Completion Report

Project Number: 39176-023 Loan Numbers: 2354/2355 June 2020

Azerbaijan: Road Network Development Program (Project 1) This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – Azerbaijani manat (AZN)

At Appraisal At Project Completion 8 August 2007 28 September 2017

AZN1.00 = $1.17 $0.59 $1.00 = AZN0.86 AZN1.70

ABBREVIATIONS

NOTES

(i) The fiscal year (FY) of the Government of Azerbaijan and its agencies ends on 31 December. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2018 ends on 31 December 2018.

(ii) In this report, “$” refers to United States dollars. Vice-President Shixin Chen, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Country Director Nariman Mannapbekov, Azerbaijan Resident Mission (AZRM), CWRD Team leader Faraj Huseynbeyov, Senior Project Officer, AZRM, CWRD Team members Aziz Haydarov, Senior Portfolio Management Specialist, AZRM, CWRD Jurgen Sluijter, Senior Transport Specialist, Central and West Asia

Transport and Communications Division (CWTC), CWRD Yagut Ertenliche, Project Officer, AZRM, CWRD

Afag Javadova, Project Analyst, AZRM, CWRD Carmina Luna, Senior Project Officer, CWTC, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

AAY – Azeravtoyol State Agency ADB – Asian Development Bank ARS – Azer Road Service DSC – design and supervision consultant EIRR – economic internal rate of return GAP – gender action plan km – kilometer LARP – land acquisition and resettlement plan MFF – multitranche financing facility PIU – project implementation unit PSC – project steering committee RNDP – Road Network Development Program SSEMP – site-specific environmental management plan TA

–

technical assistance

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 1

A. Project Design and Formulation 1 B. Project Outputs 2 C. Project Costs and Financing 3 D. Disbursements 4 E. Project Schedule 4 F. Implementation Arrangements 5 G. Technical Assistance 5 H. Consultant Recruitment and Procurement 6 I. Gender Equity 7 J. Safeguards 8 K. Monitoring and Reporting 9

III. EVALUATION OF PERFORMANCE 10

A. Relevance 10 B. Effectiveness 10 C. Efficiency 11 D. Sustainability 11 E. Development Impact 12 F. Performance of the Borrower and the Executing Agency 12 G. Performance of the Asian Development Bank 12 H. Overall Assessment 13

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 13

A. Issues and Lessons 13 B. Recommendations 14

APPENDIXES 1. Design and Monitoring Framework 16 2. Project Cost at Appraisal and Actual 18 3. Project Cost by Financier 19 4. Disbursement of ADB Loan and Grant Proceeds 21 5. Contract Awards of ADB Loan and Grant Proceeds 22 6. Chronology of Main Events 23 7. Status of Compliance with Loan Covenants 24 8. Environmental Safeguards Audit Summary 33 9. Gender Action Plan Implementation Matrix 36 10. Economic Reevaluation 38

BASIC DATA A. Loan Identification

1. Country Azerbaijan 2. Loan number and financing source 2354 OCR, 2355 ADF 3. Project title Road Network Development Program,

Project 1 4. Borrower Republic of Azerbaijan 5. Executing agency State Agency of Azerbaijan Automobile

Roads 6. Amount of loans $190 million; SDR6.535 million 7. Financing modality Multitranche financing facility

B. Loan Data

1. Appraisal – Date started – Date completed

Waived

2. Loan negotiations – Date started – Date completed

6 August 2007 8 August 2007

3. Date of Board approval 4 October 2007 4. Date of loan agreement 15 January 2008 5. Date of loan effectiveness – In loan agreement – Actual – Number of extensions

15 March 2008 3 March 2008 0

6. Project completion date – Appraisal – Actual

31 December 2009 31 August 2017

7. Loan closing date – In loan agreement – Actual – Number of extensions

30 June 2010 28 September 2017 5

8. Financial closing date – Actual

12 January 2018 for Loan 2354 30 April 2018 for Loan 2355

9. Terms of loan – Interest rate

– Maturity (number of years)

Loan 2354: LIBOR + 0.6% Loan 2355: 1.0% during grace period, 1.5% thereafter 24 (Loan 2354) and 32 (Loan 2355)

– Grace period (number of years) 4 years for OCR; 8 years for ADF loan

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11. Disbursements

a. Dates

Initial Disbursement Loan 2354: 15 September 2008 Loan 2355: 19 June 2008

Final Disbursement 3 October 2017 5 February 2018

Time Interval 108 months 115 months

Effective Date 3 March 2008

Actual Closing Date 28 September 2017

Time Interval 114 months

b. Amount

Loan 2354 ($ million)

Category

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6=4–

5) Works for Masalli–Astara Expressway Construction

114.4 37.8 5.8 146.41 146.41 -

Local Roads Rehabilitation

12.2 1.4 0.05 13.55 13.55 -

Maintenance and Vehicle-Weighing Equipment

2.0 3.0 0.06 4.94 4.92 0.02

Interest and Commitment Charge

11.2 (3) - 8.2 8.2 -

Unallocated 50.2 (39.2) 11.0 0 0 - Total 190.0 - 16.9 173.1 173.08 0.02

Loan 2355 (SDR million)

Category

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6=4–

5) Consulting Services

4.575 1.040 - 5.615 5.587 0.028

Project Management

0.457 0.398 - 0.855 0.855 -

Interest 0.065 - - 0.065 0.065 - Unallocated 1.438 (1.438) - - - - Total 6.535 - - 6.535 6.507 0.028

C. Project Data

1. Project cost ($ million)

Cost Appraisal Estimate Actual Foreign exchange cost 142.9 49.8 Local currency cost 106.1 166.5 Total 249.0 216.3

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2. Financing plan ($ million)

Cost Appraisal Estimate Actual Implementation cost Borrower financed 36.9 33.4 ADB financed 136.3 174.6 Other external financing - Total implementation cost 173.2 208.0 Interest during construction costs 11.3 8.3 Borrower financed - - ADB financed 11.3 8.3 Other external financing Total interest during construction cost 11.3 8.3

3. Cost breakdown by project component ($ million)

Component Appraisal Estimate Actual

A. Investment Costs 1. Civil Works a. Subproject A (km 0–km 22.1) 42.4 146.4 b. Subproject B (km 22.1–km 45.1) 47.4 - c. Subproject C (km 45.1–km 58.6) 24.6 - d. Local Roads 12.2 13.6 2. Weighing Stations and Road Maintenance Equipment 2.0 4.9 3. Land Acquisition and Resettlement 5.1 2.2 4. Consulting Services a. Construction Supervision, Project Monitoring and

Evaluation, and Preparation of Project 2 4.7 8.0

b. Development of Database for Secondary Roads 2.0 - c. Preparation of Legal and Regulatory Framework and

Operational Procedures for Toll Roads 0.3 0.4

5. Taxes and Duties 31.8 31.2 Subtotal (A) 172.5 206.7

B. Project Management 1. Project Implementation Unit 0.6 1.1 2. External Financial Auditing 0.1 0.2 Subtotal (B) 0.7 1.3 Total Base Costs 173.2 208.0

C. Contingencies 64.5 0 D. Interest and Other Charges 11.3 8.3

Total Project Costs (A+B+C+D) 249.0 216.3

4. Project schedule

Item Appraisal Estimate Actual Date of contract with consultants Q1 2008 12 May 2008 Completion of engineering designs Q2 2007 31 Dec 2008 Civil works contract Date of award Q4 2007 22 Dec 2010 Completion of work Q1 2010 28 Sep 2017 Equipment and supplies Dates First procurement Q3 2008 6 Apr 2011 Last procurement Q4 2008 2 Aug 2013 Completion of equipment installation Q1 2009 6 July 2015 Start of operations Completion of tests and commissioning Q2 2010 28 Sep 2017

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Beginning of start-up Q3 2010 18 Sep 2018

5. Project performance report ratings

Implementation Period Single Project Rating

From 3 March 2008 to 31 December 2009 No data available for this period From 1 January 2010 to 31 December 2010 Potential problem From 1 January 2011 to 30 June 2011 Potential problem From 1 July 2011 to 31 March 2012 Actual problem From 1 April 2012 to 31 December 2012 On track From 1 January 2013 to 31 December 2013 On track From 1 January 2014 to 31 December 2014 On track From 1 January 2015 to 31 December 2015 On track From 1 January 2016 to 31 December 2016 On track From 1 January 2017 to 28 September 2017 On track

D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-

Days Specialization of Members a

Loan inception mission 27 Nov–3 Dec 2007 2 12 d,c Loan review mission 24–28 Nov 2008 2 8 c,d Loan review mission 11–14 Feb 2009 2 6 b,c Loan review mission 13–16 Jul 2009 2 6 Loan review mission 19–24 Oct 2009 2 10 b,c Special administration mission 19–20 Nov 2009 2 2 c,d Loan review mission 3–5 May 2010 1 3 c Loan review mission 18–19 Oct 2010 1 2 c Loan review mission 29 Jan–1 Feb 2011 3 9 b,c Loan review mission 20–25 Jun 2011 2 10 b,c Loan review mission 13–22 Sep 2011 3 27 b,c.d Loan review mission 18–23 Jan 2012 3 18 b,c.e Midterm project review mission 8–12 May 2012 4 20 b,c.e.d Loan review mission 21–24 Jan 2013 4 16 b,c.e.d Consultation mission 19–21 Apr 2013 2 6 b,c Loan review mission 5–10 Jul 2013 2 12 b,c Loan review mission 17–21 Sept 2013 3 15 b,c,d Loan review mission 4–6 Feb 2014 3 9 b,c,d Loan review mission 30 Aug–2 Sept 2014 4 20 b,c,e,a Loan review mission 30 Nov– 9 Dec 2014 5 42 d,b,b,c,c Loan review mission 29–30 Jan 2015 4 8 b,d,c,c Loan review mission 13 May 2015 3 3 b,c,c Loan review mission 6–7 Oct 2015 2 4 b,c Loan review mission 22–27 Jun 2016 2 2 b,c Loan review mission 13–21 Oct 2016 4 1 b,c,d,d Loan review mission 1–9 Mar 2017 7 56 b,c,a,b,c,c,c Loan review mission 28–30 Aug 2017 5 15 c,c,c,d,f Project completion mission 1–2 July 2019 2 4 c,d

a = environment specialist, b = transport specialist, c = project officer, d = project analyst, e = social development specialist, f = portfolio management specialist.

