World Bank Documentdocuments.worldbank.org/curated/en/... · HDM (3, 4) Highway Development and...

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 54249-ET

PROJECT PAPER

ON THE

SECOND ADDITIONAL FINANCING

IN THE AMOUNT OF SDR 65.3 MILLION (US$100 MILLION EQUIVALENT)

TO THE

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

FOR A

ROAD SECTOR DEVELOPMENT STAGE II PROJECT – APL2

April 28, 2010

Transport Sector Country Department AFCE3 Africa Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective February 28, 2010)

Currency Unit = Ethiopian Birr (ETB) ETB 1.00 = US$ 0.07 SDR 1.00 = US$1.53

FISCAL YEAR

July 8 – July 7

ABBREVIATIONS AND ACRONYMS

AC - Asphalt Concrete AF - Additional Financing AFDB African Development Bank APL1, 2, 3, 4 - Adaptable Program Loan (Stages I, II, III or IV) BPR Business Process Re-engineering CAS - Country Assistance Strategy DBST - Double Bituminous Surface Treatment DMO District Maintenance Organization DRMC District Road Maintenance Contractor EIA - Environmental Impacts Assessment EIRR - Economic Internal Rate of Return EMP - Environmental Management Plan ERA - Ethiopian Roads Authority ETB - Ethiopian Birr FDRE - Federal Democratic Republic of Ethiopia FMS Financial Management System GDP - Gross Domestic Product GOE - Government of Ethiopia HDM (3, 4) Highway Development and Management Model (Version 3, 4) HIV/AIDS Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome ICB International Competitive Bidding NPV - Net Present Value PAD - Project Appraisal Document PASDEP - Plan for Accelerated and Sustained Development to End Poverty PMS Pavement Management System RAP - Resettlement Action Plan RF Road Fund RSDP - Road Sector Development Program SDR - Special Drawing Rights TA - Technical Advisory Services US$ - United States Dollar VO - Variation Order VOC - Vehicle Operating Cost

WIDPs Wereda Integrated Development Plans WTTPs Wereda Travel and Transport Plans

Vice President: Obiageli K. Ezekwesili

Country Director: Sector Director

Kenichi Ohashi Inger Andersen

Sector Manager: C. Sanjivi Rajasingham Task Team Leader: Yoshimichi Kawasumi

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA ADDITIONAL FINANCING FOR

ROAD SECTOR DEVELOPMENT STAGE II PROJECT – APL2

CONTENTS

I. Introduction ...................................................................................................................... 1 II. Background and Rationale for Additional Financing ................................................... 1 III. Proposed Changes......................................................................................................... 4 IV. Appraisal Summary ...................................................................................................... 8 V. Expected Outcomes ...................................................................................................... 9 VI. Benefits and Risks ........................................................................................................ 9 VII. Financial Terms and Conditions for the Additional Financing .................................... 9 Annex 1: Revised Results Framework and Monitoring Indicators ...................................... 10 Annex 2: Critical Risks – Risk Assessment for Proposed 2nd Additional Financing .......... 14 Annex 3: Revised Estimate of Project Costs and Financing................................................. 18 Annex 4: Economic Analysis based on Updated Cost.......................................................... 22 Annex 5: GOE Letter and ERA Action Plan for Extension of APL2 Credit Closing Date .. 27

ETHIOPIA

ROAD SECTOR DEV. SUPPORT PROGRAM II-APL2

ADDITIONAL FINANCING PROJECT PAPER

AFRICA

AFTTR Basic Information (Original Project)

Project ID: P082998 Project Name: SECOND ADDITIONAL FINANCING TO ROAD SECTOR DEVELOPMENT SUPPORT PROGRAM II (RSDSP II-APL 2)

Team Leader: Yoshimichi Kawasumi Expected Closing Date: June 30, 2012 Environmental category: A - Full Assessment Lending Instrument: Adaptable Program Loan

Joint IFC: Joint Level:

Basic Information (Additional Financing)

Date: April 28, 2010 Team Leader: Yoshimichi Kawasumi Country Director: Kenichi Ohashi Sector Manager/Director: C. Sanjivi Rajasingham / Inger Andersen

Sectors: Roads and highways (90%); Central government administration (9%); Sub-national government administration (1%) Themes: Infrastructure services for private sector development (50%); Other financial and private sector development (25%); Rural services and infrastructure (25%)

Project ID: P117644 Environmental category: Full Assessment Lending Instrument: Adaptable Program Loan Additional Financing Type: Cost Overrun

Joint IFC: Joint Level:

Project Financing Data [ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 100.00 Proposed terms:

Financing Plan (US$m) Source Local Foreign Total

BORROWER/RECIPIENT 34.19 12.95 47.14 International Development Association (IDA)

0.00 100.00 100.00

Total: 34.19 112.95 147.14 Borrower: Ministry of Finance and Economic Development

Addis Ababa Ethiopia Tel: 22-66-98 Fax: 55-13-55 Responsible Agency: Ethiopian Roads Authority Ethiopia Estimated disbursements (Bank FY/US$m) FY 2011 2012 2013 Annual 50.00 49.00 1.00 Cumulative 50.00 99.00 100.00 Project implementation period: Start May 27, 2010 End: June 30, 2012 Expected effectiveness date: September 30, 2010 Expected closing date: June 30, 2012

Does the project require any exceptions from Bank policies? Ref. Section Appraisal of Project Activities Have these been approved by Bank management?

[ ]Yes [X] No [ ]Yes [ ] No

Does the project include any critical risks rated “substantial” or “high”? Ref. Section Project Risks and Mitigating Measures [ ]Yes [X] No

Project development objective Ref. Section Bank Response The objectives of the project remain unchanged from the APL2, as originally stated, namely, to assist the Recipient in increasing its road transport infrastructure and improving the reliability thereof, strengthening the capacity for road construction, management and maintenance, and creating conditions conducive to private sector participation in the road transport sector. The additional financing would help in meeting all of the objectives of APL2. Project description [one-sentence summary of each component] Ref. Section Bank Response The project has five components: A) Rehabilitation and Upgrading of Federal Trunk and Link Roads through the (i) Upgrading of the Assela-Dodola & Shashemene-Goba road (246 km); (ii) Upgrading of the Shashemene-Dodola Junction road (70 km); (iii) Upgrading of the Gob Gob-Gashena -Woldiya road (194 km); (iv) The upgrading of the Adwa-Shire road (83km) - and the related construction supervision. B) Construction of Federal/Link and Regional Rural Roads through (i) the Construction of the Magna-Mechara road (119 km); and (ii) the Construction of the Assossa/Sherkole-Guba road (137 km) - and the related construction supervision. C) Support to the Rural Travel and Transport Program through the (i) Preparation of 40 Wereda Integrated Development Plans; and (ii) Support to establishment of ERTTP institutional arrangements. D) Institutional Strengthening of ERA. E) Support to accomplishment of Program Objectives through providing consultancy services to carry out feasibility and EIA studies, as well as design and design review for roads projects to be included under follow-on operations (APL3, APL4 and by other donors). Which safeguard policies are triggered, if any? Ref. Section Appraisal of Project Activities With the original financing of the APL2 project, Environmental Impact Assessments (EIAs), including Environmental Management Plans (EMP), and Resettlement Action Plans (RAPs) for

the above roads were disclosed in Ethiopia and at the Bank’s Infoshop in April 2004. The Dodola junction - Guba road was part of these environmental assessments, as was the existing 6 km road section running through the northern part of the Bale Mountain National Park. The EMPs for all APL2 roads have been updated following the October 2009 environmental supervision mission and will be implemented under the proposed second additional financing. Based on ongoing and future APL2 activities, the Bank's safeguard policies OP 4.01 Environmental Assessment, OP 4.12 Involuntary Resettlement, and OP 4.04 Natural Habitats have been triggered (due to an oversight, OP 4.04 was not shown as triggered in earlier project documentation). Also, OP/BP 4.11 (Physical Cultural Resources) was triggered as the policy applies whenever OP 4.01 applies, i.e. whenever there is likely to be significant civil works.

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I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide additional financing (IDA-Credit) in the amounts of Special Drawing Rights (SDR) 65.3 million (US$100.0 million equivalent) to the Federal Democratic Republic of Ethiopia for the ongoing Road Sector Development Stage II Project – APL2 (Credits 39890-ET, and 39891-ET). A 24-month extension is also sought to extend the closing date of the original project (Cr. 39890-ET), from June 30, 2010 to June 30, 2012, to bring it in line with the closing date of the first additional financing. No changes in the project development objectives, components or implementation modalities are proposed.

2. The proposed additional financing would primarily be used to complete the second stage of the Adaptable Program Loan (APL) by covering cost overrun related to surface type design change from double bituminous surface treatment (DBST) to asphalt concrete (AC) surface responding to the growing traffic and expansion of town/urban sections reflecting recent economic growth and urbanization on some of the roads, increased quantities of work items, as well as construction materials price escalation in the recent years. 3. The main financing partner for this credit remains the Government of Ethiopia (GOE). Specific activities are financed by various other donors and are listed in Annex 2 of the original Project Appraisal Document (PAD Report No. 29877-ET) dated August 23, 2004. The Ethiopian Roads Authority (ERA) will continue to manage donor coordination arrangements in consultation with major financing partners.

II. Background and Rationale for Additional Financing

4. Country context: Ethiopia is one of the poorest countries in the world, with an average income per capita of around US$400. The population is estimated by the 2007 census to be 73.9 million people, with 16 percent living in urban areas, and a growth rate of 2.6 percent per annum. Ethiopia is the second most populous nation in Africa with a land area of about 1.1 million sq km. The fertile highland plateau is used for agriculture and livestock rearing and the Great Rift Valley, running north to south, splits the plateau into west and east sections. 5. During FY09, the Ethiopian economy defied the global norm and continued to grow robustly amidst one of the worst global crises of our time. The economy registered a growth rate of 9.9 percent (against the IMF’s projection of 7.5 percent) - one of the highest in the world. During the same period, the GOE also managed to successfully deal with its two most pressing macro-economic problems: high and rapidly growing inflation rate and dwindling foreign exchange reserves. At the end-of-period, inflation rate fell from the peak of 64 percent in July 2008 to 2.7 percent by June 2009 and further to 0.6 percent by November 2009. Similarly, the foreign exchange reserves, measured in number of months of imports, increased from a low of four weeks (or US$800 million) in October 2008 to seven and a half weeks by June 2009 and then to eight weeks by November 2009 (i.e. US$1.8 billion). The GOE also tightened fiscal policy and controlled aggregate demand. As a result, the general government domestic borrowing was reduced to zero in FY09 from 2.7 percent of gross domestic product (GDP) in

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FY08, by containing expenditure and enhancing revenue mobilization through administrative measures. The general government fiscal deficit was reduced from 2.9 percent of GDP in FY08 to 1.2 percent of GDP during FY09. 6. One of the strongest aspects of Ethiopia’s fiscal policy is the large and increasing pro-poor sector spending as a share of the general government budget. Ethiopia’s spending on pro-poor sectors is among the highest in Africa, accounting for over 60 percent of its annual budget. Spending on pro-poor sectors however has fallen in recent years, both as a share of GDP as well as a share of total expenditure because of the increased spending on urban housing for poor, which has traditionally not been included in pro-poor spending, and also due to decline in overall resource envelope. Pro-poor spending covers water, health and education, improvement of infrastructure and market connectivity; and rural food security and safety net programs.

