period of construction in the Osogovo-German Landscape Biocorridor, and those on the forested areas and tree plantations due to selective vegetation clearance. The ESIA proposed mitigation measures which include, besides ensuring safe passes for the wildlife mentioned above, introduction of seasonal limitations for the implementation of civil works to avoid critical disturbance to identified species, and compensatory planting to be carried out in close coordination with the Ministry of Environment and Physical Planning. The ESIA has analyzed the legislation and regulatory framework, and with regard to the Osogovo-German Biocorridor concluded the following: the legislation in FYR Macedonia does not envisage any specific limitations on conducting projects in proposed protected areas. For approved protected areas, the national legislation provides for several levels of protection, which, on a case by case basis, are determined by the Ministry of Environment and Physical Planning. The assigned level of protection governs the activities allowed in a given protected area. In general, limitations are envisaged for the areas with the highest level of protection (such as the core zones of national parks/reserves). For the Osogovo-German, to serve its purpose as a biocorridor for

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certain species, no strict protection status is expected to be assigned. The relevant EU legislation is EU Directive 92/43/EEC on the conservation of natural habitats and of wild flora and fauna, which also does not have any specific provisions on the limitations to be applied to a proposed protected area with undefined protection status.

66. The ESIA, along with the development of the Environmental and Social Mitigation and Monitoring Plan (ESMMP) proposing the specific measures to address the anticipated environmental impacts, also provided for the detailed environmental monitoring program which specifies main institutional responsibilities and implementation arrangements for supervising the environmental compliance of the Project by both the PESR (the project implementing agency), and by the Ministry of Environment as part of the implementation of its principal mandate. The Grievance Redress Mechanism has also been identified by the ESIA and will be established both at the level of PESR and at the level of contractor/supervision consultants, as detailed below.

67. The first round of public consultations was held on May 14, 2014, to disclose and discuss the Terms of References for the development of safeguard documentation. Once prepared, all the documents have been disclosed to public at second round of the public consultation meetings held by the client in the project area in the towns of Rankovce on May 11, 2015. The documents were also duly posted through the Bank’s Operational Portal on May 26, 2015. The Minutes of the public consultations are enclosed to the final ESIA.

G. World Bank Grievance Redress

68. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate GRS, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

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Annex 1: Results Framework and Monitoring FYR MACEDONIA: Road Upgrading and Development Project (P149955)

Results Framework .

Project Development Objectives .

PDO Statement

The Project Development Objectives are to improve transport connectivity for road users along Corridor VIII between Skopje and Deve Bair, and to improve the asset management and planning functions of Public Enterprise for State Roads.

These results are at Project Level

Project Development Objective Indicators

Cumulative Target Values

Indicator Name Baseline YR1 YR2 YR3 YR4 End Target

Volume of freight along Corridor VIII (tones, section Rankovce - Kriva Palanka)

43.8 45

Market accessibility index along Corridor VIII (section Rankovce - Kriva Palanka)

138.5 265.6

Vehicle operating cost for road users, in Euro per vehicle-km, along the project road section

1.12 0.92

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Bridge maintenance and investment program developed using BMS

No No No No Yes Yes

.

Intermediate Results Indicators

Cumulative Target Values

Indicator Name Baseline YR1 YR2 YR3 YR4 End Target

Roads constructed (km)

Non-rural 0.00 0 0 0 18 24.64

Bridge condition survey completed

No No No Yes Yes Yes

Digitize all bridge structures as part of the larger digitized national road reference system

No No Yes Yes Yes Yes

Preparation of Bridge maintenance and investment plan using established BMS

No No No No Yes Yes

Percentage of project beneficiaries expressing satisfaction with project road

N/A (to be defined during the 1st year)






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Direct project beneficiaries (number), of which female (percentage)







Citizen Input to PESR during preparation and construction of the project.

Citizen committees formed

Monthly meeting with Annual Citizen engagement Report




Final Citizen’s engagement report

.

Indicator Description

.

Project Development Objective Indicators

Indicator Name Description (indicator definition etc.) Frequency Data Source / Methodology

Responsibility for Data Collection

Volume of freight along Corridor VIII (section Rankovce - Kriva Palanka)

This indicator measures the annual tonal freight volume (import, export, and transit) travelling along the project road section (Rankovce-Kriva Palanka).

At Project Completion

Customs Data PESR

Market accessibility index along Corridor

Passengers component –This indicator At Project completion

Survey PESR

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VIII (section Rankovce - Kriva Palanka)

measures the average market accessibility along the project road section (Rankovce-Kriva Palanka), described as the sum of

population of the selected major population areas weighted by travel time to reach Skopje and Deve Bair. Freight component – a freight component such as average

travel times for a typical freight truck

to travel between Rankovce-Kriva Palanka and Skopje and Deve Bair.

Vehicle operating cost for road users, in Euro per vehicle-km, along the project road section.

This indicator measures road user costs (vehicle operating costs) along the roads to be constructed under the project. Vehicle operating costs are expressed in Euro per vehicle-kilometer. This indicator will be measured at the end of the project and will be monitored annually for roads reconstructed under the project.

At Project Completion

Project Progress Reports PESR

Bridge maintenance and investment program developed based on Bridge Management System (BMS).

This indicator measures the development of bridge maintenance and investment program based on a functional Bridge Management System.

Annual Project Progress Reports PESR

.

Intermediate Results Indicators

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Indicator Name Description (indicator definition etc.) Frequency Data Source / Methodology

Responsibility for Data Collection

Roads constructed (km)

Non-rural

This indicator measures kilometers of roads constructed under the project.


Bridge condition survey completed

This indicator measures the progress of survey of bridge conditions in the country


Digitize all bridge structures as part of the larger digitized national road reference system

This indicator measures the actual progress of digitizing all bridge structures


Preparation of bridge maintenance and investment plan using the established BMS

This indicator measures the preparation of maintenance and investment plans of bridges based on functional BMS


Percentage of beneficiaries expressing satisfaction with condition of the project roads

This indicator measures the satisfaction of local communities and other road users with the condition and safety of the project roads.


Direct project beneficiaries (number), of which female (percentage).

This indicator measures the number of direct project beneficiaries and among them, percentage of female beneficiaries.


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Citizen Input to PESR during preparation and construction of the project.

This indicator measures the citizen engagement through an Annual Citizen engagement Report.


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Annex 2: Detailed Project Description FYR MACEDONIA: Road Upgrading and Development Project (P149955)

1. The Project Development Objectives are to improve transport connectivity for road users along Corridor VIII between Skopje and Deve Bair, and to improve the asset management and planning functions of Public Enterprise for State Roads.

2. The Project will improve the road accessibility to the Bulgarian border which is expected to positively impact logistics costs, attracting more international road users and increasing economic opportunities for long distance truck drivers and local road users. It is expected that an improved east Corridor VIII will bring better and safer connectivity to local, regional and pan European road users. Main project beneficiaries include more than 4,000 daily road users who would have improved connectivity from/to the border crossing to Bulgaria, public amenities and services, reduced travel time, reduced vehicle operating costs and reduced road accident risks. Lastly, upgrading of the road section on Corridor VIII would benefit cross-border road-users between FYR Macedonia and Bulgaria. The secondary beneficiaries would include the local communities along the upgraded road. They would have better access to the Corridor and improved connectivity to employment, trade, education, and social opportunities.

3. This Project will also contribute to strengthening the technical capacity of PESR by enhancing the road asset management system to include a consideration for bridges. Specifically, a national Bridge Management System building on the Road Management System that is under development will strengthen the asset management capabilities of PESR and would be a catalyst for data driven decisions to create national bridge maintenance and investment plans. This would enhance the efficiency of resource use benefitting the economy at large.