I. PROJECT DESCRIPTION 1. In the first decade after Azerbaijan regained independence in 1991, most roads in the country were in an unsatisfactory condition because of insufficient maintenance funding and the weak enforcement of vehicle axle–load controls. As a result, a large part of the road network required reconstruction or rehabilitation. The poor road conditions resulted in high transport costs, long travel times, and low safety. Moreover, the country’s vehicle fleet was expected to increase rapidly over the medium term, making it necessary to expand the road network. To help the Government of Azerbaijan tackle these challenges, on 28 September 2007 the Asian Development Bank (ADB) approved a multitranche financing facility (MFF) for the Road Network Development Program (RNDP) for an aggregate of $500 million. Subsequently on 4 October 2007, ADB approved two loans totaling $200 million to finance the RNDP Project 1.1 2. The project aimed to contribute to sustained economic and social development in Azerbaijan by improving the Masalli–Astara section of the Alat–Astara highway connecting Baku, the country’s capital, to Azerbaijan’s southern border. The project outcome was the development of an adequate, efficient, safe, and sustainable transport corridor, linking the country both domestically and internationally. The project outputs are described in paras. 8–11 below.

II. DESIGN AND IMPLEMENTATION 3. The project’s original design comprised three sections of the Masalli–Astara expressway: (i) section A covering kilometer (km) 0–km 22.1, (ii) section B covering km 22.1–km 45.1, and (iii) section C covering km 45.1–km 58.6. The project also included the rehabilitation of about 120 km of local roads in the project area, installation of a vehicle weighing station along the project road, provision of road maintenance equipment, and project management support and institutional capacity building. 4. Because of a significant increase in the cost estimate after the completion of the sections’ detailed engineering designs, in June 2011, sections B and C were removed from the project scope and the loan agreement was amended accordingly. Sections B and C formed the scope of the RNDP Project 3 approved on 14 December 2011.2 From September 2013 to November 2014, the Office of Anticorruption and Integrity of the Asian Development Bank (ADB) conducted a procurement-related review of the RNDP Projects 1 and 2. The review found no major issues that would prevent the accomplishment of the project’s objectives.3 A. Project Design and Formulation 5. As a major mode of passenger and freight transport, roads are the most important element of the country’s on-land transport network. The share of passenger turnover by road increased from 76% in 1990 to 92% in 2007 and 98% in 2018. The share of freight turnover by road grew from 8% in 1990 to 47% in 2007 and 79% in 2018.4 The Alat–Astara highway is a major strategic highway in Azerbaijan and an integral part of the North–South International Transport Corridor, the shortest transport route from Europe to the Persian Gulf.

1 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche

Financing Facility. Republic of Azerbaijan: Road Network Development Program. Manila. 2 ADB. 2011. Road Network Development Program, Project 3 (Loan 2831-AZE). Manila. 3 ADB. 2014. Project Procurement Related Review. Loans 2354/2355(SF)/2433-AZE: Road Network Development

Program—Projects 1 and 2. Manila. 4 The State Statistics Committee of Azerbaijan.

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6. Improvement of road infrastructure was a government priority, as reflected in the State Program on Poverty Reduction and Economic Development for 2008–2015, and the State Program on Socioeconomic Development of Regions for 2009–2013.5 Road infrastructure improvement was also a priority under ADB’s country and corporate strategies.6 Following the MFF modality’s introduction in December 2006 and given the need for programmatic support for road network development, the MFF modality was chosen for RNDP.7 7. The project design turned out to be highly inaccurate because the preliminary design prepared at the end of 2006 was completed when the road alignment was not fully finalized and many sources of materials were not yet identified.8 During implementation, the design and supervision consultant (DSC) prepared the detailed engineering design and updated the cost estimates, which was far above the cost estimate prepared at appraisal. As a result, the available financing (ADB’s ordinary capital resources [OCR] loan and counterpart funding) was deemed highly insufficient to cover the project’s infrastructure scope. The funding gap was about $160 million. Given this, the project design was modified during implementation (para. 4). B. Project Outputs 8. The project had five components: (i) construction of 22.15 km of a new four-lane, category I highway between Masalli and Astara on the southern corridor (the project road);9 (ii) rehabilitation of approximately 120 km of local, two-lane, category III roads in the project area; (iii) installation of a vehicle weighing station along the project road; (iv) provision of road maintenance equipment; and (v) project management support and consulting services for construction supervision, financial audit, social and environmental assessments, and institutional capacity development.10 The achievement of these outputs is reflected in the design and monitoring framework (DMF) in Appendix 1.11 9. Construction of the project road and rehabilitation of local roads. Construction of the project road was completed on 31 July 2017; however, the road was not opened for traffic until 18 September 2018 because the government decided to wait until the entire Alat–Astara highway was completed.12 Bidding for the local roads in the project area took place in 2012 but the government canceled the bidding as all bids substantially exceeded the cost estimate and

5 Government of Azerbaijan. 2008. State Program on Poverty Reduction and Sustainable Development in the

Republic of Azerbaijan for 2008–2015. Baku; Government of Azerbaijan. 2008. State Program on Socioeconomic Development of Regions for 2009–2013. Baku.

6 ADB. 2006. Country Strategy and Program Update: Azerbaijan (2006). Manila; ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila. Strategy 2020 indicated transport infrastructure development as a core area for ADB engagement.

7 ADB. 2014. Country Partnership Strategy: Azerbaijan, 2014–2018. Manila. 8 ADB. 2006. AZE: Preparing the Southern Road Corridor Improvement Project. Consultant’s report. Manila. 9 At appraisal, the project’s output 1 comprised the 59 km four-lane highway between Masalli and Astara. Because

of the change in scope during implementation (para. 4), the scope of this output has been reduced to 22.15 km, including the Lenkaran bridge at the start of section B of the Masalli–Astara road. The construction of this bridge allowed to bypass the city of Lenkaran and protect the new expressway from frequent flooding.

10 The component on the provision of road maintenance equipment was not clearly defined at appraisal. Instead, the provision of vehicle weighing stations comprised the procurement of equipment. The procurement of weighing stations resulted in a double cost overrun under the equipment category.

11 The loan agreement and the government’s periodic financing request for tranche 1 reflect five components. The project’s DMF includes two outputs as reflected in Appendix 1. The DMF was adjusted during implementation to reflect, in output 1, only section A of the Masalli–Astara highway.

12 The total length of the new four-lane Alat–Astara expressway is 205 km. ADB-financed projects constructed five consecutive sections 121.3 km in length (60% of the total road length). The remaining 40% was constructed under World Bank–financed projects.

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construction of the project road was severely delayed.13 The project funded the rehabilitation of local roads that were initially included under the scope of the East–West Highway Improvement Project (closed in June 2010).14 Overall, the project rehabilitated a total of 39.5 km of local roads under the project, although not in the Masalli–Astara highway areas. 10. Installation of vehicle weighing stations along the project road. The project installed four vehicle weighing stations, not along the project road, but along the M1 and M2 highways, in accordance with the locations determined by the Cabinet of Ministers’ decree dated 3 June 2011.15 Installation of these weighing stations, which were also part of the East–West Highway Improvement Project, was decided upon because of the delay in the procurement and construction of the project road. Although the local roads and weighing stations under the project were delivered based on the agreement between the Azeravtoyol State Agency (AAY) and ADB project team, this de facto change in scope has not been formalized and the description of the project in the loan agreement has not been amended. 11. Project support and capacity building for road network management. This entailed consulting services for (i) construction supervision, project management, monitoring, and evaluation; (ii) preparation of the RNDP Project 2; and (iii) an external audit of the project accounts. This component also helped build the capacity of the AAY in road network management, including the development of legal and regulatory frameworks and operational procedures for toll roads. C. Project Costs and Financing 12. At appraisal, the total project cost was estimated at $249.0 million, of which $200.0 million (80.3% of the total project cost) was to be financed by ADB loans and $49.0 million by government counterpart funding. ADB financing comprised an OCR loan of $190 million for civil works and equipment, and an Asian Development Fund (ADF) loan of $10 million equivalent for consulting services. The project cost at completion totaled $216.3 million, comprising $182.9 million from ADB net loan financing and $33.4 million from counterpart funding, covering taxes and duties, and resettlement and land acquisition costs (Appendixes 2 and 3). 13. Civil works contracts totaled $160 million at completion, higher than the $126.6 million estimated at appraisal, mainly because of significant cost overruns in the works under section A. Actual expenditure on weighbridge equipment increased to $4.9 million, from $2.0 million at appraisal. Consulting service contracts totaled $8.4 million, compared with $7.0 million planned at appraisal. To cover the increased cost of civil works, equipment, and consulting services, the loan funds were reallocated between spending categories, including contingencies.16

13 The construction of local roads was dependent on the construction of the project road, to which the local roads had

to be connected. 14 ADB. 2011. Project Completion Report: East–West Highway Improvement Project (Azerbaijan) (Loans 2205-AZE

and 2206-AZE). Manila. Given the approaching completion of the East–West Highway Improvement Project and its remaining unfinished agenda on local roads and weighing stations because of significant cost overruns, in January 2010 the AAY and ADB agreed to tap the loan proceeds of tranche 1, which had same-purpose investment categories.

15 Government of Azerbaijan. 2011. Decree of the Cabinet of Ministers of the Republic of Azerbaijan No. 142s. 3 June. Baku; Government of Azerbaijan. 2011. Executive Order of the Ministry of Transport of the Republic of Azerbaijan No, 96/ü. 21 June. Baku. The weighing stations were installed at km 49 (on the right side) and km 241 (on the left side) of the M2 highway (at the Baku-Alat-Georgian border), and at km 67 (on the left side) and km 84 (on the right side) of the M1 highway (at the Baku-Guba-Russian border).

16 The $35.5 million originally allocated for physical and price contingencies helped cover additional construction costs.

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14. The main reason for the cost changes was the inadequate design of the Masalli–Astara highway. At appraisal, the base cost of the highway was estimated at $146.2 million. At project inception, the updated cost estimates showed that the project required an additional $160 million. Subsequently, sections B and C were removed from the project scope (footnote 9). The final cost of section A turned out to be 26% higher than the cost of the entire Masalli–Astara highway as estimated at appraisal. The removal of sections B and C resulted in excessive allocation under the contingency category. Subsequently, the unused balance under this category was canceled. The OCR loan proceeds were partially canceled three times, for a total of $16.92 million: $11.00 million in December 2016, $5.90 million in December 2017, and $20,278.77 at loan closing. For the ADF loan, a residual amount of SDR28,367.17 was canceled at loan closing. The cost of equipment more than doubled because of the complexity of the procurement of the weighing stations (footnote 10). The variance in the cost of consulting services was largely caused by the extension of project implementation from 3 years to 10 years. D. Disbursements 15. The first disbursement under the ADF loan was made on 19 June 2008 and the first under the OCR loan was made on 15 September 2008. The last disbursement under the ADF loan was made on 5 February 2018, and the last under the OCR loan was made on 3 October 2017. The combined loan disbursements totaled $182.9 million ($173.1 million under the OCR loan and $9.8 million equivalent under the ADF loan), compared with $147.6 million estimated at appraisal ($139.8 million under the OCR loan and $7.8 million equivalent under the ADF loan). Because of the startup delays, the contract award and disbursement schedules were adjusted during implementation. The initial disbursement for civil works took place in the third quarter of 2010. Loan disbursements increased considerably in 2011, peaking in 2012, with the bulk of loan funds disbursed by 2017, followed by residual disbursements in 2017 and 2018. There was a 3-year gap between the planned and actual disbursement schedules because of the delay in the implementation of the land acquisition and resettlement plan (LARP) and procurement of works for section A. The details of the contract award and disbursements are in Appendixes 4 and 5. 16. The proceeds of both loans were disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). The direct payment procedure was used to disburse the loan proceeds to all contractors and consultants under both loans. Advance funds and the statement of expenditure procedure were used under the ADF loan to finance recurrent project expenditures such as the project implementation unit (PIU) and audit costs. The audited project financial statements did not identify any major deficiency or risk in financial management. Internal controls, funds management, and financial accounting procedures for the project were generally satisfactory. E. Project Schedule 17. The project was approved on 4 October 2007, signed on 15 January 2008, and became effective on 3 March 2008. At appraisal, the project completion date was 30 June 2010 and civil works were envisaged to be completed by 31 December 2009. Advance contracting was used for the selection of the DSC, enabling the signing of the contract on 12 May 2008. The project’s significant start-up delay occurred mostly because the executing agency lacked experience in complying with ADB’s involuntary resettlement policy.17 As the project took about 3 years to begin

17 As this was the first ADB-financed project in Azerbaijan with involuntary resettlement and significant land acquisition,

there was a general lack of experience and institutional capacity to handle these issues.