7. The Transport System: Ethiopia’s transport infrastructure comprises: (i) a classified road network estimated (December 2009) at 46,812 km (compared to 24,970 km in 1997) with about 21,172 km of federal roads (6,938 km asphalt paved) and 25,640 km regional roads – along with unclassified rural access roads estimated at some 85,767 km; (ii) a 781 km railway line from Addis Ababa to Djibouti (about 709 km within Ethiopia); (iii) air transport facilities, including four international airports, five major domestic airports, and more than 30 other domestic runways and airstrips; and (iv) a national merchant marine. Almost 98 percent of the country’s export and import needs are presently served through Djibouti port, of which over 97 percent is transported by road.

8. Original Credit and First Additional Financing: The original APL2 Credit of SDR 110 million (US$160.9 million equivalent) was appraised in May 2004, and approved on September 22, 2004 with a closing date June 30, 2010. The appraised engineer’s cost estimate was based on the 2003 market price with the costs comparable to unit costs of adjacent sections and offered prices in country of other contracts in similar terrain and pavement standards recently awarded. In August 2005, the bids for the eight International Competitive Bidding (ICB) works bids were opened, and the bid prices offered by the bidders were found to be higher by between 25 and 201 percent above the appraised prices. Out of the eight contracts, four contracts were awarded at a price on average about 52 percent above the allocated budget, and the other four contracts were retendered due to a lack of competition. World market price increases and the lack of competition were considered the main reasons for the high bid prices.

9. The first additional financing (AF) of SDR59.8 million (US$87.3 million equivalent) was requested to fill the financing gap that arose from the awarded prices and the updated engineer’s cost estimates of the four contracts to be retendered. It was approved on June 22, 2006 with an extended closing date of June 30, 2012 considering the anticipated delay due to the retendering process. The four retendered contracts were opened in February 2007, and it was found that the retendered bid prices were, on average, some five percent less than the first bid prices, and were awarded on that basis – broadly confirming the accuracy of the estimation basis for the first additional financing.

10. The objectives of the project remained unchanged from the original APL2, as stated, to assist the Recipient/Borrower in increasing its road transport infrastructure and improving the

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reliability thereof, strengthening the capacity for road construction, management and maintenance, and creating conditions conducive to private sector participation in the road transport sector.

11. The project has five components: (i) Rehabilitation and Upgrading of Federal Trunk and Link Roads through the (a) Upgrading of the Assela-Dodola & Shashemene-Goba road (246 km); (b) Upgrading of the Shashemene-Dodola Junction road (70 km); (c) Upgrading of the Gob Gob-Gashena –Woldiya road (194 km); (d) The upgrading of the Adwa-Shire road (83km) – and the related construction supervision. (ii) Construction of Federal/Link and Regional/Rural Roads through the: (a) Construction of the Magna-Mechara road (119 km); and (b) the Construction of the Assossa/Sherkole-Guba road (137 km) – and the related construction supervision. (iii) Support to the Rural Travel and Transport Program through the (a) Preparation of 40 Woreda Integrated Development Plans; and (b) Support to establishment of Ethiopian Rural Travel and Transport Program (ERTTP) institutional arrangements. (iv) Institutional Strengthening of ERA. (v) Support to accomplishment of Program Objectives through providing consultancy services to carry out feasibility and EIA studies, as well as design and design review for roads projects to be included under follow-on operations (by IDA and by other donors). 12. The APL2 project overlapped with the Stage I of the IDA financed Adaptable Program Lending (APL1) project which was approved June 2003 and closed December 31, 2009. The Stages III and IV APLs were approved in June 2007 and June 2009, respectively, and their implementation is in progress. The overall APL, three other completed IDA Credits and other projects funded by various donors support the GOE’s Road Sector Development Program (RSDP). The RSDP is a rolling program in three phases implemented from July 1, 1997 with two elapsed five-year phases and an ongoing RSDP Phase III scheduled to close June 30, 2010.

13. Proposed Second Additional Financing: During implementation of the civil works contracts, the Borrower requested IDA’s No Objection to change surface type design for Assela-Dodola-Goba and Gob Gob–Gashena road projects from the designed DBST to AC to respond to reported increase in traffic with a higher growth rate than anticipated at the design stage. The additional resources required for these surface type changes were not considered at the time of the first additional financing request since the Borrower confirmed the need with the related evidence only during project implementation. In addition, increased quantities of various works items had been necessitated – including those responding to expansion of some urban and town sections – together with higher prices of construction inputs and inflation rate that have prevailed in the country since the approval of the first additional finance (June 22, 2006). The need to address these factors is considered essential for the successful completion of APL2 Project.

14. The Borrower, therefore, has requested a second additional financing to fill the financing shortfall in completing the ongoing works by covering various variation orders and increased quantities as mentioned above, and help mitigate the effects of the high price escalation and inflation on the APL2 eight ICB works contracts. The evolution of market prices and the average inflation rate that the country has experienced in the last three years provide the basis for re-estimating the additional costs of the project. Now that the required variation orders and

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the quantity increase have been fully identified, and the inflation is stabilized, the second additional financing is requested on the basis of a robust revised estimate of cost.

15. Project performance: The last Supervision Mission in October 2009 rated the overall performance as satisfactory with regards to implementation status and meeting the expected project development objectives; and the related outcomes and outputs. There have been no changes to the original objectives and basic project design, except for the confirmed road contract variation orders, and the project has remained in compliance with legal covenants.

16. Since the launch of RSDP I (1997), GOE has made remarkable progress in the sector in physical, organizational, social, and financial terms. During RSDP I, 8,709 km of roads were constructed or rehabilitated – of which 2,709 km were federal roads and 6,000 km were newly constructed regional roads. During RSDP II, 988 km of roads were rehabilitated, 1,758 km upgraded and 628 km constructed as new gravel roads – while heavy/emergency maintenance was carried out on 4,199 km of asphalt and gravel roads. In addition, 85,767 km of community roads were constructed (December 2009) by woredas (local districts). The total classified road network of the country reached 46,812 km by the end of December 2009. The overall road network in Ethiopia therefore increased by an average of five percent per year between 1997 and 2009. Table 1 below summarizes the achievements of the road works between 1997 and 2009, measured in terms of selected access and impact indicators; and the GOE’s target values.

Table 1: Achievements and Targets

Indicators 1997 (baseline)

2009 (current)

2010 (III targets)

Proportion of Total Road network in Good Condition 22% 70% 66% Road density/1000 sq. km (excluding community roads) 24.0 km 42.6 km 45.7 km Road density/1000 pop (excluding community roads) 0.49 km 0.57 km 0.59 km Proportion of area more than 2 km from all weather roads* - 84% 83% Average distance to all weather roads (km) 21 km 11.8 km 11 km

Source: ERA’s Road Sector Development Program III (2007-2010), November 2009 * ERA is in the process of collecting data on population for use in this indicator

17. The disbursed amount as of April 7, 2010 stood at approximately US$179.56 million which is 70 percent of the total credit amount including the first additional financing. According to the disbursement plan by ERA as part of its Action Plan (Annex 5), it is estimated that the current balance (approximately US$77.42 million) will be depleted before the end of 2010.

III. Proposed Changes 18. Extension: The proposed additional financing would require extending the closing date of the original project by 24 months, from June 30, 2010 to June 30, 2012, to coincide with the closing date of the first additional financing, to allow contract implementation to continue utilizing the resources for the entire project, including those for the first and second additional financing resources. GOE’s letter requesting for the extension of credit closing date and ERA’s Action Plan have been received by the Bank are attached as Annex 5.

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19. As previously noted, there are no changes in the Project’s Development Objectives and design of the project components, except for the contractual variation orders accepted as essential, and their implementation modalities. The overall scope of the project in terms of the components to be financed with IDA funds (including the additional financing) remains the same as defined in APL2 PAD, except for one sub-component (upgrading of the Shashemene-Dodola Junction Road), which the GOE decided at the time of the first additional financing to finance from its own resources, for the national competitive bidding contracts, as these require 100 percent of local currency only – thus no IDA financing was required (Project Paper-Report No. 36265-ET dated May 23, 2006).

20. Financing Plan: Part of the second additional financing will cover the cost overrun (due to design variations in the surface type, improvements in some town section roads, increased works quantities, etc.) and price escalation of construction inputs which has increased significantly during the last three years. The change in cost of the initial road works affects all ongoing APL2 road contracts. The additional financing will therefore allow the completion of the ongoing civil works component. The revised costs and financing by component and source of financing at the original/initial APL projectand at the first and the proposed second additional financing are presented in Tables 2, 3 and 4 below with more details presented in Annex 3. Out of the proposed total US$147.14 million funding gap, IDA will finance US$100 million and the remaining balance of US$47.14 million will be financed by GOE.

Table 2: IDA and GOE Contributions for the Original APL2 Project (US$ m)

Component Project Cost

Original/ Initial

Contribution

GOE IDA Rehabilitation & Upgrading of Federal Roads 178.90 66.10 112.80 Construction of Federal/link and Regional Roads 56.30 23.70 32.60 Construction Supervision 15.80 4.40 11.40 Rural travel and Transport program 2.30 0.50 1.80 TA Support for ERA 1.80 0.20 1.60 Preparatory Activities for APL2 & 4 0.80 0.10 0.70

Total Cost 255.90 95.00 160.90

Table 3: Total IDA and GOE Contributions including the First Additional Financing (US$ m)

Component Project Cost 1st Additional

Financing

Contribution


Total Cost 377.50 129.30 248.20

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Table 4: Total IDA and GOE Contributions including the First and Second Additional Financing (US$ m)

Component Project Cost 2ndAdditional

Financing

Contribution

GOE IDA Rehabilitation & Upgrading of Federal Roads 372.52 136.01 236.51 Construction of Federal/link and Regional Roads 131.71 35.30 96.41 Construction Supervision 15.8 4.52 11.28 Rural travel and Transport program 2.99 0.61 2.38 TA Support for ERA 1.61 0.05 1.56 Preparatory Activities for APL2 & 4 0 (0.05) 0.05

Total Cost 524.63 176.44 348. 19 Note: figures in ( ) shows adjustment reflecting difference between original allocated budget and actual awarded price.