4. FYR Macedonia is crisscrossed by two main international corridors critically important for its connectivity and trade. Corridor X, over 1,500 km long (of which 176 km are in the country) runs north-south and connects the country to the Port of Thessaloniki in Greece in the south and to Austria and Hungary in the north, and Corridor VIII which 660 km long (304 km in the country), runs east-west and connects the country to the sea ports in Albania and Bulgaria. The 2013 EU guidelines for the development of the trans-European transport network (TEN-T) confirmed that Corridors VIII and X continue to be considered an extension of the comprehensive network providing linkages to the neighboring countries and better integrating Europe. As a result, these corridors have received a significant share of the country’s effort and financing in the past.

5. The development of the two main international corridors is however unbalanced. On Corridor X, the completion of the construction works on the Demir Kapija-Smokvica section (started in 2012 with EBRD, EIB and EU grant assistance) will result in a full Corridor X motorway by 2016. Corridor VIII is only 36 percent upgraded and is in need of further upgrading. This big imbalance in the development of these two main corridors in the country and the current reliance on Corridor X are of great economic and strategic concern. The western section of Corridor VIII (to Albania) is currently being expanded to a motorway standard with financial assistance from the Chinese Exim Bank, with plans for substantial completion by 2019. Consequently, the continuation of construction of the eastern section of the Corridor VIII road link is considered a priority as well. The EU is supporting the rehabilitation of east Corridor VIII sections from the capital Skopje to Rankovce, leaving the section from Rankovce toward the Bulgarian border as the only single carriageway with a lane for each direction that has not been

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upgraded. This Project is part of the phased approach of the government to upgrade the entire corridor by 2025.

6. Upgraded road Corridor VIII will contribute to a strengthened country’s integration in the region and the EU and could lead to new market opportunities. Currently, the road connection is the only connection toward Bulgaria, as railway operations are available until Kumanovo, approximately 30km east from Skopje. While there are tentative plans to eventually complete the railway connection to Bulgaria, this requires substantial resources and investments on both sides of the border, and it is therefore expected that road transport will remain to be the single mode on east Corridor VIII in the foreseeable future. Investments in the road networks on the territories of Bulgaria and Romania have been significantly ramped up in the last 10 years and present an alternative transport route to Western and Eastern Europe and also to Turkey. This applies to alternative connections to Corridors IV and X both of which have at a high service level.

7. Complementing Bulgarian efforts on Corridor VIII: Bulgaria joined the EU in 2007, and has since invested heavily in upgrading key European corridors to a four lane divided motorway, notably the 350 km of the international Corridor VIII (locally referred to as Trakia motorway) connecting Sofia to the strategically important Black Sea Seaport of Burgas. In addition, the Corridor VIII portion from the FYR Macedonia border to Sofia has been substantially rehabilitated and is in good condition. This stretch is envisaged to be further upgraded in the long range plan of Bulgaria.

8. Interventions in the road infrastructure have been continuous and with active World Bank support. The current road network8 in FYR Macedonia is about 14,100km long, of which, 1,100km are national roads, 3,700km are regional roads, and 9,300km are local roads. This relatively large public asset has suffered from delayed or limited maintenance and this is partially addressed through road rehabilitation programs, supported by the World Bank and EBRD. Additionally, under the ongoing Regional and Local Roads Program Support Project (RLRPSP) and the National and Regional Roads Rehabilitation Project (NRRRP), the country is increasingly looking into improved capacity to improve road safety on the network. This involves investments in necessary safety infrastructure and policy and capacity enhancement for institutions in transport to handle the issue.

9. The total cost of the Project is EUR 83 million. The Bank will finance the Project through an IBRD Investment Project Financing Loan with the total loan amount of EUR 83 million. The Project will be implemented over a five year period from January 2016 to December 2020.

10. Component 1: Construction along Corridor VIII: Rankovce-Kriva Palanka (estimated cost of EUR 78 million, which will be financed by IBRD loan). This will finance the construction of the express road along the east section of road Corridor VIII which connects to Bulgaria. The new road sections will be 24.64 km long, with a width of 11.4m and 12.5m.

11. This is one of the two TEN-T corridors traversing FYR Macedonia. While Corridor X connects FYR Macedonia to the Port of Thessaloniki, Corridor VIII connects FYR Macedonia to Bulgaria and therefore to the Black Sea Ports. As a land-locked country, it is of prime importance

8 (1) National roads including motorways connect to neighboring countries and the largest regional centers; and (2) regional roads connect municipalities and secure in-country connectivity.

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for FYR Macedonia to have an alternative to access major sea ports. Currently its major sea connection is via the Port of Thessaloniki.

12. The proposed road is a 24.64km section from Rankovce to Kriva Palanka, near the Bulgarian border. The proposed road is a green field road, north of the existing alignment. It is planned as an ultimate four lane divided motorway, but currently the plans are to only construct two lanes in an express road configuration, and at a later stage build the other half to achieve the motorway. The rationale for shifting this section north of the existing alignment is both technical and environmental. The current alignment that goes through the mountainous region has poor operational safety due to the original low design speed and sharp curvatures. There are plans to build a reservoir for providing water to the local citizenry that would be severely impacted if the current road segment is expanded. This segment is currently in poor condition. It carries around 3,000 vehicles per day (see Figure 1 below), is narrow (around 6.4 meters) with many places without shoulders, and passes along many villages, which will make its rehabilitation with partial widening difficult. The Project considers building an alternative two lane road going through a new green field alignment at a cost of around Euro 90 million and a distance savings of 5 km. The new road is on a hilly terrain, thus around 10 bridges will need to be constructed with a total length of about 1.5 km. In this Project, priority is placed on continuously introducing infrastructure safety management measures which are binding for contractors and road authorities in all stages of planning and execution, proper and efficient road maintenance, and ensuring visibility on roads by eliminating physical and illegal obstacles. All of these are reflected in the project design.

Figure 1: AADT on the section of Rankovce – Kriva Palanka (2006-2013)

13. The construction works supervision will be carried out by supervision engineers procured by PESR according to national procurement legislation and paid from PESR’s annual budget. It is estimated that about EUR 1.42 million will be required for the supervision and this will be earmarked in their annual plans.

14. Component 2: Institutional and Project Implementation Support (estimated cost of EUR 5 million, which will be financed by IBRD loan). Component 2 will have two sub-components:

(i) Sub-component 1: Establishment of Bridge Management System (BMS). This sub-component will further strengthen asset management by expanding the road asset management system (RAMS) currently under implementation by PESR to include also bridge asset management. The core focus of this activity would be to support PESR to introduce a bridge

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management system (BMS) to be integrated in RAMS. This will entail: provision of equipment and software, diagnostic assessment of bridge condition, creation of a national roads and bridges linear referencing system to digitize roads and bridges, supporting the preparation of a bridge maintenance and investment plan using BMS, and training for technical and administrative staff.

(ii) Sub-component 2: Capacity Development and Project Implementation Support: This Project will build on earlier institutional capacity activities in road management planning, road safety, resilience and other transport management areas as the need arises throughout the project implementation. Supervision of works will be financed by PESR. Independent technical audits of civil works will be financed from this component. Throughout the implementation, additional activities focusing on technical capacity of PESR may be identified. Consultants supporting the work of the PMT and hired under the NRRRP could be financed from the loan in the years following the closure of the NRRRP. It will also finance technical assistance, equipment, and operational costs associated with the implementation of the Project. A study evaluating the Project’s socio-economic impacts (i.e., benefits to local population and communities), and evaluating institutional capacity improvements shall be conducted. In order to identify the channels through which the project can accelerate real income growth of the poor and the bottom 40 percent, adequate measurement of the relevant transport-induced effect on their livelihoods, a baseline data collection shall take place before project implementation. Mid-term and end of project survey data would also be collected and compared against a control group in an effort to capture project-related impacts on selected welfare and accessibility indicators.