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implementing the land acquisition and resettlement activities, no major road works took place in the first 3 years of implementation. The contract for section A was signed on 15 December 2010. 18. Given the start-up delays, on 5 August 2010 the loan closing date was extended from 30 June 2010 to 31 December 2013. Following the contract award for section A, the project faced a cost overrun necessitating a change in scope and an amendment of the OCR loan agreement.18 To complete the civil works contract of section A, on 9 September 2013 the loan closing date was extended for a second time: from 31 December 2013 to 30 June 2015. The highly unfavorable weather conditions (heavy winter rains) and the contractor’s poor performance led to further implementation delays, which subsequently required further extensions of the loan closing date up to the MFF closing date of 28 September 2017. Overall, the project has been extended by more than 7 years. The project’s financial closing was delayed until 30 April 2018. The large gap between project completion and financial closing was caused by the unliquidated advance under the ADF loan. The project’s main events are in Appendix 6. F. Implementation Arrangements 19. Initially, the Ministry of Transport was the executing agency, and Azer Road Service (ARS), an open joint-stock company under the Ministry of Transport, was the implementing agency. Following the reorganization of the Ministry of Transport in January 2016, ARS assumed the responsibility of the executing agency from February 2016. ARS’s name and legal status have further changed: (i) in 2016 ARS was renamed the AAY;19 and (ii) in December 2017, the AAY was restructured as the State Agency of Azerbaijan Automobile Roads, a public legal entity.20 The envisaged project steering committee (PSC) was not established. Instead, the government practiced meetings as needed, usually chaired by the Deputy Prime Minister with the participation of representatives from concerned agencies such as the Ministry of Transport, AAY, Ministry of Finance, and Ministry of Economy. The PSC was not established because, following the reorganization of the Ministry of Transport, the government concluded that the PSC would duplicate the existing coordination and reporting arrangements exercised by the Cabinet of Ministers with respect to externally financed projects. Moreover, the empowered AAY felt that the project may be further delayed because of the time that the high-level PSC would require for convention and decision-making purposes. 20. The PIU established in the AAY handled project implementation efficiently. The PIU was headed by a project director and included financial, environmental, social, and procurement specialists, as well as highway engineers. Since January 2014, a program management consulting firm has assisted the PIU in project management, procurement, and capacity development.21 The DSC has assisted the PIU in contract administration and on-site supervision, contractor quality control and assurance, safeguards compliance monitoring, and project monitoring and evaluation. G. Technical Assistance

18 The road sections B and C were moved to Project 3; this was approved on 14 December 2011. 19 Government of Azerbaijan. 2016. Decree of the President of the Republic of Azerbaijan on the Legal Status of

“Azeryolservis” OJSC. 9 March. Baku. 20 Government of Azerbaijan. 2017. Decree of the President of the Republic of Azerbaijan on the State Agency of

Azerbaijan Automobile Roads. 19 December. Baku. 21 This firm was engaged under Project 1 (Loan 2921-AZE) of the Second RNDP.

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21. ADB approved $1.13 million for project preparatory technical assistance (PPTA) on 3 November 2005.22 The PPTA supported the preparation of the project feasibility study, the prequalification documents for work on sections A, B, and C of the Masalli–Astara road, and the request for proposals for the DSC selection. The PPTA also supported the preparation of the resettlement framework for the MFF, an environmental impact assessment for the Masalli–Astara road, and separate LARPs for sections A, B, and C of the Masalli–Astara road. 22. The cost estimates prepared by the technical assistance (TA) consultants turned out to be highly inaccurate as the detailed design prepared by the DSC in 2008 showed costs nearly doubling. The TA consultants’ final report, while assessing the project as viable, indicated the risk that (i) traffic may not grow as robustly as expected, and (ii) construction costs may escalate. The final report also noted that increased government spending on infrastructure projects will add inflationary pressure on key supplies, works, and services. There was also a surge in the cost of fuel and road construction materials in the 2 years between the TA’s preliminary design at the end of 2016 and completion of the detailed design at the end of 2008. H. Consultant Recruitment and Procurement 23. All consulting services financed under the projects were procured in accordance with ADB’s Guidelines on the Use of Consultants by Asian Development Bank and its Borrowers (2007, as amended from time to time). The project employed (i) two consulting firms: the DSC and a tolling study consultant, both engaged via quality- and cost-based selection (80:20); (ii) two audit firms, engaged via least-cost selection; and (iii) four individual social safeguards consultants. 24. The DSC carried out all activities required under the DSC terms of reference, which also included supervision of the works under the RNDP Project 3. The DSC helped the AAY prepare monthly and quarterly progress reports, implemented monitoring and evaluation programs, and provided on-the-job training for contractors and AAY staff. The DSC contract has been extended five times, in line with the multiple extensions of the loan closing date, from the original contract period of 27 months to the final period of 114 months. Total disbursements to the DSC amounted to $12.2 million comprising $8.0 million under the project’s OCR loan and $4.2 million under the loan for the RNDP Project 3.23 The DSC’s performance was satisfactory. 25. The tolling study consultant’s services comprised a strategic study for the road sector, identification of projects for public-private partnership (PPP) implementation, preparation of a legal and regulatory framework, and operational procedures for toll toads in Azerbaijan. The study focused on the main road traffic corridors in Azerbaijan and was supplemented by a detailed analysis of possible tolling options on the R6 road as a possible toll road pilot.24 The consultant contract was signed on 13 November 2012 for $399,880 (without taxes and duties), with an initial completion date of 30 June 2013; this was extended to 30 April 2017 with a final amount of $413,299. The tolling consultant’s performance was satisfactory.

22 ADB. 2005. Technical Assistance to the Republic of Azerbaijan for Preparing the Southern Road Corridor

Improvement Project (Alyat–Astara Road). Manila. The technical assistance closed in May 2008 with $1.11 million of the approved $1.13 million disbursed.

23 The funds for consulting services under Loan 2355-AZE (MFF Project 1) were fully disbursed by mid-2016, and the financing was subsequently transferred to Loan 2831 (MFF Project 3) from July 2016.

24 The tolling study aimed to suggest a possible strategy to introduce the user-pays principle as a mechanism to raise revenue to reduce the government’s burden in operating and maintaining highways. It also looked at encouraging growing private participation in the highway sector. The additional study for the R6 road demonstrated good potential for tolling on the two-lane R6 road. As per the government’s view, tolling could not be introduced on a two-lane road. The study’s main findings remain relevant and may serve as a reference for potential tolling options if the R6 road is widened in the future from two to four lanes.

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26. The audit firms’ performance was mixed. The two local audit firms, chosen using the least-cost selection method, provided poor quality reports that required corrections. Submission of the audited project financial statements during 2009–2011 and 2013–2016 was significantly delayed, by up to 6–8 months past the deadline.25 The individual consultants engaged to conduct external monitoring of social safeguards during project implementation performed well.26 Overall, while the performance of the audit firms was less than satisfactory, the performance of all individual consultants was satisfactory. 27. Civil works were procured in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). To implement the civil works, the project engaged four contractors though international competitive bidding: two contractors for section A, one for the Lenkaran bridge (via a design-build contract), and one for local roads.27 Procurement of all contracts followed ADB’s single-stage, one-envelope procedure, without prequalification. The Office of Anticorruption and Integrity investigated allegations that fraudulent practice and conflicts of interest occurred in the bidding for one of the contracts under the project. The investigation resulted in the debarment of two companies and two individuals. 28. The performance of the first contractor for section A was unsatisfactory. Only a fraction of the works had been implemented over the original 24-month completion period during 2011–2012, and this was aggravated by further delays during 2013–2015. In September 2015, the contractor stopped working and deserted the project site, resulting in the termination of the contract.28 The key reason for the contractor’s poor performance was a change in ownership and senior management after the contract award. The contractor was ultimately unable to install sound corporate management and maintain capacity to implement multiple road projects simultaneously in Azerbaijan. ADB regularly raised the issue of the contractor’s poor performance, resulting in revisions to the contractor’s work program. The performance of the other contractors overall was satisfactory. I. Gender Equity 29. The project is categorized as some gender elements. A gender action plan (GAP) was developed covering this project and the RNDP Project 3. The draft GAP was submitted to ADB in October 2014.29 The implemented gender activities included gender-sensitive road safety awareness training for communities along the project road, employment by the project of interested women from the project communities, and employment of women by the construction supervision consultant as engineers and for administrative support.30 Overall, because of the

25 The quality of the project’s last audit report covering the transactions between the loan closing date on 28 September

2017 and the financial closing date of the ADF loan on 30 April 2018 was adequate. This is because the auditor was selected based on a new arrangement adopted in March 2018; that is, auditors were selected from a list of eligible audit firms in Azerbaijan following the quality- and cost-based selection method (50:50).

26 Individual consultants conducted external monitoring of the implementation of the LARPs for sections A, B, and C. 27 Overall, there were four contracts for local road works. One contract, because of its size, was procured following

international competitive bidding. The other three contracts followed the national competitive bidding procedure. 28 The section A civil works under the original contract commenced on 21 February 2011, but the contractor stopped

all site works and abandoned the site on 21 September 2015 without any prior notice. On 14 October 2015, the government issued a notice of termination to the contractor for breach of contractual obligations. Contract termination took effect on 29 October 2015. On 24 November 2015, ADB approved the government’s recommendation to terminate the section A contract with the original contractor and select a new contractor. The contract for the balance of works for section A was awarded to the new contractor on 24 June 2016.