Table 5: Second Additional Financing by Category; and by GOE and IDA (US$ m)

Project Component Total GOE Financing

IDA Financing

Rehabilitation & Upgrading of Federal Roads 123.43 52.22 71.21 Construction of Federal/link and Regional Roads 24.01 (4.60) 28.61 Construction Supervision and Other Services (0.30) (0.48) 0.18

Total Financing Required 147.14 47.14 100.00 Note: figures in ( ) show adjustment reflecting difference between original allocated budget and actual awarded price. Safeguard Policies that Might Apply

21. Environment and Social. As was the case under the original APL2 project, the proposed additional financing operation will trigger OP 4.01 Environmental Assessment; OP 4.12 Involuntary Resettlement; OP 4.04 Natural Habitats; and OP 4.11 Physical Cultural Resources due to the planned construction and rehabilitation of roads. Due to an oversight, OP 4.11 and OP 4.04 were not shown as being triggered in the original project documentation. As the objectives and scope of the additional financing operation remains the same as that of the original APL2 project, the original Environmental Impact Assessments (EIAs) and Resettlement Action Plans (RAPs) for APL2 remain valid and do not require revisions. The EIA reports discussed the potential adverse environmental and social impacts of road construction and rehabilitation, including potential impacts on the Bale Mountain National Park and physical cultural resources. The original EIA reports and the original RAPs were disclosed in Ethiopia on April 5, 2004, and at the Bank’s Infoshop on May 5, 2004. Social mitigation measures have included and will continue to include prevention of Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome (HIV/AIDS). 22. In the course of the recent APL2 environmental supervision mission, in October 2009, the safeguard implementation status has been rated as moderately satisfactory due to gaps in the implementation of appropriate environmental mitigation measures across contracts. The mission determined that the original Environmental Management Plans (EMPs) would need to be updated to reflect the current circumstances at the various construction sites, particularly as regards the existing road (6 km) running through the Bale Mountain National Park. The eight EMPs for APL 2 contracts were updated accordingly by the contractors and sent to ERA for

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review and comments. The EMPs outline the institutional arrangements for environmental management during road construction and rehabilitation, and are included in the bidding documents. The updated EMPs were disclosed on March 4, 2010 on the ERA website in Ethiopia, and during the appraisal, were submitted to the Bank for disclosure at the Bank’s InfoShop (the EMPs were disclosed between March 4 and 9, 2010). Furthermore, as a result of the continuous dialogue between the Bank and country representatives regarding safeguards issues during the implementation of APL1 and APL2, the Ethiopian Parliament on July 15, 2005 issued a new compensation law which has much parity with Bank’s OP 4.12 Involuntary Resettlement. The project RAPs that are being undertaken during project implementation comply with OP 4.12. 23. Procurement. No additional procurement is envisaged under this additional financing. All civil works contracts have now been awarded and are ongoing with the overall works progress as of end February 2010 estimated at 61 percent (physical), but still behind the works program in general. Enhanced supervision of the works and due diligence review of variation orders (VOs) by the Client/ERA therefore will continue to be critical for the acceptable cost and the timely and quality completion of the works. ERA’s contract management capacity was evaluated during the appraisal, and was confirmed as adequate. In addition the justification of the VOs was reviewed prior to the appraisal. All consultancy service contracts have also been awarded and are progressing well with some of them completed - except for the procurement of the technical advisory services (TA) for financial management support to ERA, which is currently under revision to reflect the nation-wide Business Process Re-engineering outcomes. The procurement plan was updated by ERA, and was reviewed and found reasonable during the appraisal.

24. The proper and professional management of both the consultancy services contracts for construction supervision and of the civil works contracts is the critical and challenging area of concern. The high turnover of skilled staff coupled with poor performance by design and supervision consultants may increase the risk of further cost and time overruns of the contracts. However, the ERA contract administration team is implementing an action plan to control quality, cost and time overruns, as well as to ensure timely implementation of the works. The action plan was reviewed during appraisal and was found to be satisfactory. Further, under APL3 TA support to strengthen/establish consultants' and contractors' performance monitoring system, unit costs monitoring system, quality assurance system in procurement, etc. have been included. These TA services/ supports are ongoing, and should be utilized to enhance ERA’s capacity for contracts administration/management. 25. Financial Management. Based on the latest FM implementation review mission, conducted in October 2009, the overall financial management performance for the project is rated as moderately satisfactory. ERA has adequate accounting, information management and budgetary control systems. It has adequate and qualified finance staff and strong internal control system. The Interim Financial Reports of all Bank financed projects implemented by ERA are now being submitted within the deadline stipulated in the legal agreements. Similarly project audit reports were submitted within the due date and there is improvement in the timeliness of entity audit report submission. The entity audit report for the year ended July 7, 2009 was submitted on February 10, 2010, one month after the due date. However, the entity audit report

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was qualified due to limitation in evidence because of unsatisfactory system of internal control over the physical inventory and the evaluation of goods in warehouse. All considered the financial management systems put in place by ERA for the existing project and additional financing are adequate to produce timely reports for monitoring project progress as required by OP/BP 10.02.

IV. Appraisal Summary Economic Analysis based on Updated Costs

26. The economic viability of the road projects under APL2 was reanalyzed using the increased costs of works and the updated traffic volumes. The critical input parameters have changed, resulting in changes in economic rate of return of the project. Base year traffic volume has increased largely due to rapid economic growth that reached up to 10 percent per annum for the latest subsequent years. In addition to the significant increase in the construction cost that triggered a need for additional financing, several other physical and non-physical costs have also increased due to economic growth and inflation in the country, and international trends (for details, ref. Annex 4).

27. Economic analysis for the three existing road sections1

was carried out using Highway Development and Management Model Version 4 (HDM4) consistent with the original analysis (although the original analysis was carried out using the older version, HDM3, the two models share the same analytical framework and basic features). Economic feasibility of the construction of the two new sections (Magna-Mechara and Assosa/Sherkole-Guba), where no current traffic data is available, was analyzed using producers’ surplus approach, assuming that the agriculture activities in the influenced areas were similar to those used at appraisal and for the first additional financing.

28. Economic analysis for these roads had also been carried out earlier (during the first additional financing in May 2006) with different construction and maintenance alternatives. The then traffic forecast and analysis justified the road to be upgraded from gravel to DBST. The construction and maintenance alternatives for the HDM analysis were defined based on the improvement options identified for these projects which are summarized in Table 6. The present analysis assumes the same start of the construction as for the previous analysis (2006/2007) and lasts for 3.5 years due to the additional works, as opposed to the three years in the previous analysis, with the road opening to traffic in 2010/2011. The analysis period is 20 years (up to 2026).

Table 6: Existing Condition and Proposed Option

Project road Base scenario Alternative scenario Assela-Dodola & Shashemene-Goba Do minimum AC as changed from DBSTP GobGob-Woldiya Do minimum AC as changed from DBSTP Shire-AdiAbun/Adwa Do minimum Asphalt Concrete Magna-Mechara Not built New Gravel Road Assosa/Sherkole-Guba Not built New Gravel Road

1 Assela-Dodola/Shashemene-Goba, GobGob-Woldiya, and Shire-AdiAbun/Adwa

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29. Recommendation: As presented in Table 7, the upgrading of road to a higher level of standard as well as new construction of gravel roads are justified. The economic internal rate of return (EIRR) for all road sections exceeds 10 percent. Based on the economic analysis of the project options (using revised costs) as well as overall engineering and traffic assessment, it is concluded economical to carry out the works as recommended. Details of the economic analysis are summarized in Annex 4.

Table 7: Economic Analysis Summary – Base Case (cost in Ethiopian Birr: ETB)

Project roads Length Proposed option

Construction unit cost†

Updated EIRR (%)

Assela-Dodola & Shashemene-Goba‡ 247 km AC 6.5 mln ETB/km 19.5 GobGob-Woldiya 194 km AC 6.4 mln ETB/km 21.7 Shire-AdiAbun/Adwa 83 km AC 11.9mln ETB/km 16.1 Magna-Mechara 120 km Gravel 5.3mln ETB/km 14.8 Assosa/Sherkole-Guba 136 km Gravel 4.5mln ETB/km 12.9

† Economic cost, excluding taxes, updated in 2009 ‡ Excluded Shashemene-Dodola Junction, which is financed by the government.

V. Expected Outcomes 30. There will be no substantial changes in the project’s expected outcomes. However, the outcome indicators in the Results Framework and Monitoring have been updated accommodating the sector core indicators, as well as the extension of the closing date from June 30, 2010 to June 30, 2012. Also, to avoid duplication of the outcome indicators, the program indicators (such as roads in good and fair condition, number of the beneficiaries, etc.) are now being monitored under Stage IV Project (APL4) and have been excluded from the updated outcome indicators (ref. Annex 1).

VI. Benefits and Risks 31. The outcome of the economic analysis as shown above confirms the benefits of this project. The risks associated with this additional financing remain unchanged from those already identified in the original PAD (Report No. 29877-ET) dated August 23, 2004. The updated Risks and Mitigation table reflecting the recent development is presented in Annex 2. Country-specific risks addressed in the Country Assistance Strategy (CAS), approved on April 2, 2008 still remain valid.

VII. Financial Terms and Conditions for the Additional Financing 32. The additional financing is provided as a credit on standard IDA Credit terms for Ethiopia (i.e., principal amount repayable in 40 years, including a grace period of 10 years). The financial management and disbursement arrangements for APL2 will be equally applicable for the additional financing. The current financial management and disbursement arrangements for APL2 are adequate to handle the financial transactions of the additional financing. While the audited ERA entity for the year ended July 7, 2009 was submitted on February 10, 2010 - one month after the due date, the project financial statements (APL1, APL2 and APL3) were received by the Bank within the due date.

10

Annex 1: Revised Results Framework and Monitoring Indicators I. APL2 Project Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information Current Proposed Current Proposed Current Proposed (i) Increase road transport infrastructure and improve reliability thereof

No changes

(a) Increased road density from 30.8km/sq.km by 2009

No changes

(a) To measure the overall impact of the RSDP on the road network increase on annual basis

No changes

(b) Increased proportion of roads in good condition from 32% in 2003 to 50% by 2009

Note: Data on Core Sector Indicators is entered in P106872 APL4 for the whole APL series

(b) To measure the overall impact of the different interventions of the RSDP II on the quality of road network on annual basis

Note: Data on Core Sector Indicators is entered in P106872 APL4 for the whole APL series

(ii) Strengthen capacity for road construction, management and maintenance and enhance financing program in relation thereto in order to ensure sustainability

No changes

(a) Social, environmental, economic and planning management capacity of the client improved

(a) Note: related activities under APL2 completed and taken over by APL3 & 4, and will be monitored there-under

(a) To assess ERA’s efficiency in the implementation of the RSDPII, on a bi-annual basis, especially with regard to: (i) RSDP Performance monitoring, (ii) poverty impact monitoring, (iii) HIV/AIDS prevention program implementation, (iv) timely settlement of any contractual claims, (v) transparent, timely and fair tender processing and contract awards

(a) Note: related activities under APL2 completed and taken over by APL3 & 4, and will be monitored there-under

(b) ERA DMOs as profit centers by July 2005 and commercial center by July 2006

(b) ERA unbundled into ERA regulatory entity, and DRMC commercial enterprise after December 2010

(b) To ensure the enhanced sector efficiency

(b) To ensure that ERA can maintain DMOs operating in a competitive market with the private sector

(iii) Create conditions conducive to the private sector participation in road transport sector

No changes

(a) Share (%) of periodic maintenance (in value terms) contracted on a competitive basis to domestic contractors

(b) Share (%) of routine maintenance (in value terms) contracted on a competitive basis to domestic contractors

Note) ERA DMOs will be commercialized and operating as maintenance contractors after December 2010 as part of private sector, and therefore this indicator will be represented/replaced by (ii)(b) above

To measure the increased participation of the domestic contractors in the RSDP II implementation on an annual basis

To ensure the enhanced sector efficiency

Note: Core indicator on direct project beneficiaries: “Share of rural population with access to an all-season road within 2km (%)” is measured under APL4

11

Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring

Current Proposed Current Proposed Current Proposed 1. Upgrading of Federal Trunk and Link Roads

Roads upgraded/ rehabilitated (non-rural)

a) 593 km of federal trunk and link roads upgraded

530 km of roads upgraded/ rehabilitated (non-rural)

To assess the performance of Contractors and ERA’s contract management and administration efficiency on a quarterly basis and monitor disbursement of Funds

No changes

2. Construction of Federal Link and Regional Roads

Roads constructed (non-rural)

b) 119 km of Federal links, and 173 km Regional roads constructed

Road constructed (non-rural) - federal link: 119km, and regional roads: 137km

To assess the performance of Contractors and ERA’s contract management and administration efficiency on a quarterly basis and monitor disbursement of Funds