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Annex 3: Implementation Arrangements FYR MACEDONIA: Road Upgrading and Development Project (P149955)

Project Institutional and Implementation Arrangements

Project administration mechanisms

1. The Project will be implemented by the Public Enterprise for State Roads (PESR). PESR is already the Borrower and implementing agency for two World Bank financed projects and has successfully implemented earlier Bank projects. Currently, PESR has 60 professional employees, serving full time (engineers, procurement specialists, financial management and environmental/social and legal specialist). These are supported by 24 technical staff. PESR will carry out all project activities, including procurement and financial management, for both of which PESR has a long experience carrying out. PESR will prepare a Project Operational Manual (POM), of which a draft was provided to the Bank before negotiations.

2. A Project Management Team is being established in PESR as part of the implementation of the ongoing NRRRP. The PMT consists mainly of PESR staff (engineers, environmental and social scientist, financial management specialist) who are supported by consultants: procurement specialist; FM specialist. The monitoring and evaluation specialist and contract management specialist are in the process of being hired and should be on board before Board approval.

Financial Management, Disbursements and Procurement

Financial Management

3. Risk Analysis. The overall financial management risk for the project is substantial before mitigation measures, and with adequate mitigation measures agreed, the financial management residual risk is rated moderate.

4. FM performance of the active projects. As mentioned in the Appraisal Summary section of the PAD, the FM arrangements of the ongoing two projects implemented by PESR are satisfactory. There are no outstanding Interim Financial Reports (IFRs) or audit reports under the RLRPSP and NRRRP. The appointed auditors (Moore Stephens, FYR Macedonia), acceptable to the Bank, have carried out the audit in accordance with acceptable auditing standards, i.e. International Standards on Auditing and have issued an unmodified (clean) opinion on the project financial statements, respectively a modified qualified "except for" opinion on the entity financial statements as of December 31, 2013. The project management letter mentioned no accounting or internal controls deficiencies identified during the audit. PESR financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as accepted and published in the country. There were two qualifications issued by the auditors which related to revaluation method for plant, property and equipment (PPE) and presentation of constructions in progress. The entity management letter contained recommendations for improvement in several areas of PESR accounting and internal controls framework, namely estimation of PPE, presentation of constructions in progress, provisions for court procedures, and provisions for retirement benefits, excise revenue recognition, vehicle registration tax collection, and property deeds. PESR management acknowledged the findings, provided responses and clarifications as needed and is taking actions to address them accordingly. The implications of the matters raised

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by the auditors have little or no effect on the reliability of financial arrangements for the ongoing World Bank projects.

5. Staffing. The Project will continue to use the core PESR designated staff within the PMT, which was established for the implementation of RLRPSP and further supplemented by consultants, as agreed during the preparation of NRRRP. There is a Financial Officer assigned with financial management responsibilities for each of the ongoing Loans. Both possess appropriate experience and expertise in accounting and financial management and are well-familiarized with the Bank procedures and requirements in this area. As the activities under RLRPSP are phasing out given the upcoming closure on December 31, 2015, the existing FM capacity is assessed as sufficient. It will continue to be revaluated regularly and it may be supplemented if required.

6. Planning and Budgeting. PESR has adequate planning and budgeting capacity in terms of availability of quality information and monitoring. The project budget will be included in the entity annual budget that is drafted in line with the Annual Program that is endorsed by the Government and Ministry of Finance. A single budget will be prepared for all project components based on Procurement Plan, and complemented by best estimates of actual outflows with respect to signed contracts. Significant variances of actual versus budgeted figures will be monitored on a regular basis and appropriately analyzed and followed up. It is recommended that PESR continues strengthening its capacity of financial planning, in particular in terms of monitoring its capacity to service the debt assumed and the covenants assumed under the ongoing IFI Loans. In this respect, external expertise or technical training could be sought or the functionalities of the newly-implemented ERP may be enhanced to support financial planning, analysis and decision-making.

7. Accounting System and Procedures. Appropriate analytical accounting records will be maintained for the Project. The transformation of the implementing entity into a public enterprise in January 2013 triggered a significant change in the accounting treatment applied by the entity, from budgetary cash basis accounting to accrual method, in accordance with the International Financial Reporting Standards (IFRS), as required by law for trade companies. It is envisaged that the accounting for the Project will continue to be kept on cash basis in both Loan and local currencies in a new Enterprise Resource Planning Program (ERP), financed under the ongoing Loan. The system, an Oracle database, has five modules: (i) Financial, Material and Accounting Management System, (ii) Funds Management System; (iii) Financial Management System-Loans Management, (iv) HR Management and Payroll System, and (v) Legal Services. The procurement process was finalized at the end of 2013 and a local company was selected to implement the application, with the Loans, respectively Funds management modules implemented with priority. The new software application became operational in 2014 and it allows (i) automatic generation of the quarterly IFRs and Statement of Expenditures (SOEs), and (ii) enhanced contract monitoring. Given the recent transformation of the implementing entity in January 2013 from a governmental agency to a public enterprise, two financial covenants have been agreed with the counterparts and included in the Loan Agreement in order to monitor and enhance the financial status and sustainability of the entity:

(a) Entity audit;

(b) Two financial ratios:

(i) Debt service coverage ratio of not less than 1.2. This ratio is defined as the ratio of net revenue to debt service for the year (principal and interest);

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(ii) Current ratio of not less than 1. Given the operating profile of the entity which finances non-current assets through current liabilities, this ratio is defined as the ratio of current assets including estimated net revenues for the next year to current liabilities.

8. Such covenants are considered beneficial to contribute towards building capacity within the recently-founded PESR and as confirmed by the entity auditors, they were met for 2013. An assessment of the financial sustainability of PESR to assume and repay debt has been initiated during pre-appraisal of the Project and finalized prior to negotiations based on forecasts provided by PESR for revenues and expenditures expected for 2015-2024.

9. Based on un-audited financial information and calculations provided by PESR during pre-appraisal, while the current ratio is only marginally not met, the debt service coverage ratio will be complied with for 2015 and beyond, with a marginal deviation expected for 2017. It is expected however that both ratios will deteriorate more substantially starting 2019, below the assumed levels. PESR should regularly prepare simulations and monitor and report on the interim ratios assumed under the financial covenants of the Loans agreements on a quarterly basis, communicating to the Bank any expected deviations. In order to maintain its capacity to repay the debt and meet the covenants imposed by the Loan Agreement, measures as (i) increasing the portion of allowances received from State Budget on fuel excise tax collected, (ii) restructuring the existing Loans or (iii) assuming refinancing Loans could be contemplated by PESR, together with MoF and other stakeholders, as needed. The Bank encouraged PESR to prepare and share with the Bank annual action plans to address the challenges expected for 2019 and beyond. In addition, MoF, as Guarantor, can increase, if necessary, the percentage of excise tax on oil derivatives (currently 20%) transferred to PESR during the year in order to ensure that the financial covenants assumed under the IBRD Loans Agreements are met.