29 The GAP implementation matrix is in Appendix 9. 30 This included the women employed by the contractor as administrative support (two) and auxiliary staff (57), such

as canteen workers, utility staff, and office cleaners.

8

nature of the construction work and cultural factors, the gender composition of the consultants and workers hired under the project skewed towards men. J. Safeguards 30. Environment. The project and all project facilities had to be developed, conducted, implemented, and maintained in accordance with Azerbaijan’s applicable laws and regulations and ADB’s Environment Policy (2002). At appraisal, the project was category A for environmental safeguards. This category remained the same during implementation and at completion. The PPTA consultants prepared an environmental impact assessment and corresponding environmental management plan for the Masalli–Astara road in 2007.31 The project road’s alignment skirted a protected forest plot, the lowland Hirkan Forest Reserve. Given this, the DSC deployed a biodiversity specialist prior to construction to do a detailed study and propose additional measures to mitigate any adverse impacts on the forest’s ecosystem as specified in the final environmental monitoring report.32 31. The midterm review determined that the project’s environmental compliance was poor: the contractor had commenced works without finalizing the site-specific environmental management plan (SSEMP), and noncompliance was observed at the construction site and contractor’s camp. A time-bound corrective action plan was prepared and implemented to address this noncompliance. After the midterm review, the DSC reviewed all SSEMPs and found that the contractors had finalized them before beginning construction. 32. The DSC submitted semiannual monitoring reports on the implementation of environmental safeguards. Based on the construction supervision consultant’s monitoring of the compliance with environmental safeguards, the executing agency sent the contractors numerous nonconformance letters. Key issues encountered during construction were on-site contamination, dust control, solid and construction waste management, and general housekeeping. The contractors subsequently addressed all issues. Complaints and grievances were recorded in the grievance register and resolved prior to project completion. 33. ADB conducted an independent post-completion environmental safeguards audit (summarized in Appendix 8). The environmental audit revealed that the project-impacted areas (primarily km 5–km 19 of section A) have recovered and feature thriving vegetation. The audit found no major adverse impact and confirmed that all issues encountered during implementation, such as delays in the preparation of SSEMPs, were fully resolved. The audit concluded that the environmental requirements agreed for the project have been generally complied with. 34. Social safeguards. The project was implemented in accordance with Azerbaijan’s applicable laws and regulations and ADB’s Involuntary Resettlement Policy (1995). The project was category A for involuntary resettlement, and category C for indigenous people. LARPs were prepared for sections A, B, and C of the Masalli–Astara motorway, following the provisions of the RNDP land acquisition and resettlement framework. The project faced significant delays because it was the first ADB project in Azerbaijan with large-scale resettlement activities, in which the AAY lacked experience. The LARP for section A was endorsed in June 2011 and fully implemented by the end of 2015. Independent consultants regularly conducted external monitoring of the LARP’s implementation. The final external monitoring report dated September 2017 confirmed that there

31 It covered sections A–C, as per the project’s original scope. 32 The final safeguard documents are accessible at ADB. 2018. Road Network Development Program - Tranche 1:

Section A and Lenkaran Bridge Final Environmental Monitoring Report. Manila.

9

was no outstanding grievance under the LARP for this project. There was also no resettlement issue under the project’s local road component. K. Monitoring and Reporting 35. Most covenants specified in the loan agreements have been complied with, except for the covenant on audited project financial statements, which in some years were submitted with a delay of up to 8 months (partial compliance). The project has not complied with the special loan covenants on (i) the establishment of the PSC, (ii) installation of vehicle weighing stations within the project road, and (iii) maintenance concessions with private sector for at least 20 km of local roads.33 Instead of establishing the PSC, interagency coordination meetings were conducted as needed, resulting in less effective oversight and problem-solving under the project. The project did not install vehicle weighing stations along the project road mainly because of poor coordination between the construction activities managed by the PIU and the AAY’s road maintenance department, leading to the non-inclusion of the project road in the 2011 weighing station installation initiative and non-implementation of weighing stations along the project road based on the installation plan adopted in 2015.34 The concession for the maintenance of local roads was not implemented because the AAY, which has remained responsible for maintaining the country’s road network saw no need to engage an outside party and no capacity in the private sector for adequate road maintenance delivery. 36. The following special loan covenants were partially complied with: (i) the action plan for establishing toll roads along any ADB-financed expressway, and (ii) the implementation of the GAP. The introduction of tolling on the project road has been affected because (i) the government introduced an enabling environment for tolling in the second quarter of 2016 when the convention-road civil works were already underway,35 and (ii) the government (factoring in the expected significant traffic flow) decided to introduce tolling on the M1 motorway connecting the country’s Russian border with Baku.36 AAY only partially implemented the GAP because of a lack of sex-disaggregated data, and because cultural restrictions prevented the intended involvement of women in the construction works. No covenant has been modified, suspended, or waived, as they remained conceptually relevant to the project design and important for sector policy dialogue with the government. On balance, the issues of compliance with the covenants discussed above did not significantly impact the project’s outcome and outputs. The status of compliance with loan covenants is in Appendix 7. 37. The project’s monitoring and reporting arrangements were satisfactory and were provided to ADB through the monthly progress reports prepared by the supervision consultants and endorsed by the AAY. The PIU established a project performance monitoring system and was responsible for coordinating overall project implementation, including compliance with the program undertakings and loan covenants. The DSC worked closely with the PIU in supervising the contractors’ work, monitoring contractors’ conformity with environmental and social impact

33 Bidding for the local roads along the project toad was canceled by mutual agreement between the borrower and

ADB. Instead of 120.0 km of local roads, 39.5 km of rural roads were rehabilitated in the Yevlakh-Ganja-Qazakh region, which is outside of the project area.

34 The Decree of the Cabinet of Ministers No. 214s dated 16 July 2015 provides for 32 weighbridge stations to be installed across the country. These included three stations to be installed on the project road at the final stage of road works. However, no vehicle weighing station has yet been installed on the project road.

35 The build-operate-transfer law was adopted in March 2016 and the rules to implement this law were adopted in April 2016 (Law No. 177-VQ 2016 and Presidential Decree No. 867 dated 20 April 2016). The Law on Roads was amended in November 2017 (Law No. 866-VQD, dated 17 November 2017) to enable tolling on the country’s roads.

36 Construction of this motorway started in November 2017. The motorway is expected to be commissioned as a toll road at the end of 2020.

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controls, supervising the implementation by the contractor, and monitoring contractors’ conformity with the traffic control and road safety action plan during construction. The PIU environmental expert coordinated the implementation of the environmental management plan and mitigation activities, resolved environmental issues, regularly monitored environmental quality, and reported the results. 38. Separate financial accounts were established for the projects, and an auditor appointed by the executing agency as accepted by ADB audited these accounts and submitted annual audit reports to ADB. The audit reports provided quantitative and qualitative assessments of the financial management systems adopted for the project, which were found to be satisfactory. The auditor submitted several audited project financial statements with a delay. The audit reports were found to be generally in order, and the unqualified audit opinions were acceptable. During implementation, the counterpart funding required for the project was provided in full. 39. The contractors, in consultation with the DSC, developed a grievance redress mechanism, which was approved by ADB and subsequently communicated to the project-involved communities via leaflets and at the public consultation meetings. The DSC maintained the grievance register in which all complaints and comments were logged, alongside details of the complainant, and how and when the issue was resolved. Most grievances were dealt with swiftly and satisfactorily, and all 29 grievances under the project were resolved.

III. EVALUATION OF PERFORMANCE A. Relevance 40. The project design was less relevant at appraisal because of unrealistic cost estimates, but became relevant at completion because corrective action was taken during implementation to adjust the project scope in line with the revised cost estimate. The MFF modality may have been less appropriate for the project financing, because the 2006 Country Strategy and Program Update included a project loan to upgrade the southern road corridor. Furthermore, when the large cost overrun crystallized during project implementation, the initial correct intention to fund it through additional financing did not materialize. The at-appraisal DMF was appropriate as most of the outcome and output indicators were connected to the development of the country-wide road network, resulting in increased passenger and freight turnover and fewer road accidents throughout Azerbaijan. The DMF was revised during implementation to reflect the narrowed focus on the southern road corridor from Baku and the extended implementation timeline. However, the country-wide impact and outcome indicators have been substantially retained as these were the best available statistics. Although the project design did not have innovative features or demonstration values, it provided a visible transformational effect: section A of the Masalli–Astara highway was integrated into the newly constructed 200-km long Alat–Astara highway, connecting the country both domestically (by increasing local access to main roads and village centers) and internationally through the north–south corridor. On balance, and given the correction of the design flaws during implementation, the project is rated relevant. B. Effectiveness 41. The project is rated less than effective because of the 7-year implementation delay and large cost overrun, and because no access roads were rehabilitated in the project area. No vehicle weighing station was installed along the project road, and no road maintenance equipment was provided. The project’s main output—construction of section A of the four-lane expressway between Masalli and Astara—was eventually completed. However, the expected connectivity

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gains from the project have yet to materialize, as the traffic volume on the project road turned out to be significantly lower than estimated at appraisal. The lack of adequate access roads to the project road limited gains for nearby villages, which continue using the old M3 road. The targeted International Roughness Index of the completed project road was achieved in the first year of operation, but must be sustained at this level for the 5-year operational period. C. Efficiency 42. The project is rated inefficient because the economic internal rate of return (EIRR) calculated for the Masalli–Astara road (representing a newly constructed 58.6 km long section of the M3 highway) was estimated at 12.8% at appraisal but reevaluated at 3.8% at completion.37 As the reevaluated EIRR is far below the ADB threshold of 12.0%, the project is considered economically unviable. The result of the economic reevaluation indicates that the project was poor value for money. There are two reasons for this. First, the actual cost was approximately 60% higher than expected at appraisal in 2007. Second, traffic is significantly lower than expected: average traffic on the new M3 highway is estimated at 4,800 vehicles per day, compared with 9,200 expected at appraisal. The cost overrun for section A, the economic downturn in 2015–2016 (following the oil price crunch in 2014), and much-lower-than-expected traffic (mainly because of the economic downturn) were not foreseen at appraisal. Hence, the project’s low efficiency can also be attributed to exogenous factors beyond the control of the government and ADB.38 The details of the economic reevaluation are in Appendix 10. D. Sustainability 43. Overall, the project is considered likely sustainable. Tolling has not been introduced on the Masalli–Astara highway as initially planned and the project is not generating direct revenues. Yet, the road’s sustainability is assured by the government’s commitment to maintain the newly created road network and enforce road safety and axle load regulations. 39 44. Routine and periodic maintenance is carried out by the AAY through its regional units and is financed from the State Road Maintenance Fund established in December 2006. The government has been programming and allocating enough funds and resources annually for road maintenance, based on the established norms.40 The overall budget for road maintenance increased from $55 million in 2006 (about $9,700 per km) to nearly $190 million in 2019 (about $11,500 per km).41 In addition, with assistance from the World Bank, seven new specialized

37 An economic reevaluation was done for the entire Masalli–Astara road, including sections A, B, and C. The original

economic evaluation in the report and recommendation of the President and the re-evaluation in the periodic financing request for Project 3 both considered the entire M3 (sections A, B, and C) as the correct approach from an economic perspective.