No changes

3. Enhanced Construction Supervision

No changes

c) 10 supervision contracts efficiently performing supervision

8 supervision contracts efficiently performing supervision

To assess the overall efficiency of Consultants in carrying out the supervision works in general and their and ERA’s performance in asserting that the Environmental Mitigation, Resettlement Action plans and HIV/AIDs intervention are properly carried out. by contractors

No changes

4. Ethiopian Rural Travel and Transport Program. implemented satisfactorily

No changes

40 Wereda Travel and Transport Plans (WTTPS) prepared as part of Wereda Integrated Development Plans (WIDPs)

No changes

To assure that the WTTPS and WIDPs are prepared for future financing under APL2 and or other programs

To assure that the WTTPS and WIDPs are utilized for future financing

5. Technical Assistance to ERA functioning satisfactorily

No changes

FMS updated, PMS updated and 60 ERA employees trained in different fields

(a) FMS updated, (b) PMS updated and 60 ERA employees trained

To assess ERA’s efficiency in the implementation of the RSDPII, and that the District Maintenance Organizations (DMOs) are operating in a competitive market with private sector

To ensure the enhanced sector efficiency

6. Preparatory activities for APL3 and 4 completed

Note) after MTR, budget for this was reallocated to other TAs

Preparatory studies carried out for about 260km of roads

Note) after Mid Term Review, budget for this component was reallocated to other TAs

To follow up ERA’s readiness for the preparation and appraisal of follow up operations

Note) after MTR, budget for this component was reallocated to other TAs

12

II. Arrangements for Results Monitoring

APL2 Project Outcome Indicators Baselines Target Values Data Collection and Reporting

Original

20102

(at AF appraisal) YR

2011 YR

2012 Frequency

and Reports Data

Collection Instruments

Responsibility for Data

Collection Current Proposed 1. Increase road density (km/1000 sq.km)

Increase road density to 45.7 (km/1000 sq.km)

30.8 42.6 44.0 45.7 Twice a year Progress Report

ERA

2. ERA DMOs as profit centers by July 2005 and commercial center by July 2006

ERA unbundled into ERA regulatory entity and DRMC commercial enterprise after December 2010

Commercialization of ERA DMO not started

DRMC separated from DMO and operating as cost center, and ERA under business re-engineering. process

achieved - Twice a year Progress Report

ERA

Intermediate Outcome Indicators Current Proposed 1. 593 km of Federal trunk and link roads upgraded

530 km of roads upgraded/ rehabilitated (non-rural)

None 253 km 370 km 530 km Twice a year Progress Report

ERA

2. 119 km of Federal links, and 173 km Regional roads constructed

Road constructed (non-rural) - federal link: 119 km, and regional roads: 137 km

None Federal link: 79km, and regional roads: 53 km

Federal link: 119km, and regional roads: 69 km

Federal link: 119 km, and regional roads: 137 km

Twice a year Progress Report

ERA

3. 10 supervision contracts efficiently performing supervision

8 consultancy contracts efficiently performing works supervision services

None 8 ongoing achieved - Twice a year Progress Report

ERA

2Target value at time of additional financing appraisal becomes the revised baseline.

13

Intermediate Outcome Indicators Current Proposed 4. 40 WIDPs completed

No changes None 24 40 achieved Twice a year Progress Report

ERA

5. (a) FMS updated, (b) PMS updated and 60 ERA employees trained

No changes None (a) FMS update under revision, (b) PMS update ongoing

(a) FMS updated, (b) PMS updated and 60 ERA employees trained

achieved Twice a year Progress Report

ERA

14

Annex 2: Critical Risks – Risk Assessment for Proposed 2nd Additional Financing

Risk Residual Risk

Rating

Risk Mitigation Measure

Country Level

Macroeconomic Framework. Ethiopia continues to register strong economic growth, albeit at a lower rate than the double digit growth of the last five years. Ethiopia’s macro situation, which was battered by mounting balance of payments pressure and high level of inflation, has improved in the past one year. However, the recovery process remains fragile and vulnerable to external and weather-related shocks. One of the areas of concern is non-food price inflation, which stood at 18.4% in December 2009 – the highest it has been in the last seven months. Also, while the government has managed to stabilize the macro economy, the progress on addressing structural constraints has been slow and intermittent.

L

The IMF, which has a program with the government under its Exogenous Shocks Facility operation, is closely monitoring the macro-economic performance. Preliminary results through September 2009 indicate that the Exogenous Shocks Facility (ESF) program is on track, with most targets achieved. The Bank is also assisting GOE to address some of the structural problems through its investment projects, including areas such as private sector development, modernization of the financial sector, and land markets, though progress has been less than satisfactory in some areas.

Country Engagement with World Bank: There is high demand and strong ownership by GOE at national level, and engagement has been positive. GOE consulted closely with Bank and donors in preparing the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), adopted by Parliament in 2006. GOE has begun work on a successor to PASDEP but has not yet engaged deeply with partners on it.

L

The current World Bank Country Assistance Strategy (CAS) for 2008-11 is closely aligned with the PASDEP, and builds on the strong collaboration that already exists between the Bank and GOE. Our forthcoming CAS Progress Report will look for ways to further build on this alignment.

Country Governance: Analysis of Governance in Ethiopia is characterized by (i) strong concerns expressed by many development partners and domestic stakeholders on democratic governance (weakly contested local elections in April 2008, restrictive CSO and media laws, alleged human rights abuses, notably in Ogaden), illustrated through the tight controls on flows of information critical to development outcomes (e.g. food shortage); contrasted with (ii) a steady trend of improvement in state capacity (as evidenced by strong performance on World Governance Indicators covering "Government Effectiveness" and by improvements in service delivery indicators). The 2010 election is the next flashpoint in domestic politics and the risks of political turbulence are substantial due to the recent track record of the National Electoral Board of Ethiopia (NEBE), the dominance of the ruling Ethiopian People's Revolutionary Democratic Front (EPRDF) and the arrest of opposition leaders.

S

The current CAS notes the risk that political governance issues could impact the pace and sustainability of development in Ethiopia, and suggests principles to help adjust Bank support to future governance developments. The Bank's program addresses this risk by, amongst other things, support to the governance agenda in PASDEP, in coordination with donor partners, as one of four CAS pillars. Key areas for Bank support include decentralization, public financial management, anti-corruption and local-level accountability and empowerment, to continue to strengthen supply side responses. Assurances have also been sought to ensure demand-side activities in social accountability will not be affected by the Civil Society Organization (CSO) law. Despite this, there has overall been a reduction in political space and reduced voice and the risk remains substantial. Donor partners are attempting to support the NEBE to ensure a fairly organized election.

15

Systematic Corruption Indicators of corruption in Ethiopia (Transparency International, Worldwide Governance Indicators) continue to report domestic views, rather than international views that benefit from cross-country comparison. In-depth sector level diagnosis is beginning to suggest that corruption in Ethiopia is less frequent and of a lower magnitude than in other low income African countries; and that merits and ethics are higher than previously measured. The lack of separation of party and state remains a key area of concern. There have been allegations that the benefits from some projects have been subject to political capture.

L

In 2008, the Bank launched an ongoing diagnostic effort to try and better understand the levels, scope and nature of corruption. This will enable better targeting of anti-corruption mechanisms, and reduce project risks. The Public Sector Capacity Building Project (PSCAP) focuses on strengthening government systems for ensuring that public funds are used transparently and effectively; and has made significant efforts to improve human resource management over an extended period. The Protection of Basic Services program (PBS) supports increased accountability and transparency in the decentralized delivery of basic services at national, regional and local levels. Both PBS and the Productive Safety Nets Program (PSNP) rely on independent surveys, and other tools, to ensure the risk of political capture is minimized.

Other Risks : While weather patterns were favorable from 2004 to 2007, Ethiopia had problems with the spring (belg) rains in 2008, and with the main (meher) rains in 2009. The resulting incidence of food shortages has reminded us that vulnerability to drought is an ever-present risk, and that Ethiopia is likely to be significantly impacted by climate change. Ethiopia's involvement in Somalia (although their troops have withdrawn), continuing tensions with Eritrea, and domestic tensions particularly in the Ogaden region, and problems on Oromia's borders, also present important risks.

S

The Bank is seeking to mitigate the impact of drought on development, and help the country to become more climate resilient, through its support to PSNP, Food Security, land use management, and environmental programs. In addition, we restructured our portfolio to release funds to finance fertilizer needed to ensure a good harvest in 2009, and to top up support for PSNP. Conflict risks are very difficult to mitigate except though the long-term process of building interdependencies among countries in the Horn. In this context we are exploring or supporting a number of regional projects in the roads and energy sectors. We also seek to address internal conflict risks through efforts with the emerging regions (e.g. better service delivery) to check the imbalance in growth and poverty.

Sector Governance, Policies and Institutions

The sector governance. The risk is generally highly limited in the road sector in Ethiopia. GOE started the comprehensive RSDP in 1997 with long term physical - as well as institutional – development of the sector to enhance sector efficiency and transparency in decision making. Sector governance issues have also been continually addressed in the Bank’s projects based on the lessons from preceding phases. Corruption risks in the road sector have recently been assessed and reported in a Governance and Anti-Corruption (GAC) report which indicates that, on Federal Road projects, corruption in the road sector appears to be less and of a lower magnitude than in other SSA countries; and that ERA has a sound record of ethics.

L

The efforts and mitigation measures have been demonstrated by the continuing participatory approach in network planning and in defining the country’s long-term road needs - applying robust decision making criteria in prioritizing roads. The Prime Minister’s agreement for Ethiopia to join the CoST and to consider joining the Extractive Industries Transparency Initiative–will strengthen the governance status of the transport sector, enhance Monitoring and Evaluation capacity on governance, and improve demand-side accountability mechanisms around the construction sector. GOE is also making efforts to ensure that tenders are pro-actively solicited from a range of competitive countries through various campaign activities and applying post-qualification procedure. ERA's records on post qualification procedures on government financed tenders indicate that there is better participation with more than seven bids submitted per tender. On the most recent tenders under APL3 (Gedo - Bako and Bako - Nekempt road projects), more than

16

eight firms have submitted bids on each contract. The number of firms from different countries has increased to include Korea, China, India, Turkey, Lebanon and Sudan.

ERA management capacity. The annual procurement and disbursement amount for federal roads under RSDP Phase III has now more than doubled compared with the previous two phases – and the anticipated scale of the implementation workload on ERA has substantially expanded and requires further capacity enhancement – especially considering the high staff turnover largely due to the more attractive private sector.

M

ERA is being provided a variety of capacity building support for planning and procurement of projects, design review, etc. under APL1 and APL2. Under APL3, TA for quality assurance, contractors/ consultants performance monitoring, cost and unit rates monitoring, pavement management, etc. is been provided. APL4 (Board approval May 2009) supports in establishing an engineering research center, and strengthening maintenance training, etc., which will all enhance ERA’s capacity. These all enhance scaling up of ERA’s management capacity. However, uncertainty in its management capacity still exists regarding the future management structure and the capacity of ERA currently discussed within the business reengineering process (BPR) to modernize ERA - which is part of the legal covenants under APL4.

Road maintenance. Annual road maintenance program may not be implemented as scheduled.

M

Office of Road Fund (RF) performance audit system is intended to safeguard effective implementation by monitoring ERA and regional and urban road authorities’ performance of maintenance. Maintenance Action Plan Targets would be set and reviewed quarterly and annually - and the following APL projects continue monitoring the realization of these targets. APL4 also provides RF revenue diversification study.