10. Financial Reporting. Project management-oriented Interim un-audited Financial reports (IFRs) will be used for project monitoring and supervision. The format of the IFRs has been agreed with the Bank at negotiations and attached to the Project Operational Manual (POM), respectively Minutes of Negotiations. PESR will produce a full set of IFRs for each calendar quarter throughout the life of the Project. First set of reports to be prepared will cover the calendar quarter period in which disbursement has started. Such reports will be prepared on IPSAS cash-basis in the Loan currency and will be due 45 days after each quarter end. The IFRs will comprise the following reports presented in the agreed format: (i) Project Cash Receipts and Payments; (ii) Uses of Funds by Project Activity; (iii) Designated Account Statement, (iv) Units of Outputs by Project Activity, and (v) Accounting policies and explanatory notes. Annual entity financial statements will be prepared in accordance with the International Financial Reporting Standards (IFRS) as required by law. Such financial statements will be audited by independent auditors acceptable to the Bank as per the provisions of agreed terms of reference.

11. Internal Controls. An adequate system of internal controls and procedures were instituted as part of the previous World Bank Projects. Such system is assessed as reliable and will continue to be applied to the Project as well. The current management control framework is described in a Financial Manual, as part of the POM for RLRPSP and NRRRP which was last updated prior to effectiveness of the IBRD Loan for NRRRP. The current Financial Manual will serve as the basis for the development of the respective section of the POM that will be updated with any specifics of the Project by the Loan effectiveness. A draft of the POM has been provided prior to negotiations. Key internal controls to be applied for the project include:

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(a) Appropriate authorizations and approvals;

(b) Segregation of duties;

(c) Different persons being responsible for different phases of transaction;

(d) Reconciliations between records and actual balances, as well as with third parties should be performed on regular basis; and

(e) Complete original documentation should exist to support project transactions.

12. PESR publishes tenders and signs the contracts under the Project. All contracts are signed by the Director of PESR. Received invoices are verified against contracts and delivered goods or services by technical staff that checks the invoiced amount against the contract ceiling. After the technical staff has approved the invoice in terms of quality and quantity of the work/services delivered, the invoice is forwarded to the PMT within PESR, where it is registered in the archives and forwarded to the Project Director. The invoice is handed to the project accountant who checks the calculations and registers the invoice in a simple log file with name of supplier, amount, and date of payment. The procurement staff also checks the invoice against the clauses of the relevant contract if necessary attaches a copy of the relevant paragraph on which the invoice is based from the contract. Invoices are verified and signed off also by independent supervising engineers and Assistant Director for investments and then are forwarded for payment. Payment order and the invoice with all designated approvals and signatories as described above are submitted for payment, indicating the Denar account that will serve as transit account for executing the payment. Payment orders are signed by the Director, and withdrawal applications by either Director or Assistant Director. Original and complete documentation relating to the above-described process is available. The internal controls framework will be maintained as such.

13. Contract management will be carried out through the entity ERP by keeping an individual fiche for each contract. These fiches will be updated every time an invoice is received or a payment is made on each contract. These fiches will show key data for each contract as the contract value, schedule of payments, date, reference and amount of invoices received, date and amount of payments made and the contract value remaining to be paid. The quarterly IFRs will provide financial information on the actual expenditures incurred under each ongoing contract during the analyzed quarter, and on a yearly and cumulative basis.

14. External Audit. PESR is responsible for the timely compilation of the annual project financial statements for the independent external audit. Project and entity financial statements will be audited by an independent auditor acceptable to the Bank. The entity audit will provide information on the financial viability of the company and will contribute towards strengthening its financial environment. The audits will be conducted in accordance with the International Standards on Auditing (ISA) as issued by the IFAC. The terms of reference for the audit have been agreed with the Bank during preparation, and attached to the Minutes of Negotiations and POM. In addition, the auditors are expected to deliver management letters in relation to the Project and entity. Each management letter will identify internal control deficiencies and accounting issues, if any. The audit reports, audited financial statements and management letters will be delivered to the Bank within six months of the end of each fiscal year. The audited project, respectively entity financial statements will be made publicly available in a timely fashion and in a manner acceptable to the Bank. The audit fee for project and entity financial statements may be financed from the Loan proceeds. It is envisaged that the existing audit contract under RLRPSP would be extended

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for both project and entity for the overlapping implementation period of the projects (2015), and that a new selection will be done for the remaining period of NRRRP and RUDP (2016- 2019 and beyond).

15. The following chart identifies the types of audit reports that will be required to be submitted to the Bank and the respective due dates for submission.

Audit Report Due Date

(i) Project financial statements (PFS), including SOEs and Designated Account. The PFSs include Statement of Cash Receipts and Payments by category, by components and by financing source; SOE statements, Statement of Designated Account, notes to financial statements, and reconciliation statement.

(ii) Entity financial statements

Within six months of the end of each fiscal year and also at the closing of the project

Within six months of the end of each fiscal year

16. Flow of funds and disbursement arrangements. The transaction-based disbursement method will be used for the Project. A Designated Account (DA) will be opened in a commercial bank acceptable to the World Bank. It will be an account denominated in the Loan currency. A mirror account will be opened in Macedonian Denars for payments to local suppliers. The mirror account will be a transit account with no material balances held.

17. Project funds will flow from the World Bank - either as an advance, via a DA to be opened in an acceptable commercial bank, which will be replenished under transaction-based disbursement method, and managed as described in the section, or by direct payment on the basis of direct payment withdrawal applications.

18. The procedures relating to the flow of funds, including paths for authorization and approval of payments will be described in detail in the updated Financial Management section of the POM. The procedures should clearly describe all steps of the process, as well as authorized signatories for administering the account funds. Bank Statements indicating turnover and balance on the Denar sub-account will be submitted on daily basis. The PMT will include balances on all project related accounts in the quarterly IFRs.

19. The Ceiling for the Designated Account will be indicated in the Disbursement Letter to be agreed on at negotiations. Applications for replenishment of the Designated Account will be submitted at least quarterly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow standard Bank procedures as described in Disbursement Handbook. Bank statements of the Designated Account, which have been reconciled, would accompany all replenishment requests.

20. Financial Management Conditions and Action Plans. PESR will continue to maintain a project financial management system acceptable to the Bank. Adequate staffing should be dedicated to the Project and proper analytical accounting records should be developed to allow an appropriate level of transparency and reliability of financial information. The project and entity financial statements will be audited by independent auditors acceptable to the Bank and on terms

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of reference acceptable to the Bank. The annual audited statements and audit reports will be provided to the Bank within six months of the end of each fiscal year. Quarterly IFRs will be forwarded to the Bank no later than 45 days after the end of each quarter. PESR should also consolidate its financial planning capacity and closely monitor its capability to repay the debts assumed and to meet the financial covenants imposed under the Loans Agreements. Any expected deviations in meeting the two financial ratios should be duly addressed through time-bound action plans shared with the Bank. In order to further strengthen the project FM arrangements, there is one condition for effectiveness which should be implemented by PESR as indicated:

Condition Due Date

Prepare the financial management manual, a separate section of the Project Operational Manual, describing the specific financial and disbursement procedures instituted for the project

Effectiveness

Procurement

A. General

21. Procurement for the Project will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011, revised July 2014; and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011, revised July 2014 and the provisions stipulated in the Financing Agreement. The Bank standard bidding documents, including evaluation for procurement of works and goods will be used, as well as the Bank’s standard request for proposal for selection of consultants, including the standard evaluation report. Specific rules and regulations set forth in the Project Operational Manual will be followed during implementation of the Project.

22. The various procurement actions under different expenditure categories are described in general below. For each contract to be financed under the Financing Agreement, the various procurement or consultant selection methods, estimated costs, prior review requirements, and time are agreed and will be confirmed during the negotiations between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) will be published online in UNDB, the World Bank’s external website, in daily newspapers and on the implementing agencies’ websites. The Bank will assist with its publication in UNDB and on the Bank’s external website. It will be printed soon after negotiations. Specific Procurement Notices (SPN) will be published for all ICB procurement and Consulting contracts as per Guidelines as the corresponding bidding documents and RFPs become ready and available.