38 Reevaluation of the local road component resulted in an EIRR of 16.2%. However, local roads were not subject to the project’s economic appraisal during preparation. Hence, the local roads’ economic reevaluation is not considered in the assessment of this project’s efficiency.

39 Government of Azerbaijan. 2015. Presidential Decree No. 114. On the Protection of Major Highways in Azerbaijan. 18 March. Baku.

40 Government of Azerbaijan. 2006. Presidential Decree No. 1729. On Establishment of the Automobile Road Specialized Budgetary Fund. 12 October. Baku; Government of Azerbaijan. 2007. Decree of the Cabinet of Ministers of the Republic of Azerbaijan No. 13. Order on the Road Fund Regulations. 25 January. Baku; Government of Azerbaijan. 2006. Decree of the Cabinet of Ministers of the Republic of Azerbaijan No. 12. Order on Road Maintenance Norms. 17 January. Baku.

41 Government of Azerbaijan, Ministry of Finance. 2020. Information on the 2019 State Budget Implementation. Baku. The per km road maintenance expenditure grew steadily from about $9,700 in 2008 to about $17,200 in 2015. Because of the economic crisis and sharp depreciation of the manat against the United States dollar caused by the

12

regional road maintenance units have been established under the AAY. These units have sole responsibility for highway maintenance, and one is responsible exclusively for maintaining the new Alat–Astara highway. Next measures on strengthening the road maintenance may include the introduction of performance-based contracts between the regional units and the AAY.42 E. Development Impact 45. The project will have a generally positive impact on economic development in Azerbaijan. Trade turnover with neighboring countries reached $3.8 million in 2018. Freight traffic by road has grown in general on account of the improved road network and road conditions, reaching 16.857 million ton-km in 2018. Passenger transportation by road also grew throughout the country, reaching 25.276 million passenger-km in 2018.43 The project has provided opportunities for further economic, industrial, and commercial development, and increased opportunities for business and employment. Although not in the project area, the rehabilitated local roads in the Ganja-Gazakh region are in an agriculturally productive area, and will improve rural communities’ access to agricultural markets along the east–west highway. F. Performance of the Borrower and the Executing Agency

46. The PSC was not established as planned at appraisal, resulting in a weakened coordination and problem-solving framework under the project. The government provided the required counterpart funds and all necessary support without delay. The executing agency closely coordinated and regularly monitored construction progress and the quality of physical works. The PIU, with the consultants’ assistance, monitored project implementation onsite and prepared all required progress reports. The project was out of compliance with environmental safeguards until corrective action was taken after the midterm review mission in May 2012. 47. The executing agency and borrower effectively facilitated and supported ADB’s review missions during implementation and at completion. External auditors acceptable to ADB audited the project accounts and financial statements, and submitted the audit reports to ADB as required under the loan agreement. However, the quality of audit reports was below required standards, resulting in multiple revisions and resubmissions. The reports missed the records of the ADF loan advance account, and the implementation of a specialized accounting system was delayed despite numerous audit findings resulting in poor financial management of the advance account.44.The executing agency established the project performance management system. The project completion reports and facility completion report received from the borrower were generally well prepared. On balance, the performance of the borrower and executing agency is rated satisfactory. G. Performance of the Asian Development Bank 48. ADB headquarters administered the project until February 2014, after which it was delegated to the resident mission in Azerbaijan. During implementation, ADB was closely involved in identifying and resolving issues through the regular fielding of project review missions.45 ADB headquarters continued to provide sector-specific technical and procurement guidance during

2014 oil price shock, the per km maintenance expenditure dropped to about $11,400 in 2016 and $10,700 in 2017. Since then it has increased from about $11,000 in 2018 to $11,500 in 2019.

42 World Bank. 2016. Azerbaijan—Third Highway Project: Additional Financing—Restructuring. Washington, DC. 43 The State Statistical Committee of Azerbaijan. Transport Statistics Database. Baku. 44 Liquidation of the advance account was overdue by 2 years, having the delayed financial closing of the ADF loan. 45 ADB conducted 25 loan review missions, a midterm review mission, and a project completion review mission.

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project implementation, and the resident mission helped proactively resolve emerging issues and efficiently coordinate with government agencies on the ground. ADB’s approval of documents during processing and implementation was timely, and the payment of claims was prompt. In general, the government appreciated ADB’s timely advice on technical and contract administration matters. The de facto change in scope in 2010 on the inclusion of non-project local roads and weighing stations was not formalized. On balance, ADB’s performance is rated satisfactory. H. Overall Assessment 49. The overall assessment of the project is less than successful, based on the sub-ratings presented in the table below.

Overall Ratings Criteria Rating Relevance Relevant Effectiveness Less than effective Efficiency Inefficient Sustainability Likely sustainable Overall Assessment Less than successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory ADB = Asian Development Bank. Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 50. Significant start-up and implementation delays. The lengthy interval between loan effectiveness and commencement of project implementation was attributed to administrative and operational issues. A contractor’s inability to identify suitable local subcontractors led to the slow mobilization and deployment of workers and equipment. The project-readiness checklist has been neither developed nor institutionalized at the time of loan approval. To minimize the risk of delay, the qualification criteria for bidders and contractors could include a requirement to disclose information on subcontractors, and contractual provisions related to contractor performance such as mobilization could be strengthened. Inclement weather conditions hampered project implementation as civil works were in some cases put on hold for more than 6 months, out of the 24 months envisaged under the contract. 51. Highly unrealistic cost estimates. The at-appraisal design was largely incomplete: the preferred alignment option was not confirmed and the survey for material sources was not completed. This led to overoptimistic project cost estimates at appraisal. The prices of materials should have been examined more carefully, and the unit costs of similar items should have been compared with neighboring markets and previously awarded contracts. All of these issues contributed to the underestimation of project costs. The contingency resources included in the project’s financing plan only covered 50% of the cost overrun. An independent engineer could have been engaged to verify whether the cost estimates and contingency funds were enough to ensure effective project financing. Highly inaccurate cost estimates during preparation undermined the relevance and impact of the MFF modality: instead of $200 million, sections A, B, and C cost $400 million, or 80% of the MFF.

14

52. Inadequate oversight and performance monitoring. The government’s PSC was not formally established, leading to deficient interagency coordination. For example, the locations of four weigh stations were changed because of conflict with the implementation of other state-funded road projects, and the location of one weigh station changed twice. This second change of location was imposed when civil works had already commenced and initial expenditures had been incurred.46 A realistic and workable interagency coordination framework could have been established at the outset of project implementation. Insufficient government-level project oversight arrangements affected results and timeliness in particular, given institutional changes in the transport sector and a challenging “soft” component agenda, and resulted in inadequate implementation of the GAP. Some of the DMF performance indicators were generically defined, constraining proactive measures on important subdimensions. For instance, the road safety indicator on the percentage reduction of traffic accidents included minor crashes that have little or no serious consequences but are numerous compared to serious crashes. 53. Sustaining project effectiveness and impact. The AAY’s regional units carry out routine and periodical maintenance of the road network. The budget for road maintenance has grown robustly and the annually allocated funds have been sufficient overall. With the assistance of the World Bank, seven new specialized regional road maintenance units were established under the AAY. One unit is responsible for maintaining the new Alat–Astara highway. The next steps will include introducing performance-based contractual relations between the specialized regional units and the AAY, with the aim of promoting the efficient utilization of road maintenance funding. The country’s planned first tolling on the M1 highway will be an important step towards introducing demand-based, user-pays provision of public infrastructure and strengthening the financial sustainability of road maintenance.47 54. Better connectivity for rural users. Azerbaijan has significantly improved its road infrastructure quality.48 This can be primarily attributed to the newly constructed high-quality motorways. Under the government’s annual state investment programs and the five-year state programs on regional development, sizable funds are envisaged for the construction and rehabilitation of local roads. To increase benefits for local communities and promote in-land connectivity, the planning and implementation of local road works should be better synchronized with those on motorways. B. Recommendations 55. Maximize project readiness efforts. To promote more robust due diligence during project preparation and enable the timely commencement of activities, it would be useful to consider (i) engaging an independent engineer to validate the cost estimates and adequacy of contingency funds, (ii) assessing contractors’ capacity to work with subcontractors, (iii) advising the executing agency on a realistic construction schedule factoring in local weather conditions, and (iv) setting a solid coordination framework at the project’s outset. For such engineering-intensive projects as this one, approval of ADB financing should be contingent on the availability of (vetted by technical audit and safeguards experts) detailed engineering designs and bidding

46 One of the weigh stations had to be reallocated as per the government’s request, despite the commencement of

civil works at the site. This resulted in the waste of $29,360 of project resources. Subsequently, the PSC has strengthened the coordination of activities carried out under various projects, including state-funded projects.

47 Government of Azerbaijan. 2019. Resolution of the Cabinet of Ministers of the Republic of Azerbaijan No. 76 on the Approval of “Rules of Use of Highway as Toll Road in the Republic of Azerbaijan.” 6 March. Baku.

48 World Economic Forum. 2019. The Global Competitiveness Report. Cologny. In 2019 Azerbaijan ranked 27th of 141 countries in the quality of road infrastructure. At project commencement in 2011, the country ranked 63rd of 139 countries.