Project Level Risks: to component results

Procurement. Some of the ongoing projects under APL2 suffer from implementation delay due to lack of contactors’ site management capacity – which may continue. In addition, various variation orders (VOs) caused cost overrun. Enhanced supervision of the works and due diligence review of VOs by ERA therefore continues critical.

M

One of the root causes identified was the poor performance of the consultants and contractors - which led to weak site management and supervision, poor design documents, etc. Recognizing the problem, AfDB provided design review capacity building (completed Sept. 2008), Japan International Cooperation Agency (JICA) provides bridge engineering TA support (continuing), European Union (EU) provides transport sector capacity building program focusing on private sector, etc.; and the Bank included in APL3 TA support to strengthen/establish consultants' and contractors' performance monitoring system, unit costs monitoring system, quality assurance system in procurement, etc. These TA services/supports are expected to enhance works progress, strengthen supervision and quality of design documents; and ERA contract administration, supported by its supervision consultants, has put in place an action plan to control cost and time overruns, and quality – which needs to be communicated with the Bank for joint follow up for its implementation.

17

Financial management. ERA has unsatisfactory system of internal control over the physical inventory and the evaluation of goods in warehouse.

M

ERA is now implementing inventory module of ACCPAC to improve the inventory management system.

Safeguards. Given the numerous contracts under implementation in addition to APL2, there is insufficient capacity in ERA to ensure that: (i) all APL2 bidding documents include the requisite environmental management requirements as per updated EMPs; (ii) all road designs include appropriate environmental mitigation measures as per updated EMPs; (iii) regular environmental supervision missions are carried out to ensure effective implementation of the updated EMPs as part of the contractors’ work programs; and (iv) contract enforcement measures are implemented in a timely manner to significantly reduce the potential for soil erosion, landslides, water and soil pollution or traffic accidents due to construction and rehabilitation activities.

M

ERA will ensure that technical assistance budgeted under APL3 will be used during implementation of the APL2 additional financing operation to strengthen its: (i) short-term environmental management capacity through environmental training of relevant staff and the recruitment of qualified environmental consultants and/or staff to ensure effective implementation of the updated EMPs; and (ii) long-term environmental management capacity to ensure effective environmental management of subsequent APLs as well as future road sector investments. In addition, ERA has taken steps during its recent BPR exercise that will further strengthen its environmental management capacity.

Overall Risk Rating M Moderate

H = High S = Substantial M = Moderate L = Low

18

Annex 3: Revised Estimate of Project Costs and Financing

Table 1: Total Project Cost by Component (US$ m)

Project Component Project Cost

Original/ Initial

Project Cost 1st Additional

Financing

Revised Cost 2nd Additional

Financing

Total IDA Financing

Portion Rehabilitation & Upgrading of Federal Roads

178.90 249.10 372.52 236.51

Construction of Federal/link and Regional Roads

56.30 107.70 131.71 96.41

Construction Supervision for Civil Works

15.80 15.80 15.80 11.28

Rural Travel and Transport Program 2.30 2.30 2.99 2.38 TA Support for ERA 1.80 1.80 1.61 1.56 Preparatory Activities for APLIII & IV

0.80 0.80 0.00 0.05

Total Project Cost 255.90 377.50 524.63 348.19

Table 2: IDA and GOE Contributions for the Original/Initial APL2 Project (US$ m)

Component Project Cost

Original/ Initial

Contribution


Total Cost 255.90 95.00 160.90

Table 3: Total IDA and GOE Contributions including the First Additional Financing (US$ m)

Component Project Cost 1st Additional

Financing

Contribution


Total Cost 377.50 129.30 248.20

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Table 4: Total IDA and GOE Contributions including the First and Second Additional Financing (US$ m)

Component Project Cost 2ndAdditional

Financing

Contribution

GOE IDA Rehabilitation & Upgrading of Federal Roads 372.52 136.01 236.51 Construction of Federal/link and Regional Roads 131.71 35.30 96.41 Construction Supervision 15.80 4.52 11.28 Rural travel and Transport program 2.99 0.61 2.38 TA Support for ERA 1.61 0.05 1.56 Preparatory Activities for APL2 & 4 0 (0.05) 0.05

Total Cost 524.63 176.44 348.19 Note: figures in ( ) show adjustment reflecting difference between original allocated budget and actual awarded price.

Table 5: Estimated Additional Financing Summary by Sub-Component (US$ m)

Project Component

Original Indicative

Project Cost (August 2003)

Revised Cost with First Add’l Fin. (May 2006)

Proposed Additional Financing

Total Revised

Project Cost

I. Civil Works 1. Rehabilitation & Upgrading of

Federal Roads

A. Assela-Dodola/Shashemene-Goba 79.48 111.81 3.86 126.85

B. Gobgob-Woldiya 45.02 61.76 30.06 97.99 C. Shire-AdiAbun/Adwa 25.46 36.15 38.72 78.49

2. Construction of Federal/link and Regional Roads

A. Magna-Mechara 29.16 48.44 13.00 66.29 B. Assosa/Sherkole-Guba 17.87 42.00 13.77 59.97

II. Construction Supervision for Civil Works 13.79 13.79 0.63 15.80

III. Rural Travel and Transport Program 2.05 2.05 0.74 2.99

IV. TA Support for ERA 1.60 1.60 (0.15) 1.61 V. Preparatory Activities for

APL3 & 4 0.69 0.69 (0.76) -

Total l Base cost 215.12 318.29 99.87 450.00 Physical contingency 20.60 31.83 0 0 Price Contingencies 20.18 27.37 47.27 74.64 Total Cost 255.90 377.50 147.14 524.64

Note: figures in ( ) show adjustment reflecting difference between original allocated budget and actual awarded price.

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Table 6: Total Revised Project Cost by Currency (US$ m)

Project Component Local Foreign Total I. Civil Works 1. Rehabilitation & Upgrading of Federal Roads

A. Assela-Dodola/Shashemene-Goba 35.35 91.50 126.85 B. Gobgob-Woldiya 26.32 71.66 97.98 C. Shire-AdiAbun/Adwa 23.55 54.94 78.49

2. Construction of Federal/link and Regional Roads - A. Magna-Mechara 17.58 48.71 66.29 B. Assosa/Sherkole-Guba 17.98 42.00 59.98

II. Construction Supervision for Civil Works 6.85 8.95 15.80 III. Rural Travel and Transport Program 0.90 2.09 2.99 IV. TA Support for ERA 0.05 1.56 1.61 V. Preparatory Activities for APL3 & 4 - - -

Total l Base cost 128.58 321.41 499.99 Physical contingency - - - Price Contingencies 30.08 44.56 74.64 Total Cost 158.66 365.97 524.63

Table 7: Additional Financing Requirement by GOE and IDA (US$ m)

Project Component Total GOE Financing IDA Financing

Rehabilitation & Upgrading of Federal Roads 123.43 52.22 71.21 Construction of Federal/link and Regional Roads 24.01 (4.60) 28.61 Construction Supervision and Other Services (0.30) (0.48) 0.18

Total Financing Required 147.14 47.14 100.00 Note: figures in ( ) show adjustment reflecting difference between original allocated budget and actual awarded price.

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Table 8 Summary of Program/Project Financing Data (US$m)

Program Financing Data (US$m)

APL Indicative Financing Plan Estimated Implementation

Period (Bank FY) Borrower IDA

US$ m % Others US$ m

Total US$ m

Commitment Date

Closing Date

APL 1 Grant 126.80 57.8% 92.47 219.27 06/17/2003 06/30/2009

Federal Democratic Republic of Ethiopia

APL 2 Credit 160.90 58.7% 113.29 274.19 09/22/2004 06/30/2010 Federal Democratic

Republic of Ethiopia APL 2 First Additional Financing

87.30 71.8% 34.30 121.60 06/22/2006 06/30/2012 Federal Democratic Republic of Ethiopia

APL 2* Second Additional Financing

100.0 68.0% 47.14 147.14 06/30/2010* 06/30/2012 Federal Democratic Republic of Ethiopia


Republic of Ethiopia APL 3** Additional Possible Costs

0.0 0% 69.00 69.00 02/16/2009** 06/30/2015 Federal Democratic Republic of Ethiopia


Republic of Ethiopia

Total 945.00 61.8% 549.69 1,528.99

* Proposed Additional supplement to APL2 Credit ** Possible Additional costs to APL3 for future financing by GOE as confirmed March 2009

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Annex 4: Economic Analysis based on Updated Cost 1. The economic viability of the road projects under Adaptable Program Loan (APL2) was reanalyzed using the increased costs of works and the updated traffic volumes. The critical input parameters have changed, resulting in changes in economic rate of return of the project. Base year traffic volume has increased largely due to rapid economic growth that reached up to 10 percent per annum for the latest subsequent years, and new base year traffic volumes by section are summarized in Table 1.

Table 1: Revised Base Year Traffic Volumes by Road Section (2008)

Project road Car L/R S/bus L/bus S/T M/T H/T T/T Total Assela-Dodola & Shashemene-Goba Assela – Dodola 1 65 120 54 137 35 35 26 473 Shashemena – Dodola 0 77 103 61 84 52 84 60 521 Dodola – Goba 1 66 20 61 67 69 56 40 380 GobGob-Woldiya GobGob – Gashena 0 63 7 25 46 82 68 72 363 Gashena – Woldiya 13 91 58 27 82 59 51 58 439 Shire-AdiAbun/Adwa 0 76 8 30 56 99 82 87 439

2. In addition to the significant increase in the construction costs that triggered a need for additional financing, several other physical and non-physical costs have increased due to economic growth and inflation in the country, and international trends. Table 2 exhibits changes in input costs (economic, not financial) that affect economic feasibility of the project under three categories - maintenance unit costs, monetary value of travel time, and vehicle operating related unit costs. As the table suggests, most of the input parameters have significantly increased from the values estimated in 2002. Notable changes are found in the maintenance unit costs, which have increased up to 720 percent between 2002 and 2008. Crew wages and value of travel time have also significantly increased. An increase in fuel prices is also notable, reaching five to six fold.

Table 2: Revised Key Input Parameters: Unit Costs, Values of Travel Time, and Vehicle Operating

Costs (VOC)

(in ETB) Activity Original (2002)

Update (2008)

Activity Original (2002)

Update (2008)

Maint. unit costs (unpaved)

Regraveling 39.20/m3 171/m3 Grading 395.10/km 1700/km Spot regraveling 55.10/m3 83/m3 Routine maint. 2679/km† 12300/km/yr

Maint. unit costs (paved)

Overlay 64.9/m2 † 85/m2 Patching 21.80/m2 254/m2 Crack sealing 28.3/m2 34/m2 Routine maint. 3398/km† 24600/km/yr

Monetary value of travel time

Passenger working hour

0.23/hr 1.65/hr Passenger non-working hour

0.23/hr 0.58/hr

Crew (car/bus) 3.2/hr 8.2–11.5/hr Crew (bus/truck) 3.2/hr 10.6–17.3/hr Cargo (S/T) n/a 0.1/hr Cargo (H/T) n/a 0.3/hr

Vehicle operating cost parameters

Small bus 109,785 294,662 Medium truck 357,698 466,624 Gasoline price 1.7–1.9/l 6.7/l Diesel price 1.3–1.53/l 4.5/l Tire (car) 196 429 Tire (bus/truck) 466-1749 1507-2317

† Values from 2006 study

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3. Economic analysis for the three existing road sections1

was carried out using Highway Development and Management Model (HDM4) in order to be consistent with the original analysis (although the original analysis was carried out using the older version, HDM3, the two models share the same analytical framework and basic features). The proposed options were compared with a “do minimum” case, which assumes a minimum amount of maintenance works on the existing road. For each road section under the project, benefits to road users were estimated in terms of savings in VOCs and travel time, derived from improved road conditions. Then the net benefits were calculated against the total agency costs, including capital investment and maintenance costs over the life of the project. Net benefits over the life of the project were discounted at a rate of 10 percent. Sensitivity analysis was done for various scenarios of costs and benefits, consistent with the original analysis. The results are presented in Economic Internal Rates of Return (EIRRs) and Net Present Values (NPVs).