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

23. The Project will be implemented by the Public Enterprise of State Roads (PESR). Based on capacity assessment of the implementing agency the procurement risk for the Project is rated as Moderate.

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24. The following potential procurement issues and risks were identified: (i) Implementation at the same time of several other projects financed by the World Bank and other IFIs in addition to the Project, may strain the procurement and contract management capacity of the enterprise; (ii) PMT might be initially overwhelmed with preparation of the bidding procedure for the new road contract.

25. The following procurement-related risks mitigations measures were agreed between the Bank and the client during project preparation. Actions Deadline/Status

1 Prepare a detailed procurement plan for the implementation of the project.

Negotiations

2 Prepare a Project Operational Manual including a detailed chapter on procurement and contract management; service standards, responsibilities and accountability of PMT staff and technical staff

Effectiveness

3 Work on the preparation of all first year bidding documents to avoid delays in project implementation

Ongoing

4 PESR will maintain the existing Project Management Team. Additional contract management specialist dedicated to the express road contract will be hired.

Ongoing

5 Attend relevant procurement and technical trainings Ongoing

C. Procurement Methods

26. The following methods may be used for procurement of goods, works and non-consulting services as agreed in the procurement plan: International Competitive Bidding (ICB), Shopping (S), and Direct Contracting (DC).

27. Works will include construction of a 24 km section of an express road. Goods will include procurement of BMS hardware and software. The decision for direct contracting for rehabilitation and upgrading of the existing bridge surveying equipment or competitive procurement of new equipment will be taken based on recommendations of the specialized consultant who will be selected during project implementation. If direct contracting is proposed, justification will be provided for Bank’s prior review. Procurement for all ICB procedures will be done using the Bank’s Standard Pre-Qualification (PQ) and Standard Bidding Documents (SBD).

28. Consultant services will include services for National Bridges Condition Survey, BMS managing consultant, services for preparation of bridge investment plan, independent technical audit, financial auditing, road safety consultancy and project management consultants. The following methods may be used for the selection of consultants: Quality and Cost-Based Selection (QCBS), Least-Cost Selection (LCS), Fixed Budget Selection (FBS), Selection based on Consultants Qualifications (CQS), Individual Consultant Selection (IC), and Single Source Selection (SSS). The World Bank's Standard Request for Proposals will be used. All Terms of Reference, irrespective of prior/post review status, are subject to Bank’s review and no objection. Short list comprising entirely of national consultants: Short list of consultants for services estimated to cost less than US$300,000 equivalent per contract may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

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29. Training. The institutions providing standard training, conducting seminars and organization of study tours would be selected on the basis of analysis of the most suitable program of training offered by the institutions, availability of services, the period of training and the reasonableness of cost. However, consultants hired to deliver training under the Project shall be selected in accordance to the selection methods as stipulated in the Consultant Guidelines applicable to the Project. An annual training plan shall be prepared and agreed with the Bank. It will include information on the title of training, institution that shall provide it, timeline, cost, number, position and names of relevant people to be trained. The training plan shall be updated in agreement with the Bank through the duration of the Project at least annually or as required to reflect the actual project implementation needs.

30. Operating Costs. Activities to be financed by the Project (as defined in the Financing Agreement) will be procured using the implementing agency’s administrative procedures, which were reviewed and found acceptable to the Bank. Operating cost will not include salaries of civil servants.

Procurement Plan

31. The Procurement Plan (PP) for the first 18 months of the Project will be agreed between the Borrower and the Bank during negotiations. This PP is consistent with the implementation plan and provides information on procurement packages, methods and Bank review requirements and procurement thresholds. The PP will be available at the implementing agency’s website and on the Bank’s external website after Board approval. The PP will be updated in agreement with the Bank project team annually or as required to reflect the actual project implementation needs and improvements in the implementing agency institutional capacity.

Summary of Procurement Plan Table A. Procurement Arrangements and Schedule for Works and Goods

Package Description Procurement

method Prior/ Post Expected Bid Opening Date

1 Construction of express road: in 2 lots ICB Prior March 2016

2 BMS HW and SW ICB Prior Jan. 2017

3 Bridge surveying Equipment ICB/DC Prior April 2017

Table B. Consultancy Assignments selection methods and schedule

Package Description Selection method

Prior/ Post

Expected Proposal Opening Date

1 BMS managing consultant QCBS Prior Jan 2016

2 National Bridges Condition Survey (1070 structures)

QCBS Prior July 2016

32. Post-review. Contracts not subject to prior review will be subject to post-review as per procedures set forth in Paragraph 5 of Appendix 1 of the Procurement Guidelines and Consultant

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Guidelines. The Bank will carry out procurement post-reviews on an annual basis with a sampling rate of initially 20 percent. This rate will be adjusted periodically during project implementation based on the performance of the project implementing agency.

Records keeping and filing

33. The PMT and PESR will keep procurement documentation for each contract funded under the Project. Adequate space should be ensured for records keeping.

Anti- Corruption Measures

34. The Borrower shall ensure that the Project, including procurement, is carried out in compliance with the current version of the Bank’s Anti-Corruption Guidelines. All bidding documents, including contracts, used under the Project shall include the latest version of the provisions on fraud and corruption. All members of the evaluation committees shall sign a disclaimer on absence of conflict of interest and confidentiality for each evaluation process. The list of such debarred firms and individuals is located at http://www.worldbank.org/html/opr/procure/debarr.html .

Environmental and Social (including safeguards)

35. The client has undertaken an environmental and social assessment of the Project, which findings have been presented in a comprehensive Environmental and Social Impacts Assessment report (ESIA). The following main impacts (ESIA will provide details on anticipated impacts) to be occurring at both the construction and operation phase have been identified by the studies:

Construction

Impacts on the natural landscape and aesthetics; Impacts associated with the extraction and transportation of road construction materials,

and disposal of excessive materials. Due to the volume of materials which will need to be extracted and transported, this impact is considered to be significant. The ESIA has identified material sources (all duly permitted/licensed), provided guidance to Contractor on the environmental due-diligence procedures to be followed in case Contractor opts to use alternative sources of the materials, and identified safe sites for storing and disposing excessive materials;

Disturbance to flora and fauna, especially by the road segment to cross the Osogovo-German Landscape Biocorridor important for migration of large mammals and some other species;

Potential disturbance to the existing drainage systems; Increased dust and emissions; Impacts related to noise and vibration at selected sensitive sections of the roads in the

vicinity of settlements of T’lminici, Ginovce and Rankovce, and within the Osogovo-German Landscape Biocorridor;

Impacts related to the generation and disposal of liquid and solid wastes at the construction phase. The ESIA has identified site for the waste disposal and also provide detailed quiance to Contractor on handling various types of wastes to be generated during construction;

Surface water pollution, including the Kriva River flowing in parallel with the road alignment, and Rankovska River to be crossed by the proposed road;

Potential impacts on ground water in the project area;

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Impacts on soil which might be caused by spills and leaks of hazardous liquids, as well as soil compaction and erosion which might be caused by poorly managed excavation, use of construction machinery and other construction activities.

Increased traffic of trucks due to construction; Impacts on employment opportunity.

Operation

Impact related to noise and vibration; Impact on air quality by traffic; Risk of accidental pollution of soils and water due to fuel spills and leakages; Impact on wildlife due to ecosystem fragmentation; Better connectivity and improved accessibility; Land acquisition; Possible small decrease in volume of services, business by the current road, due to

redirection of the national and international road to new express road; Increased opportunity for the industrial zone because of the new express road; Traffic safety for the current regional road. National and international traffic will be

transferred to the new express road; More options for travel for the villages remote from the current regional road.