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documents. Also, given the criticality of traffic forecasts for such projects’ economic viability, it is important to engage an independent traffic forecast auditor to mitigate the risk of optimism bias on the part of the project preparation consultant and concerned project proponent agency. The required financing can be provided through ADB’s project readiness financing modality. 56. Strengthen the coordination and accountability mechanism. Development partner-financed road projects often involve covenants on important policy measures such as road safety enforcement, road maintenance financing, and axle load regulations. Implementation of these covenants requires an effective coordination and accountability platform for concerned government stakeholders. This platform can also guide the executing agency in a project-purposeful use of loan funds (e.g., for the installation of weighing stations along the project road) and help the government better align the loan funds with the rest of public spending in the road sector and the country’s overall transport network. This will support proactive measures in cases when traffic flows are significantly different from what was expected. 57. Greater attention to road safety. A sound monitoring system for road accidents is necessary to ensure that the newly constructed road is safe for the public. The existing road planning documents should include financial provisions for road safety measures. Before the new roads are opened to traffic, the road agency, in collaboration with the traffic police, should (i) conduct public consultation to increase awareness among road users and promote road safety, and (ii) complete road safety audits and install adequate traffic safety infrastructure. Also, instead of a generic indicator of the reduction in road accidents, it may be expedient to adopt those focused on reducing fatal and serious injuries, or to design a 3-star or better road. 58. Promote the efficient utilization of road maintenance funds. Raising the transparency and accountability of road maintenance funding is necessary to extend the road network’s productive life. To this end, developing a comprehensive road maintenance program should be considered. This could cover: (i) private sector participation (modalities and country areas or zones); (ii) road asset management principles and funding (e.g., performance-based budget allocations to regional maintenance units, and a road asset inventory and database); and (iii) the enforcement of a vehicle axle load management system (e.g. establishing more vehicle weighing stations along the main roads and setting up an effective overloading control system). In future operations in the sector, ADB may consider providing attached TA to help the executing agencies implement “soft” components and GAPs. 59. Increase road sector sustainability. To improve sector performance, tolling should be an integral part of road sector planning. Subject to the positive test results from the first tolling on M1 highway, an expansion of toll roads and their transfer to the private sector for operation and maintenance should be considered. Such an expansion would free up resources and support the road sector’s long-term sustainability. 60. Timing of the project performance evaluation report. The project’s socioeconomic benefits are likely to crystallize more clearly by the end of 2021, 1 year after the government completes and opens to traffic the M1 highway currently planned for the end of 2020. Hence, a project performance evaluation could be done in 2022–2023. By then, the project road will have been operating for more than 4 years, enabling a fair and comprehensive assessment.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Indicators and

Targets Project Achievements Impact Greater economic development in Azerbaijan and expanded trade with the neighboring countries

By 2020 Increase in trade with neighboring countries to $2.5 billion (Baseline: $2.2 billion in 2006)

Trade turnover with neighboring countries reached 3.6 billion in 2018

Outcome An efficient, safe, and sustainable southern road corridor from Bakua

By 2017 10% increase in freight traffic (Baseline: 7,536 million ton-km in 2005) 5% increase in passenger traffic (Baseline: 10,892 million passenger-km in 2005) Increased funding for road maintenance to at least $100 million (Baseline: $55 million in 2006) 2% reduction in road traffic accidents (Baseline: 3,179 in 2005)

Achieved. Freight traffic has grown by 116% by 2017. In 2018, traffic freight was 16.857 million ton-km. Achieved. Passenger traffic has grown by 128% in 2017. In 2018, passenger traffic was 25.276 million passenger-km. Achieved. Budget allocation for road maintenance grew to $151 million in 2017. In 2018, the budget allocation for road maintenance was $180 millionb Achieved. Traffic accidents reduced by 30% in 2017. In 2018, there were 1,817 accidents.

Outputs Section A of 4-lane expressway between Masalli and Astara on the southern corridor built, with access roads rehabilitated.

Section A (22.15 km) of the Masalli-Astara expressway completed by 2016. IRI value for Section A of the expressway maintained at no higher than 3.0 within 5 years after project completion, compared with the average IRI value of 11.0 in 2006.

Partly achieved The original civil works contract for Section A was terminated on 14 October 2015 with about 66% completion of physical progress. The contract for the balance work was approved and contract was signed on 24 June 2016. All works fully completed by August 2017. No access roads were rehabilitated in the project area. Achieved. IRI estimated at 2.0 after 2018.

Appendix 1 17

Design Summary Performance Indicators and

Targets Project Achievements Road network management capacity strengthened

Legal and regulatory frameworks and operational procedures for toll roads developed in 2016.

Achieved. The final report on 'Legal and Regulatory Framework for Toll Roads' submitted in November 2013 and the updated report submitted in April 2014. The build-operate-transfer law was adopted in March 2016 and the rules to implement this law were adopted in April 2016 (low no. 177-VQ 2016 and Presidential Decree no. 867 dated 20 April 2016). The Law on Roads was amended in November 2017 (law no 866-VQD, dated 17 November 2017) to enable tolling on the country’s roads.

a The at-appraisal formulation of the outcome was “An adequate, efficient, safe, and sustainable road network in Azerbaijan, connecting the country domestically and internationally”. This outcome was for the multitranche financing facility and the outcome indicators reflected the country-level dynamics. During implementation, the outcome formulation of the multitranche financing facility has been narrowed down to focus on the southern road corridor from Baku, but the formulation of the original indicators has been retained as these were the best available statistics.

b The numbers would correspond to $248 million and $291 million on the pre-devaluation exchange rate of AZN0.86 per United States dollar.

IRI = International Roughness Index Source: Asian Development Bank, the State Statistics Committee of Azerbaijan.

18 Appendix 2

PROJECT COST AT APPRAISAL AND ACTUAL ($'000)

Appraisal Estimate Actual

Foreign Exchange

Local Currency

Total Cost

Foreign Exchange

Local Currency

Total Cost

A. Investment Costsa

1. Civil Works a. Subproject A (km 0–km 22.1) 33.4 9.0 42.4 29.1 117.3 146.4 b. Subproject B (km 22.1–km 45.1) 39.0 8.4 47.4 - - - c. Subproject C (km 45.1–km 58.6) 19.5 5.1 24.6 - - - d. Local Roads 3.0 9.2 12.2 - 13.6 13.6 2. Weighing Stations and Road Maintenance Equipment 2.0 0.0 2.0 4.0 0.9 4.9 3. Land Acquisition and Resettlement 0.0 5.1 5.1 2.2 2.2 4. Consulting Services a. Construction Supervision, Project Monitoring and

Evaluation, and Preparation of Project 2 2.1 2.6 4.7 8.0 - 8.0

b. Development of Database for Secondary Roads 1.0 1.0 2.0 - - - c. Preparation of Legal and Regulatory Framework and

Operational Procedures for Toll Roads 0.1 0.2 0.3 0.4 - 0.4

5. Taxes and Duties 0.0 31.8 31.8 - 31.2 31.2 Subtotal (A) 100.1 72.4 172.5 41.5 165.2 206.7

B. Project Management 1. Project Implementation Unit 0.3 0.3 0.6 - 1.1 1.1 2. External Financial Auditing 0.0 0.1 0.1 - 0.2 0.2 Subtotal (B) 0.3 0.4 0.7 - 1.3 1.3 Total Base Costs 100.4 72.7 173.2 41.5 166.5 208.0

C. Contingencies 31.2 33.3 64.5 - - - D. Interest and Other Chargesd 11.3 0.0 11.3 8.3 - 8.3 Total Project Costs (A+B+C+D) 142.9 106.1 249.0 49.8 166.5 216.3 Source: Asian Development Bank estimates.

Appendix 3 19

PROJECT COST BY FINANCIER

Table A3.1: Project Cost at Appraisal by Financier ADB Azerbaijan Total Cost

Amount % of Cost Category Amount

% of Cost Category Amount

Taxes and Duties

Item {A} {A/C} {B} {B/C} {C} {D} A. Investment Costs

2. Civil works 126.6 81.89% 28.0 18.11% 154.6 (28.0) 3. Mechanical and equipment

2.0 66.67% 1.0 33.33% 3.0 (1.0)

4. Environment and social mitigation

0 0.00% 5.1 100.00% 5.1 0.0

5. Consultants a. Project management

4.7 75.81% 1.5 24.19% 6.2 (1.5)

b. Capacity development

2.3 67.65% 1.1 32.35% 3.4 (1.1)

Subtotal (A) 135.6 78.70% 36.7 21.30% 172.3 (31.6) B. Recurrent Costs

1 Project Implementation Unit

0.6 85.71% 0.1 14.29% 0.7 (0.1)

3 External Financial Auditing

0.1 50.00% 0.1 50.00% 0.2 (0.1)

Subtotal (B) 0.7 77.78% 0.2 22.22% 0.9 (0.2) Total Base Cost (A+B) 136.3 78.65% 36.9 21.35% 173.2 0.0

C. Unallocated 52.4 81.24% 12.1 18.76% 64.5 0.0 D. Financial Charges During

Implementation 11.3 100.00% 0.0 0.00% 11.3 0.0

Total Project Cost (A+B+C+D)

200.0 80.32% 49.0 19.68% 249.0 (31.8)

% Total Project Cost

80.32%

19.68% 100%

Note: Numbers may not sum precisely because of rounding Source: Asian Development Bank estimates, LFIS

20 Appendix 3

Table A3.2: Project Cost at Completion by Financier ADB Azerbaijan Total Cost

Amount % of Cost Category Amount

% of Cost Category Amount

Taxes and

Duties Item {A} {A/C} {B} {B/C} {C} {D} A. Investment Costs

2. Civil works 160.0 84.75% 28.8 15.25% 188.8 (28.8) 3. Mechanical and equipment

4.9 84.48% 0.9 15.52% 5.8 (0.9)

4. Environment and social mitigation

0 0.00% 2.2 100.00% 2.2 0.0

5. Consultants a. Project management

8.0 85.10% 1.4 14.90% 9.4 (1.4)

b. Capacity development

0.4 80.00% 0.1 20.00% 0.5 (0.1)

Subtotal (A) 173.3 84.75% 33.4 15.25% 206.7 (31.2) B. Recurrent Costs

1 Project Implementation Unit

1.1 100.00% 0.0 0.00% 1.1 0.0

3 External Financial Auditing

0.2 100.00% 0.0 0.00% 0.2 0.0

Subtotal (B) 1.3 100.00% 0.0 0.00% 1.3 0.0 Total Base Cost (A+B) 174.6 100.00% 33.4 0.00% 208.0 0.0

C. Contingencies 0.0 81.24% 0.0 0.00% 0.0 0.0 D. Financial Charges During

Implementation 8.3 100.00% 0.0 0.00% 8.3 0.0

Total Project Cost (A+B+C+D)

182.9 84.56% 33.4 15.44% 216.3 (31.2)

% Total Project Cost

84.56%

15.44%

100%

Note: Numbers may not sum precisely because of rounding Source: Asian Development Bank estimates, LFIS

Appendix 4 21

DISBURSEMENT OF ADB LOAN AND GRANT PROCEEDS

Table 4.1: Annual and Cumulative Disbursement of ADB Loan Proceeds a ($ million)

Annual Disbursement Cumulative Disbursement

Year Amount

($ million) % of Total Amount

($ million) % of Total 2008 1.71 0.9 1.71 0.9 2009 0.71 0.4 2.43 1.3 2010 1.96 1.1 4.39 2.4 2011 23.42 12.8 27.80 15.2 2012 49.40 27.0 77.20 42.2 2013 16.02 8.8 93.23 51.0 2014 33.20 18.2 126.42 69.1 2015 12.93 7.1 139.35 76.2 2016 31.25 17.1 170.61 93.3 2017 12.21 6.7 182.82 100.0 2018 0.06 0.0 182.87 100.0 Total 182.87 100.0% 182.87

ADB = Asian Development Bank. a All amounts are for combined disbursement of OCR and ADF loans including disbursement to advance account. Source: Asian Development Bank.