4. Economic feasibility of the construction of the two new sections,2

where no current traffic data is available, was analyzed using producers surplus approach. The analysis used similar assumptions on the agriculture activities in the influenced areas to be consistent with the previous analyses (appraisal and the first additional financing). Agriculture prices, which then affect producers’ surplus, as well as unit costs for vehicle operating costs were adjusted reflecting the recent inflation, but based on conservative estimation (used inflation rates available from International Monitory Fund country database). Producers’ surplus and agency’s costs over the project life were then discounted to the present value at a rate of 10 percent. The results are presented in EIRRs and NPVs.

5. For a project to be acceptable for implementation, the proposed investments have to result in an EIRR that is at least equal to the opportunity cost of capital in Ethiopia, which is set at 10 percent. NPVs are calculated using opportunity cost of capital as the discount rate. The economic analysis is done for various alternatives as shown below.

6. Construction Alternatives: The surfaces of two road projects (Assela-Goba, GobGob-Woldiya) have been proposed to change from the designed Double Bituminous Surface Treatment (DBST) to Asphalt Concrete (AC), due to higher than anticipated traffic increase from what was forecasted during the design stage. Thus, construction and maintenance alternative for the HDM analysis were defined based on the improvement options identified for these projects. For each alternative defined, a set of maintenance and improvement standards was assigned. The maintenance and improvement standards define the work items proposed on the project road over the analysis period. The different alternatives proposed for each road section are given below in Table 3. For other road projects under APL2, economic analysis was carried out to verify the appropriateness of additional investment in regard to the additional works included as variation orders (increased quantities, widening of town sections, etc.).

1 Assela-Dodola/Shashemene-Goba, GobGob-Woldiya, and Shire-AdiAbun/Adwa 2 Magna-Mechara and Assosa/Sherkole-Guba

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Table 3: Existing condition and proposed option

Project road Base scenario Alternative scenario Assela-Dodola & Shashemene-Goba Do minimum Asphalt Concrete GobGob-Woldiya Do minimum Asphalt Concrete Shire-AdiAbun/Adwa Do minimum Asphalt Concrete Magna-Mechara Not built New Gravel Road Assosa/Sherkole-Guba Not built New Gravel Road

7. Economic analysis for these roads had also been carried out earlier (during the first additional financing in May 2006), but with different construction and maintenance alternatives. The then traffic forecast and analysis justified the road to be upgraded from gravel to DBST. However, the rapid economic growth in the last six years in the country, and particularly in the project vicinity area, has brought a substantial change in traffic volume and composition on the roads under discussion, which necessitated change in road surface type. Basically, the analysis assumes the same start of the construction as was in the previous analysis (2006/2007) and lasts for 3.5 years due to the additional works, as opposed to the proposed three years in the previous analysis, with the road opening to traffic in 2010/2011. The analysis period is 20 years, i.e., to the year 2026. The investment spread was assumed to be: 2008: 10 percent, 2009: 45 percent, and 2010: 45 percent. 8. As presented in Table 4, the upgrading of road to a higher level of standard and the recommended solutions are justified; the EIRR for all road sections exceeds 10 percent. The key factors include: (i) current and expected traffic along the routes over the analysis period; and (ii) input user costs that have been significantly increased due to economic growth and inflation. Among three existing roads, GobGob-Woldiya section had highest EIRR value, attributed to worse initial condition of existing gravel road3 and greater grade and horizontal curvature4

, than other roads. On the other hand, Shire-AdiAbun/Adwa section had the lowest EIRR value mainly due to its high construction cost, due to a by-pass section of the Axum town.

3 The initial condition of existing gravel roads is negatively correlated with the capital and recurrent costs of do-minimum case. The thickness of Gashena-Woldiya sub-section is 140 mm, thinner than any other sub-sections, resulting in early intervention (regraveling in the 2nd year) under the do-minimum case. This makes EIRR of AC option higher. The relationship between initial thickness and capital cost per km is depicted in the figure below.

4 This amplifies the impact of improved pavement on VOC.

600

800

1,000

1,200

1,400

1,600

100 120 140 160 180 200

Do-

Min

Cap

ital

cost

/km

Initial thickness of gravel road (mm)

Capital/km

Linear (Capital/km)

Gashena-Woldiya

Shire-Adwa

GobGob-Gashena

Dodola-Goba

Assela-Dodola

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9. EIRR values for the two new roads (Magna-Mechara and Assosa/Sherkole-Guba) were estimated lower, ranging around 12-15 percent. This was mainly because of the different approach based on producers’ surplus and more conservative inputs that were used because there is no base value for initial traffic.

10. Recommendation: Based on the economic analysis of the project options (using revised costs) as well as overall engineering and traffic assessment, it is concluded economical to upgrade these roads to AC standard (see below) and carry out additional works as recommended, as well as the new construction of gravel road sections.

Table 4: Economic Analysis Summary – Base case

Project roads Length Proposed option

Construction unit cost†

Updated EIRR (%)

Assela-Dodola & Shashemene-Goba‡ 247 km AC 6.5 mln ETB/km 19.5 GobGob-Woldiya 194 km AC 6.4 mln ETB /km 21.7 Shire-AdiAbun/Adwa 83 km AC 11.9mln ETB /km 16.1 Magna-Mechara 120 km Gravel 5.3mln ETB /km 14.8 Assosa/Sherkole-Guba 136 km Gravel 4.5mln ETB /km 12.9

† Economic cost, excluding taxes, updated in 2009 ‡ Excluded Shashemene-Dodola Junction, which is financed by the government.

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Table 5: Economic Analysis Details Project roads Assela-Dodola Dodola-Goba GobGob-Gashena Gashena-Woldiya Length (km) 117 130 86 108 Economic cost (mln ETB/km) 6.213 6.759 5.835 6.814 EIRR (%) 21.0% 18.3% 18.5% 25.6% NPV @ 12% (mln ETB) 1,234 1,096 639 1,783 Existing road: Surface type Gravel Gravel Gravel Gravel Initial IRI (mm/km) 17.3 20 20 20 Proposed intervention: Surface type AC AC AC AC IRI after intervention 2.5 2.5 2.5 2.5 Traffic (AADT): Base year 473 380 363 439 Normal growth in 2030 1,441 1,147 1,082 1,319 Generated traffic in 2030 262 220 251 277 Sensitivity Analysis: EIRR NPV EIRR NPV EIRR NPV EIRR NPV Base case 21.0% 1,234 18.3% 1,096 18.5% 639 25.6% 1,783 Cost +20% 19.0% 1,127 16.6% 967 16.7% 563 23.3% 1,681 Benefit -20% 18.6% 880 16.2% 747 16.3% 435 22.8% 1,325 Cost + 20%, Benefit -20% 16.7% 773 14.6% 618 14.7% 359 20.7% 1,223

Table 6: Economic Analysis Details (Continued) Project roads Shire-AdiAbun/Adwa Magna-Mechara Assosa/Sherkole-Guba Length (km) 83 120 121 Economic cost (mln ETB/km) 11.940 6.978 5.573 EIRR (%) 16.1% 14.8% 12.9% NPV @ 12% (mln ETB) 834 374 224 Existing road: Surface type Gravel N/A N/A Initial IRI (mm/km) 18 N/A N/A Proposed intervention: Surface type AC Gravel Gravel IRI after intervention 2.5 Traffic (AADT): Base year 439 N/A N/A Normal growth in 2030 1,323 Generated traffic in 2030 226 Sensitivity Analysis: EIRR NPV EIRR NPV EIRR NPV Base case 16.1% 834 14.8% 374 12.9% 224 Cost +20% 14.5% 676 12.9% 237 11.3% 110 Benefit -20% 14.1% 509 12.5% 167 12.0% 156 Cost + 20%, Benefit -20% 12.5% 352 10.8% 56 10.5% 44

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Annex 5: GOE Letter and ERA Action Plan for Extension of APL2 Credit Closing Date

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ACTION PLAN Extension of Road Sector Development Program- APL 2 (39890-ET)

I. The Projects and Follow-up Mechanism

The implementation of Adaptable Program Loan (APL2) project is proceeding well with different stages of levels of status of civil works contracts. However, it is now clear that the project will not be completed within the originally intended period. The main reasons contributing to the necessity of extending the closing date up to the end of June 2012 are partly due to the increased quantities, but also due to Ethiopian Roads Authority’s (ERA) Risk Events which are beyond its control such as inclement weather conditions, and recent rapid economic development along the project sites. The works contracts under APL 2 have recorded delays and cost overrun as a result of additional works, unfavorable weather conditions and price escalation. In order to enhance progress, ERA has been conducting several meetings with the contractors and consultants at various levels in the presence of the project engineers (ERA representatives), project managers and ERA’s counterpart Engineers. In the monthly progress meetings, issues such as progress of works, Right of Ways, design and variation issues have been thoroughly discussed and remedial measures are being taken to improve the situation. To expedite the works progress and ensure timely response and decision makings on contractual and technical issues/problems, the ERA has already put in place an enhanced supervision and auditing system through frequent higher management site visits, forming an Executive Project Team for civil works contracts constituting the Director General, Deputy Director Generals, Manager of the Construction Contract Implementation Division and any of the Branch or section Heads concerned, Design and Technical Support Division and Road Inspectorates. The headquarters of the construction firms have also been contacted to strengthen their backstop system to support their site offices and to communicate directly with ERA on critical issues. Of civil works contracts Contractual and technical issues, including review of design changes, variation orders, poor works quality and delays are now directly and thoroughly reviewed by the Executive Project Team, and remedial measures have been and will be taken in timely and efficient manner, involving as necessary the contractor’s headquarters. The ERA management is committed to continue strengthening the site supervision under the Executive Project Team and closely monitor and evaluate the progress, quality and costs of the works. As a result substantial improvements have been recorded as mentioned below in Section II. In terms of physical progress of works, still some delays remain inevitable due to additional works instructed and unfavorable weather conditions in most of the project areas as mentioned above. Therefore, ERA requests the extension of the APL2 project closing date for 24 months. As part of it continual effort to improve the situation in the road sector, the ERA has also committed an agreement with international consultants having a great reputation on consultancy services for review of Road Sector Development Programmes, Capacity Building Programmes, Performance Monitoring and Unit Rate Systems and Technical Assistance for Quality Assurances. Egis BCEOM International of France and WSP of UK are now working on separate agreements with ERA on the above mentioned programmes and provide technical assistances.