36. For the mitigation of the identified impacts and monitoring of the environmental compliance throughout the project life and also during the operational phase, the client has developed an Environmental and Social Management Plan which identified adequate mitigation measures, set forth the implementation arrangements and responsibilities and determined the monitoring program to be undertaken during the construction and operation. While the client organization (PESR) has overall responsibility for ensuring environmental compliance of the project and implementation of the mitigation and monitoring activities, the specific responsibilities have also been assigned to/defined for, other parties such as contractors, supervision consultants and relevant government authorities and local government. Since the project design envisages support to reconstruction/rehabilitation of the roads/road segments to be identified during the project implementation, the client also developed an Environmental and Social Management Framework which should govern the preparation of specific environmental and social assessment studies for yet to be defined roads and segments.

37. PESR prepared a Resettlement Policy Framework (RPF) because the road design has not been completed. RPF will guide the preparation and implementation of the RAP once the design is completed and the surveying company can be engaged to determine exact impacts of the road alignment.

38. The first round of public consultations was held on May 14, 2014, to disclose the Terms of References for the development of above safeguard documents. Once prepared, all those documents have been disclosed in country and discussed at the public consultation meetings held by the client in the town of Rankovce on May 11, 2015. Both the findings of the environmental and social studies and the public consultations will duly reflected in the project design.

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39. The Public Enterprise for State Roads (PESR) will be responsible for the implementation of the project ESMPs. The PESR (earlier ASR) has been involved in the implementation in similar projects for several years. Since 2010, the ASR employed a full time Environmental Specialist who has been responsible for the project environmental management and trained at the World Bank organized safeguard training. After the institutional restructuring and establishing the PESR, a specialized Environmental and Social Unit has been set up within PESR. The Unit was reinforced by the second Environmental Specialist, who also took the World Bank offered safeguard training course, and a Social Specialist. The staff of the Unit is knowledgeable in the environmental and social management practices and the requirements under the World Bank policies, and is able to carry out proper supervision of the implementation of environmental and social mitigation measures. World Bank Grievance Redress - Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate GRS, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

40. The Project will finance construction of a new express road, Corridor VIII from Rankovce to Kriva Palanka. The most important social risks of the Project are land acquisition impacts and displacement. The road to be constructed passes through the north-east part of the country, North East planning region, which is the poorest among the eight planning (statistical) regions in FYR Macedonia. PESR prepared a Resettlement Policy Framework to address the involuntary land acquisition. A Resettlement Action Plan will be prepared once the detailed design is ready which will enable determining the exact impacts and the project affected persons. However, even though the detailed design is not ready the route has been determined and thus it is expected that there will be no displacement of people because of loss of dwelling nor displacement of any businesses. The existing national road passes through Rankovce, Odreno, Ginovce, Psaca, Konpnica and Kriva Palanka settlements whereas the new express road route is set north of the existing road and is expected to minimize any possible adverse impacts on potentially affected persons. Approximately 100 to 120 ha of privately owned and used land will be affected. About 75% is arable land but only half of it is used. The rest of the land is meadows, pastures, forestry and orchards, whereby about 5% of land are orchards.

41. Citizens Engagement and Gender Considerations. The RLRPSP financed a Beneficiary Assessment (BA) of the sample of local roads whereas as part of the NRRRP the Bank, through a trust fund financed demonstration PSIA. As a result of continued dialogue through these projects, PESR has built some capacity to solicit qualitative feedback more and less quantitative and thus to carry on Beneficiary Assessments of the ongoing rehabilitation projects. Therefore the Project will finance ex ante (of current road) and ex post (of new express road) Beneficiary Assessment whereby the assessment will take into consideration gender of the feedback. The methodology of the BA will seek out views separately through focus groups comprised by women but also separate focus groups comprised by marginalized society segments. Mobility and connectivity will be

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assessed for women and will be determined whether there are different perceptions controlled by gender variable or vulnerability. This would inform the identification of targeted actions to be included in the Project to specifically target a gender. The ex-ante Beneficiary Assessment will be organized before the tendering process and this will help that if important issues raise from the ex-ante BA to try to address it through inclusion in the tendering. For sure the ex –ante BA will be organized well in advance before the construction works start and thus this will be used to utilize and use ideas how the local population could participate by either labor or any other services, such as catering, support to supervision, provision of materials or transport. Ex-ante BA will be used also as feedback to local government know how supporting infrastructure to the express road that is competence to local government would be utilized.

42. In addition to the Beneficiary Assessment, consultation in every settlement will be organized including separate consultation with women only before the construction, whereby citizens will be informed about the possibility to express their concerns before and during the construction of the road. Information panels typically erected in the vicinity of any construction site have been agreed to include more than the basic information about investor, contractor and the timing of the project and resultantly include grievance mechanism contact information in PESR. In addition, facilitation committees will be formed in both municipalities, municipality of Rankovce and Municipality of Kriva Palanka. The committees will be formed by Local Government employees, ideally from the urbanism department, and 305 other members from the villages near the vicinity of the proposed express road. The members of the committees will act as resource and contact persons for any individual from the project near communities. They will act as facilitators for the citizens and will help them address issues related road project, The committee member will be informed also for the needs of the contractors and will help to share information for the possibility to participate with labor or any other services, thus the committee will help that local population gets increased chance to gain more. The committees and PESR, M&E officer, will have monthly meetings which will be one of the channels of communication between facilitation committees and PESR. However, if needs raise there are also going to be organized meetings between committees and management of PESR on ad hoc base and this meetings will be organized by this facilitation committees and M&E officer. The monitoring and evaluation specialist working in the PMT will be tasked to collect the data and do analysis on gender disparities and propose actions in cooperation with engineers. Initially, this mechanism will be applied to the construction of the road under the project; PESR will maintain the pilot the same mechanism for a rehabilitation or new road construction financed from their budget. In addition PESR will establish a pilot citizens/users feedback mechanism for the maintenance for one road section to be determined. The maintenance feedback mechanism could use GSM/IT platform. PESR will report on the feedback for the Rankovce-Kriva Palanka section and a pilot other two sections, one rehabilitation project or construction and the other one maintenance.

Monitoring & Evaluation 43. Monitoring and evaluation of results will be the responsibility of PESR and will include: (i) monitoring of the Project’s physical progress (i.e. length of constructed road), (ii) evaluation of the Project’s socio-economic impacts (i.e., benefits to local population and communities), and (iii) evaluation of institutional capacity improvements. In order to identify the channels through which the project can accelerate real income growth of the poor and the bottom

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40 percent, adequately measuring the relevant transport-induced effect on their livelihoods, baseline data collection will take place before project implementation. Mid-term and end of project survey data would also be collected and compared against a control group in an effort to capture project-related impacts on selected welfare and accessibility indicators. Under the ongoing NRRRP, the Bank team has secured funds from Poverty and Social Impact Analysis (PSIA) and conducted a pilot study of “Assessing the Impact on Poverty Reduction and Social Inclusion through Improved Connectivity along Newly Rehabilitated/Upgraded Roads and Capacity Building to Streamline Poverty Reduction Consideration in Investment Planning”. The findings and methodologies as well as capacity built for PESR staff during the collaboration will benefit the Monitoring and Evaluation of this Project.

Monitoring Financial Ratios

44. The implementing entity in January 2013 changed from a governmental agency to a public enterprise (PESR), two new financial covenants have been agreed with the counterparts for the ongoing two Loans in order to monitor and enhance the financial status and sustainability of the entity:

(a) Entity audit, starting 2013;

(b) Two financial ratios, beginning December 31, 2013:

(i) Debt service coverage ratio of not less than 1.2. This ratio is defined as the ratio of net revenue to debt service for the year (principal and interest);

(ii) Current ratio of not less than 1. Given the operating profile of the entity which finances non-current assets through current liabilities, this ratio is defined as the ratio of current assets including estimated net revenues for the next year to current liabilities.