Figure 4.1: Projection and Cumulative Disbursement of ADB Loan Proceeds ($ million)

110102030405060708090

100110120130140150160170180190200

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Disbursements

Actual Plan

22 Appendix 5

CONTRACT AWARDS OF ADB LOAN AND GRANT PROCEEDS

Table 5.1: Annual and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Annual Contract Awards Cumulative Contract Awards

Yeara Amount

($ million) % of Total Amount

($ million) % of Total 2008 7.99 4.58 7.99 4.58 2009 0.00 0.00 7.99 4.58 2010 79.35 45.45 87.34 50.03 2011 17.30 9.91 104.64 59.94 2012 30.32 17.37 134.96 77.31 2013 0.49 0.28 135.46 77.59 2014 0.00 0.00 135.46 77.59 2015 0.002 0.01 135.48 77.60 2016 39.08 22.39 174.56 99.99 2017 .002 0.01 174.58 100.00 Total 174.58 100.0%

ADB = Asian Development Bank. a {Classified by contract signing dates.} Source: Asian Development Bank.

Figure 5.1: Projection and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

0102030405060708090

100110120130140150160170180190200

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Actual Plan

Appendix 6 23

CHRONOLOGY OF MAIN EVENTS

Date Event 2006 9 November Concept Paper 11-22 November ADB Fact-Finding Mission 2007 22 June MRM 6-8 August 4 October

Loan Negotiations Project approved by the ADB Board

2008 15 January Signing of Loan Agreements 3 March Loan Effectiveness 12 May DSC contract signed 2010 5 August 1st extension of loan closing date 10 December Section A works contract signed 2011 11 March Contract for supply and installation of weighbridges signed 2012 30 March Contract for Lenkaran bridge works signed 5-12 May Mid-term Review Mission 2013 9 September 2nd extension of loan closing date 2015 5 July 3rd extension of local closing date 2016 22 June 4th extension of loan closing date 7 October 1st partial cancelation of loan proceeds 2017 13 January 5th extension of loan closing date 28 September Project Completion 12 December 2nd partial cancelation of loan proceeds 2018 30 April

Loan account financially closed

2019 26 June – 5 July Project completion review mission fielded

Source: Asian Development Bank.

24 Appendix 7

STATUS OF COMPLIANCE WITH LOAN COVENANTS

I. LOAN 2354

Covenant Reference in

Loan Agreement

Status of Compliance

(a) The Borrower shall cause the Project to be carried out with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and highway and road construction, and operation and maintenance road practices. (b) In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to this Loan Agreement.

Article V, Section 4.01

Complied

The Borrower shall make available, promptly as needed, the funds, facilities, services, land and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project and for the operation and maintenance of the Project facilities.

Article V, Section 4.02

Complied

(a) In the carrying out of the Project, the Borrower shall cause competent and qualified consultants and contractors acceptable to ADB, to be employed to an extent and upon terms and conditions satisfactory to the Borrower and ADB. (b) The Borrower shall cause the Project to be carried out in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB. The Borrower shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request.

Article V, Section 4.03

Complied

The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Project and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures.

Article V, Section 4.04

Complied

(a) The Borrower shall (i) maintain, or cause to be maintained, separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; (iii) furnish to ADB, as soon as available but in any event not later than 6 months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the financial covenants of this Loan Agreement as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language; and (iv) furnish to ADB such other information concerning such accounts and financial statements and the audit thereof as ADB

Article V, Section 4.05

Partially Complied The Borrower maintained separate accounts for the project. Annual audited reports and related financial statements were submitted to ADB after the end of each fiscal year during implementation of the Project. Submission of APFS for 2009, 2010, 2011, 2013, 2014, 2015 and 2016 was significantly delayed ranging from 6 to 8 month after the deadline.

Appendix 7 25

shall from time to time reasonably request.

(b) The Borrower shall enable ADB, upon ADB’s request, to discuss the Borrower’s financial statements for the Project and its financial affairs related to the Project from time to time with the auditors appointed by the Borrower pursuant to Section 4.05(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of the Borrower unless the Borrower shall otherwise agree.

The Borrower shall enable ADB’s representatives to inspect the Project, the Goods and Works financed out of the proceeds of the Loan, and any relevant records and documents.

Article V, Section 4.06

Complied

The Borrower shall ensure that the Project facilities are operated, maintained and repaired in accordance with sound administrative, financial, engineering, environmental, highway and road construction, and maintenance and operational practices.

Article V, Section 4.07

Complied

A project steering committee (PSC) shall be established with representation from the Cabinet of Ministers, Ministry of Economic Development, Ministry of Finance, MOT, ARS, and PIU amongst others. PSC will ensure interagency coordination, provide guidance and supervise Project implementation. PSC will be chaired by a Deputy Minister of Transport and shall meet at least semiannually to review implementation progress and provide approvals and guidance as necessary. MOT shall be the Project Executing Agency responsible for overall Project supervision and execution, and shall be assisted by ARS, as implementing agency, responsible for daily management of the Project.

Loan 2354 Schedule 5 Para 1

Not complied with PSC was not established. Instead, the government practiced meetings on need basis, usually chaired by the Deputy Prime-Minister with participation of representative of the concerned agencies such as MOT, ARS/AAY, Ministry of Finance, and Ministry of Economy. This led to deficiencies in the interagency coordination resulting in the weakened coordination and problem-solving framework under the project.

Project Implementation Unit The joint PIU, established within ARS for the ongoing road sector projects financed by ADB, World Bank and EBRD, shall implement the Project. The PIU will comprise ARS staff and externally contracted staff to supplement limited human resources in ARS.

Loan 2354 Schedule 5 Para 2

Complied A Project Implementation Unit for ADB-funded projects was established in January 2008, headed by a Project Director and comprised a team of qualified technical, procurement, financial, and support staff.

Project Management Support In the interest of providing continuity for Project management, the PIU director shall serve in the position throughout the Project implementation period, except in case of gross dereliction of duties or such other serious cause, provided that such a determination is made through due process. MOT, through ARS shall provide the PIU with adequate office space and support services in a form satisfactory to ADB throughout the implementation period. MOT, through ARS shall ensure that, upon completion of the Project, PIU staff is integrated to implement future projects or subprojects financed by ADB.

Loan 2354 Schedule 5 Para 3

Complied There was a replacement of the thee PIU directors during implementation, all made through due process. Adequate office space and support services in a form satisfactory to ADB were provide throughout the implementation period. Upon completion of the project, PIU staff has continued their duties under the ongoing ADB projects,

MOF shall provide, on a timely basis, all counterpart funds, staff, land and other resources necessary for reconstruction, rehabilitation, operations, maintenance, and management of the Project facilities. MOT shall

Loan 2354 Schedule 5 Para 4

Complied MOF provided all counterpart funds, staff, land and other resources necessary for

26 Appendix 7

ensure that ARS can successfully implement the Project as described in Schedule 1, and operate and maintain Project facilities upon completion.

implementation of projects as required under loan agreement.

MOT shall cause ARS to ensure that the Works financed under the Project comply with technical specifications of the design. MOT through ARS shall ensure that construction supervision, quality control, and project management are performed according to internationally accepted standards and practices.

Loan 2354 Schedule 5 Para 5

Complied ARS/AAY followed Technical Specifications of International standards and projects were implemented according to the internationally accepted standards and practices. The quality control of construction was carried out by the contractor and the construction supervision consultants. The consultants inspected and assessed the works to ensure that the standard and specifications in the project document were met. No quality problem was reported in the defect liability period.

In the event that (i) any change in ownership of the Project Road or Project facilities, (ii) any sale, transfer, or assignment of interest or control in the Project Road or Project facilities, or (iii) any lease or other contract or other modification of MOT’s or ARS’s functions and authority over operation and maintenance of the Project Road or Project facilities, is anticipated, MOT shall ensure that ADB’s consent is obtained at least six months prior to the implementation of such a plan. MOT shall ensure that any such changes shall be carried out in a legal and transparent manner.

Loan 2354 Schedule 5 Para 6

Complied No such issue occurred during the implementation period

MOT shall ensure that ARS develops in consultation with ADB, and MOT shall approve, a road maintenance plan for the fiscal years 2008-2015 by 30 September 2008, which will (i) establish a system for efficient planning and prioritization of road maintenance works; (ii) provide funding modalities to finance the maintenance of relevant roads acceptable to ADB, (iii) develop or adopt adequate road maintenance standards and prepare relevant road maintenance planning and operational manuals; and (iv) provide training to strengthen the capacity of local maintenance units. MOT shall ensure that a road maintenance program covering the country’s road network is implemented.

Loan 2354 Schedule 5 Para 7

Complied Maintenance plan includes maintenance management system, which analyzes the data and provide prioritization of road network for maintenance and required standards.

Prior to the completion of the Works, MOT shall have used its best efforts to enter into maintenance concession with a private sector entity for at least 20 km of local roads along the Project Road. MOT shall cause ARS to submit the bidding documents and the concession framework to ADB by the end of 2008.

Loan 2354 Schedule 5 Para 8

Not complied with Bidding for the maintenance concession for the local roads along the Project Road was cancelled by mutual agreement between Borrower and ADB. Instead of 120 km of the local roads it was agreed to rehabilitate 39.5 km of rural roads in Yevlakh-Ganja-Qazakh, which is outside of the project area.

MOT shall ensure that at least six months prior to the opening for operation of the Project Road: (i) a plan, acceptable to ADB, for ensuring safe operation of road infrastructure facilities, is developed and implemented; and the Borrower acting through relevant government authorities shall ensure that (ii) traffic police patrols the Project road and enforces the national laws and regulations. MOT shall ensure appropriate safety enforcement measures on the Project road and shall cause ARS to monitor the accident rate and traffic volume after commencement of the operation of the

Loan 2354 Schedule 5 Para 9

Complied Planning for the continuous patrolling of the Project Road falls with the State Road Police (DYP). DYP made significant progress in road safety monitoring on major roads throughout the country: vehicle speed radars and surveillance cameras have been installed on all main highways, and all city roads through the country.

Appendix 7 27

Project Road. The Borrower acting through relevant government agencies shall provide strict border control and road patrol to prevent trafficking of humans, wildlife, endangered species, and illegal substances on the Project Road.

Loan 2354 Schedule 5 Para 10

Complied Appropriate legislations are in place (the Law of AZ Rep. on fight against human trafficking, the Law of AZ Rep. On specially protected natural territories and objects, the Law of the Republic of Azerbaijan on the Control of Illicit Trafficking in Narcotic Drugs, Psychotropic Substances and Precursors), the responsibility of relevant government agencies.

MOT shall ensure that ARS establishes vehicle weighing stations within the Project Road to control the axle overloading and institute appropriate procedures and regulations to enforce the axle load control by the completion of the Project.

Loan 2354 Schedule 5 Para 11

Not complied with. As per the Decree of the Cabinet of Ministers of the Republic of Azerbaijan no. 214 S dated 16 July 2015, 32 weigh bridge stations were supposed to be installed in Azerbaijan, including three stations within project road. Eventually, no vehicle weighing station was installed on the project road.