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WSP, in particular, is currently working on development of Performance Monitoring and Unit Rates Systems taking into consideration the various geographical nature of the Country, which will help in establishing a reasonable project specific cost at a particular region or location. ERA has also developed internal performance evaluation techniques to monitor the performance of contractors. Thus, each contractor is now being monitored and evaluated using the evaluation system. The results of the monitoring systems are being communicated to ERA’s Engineering Service Procurement, Design and Technical Support Division on a monthly basis - so that each contractor’s performance is being considered during tender evaluation as appropriate One of the major problems facing ERA has been timely settling of claims that arise during the course of implementation. To this effect, as part of the contact, Dispute Review Experts (DREs) are recruited to all on-going contracts - including those under the World Bank financed projects. It is expected that these experts would assist ERA in settling claims in case both parties fail to resolve their differences. The following is the details of the current status of the individual contracts and Action Plan with remedial measures to enhance the implementation progress thorough review of variation orders, cost monitoring and quality. II. Status and Action Plan for Speeding up the Progress of Civil Works 1. Nazareth – Assela – Dodola & Shashemene – Goba Road Upgrading Project

Contract 2: Assela – Dodola Junction (116.5 Km.) Status The construction of this project has shown slow progress. According to the Contractor’s first revised works program, the Contractor planned to accomplish 67.6 percent of the works before the end of January 2010. However, he achieved only 33.1 percent - which is 34.5 percent behind his program. The Executive Project Team identified the major reasons of delaying factors as poor site management, shortage of available machineries, delay in production of construction materials, repeated works on pavement due to poor quality, etc. Action Plan With respect of these shortcomings, the Contractor and its headquarters have been instructed to take all the possible remedial measures to compensate the delay. With regard to the poor management of resources, the Contractor has taken actions by replacing and mobilizing new management staffs at the site level. In addition the Contractor has also mobilized additional staffs to fill the gap of the lack of skilled laborers that the project had faced. Additional equipment is also being mobilized to speed up the progress. As a result, the Contractor is now performing better than before. Nevertheless, in light of the fact that the Contractor’s progress is not sufficient enough to make up the slippage and to guarantee timely completion of the project, the ERA has brought the case to the Contractor’s Head Office and called for a senior

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management meeting between the Contractor’s HQ management and ERA teams led by the Director General. The outcome of the meeting is expected to result better progress of works and improved management. In relation to the Variation Order issued for the change of the wearing course from DBST to AC, the unit rates for the AC has been fixed by the Engineer according to the Contract provision. However, the ERA and Contractor could not come into an agreed rate although repeated meetings and discussions were made. Recently, the Contractor has submitted a reduced unit rate than its previous quotations and both parties are now working together to arrive at an agreed rate as soon as possible. 2. Nazareth – Assela – Dodola & Shashemene – Goba Road Upgrading Project

Contract 3: Dodola Junction– Goba Road Project (132.65 Km)

Status As per the Contractor’s works progress up to the end of January 2010, most of the activities of the permanent works are in line with the schedule. According to the Contractor’s first revised work schedule, the Contractor planned to accomplish 48.01 percent of work up to the end of January 2010 and attained 35.87 percent with 12.14 percent slippage. The base course and wearing course construction progress is however very slow. The problems observed during the Executive Project Team visit which led to the slow progress are shortage of construction equipment, lack of proper maintenance, unsatisfactory pipe and pre-cast rectangular paved water way production, delay in supply of the required asphalt material, and lack of provision of skilled labors which critically affected the works progress. Action Plan Progress meetings have since long been addressing the Contractor’s resource management weakness. Despite several meetings at the site level, and at the ERA head office, the Contractor could not take practical measures to the satisfaction of the Engineer. In July 2009, ERA has called the President of the Contractor and conducted an extensive meeting on mitigation measures. As a result an agreement was reached to improve the situation. As a first step, additional resources from the Contractor’s own fleet were mobilized which covered 80 percent of the requirement, and the remaining plant and equipment were rented from the local suppliers. Currently the available equipment and plant on site is satisfactory. The Contractor’s previous site management staffs have already been replaced. Additional staffs are mobilized. The Contractor has, in addition to mobilizing resources, revised his works programme in such a manner that his resources are planned to give utmost outputs. As a result sectional completion is agreed as a strategy and he has organized his resources in two main fronts to work on 30km length each. In addition to the two fronts opened, the Contractor has further been advised by the Executive Project Team to open an additional new construction front to further enhance its progress. The Contractor has already installed the AC plant and all related equipment and plan are on site. The AC plant is now in the process of commissioning and will start production once it is

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accepted. The Contractor has produced sufficient aggregate to expedite the base course activities and commenced the AC wearing courses. At the moment, the Contractor is carrying out the mix-designs and is expected to be completed within the coming two weeks, and sooner, he is expected to commence job-mix-design and placing of AC wearing courses on trial section for the approval of the Engineer. The Executive Project Team is of the view that the progress of this project is showing improvements and given the improved management and work progress, it is expected that project would be completed as planned. Nevertheless, the Executive Project Team will continue closely monitoring and evaluating the progress of the works. 3. Woreta – Woldiya Road Upgrading Project Contract 2: Gob Gob – Gashena (86km) Status The Contractor has been grated 59 day of EOT as a result of the change of the DBST to AC, and the revised completion date was set to March 29, 2010. However the Contractor has forwarded its disagreement against the awarded time and the issue is now referred to the Dispute Review Expert for its recommendation. As per the revised contract, including the amounts due to change of the wearing course from DBST to AC, the Contractor has achieved an overall progress of 62.60 percent against his plan of 64.4 percent. With respect to progress of individual works, the Contractor has accomplished the construction of the earthworks and drainage works as planned. In regards to the sub base activity, there was some delay due to heavy rain in the last rainy season. Action Plan ERA has made frequent meetings, both at site and head office management levels involving Executive Project Team and the Contractor to discuss the way forward to mitigate the delays. As a result the overall rate of progress of the works has now greatly improved. Notwithstanding such an improved progress, ERA is still making further push over the Contractor to complete the works within the contract time. AC wearing course has been commenced in December 2009, and to-date 30kms of the AC wearing course completed out of the total length of 86km. The Contractor has produced sufficient aggregate for base course and asphalt wearing course. The aggregate production is expected to be completed in March 2010. Despite the efforts and progress as mentioned above, the Contractor has less than two months time before the contractual completion of the project. With the current pace and the remaining works load, the Executive Project Team concluded that the Contractor would not be able to finish the project within the Contract time, and further enhanced works execution during the defects liability period would become necessary – which would be an event for triggering liquidation damage. The Executive Project Team will therefore continue monitoring and evaluating the works progress and requesting for necessary interventions by the Contractor’s headquarters.

4. Woreta – Woldiya Road Upgrading Project Contract 3: Gashena – Woldiya (108 km)

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Status The original completion time, as per the contract, is 28th February 2010. As per the revised works programme, the Contractor planned to accomplish 98.43 percent of the works by the end of January 2010; however, the actual accomplishment is 97.0 percent with a slippage of only 1.43 percent. The Contractor has substantially finished the works. Only 4km (half width) of asphalt wearing course construction is remaining. The total to-date progress in relation to the permanent work is satisfactory. It is anticipated that the Contractor will finish the remaining works within the contract time, which is February 28, 2010. Action Plan During the course of evaluation and inspection of defects, some sections of the asphalted works are found to be out of the specification requirements. The Engineer has instructed the Contractor to rectify the defective works. The methodology of rectifying the defective works is also approved by the Engineer. The Contractor is now rectifying the defective works, and it is progressing satisfactorily and would be completed as planned within the contract completion date.

5. Shire – Adiabun Road Upgrading Project (91.8km) Status At the end of January 2010, the total to-date progress is 54.60 percent against the Contractor’s planned schedule of 71.50 percent. Construction of earthworks, sub base and base layers are progressing relatively well. Until the end of January 2010, the Contractor achieved 67.22 percent against his planned 74.71 percent. However, the AC works is far behind the schedule showing 38.70 percent slippage from his plan. The main reason of the asphalt works delay was the late installation of asphalt plant and production of asphalt concrete due to delayed import of bitumen and extended rainy season. Action Plan Having noticed the delaying events which belong to the Contractor’s accord, the Engineer has instructed the Contractor to revise its Works Programme incorporating the slippage and all additional works issued as variation orders. The Contractor has also been advised by the Engineer and the Executive Project Team to mobilize additional resources to mitigate the delays. Accordingly, the Contractor has already mobilized additional crew, machineries, and construction materials such as cement. The action taken by the contractor already led to progress, though further improvement is required to guarantee timely completion of the project. The Executive Project Team will continue closely monitoring and evaluating the progress and will take additional measures depending on the progress. 6. Dera–Mechara Road upgrading Project Contract 2:Magna–Gololcha-Mechara (120km)

Status The Contractor has planned to accomplish 100 percent of the works up to January 14, 2010 (original completion date). However, he only accomplished 71.62 percent of the works. Earthworks have been achieved more than the planed, but with respect to the construction of

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pavement layer 38.2 percent slippage has been observed. The Executive Project Team identified the major causes of delays as failure to deploy machineries and skilled manpower, less production rate in the construction of minor drainage and major drainage structures and fuel supply problem. In view of the fact that the original contract completion date was January 14, 2010 and due to the fact that implementation of liquidated damages and other contractual impositions are necessitated to be applied, the ERA and Engineer has responded to all time and cost related claims timely. However, the Contractor has refused the ERA’s/Engineer’s determination and referred the issue to the DREs. The parties are expecting the DRE’s recommendations to be issued at the end of February 2010. Action Plan Having noticed the delaying events which belong to the Contractor’s accord, the Contractor has been advised by the Engineer and the Executive Project Team to mobilize additional machineries and skilled manpower to mitigate the delays – and requested for the Contractor’s headquarters commitment to do so to ensure timely completion of the project. The Executive Project Team has been visiting the project site regularly and participated in progress meetings. ERA has now called for the Contractor’s senior management to discuss ways to enhance progresses. The Executive Project Team will continue closely monitoring and evaluating the progress and will request additional measures depending on the progress. 7. Assosa/Sherkole-Guba Road Project Contract 1: Sherkole – Blue Nile Status Pursuant to the approved Works Programme, the Contractor planned to execute 76.73 percent while the actual achievement is 60.0 percent. Clearing and grubbing was planned to execute 67.7 percent of the works; while the Contractor achieved only 44 percent showing a slippage of 23.7 percent. With respect to the pavement construction, the progress is 19.5 percent behind his program. Due to shortage of natural gravel for sub base the Contractor has now started using crushed aggregate for sub base. The Executive Project Team identified the major causes of the delay as lack of proper planning and incapability of the Contractor's site staffs to manage and utilize the available resource at hand efficiently. In addition, frequent breakage of equipment, and high turnover of workforce due to improper handling of staff contributed to the slow progress of works. Action Plan Based on the current progress and the lack of management capacity of the Contractor, the Executive Project Team concluded that the Contractor cannot finish the remaining works within the original contract completion period, of August 31, 2010 – which would be an event for triggering liquidation damage. Therefore, the Executive Project Team issued a notice to the Contractor to reinforce site management team, and to arrange proper maintenance to his equipment and plants. Responding to the notice, the Contractor is now making necessary efforts with the involvement of its headquarters to resolve the problems.

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8. Assosa/Sherkole-Guba Road Project Contract 2: Blue Nile – Guba

Status According to the approved Works Programme, the Contractor has planned to execute 97.20 percent while the actual achievement is 48.90 percent. The execution of the pavement layer was planned to perform 94.7 percent, however, the actual accomplishment is 73.2 percent. Despite 80.3 percent of the contract time has elapsed, the overall progress with respect to the permanent works remains unsatisfactory.