45. It will be the responsibility of PESR to ensure that these financial ratios are monitored.

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Annex 4: Economic and Financial Analysis

FYR MACEDONIA: Road Upgrading and Development Project (P149955) Introduction 1. The project road, Rankovce – Kriva Palanka, is part of the state road A2, which is part of corridor VIII, known also as corridor East – West. It extends, on the FYR Macedonia, from the border with Republic of Albania to the border with Republic of Bulgaria (Cafasan – Kicevo – Gostivar – Skopje – Kumanovo – Kriva Palanka – DeveBair). Corridor VIII interlocks the Adriatic Sea and the area of Black Sea, Russia as well Central Asia passing through Albania, FYR Macedonia and Bulgaria. In addition, FYR Macedonia covers 304 km, out of the 960 km total corridor’s length. The project road is part of the Northeastern region of FYR Macedonia. However, the wider area of influence also includes Skopje region (578,144 population), Polog region a (90,000 population) and Southwest region (222,064 population).

2. The Project will bring direct benefits to road users arising from a reduction in vehicle operating costs and travel time costs as a consequence of improved ride quality and reduced congestion and roadside activities that reduce vehicle speeds on the existing road. The Project will also have a positive impact on communities living in the vicinity of the project road and the existing road through stimulation of economic activity in the region and provision of better access to social and economic services. However, these benefits were not included in the economic analysis because they are difficult to quantify in monetary terms.

3. The economic analysis was conducted using the Highway Development and Management Tool (HDM-4), which simulates life-cycle predictions of road deterioration, road works effects and their costs and road user costs, and provides economic decision criteria for road construction and maintenance works. The HDM-4 analyzes projects by computing present values, at a given discount rate, of costs and benefits of different investment options in terms of savings in road maintenance costs, vehicle operating costs and travel time costs. The comparison is done between the “do something” scenario (project case) and the “do minimum” scenario (without project case) over the analysis period. The “do minimum” scenario incorporates an assessment of what would happen to the road infrastructure and road users if the project was not undertaken. The project scenario consists of the project construction works followed by proper maintenance works over the analysis period. The evaluation considered a 10 percent discount rate and a 25 year evaluation period.

Main Assumptions 4. The existing road between Rankovce – Kriva Palanka is a narrow (6.2-6.5 meters with limited shoulders) two lane Asphalt Concrete regional road in fair condition with an average roughness of around 3.0 IRI, m/km. The project road is a new wider (7.0 meters plus 2 meter hard shoulder) two lane road with Asphalt Concrete pavement that will pass through a new alignment around one km north of the existing road. The estimated economic investment cost, net of taxes, subsidies and price contingencies, is Euro 70.2 million, corresponding to Euro 2.85 million per km. The construction period is three years, and the project road is expected to be opened to traffic at the end of 2019. Table 1 presents the basic project characteristics.

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Table 1: Basic Project Characteristics

Alternative Project Road Length (km) 24.64 Without Project Road Length (km) 25.70 Surface Type Asphalt Concrete Number of Lanes (number) 2 Financial Total Project Cost (Euro million) 78.00 Economic Total Project Cost (Euro million) 70.20 Economic Total Project Cost (Euro million per km) 2.85

Construction Period (years) 3 Road Opened to Traffic (calendar year) 2019 Traffic at Opening (vehicles per day) 4,301 Journey Time With Project (minutes) 16

Journey Time Without Project (minutes) 31

5. A comparison in journey distance between the existing road and project road shows 4 percent distance savings. The current journey time on the existing road, which goes through some populated areas, is around 31 minutes by car (average journey speed of about 50 km per hour). Whereas, on the proposed project road, an average journey time of 16 minutes is expected, translating into an average journey time of about 16 minutes. Hence, a time saving of some 15 minutes per trip could be achieved as a result of the project.

Project Traffic 6. Most of the traffic that will use the project road currently passes through the existing road; thus, its traffic was used to estimate the expected traffic on the project road (see Table 2).

Table 2: Existing Road Traffic

Year

AADT (vehicles/day)

Traffic Annual Growth

Period %/year

2006 2,317 2006-2010 5.5%

2007 2,389 2011-2013 3.4%

2008 2,524 2006-2013 4.5% 2009 2,723 2010 2,874 2011 2,943 2012 2,882 2013 3,147

7. The existing road traffic increased on average by 4.5 percent per year from 2006 to 2013 and is estimated to reach 3,982 vehicles per day in 2019, the expected year of the opening of the new road. The normal traffic is estimated to grow at 5.0 percent per year during the first 10 years of the evaluation period for all vehicles types reducing thereafter to 4.0 percent per year,

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considering historic traffic growth on the existing road and IMF estimates that the GDP will grow at 4.0 percent per year from 2014 to 2019 in FYR Macedonia. It is estimated that 90 percent of the existing road traffic will use the project road in 2019. In addition, generated traffic was assumed to reach 20 percent of the normal traffic. The table below presents the estimated traffic on the project road9.

Table 3: Project Road Traffic Normal Generated Total

year Traffic Traffic Traffic 2019 3,584 717 4,301

2024 4,574 915 5,489 2029 5,565 1,113 6,678 2034 6,771 1,354 8,125 2039 8,238 1,648 9,885 2044 10,023 2,005 12,027

8. The Project will have positive impact on the existing road, as there would be a reduction in traffic volume on the existing road with the proposed project. However, for a conservative evaluation, the economic analysis did not consider the benefits to the remainder traffic on the existing road.

Road User Costs 9. Road user costs savings are related to journey time and other distance related savings that include fuel cost and other vehicle operating costs such as vehicle wear and tear and vehicle repairs and maintenance costs. The table below presents the vehicle fleet characteristics and economic unit costs adopted on the economic analysis and the estimated traffic composition on the project road, which shows the majority of the traffic is composed of cars and vans (81 percent), while trucks account only for 5 percent of the traffic.

Table 4. Vehicle Fleet Basic Characteristics and Economic Unit Costs

Medium Articulated

Car Bus Truck Truck Economic Unit Costs New Vehicle Cost (Euro/vehicle)

7,680

136,000

24,000

96,000

New Tire Cost (Euro/tire) 32 185 225 352 Fuel Cost (Euro/liter) 0.67 0.69 0.69 0.67 Lubricant Cost (Euro/liter) 1.50 1.50 1.50 1.50 Maintenance Labor Cost (Euro/hour) 2.35 2.60 2.60 3.26 Crew Cost (Euro/hour) 3.00 3.00 3.00 3.00 Overhead (Euro/year) 105 161 700 882 Interest Rate (%) 10 10 10 10 Passenger Working Time (Euro/hour) 2.47 2.23 0.00 0.00

9 Normal traffic is the expected traffic on the project area with or without the project. Generated traffic is the additional traffic that will occur due to reduction in transport cost and the economic development it will produce on the project area.