The Executive Project Team identified the reasons for these lower progresses as low utilization of available plant, slow mobilization of man power and its effect for late starting of permanent works. Action Plan The Executive Project Team concluded that the Contractor cannot finish the remaining works within the original contract period, September 4, 2010 – which would be an event for triggering liquidation damage. In this project the completion and erection of the steel bridge is critical. The Executive Project Team however also noted that the value of the steel bridge is 57 percent out of the total project cost. Currently the steel bridge is manufactured and consigned for shipment on February 15, 2010, and once it reaches site and erected, there would be a boost in the performance of the project. Therefore, strict follow up is required on the shipment of the steel bridge. The Executive Project Team will continue closely monitoring and evaluating the progress of works and will request additional measures depending on the progress. III. Actions Being Taken to Improve the Performance of the Sector Regular Quality and Cost Monitoring - and Its Assurances ERA along with the Supervision Consultants monitors the quality and cost of each road construction. ERA has a separate Design and Technical Support Branch; giving technical assistance to the Construction Contract Implementation Division on the Contractors request of changing the design and/or the specification. In order to enhance the quality of construction, the Consultants have been regularly advised to ensure the quality of works to be in accordance with the project specification. As part of its effort to improve quality of works and monitor construction cost in the sector, ERA has engaged consultancy firms for (i) review of the Road Sector Development Programme, (ii) review of the capacity building programmes; (iii) system development of Performance Monitoring and Unit Rate Systems; and (iv) Technical Assistance for Quality Assurances to ERA. ERA’s Road Inspectorate department would also play a major role in monitoring and controlling cost and quality of works. This department would be visiting the project sites at certain intervals

35

so that the ERA would be in the level where the quality of the works are closely monitored, controlled or checked in collaboration with the respective supervision Engineers. In order to control the cost overrun and to settle claims timely, the Engineers have been advised to monitor and register the contractors’ progress and equipment and advise the ERA the revised contract amount in quarterly basis. ERA will enhance his response to the contractors’ claims and would be committed to manage claims and dispute related issues timely. Whatever measures could be devised, Price Escalation is unavoidable factor. The ERA has taken, by way of its contract, the risk of Price Escalation. We have no control of what is happening in other parts of the world. The situation of the world economic recession is also contributing to high price escalation to locally produced materials. However, the amount of price escalation that the ERA would pay through price escalation formulae could be minimized by enhancing the progress of the projects. If contractors enhance their performance and accomplish according to their plan, then the price escalation would be dramatically lower. Delay of projects would have a direct implication on price escalation. ERA has devised a short and long term plan to improve the performance of contractors and thereby minimize the escalation costs. Variation of the works could also be regulated through several measures. Of such measures, ERA has now taking an action to considerably reduce the time gap between the design and construction time. In most of the APL 2 contracts, variations of the works were resulted due to the fact that the design and construction periods had a considerable time break. Through those periods of delay, several factors had been found inapplicable. The rapid growth of the townships had forced ERA to modify the urban sections. Topographical changes throughout the design versus construction time delay has also forced in some projects to certain extent to make some vertical/horizontal alignment changes and/or modifications. Therefore, it is unavoidably necessary to reduce the time gap between the design and construction periods. ERA has also paid due attention for such factors and has shown a great improvements on the recently procured projects. The design consultants have also been aware through various meetings and discussions that one of the main problems that the ERA was forced to extend the contract time was the quantity increase of various bill items and the resultant variation orders. The same has also been discussed with the Supervision Consultants in carrying out the preliminary review of the data furnished by the design consultants, and were advised to timely forward to ERA their findings to obtain ERA’s consent before the permanent works commencement. Monitoring of Contractors/Consultants Performance – and Establishment of Project Costs Unit Rates Estimation and Monitoring System: The ERA signed a contract with WSP International Management Consulting (WSPimc) in August 2009 to provide services for the “Monitoring of Contract/ Consultants Performance – and Establishments of Project Costs and Unit Rate Estimation and Monitoring System”. The objective of this assignment is to provide ERA with the tools to monitor the performance of

36

contractors and consultants and to develop a construction cost monitoring and unit rate estimation system. Such system will allow ERA to maintain, in-house, any necessary and independently measured and surveyed cost data as a basis for evaluation consultant Engineers’ cost estimates, individual unit rates and, ultimately, bid prices and moreover it would provide valuable information of life-cycle costs. Establishing Performance and Cost Monitoring System In the light of the multidimensional problems discussed above, collaborative effort is mandatory to tackle the issues so that an improved project delivery can be achieved. Documentation and systems need to be improved, including the improvement of the RFP, accurate designs and properly prepared tender documentation. Continued feedback mechanism is also needed. In addition to the above, systematic evaluation of Consultants/Contractors performance, consideration of consultants’ staff experience and availability, evaluating the quality of proposed team leaders using face-to-face interview techniques are required to be carried out. In addition to the Quality Assurance Study, Establishment of Unit Cost and Performance Monitoring of Contractors, supported by the World Bank, is also designed to systematically solve the existing and/or forthcoming problems. IV. Capacity Building

ERA, having identified the necessity of continued capacity building programmes, has engaged several consultants in assisting its effort in bringing improvements in the sector. Of these consultants, BCEOM Societe Francaise d’Ingenierie, Bernard Krief Consultants and WSP are working on the Consultancy Service for Road Sector Development Programme. These firms are working on review of Road Sector Development Programmes, Capacity Building Programmes, Performance Monitoring and Unit Rate Systems and Technical Assistance for Quality Assurances.

WSP is currently working on Performance Monitoring and Unit Rate Systems and Technical Assistance for Quality Assurances taking into consideration the Geographical and Regional classification of the Country. This will help ERA in establishing a reasonable project specific cost at a particular region or location at any time of the project life rather than the customary procedures that ERA has been adopting up to now.

Trainings & Higher Education as Capacity Buildings-ERA staffs: As a vital role in proper planning, contract management and implementation, cost monitoring, quality control, ERA has been arranging opportunities for short-term and long-term trainings, and higher education both in the country and abroad. Recently nine (9) staffs are expected to complete their higher education, both inland and abroad, and join the ERA. Those highly qualified staffs, including the already graduated ones, have been impacting the performance of ERA, and it is believed that continued trainings and education would improve ERA’s capacity in the sector.

Capacity Building of Local Consultants and their Staffs:

37

It is a common phenomenon and practice that in ICB Contracts, foreign consultants, are carrying out the supervision services in joint venture or association with the local consultancy firms. These local firms are responsible for employing and providing the majority of the key and supporting staffs. Building the capacity of the local consultants would play a major role for sustainable road development. ERA, as part of its sustainable road sector development programme, has arranged Capacity Building programmes to the Private Sector Associations (Consultants and Contractors Associations, and other beneficiary entities) so that the road sector development would meet its utmost target.

A number of donors have been financing Capacity Building and Institutional Strengthening programmes.

V. Implementation of Business Process Re-engineering, BPR, Studies

Realizing that the existing working systems and processes do not cop with the current and the forthcoming work load of the Road Sector Development Program, ERA is working to change the old way of doing business and aims to bring about basic changes through fundamental re-thinking. Currently, the re-designed to-be process as well as the corresponding re-grouping and organizing jobs and structure is already finalized and approved at different levels including the ERA Board. In order to implement the re-designed process effectively, policy and procedure manuals has been developed.

Hence, ERA is now on the implementation of the business processing re-engineering (BPR) which is believed to solve the existing problems observed during the old way of doing business and thereby improving the implementation process.

The Disbursement Forecast Based on the above facts, the Excel tables attached herewith show the estimated disbursement amount based on an average disbursement rate of US$2.37 million per month for works, and US$0.047 million for supervision services for all APL2 projects.

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Disbursement Plan for APL II Projects (39890-ET)

Project Name

Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

US$ Equiva

lent

US$ Equiva

lent

US$ Equivalent

US$ Equiva

lent

US$ Equiva

lent

US$ Equivalent

US$ Equivalent

US$ Equival

ent

US$ Equivalent

US$ Equivalent

US$ Equivalent

US$ Equivalent

US$ Equival

ent Assela -

Dodola Jun. Works 1.75 1.75 1.75 1.80 1.80 1.80 2.10 2.10 2.10 1.30 1.30 1.30 2.73

Supervision 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 Dodola Jun. -

Goba Works 2.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 0.95 0.95 0.95 2.75 3.75 Supervision 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056

Gob Gob - Gashena

Works 2.22 2.22 3.00 3.00 3.00 3.00 2.75 2.75 1.80 1.60 Supervision 0.081 0.081 0.081 0.081 0.081 0.081 0.081 0.081 0.081 0.081

Gashena - Woldiya

Works 2.50 2.50 2.50 2.80 2.80 Supervision 0.043 0.043 0.043 0.043 0.043

Shire - Adi Abun

Works 3.73 3.73 3.73 3.86 5.18 5.18 3.73 3.73 3.73 0.96 0.96 0.96 3.73

Supervision 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.036 Magna - Mechara

Works 2.37 2.37 2.62 2.68 2.84 2.84 2.57 2.57 2.35 Supervision 0.104 0.104 0.104 0.104 0.104 0.104 0.104 0.104 0.104

Sherkole - Blue Nile

Works 1.38 1.38 1.38 2.52 2.22 1.60 1.60 0.98 0.98 0.98 0.98 1.60 1.38 Supervision 0.041 0.041 0.041 0.041 0.041 0.041 0.041 0.041 0.041 0.041 0.041 0.041 0.041

Blue Nile -Guba

Works 1.26 1.46 1.26 1.16 1.46 1.26 1.46 1.26 1.26 - - 1.26 1.46 Supervision 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030

Monthly Anticipation 18.12 19.32 20.16 21.74 23.21 19.55 18.08 17.26 13.55 6.07 4.38 8.06 13.24

39

Disbursement Plan for APL II Projects (39890-ET) Project Name

Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Reserved ** Total

US$ Equivalent

US$ Equivalent

US$ Equival

ent

US$ Equival

ent

US$ Equival

ent

US$ Equival

ent

US$ Equival

ent

US$ Equival

ent

US$ Equival

ent

US$ Equival

ent

US$ Equival

ent

US$ Equivalen

t

Assela - Dodola Jun.

2.73 2.73 3.50 3.50 3.50 3.75 3.75 1.00 0.05 0.05 0.05 3.00 51.19

0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.06 0.78 Dodola Jun. - Goba

3.75 3.90 3.90 3.90 3.90 3.90 3.90 0.95 0.95 3.50 68.90 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.056 0.440 1.672

Gob Gob - Gashena

4.45 29.79

0.16 0.97 Gashena - Woldiya

4.50 17.60

0.09 0.30 Shire - Adi Abun

3.73 3.73 5.18 5.18 5.18 3.73 3.73 3.73 3.01 80.38 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.036 0.08 0.83

Magna - Mechara

9.28 32.46

0.21 1.14

Sherkole - Blue Nile

1.38 1.38 2.54 24.24 0.041 0.041 0.09 0.70

Blue Nile -Guba

1.26 1.46 1.26 1.26 1.46 1.26 1.46 3.73 27.72

0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.06 0.67

Monthly Anticipation

13.04 13.39 13.99 13.99 14.19 12.79 12.99 5.80 1.09 0.08 0.08 35.17 339.33

** To be Utilized During the Defects Liability Period Total US$ Equivalent for Works 332.28 Total US$ Equivalent for Supervision 7.06 Total US$ Equivalent for APL 2 (C) = (A) + (B) 339.33

World Bank Documentdocuments.worldbank.org/curated/en/... · HDM (3, 4) Highway Development and...

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