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Passenger Non-Working Time (Euro/hour) 0.83 0.75 0.00 0.00 Cargo Time (Euro/hour) 0.00 0.00 0.08 0.08 Basic Characteristics Kilometers Driven per Year (km)

12000

80000

30000

80000

Hours Driven per Year (hr) 550 1750 1200 2050 Service Life (years) 10 7 8 6 Percent Private Use (%) 100 0 0 0 Number of Passengers (#) 2.50 45.00 0.00 0.00 Work Related Passenger-Trips (%) 75 33 0 0 Gross Vehicle Weight (tons) 1.20 10.00 7.50 28.00 Equivalent Standard Axels (ESA) 0.00 0.80 1.25 4.63 Traffic Composition (%) 81% 13% 3% 2%

10. The unit road user costs of a car and medium truck, in US$ per vehicle-km, will be 22 and 12 percent respectively less with the project than without the project due to the improved ride quality and reduced travel time (see Table below). At the year of the opening of the project road, it is estimated that the vehicle fleet total CO2 emissions will around 12,764 tons per year, which represents a 20 percent increase of CO2 emissions compared with the without project case, which is due to the generated traffic and the increase in vehicle speeds. The total CO2 emissions are estimated to increase by 6 percent during the duration of the project.

Table 5. Unit Road User Costs (Euro per vehicle-km)

Medium Articulated

Car Bus Truck Truck Without Vehicle Operating Costs 0.14 0.74 0.40 1.12 Project

Travel Time Costs 0.11 1.19 0.00 0.00 Road User Costs 0.25 1.94 0.41 1.12

With Vehicle Operating Costs 0.14 0.66 0.36 0.92 Project

Travel Time Costs 0.06 0.61 0.00 0.00 Road User Costs 0.20 1.27 0.36 0.92

11. The economic evaluation included the net benefits of the expected reduction of road fatalities per year on the project road, at a social cost of Euro 0.5 million per fatality. Currently on the existing road there are around 1.8 fatalities per year, which was assumed to decrease by 25 percent with the project In addition, the economic analysis included the social cost of CO2 emissions, at US$ 30 per ton.

Economic Analysis Results 12. The return on the investments of the Project is satisfactory with an Economic Internal Rate of Return (EIRR) of 13.5 percent, Net Present Value (NPV) of Euro 27.78 million, at a discount rate of 10 percent, and Benefit Cost Ratio of 1.47. The Switching values analysis shows that construction costs would have to increase by 45 percent for the Project EIRR be reduced to 10 percent. The results of the economic analysis are presented in the table below.

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Table 6: Economic Analysis Results Economic Internal Rate of Return, EIRR (%) 13.5% Net Present Value, NPV (Euro million) 27.78 Present Value of Benefits (Euro million) 87.48

Present Value of Costs (Euro million) 59.70 Benefit Cost Ratio 1.47

13. Most of the project net benefits (86 percent) derive from normal traffic benefits, while generated traffic and accident benefits accounts for 13 percent of the benefits each (see Table below).

Table 7: Distribution of Project Benefits Present Value Source (Euro Million) (%) Normal Traffic Benefits 75.64 86% Generated Traffic Benefits 7.56 9% Accident Benefits 3.83 4% CO2 Emissions Benefits 0.45 1% Total Benefits 87.48 100%

14. A sensitivity analysis was carried out to assess the robustness of the results to possible variations in key project parameters, which in this case were identified as construction costs and the forecasted traffic at opening of the project road. A severe worst case scenario with construction costs increased by 15 percent and traffic at the opening of the project road decreased by 15 percent shows an acceptable return for the Project with an EIRR of 11.0 percent. The economic analysis sensitivity results are presented on the table below.

Table 8: EIRR Sensitivity Analysis (%)

Base Case 13.5% Construction Costs + 15% 12.1% Traffic at Opening - 15% 12.3% Construction Costs + 15% and Traffic at Opening -15% 11.0%

Public Sector Financing and World Bank Added Value 15. Public sector financing is the appropriate vehicle for financing the construction of the proposed highway because the construction costs cannot be recovered through tariffs due to high costs of constructing a new road on a new alignment. Public investment in road infrastructure is desirable because it is a way the government plays a key role in the country’s development by handling a range of issues that can only be accomplished or implemented through government actions, such as axle weight controls and road safety regulations. The World Bank’s role is justified because of the project’s economic and social benefits and because of the value added it brings beyond financing in areas such as: construction quality control, road safety, transport planning, environmental risk management, safeguards, procurement, and financial management.

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Annex 5: Implementation Support Plan

FYR MACEDONIA: Road Upgrading and Development Project (P149955) Strategy and Approach for Implementation Support 1. The implementation support will focus on implementation of risk mitigation measures defined in Systematic Operations Risk-Rating Tool (SORT), namely the technical design of project and institutional capacity for implementation and sustainability, which are rated as substantial and moderate respectively, as well as the environmental and social aspects, which are also rated as substantial. Implementation support missions, including field visits will be carried out semi-annually, and will focus on: (a) technical aspects of works, (b) institutional strengthening; and (c) alliance of environmental and social requirements.

(a) Technical aspects of works. Close cooperation and review of construction works will be carried out from the design phase until completion of works. Engineering inputs will be provided to the design to ensure proper technical specifications, and appropriate consideration of road safety and climate resilience measures. During bid evaluation, the review will ensure fair assessment of the technical aspects of bids. During implementation, technical supervision will be provided to ensure technical, environmental and social contractual obligations are met. The team’s engineers will conduct site visits on a semi-annual basis throughout implementation.

(b) Institutional strengthening. As a part of the PDO, institutional strengthening will receive substantial focus during implementation and related supervision. This will include a regular dialogue on the progress related to road asset management system, and establishment of bridge maintenance system as well as integration of revised design and maintenance standards applied by PESR.

(c) Alliance of environmental and social requirements. The environmental and social safeguards specialists in the team will work closely with clients to ensure all requirements are met and documents prepared properly.

(d) Financial management. Supervision of financial management arrangements will be carried out on a risk-basis, at appropriate intervals, as part of the project supervision plan and support will be provided on a timely basis to respond to client needs. During implementation, the World Bank will supervise the project’s financial management arrangements in the following ways: (i) desk reviews of the project’s quarterly IFRs as well as the project’s and entity`s annual audited financial statements and the auditor’s management letters and status of implementation of remedial actions recommended in the auditor’s management letters, if any; and (ii) on-site reviews of the following key areas: (a) project accounting and internal control systems; (b) budgeting and financial planning arrangements; (c) disbursement arrangements and financial flows, including counterpart funds, as applicable; and (d) any incidences of corrupt practices involving project resources. A walkthrough review of a sample of transactions will be also conducted. A World Bank Financial Management Specialist will participate in the implementation support and supervision process.

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Implementation Support Plan 2. The Project supervision missions will coincide with the missions on the ongoing NRRRP.

The supervision missions will involve engineering, procurement, safeguards and financial management specialists at least once annually. Bank guidance will be particularly focused on the activities related to the establishment of bridge management system.

3. Capacity regarding environmental and social safeguards will be continuously monitored by the World Bank environmental and social specialists, who will participate regularly in implementation support missions and provide input directly to the client in the course of EMP preparation and works supervision.

4. The Mid-term review of the Project, expected to take place in the first quarter of 2017, will include technical workshops to discuss engineering design challenges, BMS and RAMS.

5. Main focus in terms of support to implementation during the Project: Time Focus Skills Needed Resource

Estimate Partner

Role First twelve months

Completion of procurement works for first year road works Establishing Bridge Management System

Procurement Safeguards Project Management skills Bridge Management

12-48 months Implementation of works contracted Determination of civil works and timely procurement for consecutive years

Road Engineering Procurement Safeguards Project Management skills Bridge Management

Skills Mix Required Skills Needed Number of

Staff Weeks Number of

Trips Comments

TTLs Transport Economist/Specialist Road Engineer Procurement Specialist Financial management specialist Environmental specialist Social development specialist Bridge Management System Specialist

8/year 6/year

4/year 8/year 4/year 3/year 2/year 3/year

3/year 2/year

2/year 3/year 2/year 2/year 2/year 2/year

Annex 6: Map FYR MACEDONIA: Road Upgrading and Development Project (P149955)

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