MOT shall ensure that at least six months prior to the opening for operation of the Project Road, ARS shall have provided ADB with the MOT-endorsed framework and definitive action plan for establishing tolling roads along any Borrower’s expressway road financed by ADB. MOT shall cause ARS to review and inform ADB by mid-2010 of any significant difficulties in establishing tolls on expressway roads under the Borrower’s laws and regulations.

Loan 2354 Schedule 5 Para 12

Partially complied In 2014 AAY conducted review of the country's legal and regulatory framework on toll road concessions. The cross-sectoral legal framework for private participation in infrastructure (that could be used for toll road concessions) was adopted in April 2016 (Law on the Implementation of Construction and Infrastructure Investment Projects with Special (Private) Financing [law no. 177-VQ 2016]); Presidential Decree no. 867 dated on 20 April 2016 approving rules on the implementation of the investment projects delivered under law no. 177-VQ of 2016). This covenant was transferred to Tranche 1 of the Second Road Network Development Investment Program MFF (Loan 2921). In February 2018, the government decided to prioritize the introduction of tolling (to be run by AAY) on the new Baku-Russian border- highway, whose construction is expected to be completed by end-2020. As defined in the RRP, para 5, and in the title of the Loan Agreement (Loan 2354: Road Network Development Program, Project 1 – Masally-Astara section of the North-South Highway) both M1 and M3 are the integral part of the North-South highway running from the Russian border to the Iranian border through Baku. Thus, the tolling will be first establishment along the Project road on M1 highway, while government the introduction of tolling on M3 highway is considered as the second stage after 2020.

MOT shall ensure that at least six months prior to the opening for operation of the Project Road, ARS shall have provided ADB with the Borrower’s emission standards and the penalties for infringement of such

Loan 2354 Schedule 5 Para 13

Complied The vehicle emission standards are enforced by the Azerbaijan’s State Traffic Police

28 Appendix 7

standards. The Borrower shall ensure through the relevant agencies that the said vehicle emission standards are enforced

(DYP). The DYP has appropriate equipment for carrying out road-side checks to ensure compliance with the Republic of Azerbaijan’s vehicle emission standards legislation.

MOT shall ensure that the Project and all Project facilities are developed, conducted, implemented and maintained in accordance with its applicable laws and regulations and ADB’s Environment Policy (2002).

Loan 2354 Schedule 5 Para 14

Complied The AAY implemented projects in accordance with its applicable laws and regulations and ADB’s Environment Policy. Regular reports were submitted to the Bank.

MOT shall ensure that an environmental impact assessment (EIA) is prepared for the Project in accordance with its applicable laws and regulations and ADB’s Environment Policy, and that such EIA is approved by ADB and Azerbaijan’s Ministry of Ecology and Natural Resources and is adhered to during design, construction and operation phases of the Project.

Loan 2354 Schedule 5 Para15

Complied Final environmental monitoring report submitted. An environmental impact assessment (EIA) for the Project was prepared in accordance with Azerbaijan’s applicable laws and regulations and ADBs Environment Policy and it has been approved by ADB. This EIA was endorsed by the Ministry of Transport on 19 June 2007 and it was passed to the Ministry of Ecology and Natural Resources and approved. A summary environmental impact assessment (SEIA) was disclosed through the ADB website on 16 January 2007.

MOT shall ensure that the environmental management plan (EMP) is implemented in accordance with its terms, and that all recommendations of the EMP are incorporated in the bidding documents, Works contracts and consultant’s contracts to ensure compliance.

Loan 2354 Schedule 5 Para 16

Complied An action plan was put in place to rectify non-compliance identified under roadworks contract.

MOT shall ensure that: (a) ARS monitors the implementation of EMPs by the contractor; (b) Works and consulting services contracts include specific provisions for EMPs’ preparation, implementation and monitoring, (c) mitigation measures in EMPs are adequately implemented by the contractors, and (d) adequate budgetary allocation for these activities are timely provided. MOT shall also ensure that ARS timely submits semi-annual monitoring reports on EMPs implementation to ADB.

Loan 2354 Schedule 5 Para 17

Complied Final environmental monitoring report submitted. Works contracts contain provision for the contractors to prepare contract specific EMPs in accordance with the EMP contained in the EIA and SEIA. Monitoring reports were submitted to ADB regularly.

The Borrower acting through relevant government authorities shall ensure that all land and rights-of-way required for the Project are made available free and clear from any and all rights and claims of third parties and any other encumbrances whatsoever in a timely manner and that land acquisition and resettlement are carried out pursuant to the Resettlement Plan (RP) as agreed with ADB, in conformity with (i) Borrower’s applicable laws and regulations, (ii) ADB’s Involuntary Resettlement Policy (1995).

Loan 2354 Schedule 5 Para 18

Complied Land acquisition started in year 2007 and completed in year 2015 and the entire process was monitored by the Project team. There were some events including court cases which were attended in accordance with established rules and regulations and all these events were reported to ADB, as and when it happened.

MOT shall cause ARS to ensure that within 3 months of the effective date of this Loan Agreement, the PIU shall have engaged an independent agency or consultant, acceptable to ADB and the Borrower, to conduct monitoring and evaluation of the resettlement process and impacts. Reports of such independent monitoring shall be submitted to ADB on a quarterly basis.

Loan 2354 Schedule 5 Para 19

Complied Engagement was done and contract completed. Revised External Resettlement Monitor report shows that land acquisition activities for Section A have been completed.

MOT shall ensure that contractors commence the Works only after the Resettlement Plan has been

Loan 2354 Schedule 5

Complied

Appendix 7 29

implemented in accordance with its terms. Para 20 MOT shall ensure that an independent monitoring of the social impacts throughout implementation of the Project is conducted, in consultation with local governments and beneficiaries.

Loan 2354Schedule 5 Para 21

Complied

External Monitoring Consultants submitted reports to ADB.

MOT shall ensure that all Works contractors (i) comply with all applicable labor laws, (ii) use their best efforts to maximize employment of women and local people, including disadvantaged and affected persons, living in the Project area, (iii) disseminate information at worksites on health safety for those employed during construction, (iv) provide equal pay to men and women for work of equal type, (v) provide safe working conditions and separate culturally appropriate facilities for male and female workers, (vi) do not use forced or involuntary labor, and (vii) do not use labor of children and minors below age 16. Bidding documents and Works contracts for the Project shall include specific clauses on these undertakings. MOT shall ensure that the PIU and Construction Supervision Consultant monitor and report compliance with these provisions throughout Project implementation.

Loan 2354 Schedule 5 Para 22

Complied The Bidding Documents and Works contracts contain specific clauses requiring contractors to comply with the provisions of this covenant.

MOT shall ensure that the GAP is developed within six (6) months of the Effective Date and is fully implemented in a timely manner over the Project period, and that adequate resources are allocated for this purpose. The GAP shall: (a) ensure women's representation in management and dispute resolution bodies of resettled communities, (b) integrate women's needs in the design and operation of Project outputs; (c) establish targets for women’s participation in training, construction and maintenance, and other Project activities; and (d) ensure women's effective involvement in the monitoring and evaluation of the Project. MOT shall ensure that ARS with assistance of Project management consultants develops a field manual on GAP implementation and conducts training for Project staff. Gender-related indicators shall be included in PPMS and sex-disaggregated data shall be collected and monitored. MOT shall ensure that GAP implementation is closely monitored and reported to ADB semiannually.

Loan 2354 Schedule 5 Para 23

Partially complied Gender Action Plan was developed in 2014 for the Loan 2354 and Loan 2831 that covered sections A, B and C of Masalli-Astara highway. About 50% of the actions envisaged in Gender Action Plan have been implemented. Gender-sensitive road safety awareness training was conducted to the all communities, namely 21 villages along the road in Section A, B, C during May 2015. Above 50% of participants were female residents of these villages. The training sessions were conducted by the Social Safeguards Specialist of the DSC. Women and men were given equal opportunities during the construction phase.

MOT and ARS shall maintain separate project records and accounts to identify the Works, Goods and consulting services financed from the Loan proceeds, financing resources received, expenditures incurred for the Project, and use of counterpart funds. These project accounts and related financial statements will be audited annually in accordance with sound auditing standards by an independent auditor acceptable to ADB. MOF shall ensure that annual audited reports and related financial statements are submitted to ADB within six months after the end of each fiscal year during implementation of the Project. The audit of the imprest account and statement of expenditure will be carried out as part of the regular annual audit. The auditor's opinion of the examination of the imprest account and statement of expenditure should be separately set out in the auditor's report.

Loan 2354 Schedule 5 Para 24

Partially complied Annual audited reports and related financial statements were submitted to ADB after the end of each fiscal year during implementation of the Project. Submission of APFS for 2009, 2010, 2011, 2013, 2014, 2015 and 2016 was significantly delayed ranging from 6 to 8 month after the deadline.

MOF shall ensure that an annual performance audit for the Project is completed pursuant to the terms of reference to be developed by ADB. All costs incurred

Loan 2354 Schedule 5 Para 25

Complied Instead of an annual performance audit, joint

30 Appendix 7

in connection with such performance audits shall be the Project's cost.

EA and ADB review missions were conducted annually, which reviewed physical progress, project design compliance, and contract implementation progress, among others. EA submitted monthly progress reports and ADB submitted Aide Memoires for each completed review mission

(a) ADB, MOED, MOF, MOT and ARS shall meet regularly as required to discuss the progress of the Project and any changes to implementation arrangements or remedial measures required to be undertaken towards achieving the objectives of the Project. (b) A midterm review of the Project will be undertaken by ADB and the Borrower in 2008. The midterm review will include review of issues and any problems or weaknesses in implementation arrangements, institutional, administrative, organizational, technical, environmental, social, poverty reduction, resettlement, economic, financial, and other relevant aspects that may have an impact on the performance of the Project, and its continuing viability. The review shall also examine progress in resettlement, environment, poverty impact, and compliance with assurances in this Loan Agreement and agree on any changes needed to achieve the objectives of the Project.

Loan 2354 Schedule 5 Para 26

Complied a) Meetings were organized between the Stakeholders to discuss the progress of the Project and any changes to implementation arrangements or remedial measures required to be undertaken towards achieving the objectives of the Project. b) Regular review missions were fielded to review the project's implementation status, discuss pending issues, and agree on actions to be taken for improvement.

MOT shall ensure that ADB is informed about the Borrower's policies, strategies and programs related to the road subsector that will materially affect the financial viability of the Project.

Loan 2354 Schedule 5 Para 27

Complied

MOF, MOT and ARS shall follow ADB’s Anticorruption Policy (1998, as amended to date) and acknowledge that ADB, consistent with its commitment to good governance, accountability and transparency, reserves the right to undertake directly, or through its agents, investigation of any alleged corrupt, fraudulent, collusive or coercive practices related to the project/subproject and cooperate with such investigation and extend all necessary assistance including access to all relevant books and records, and engaging independent experts who may be needed for satisfactory completion of such investigations. All costs related to such investigations shall be borne by the Project. MOT shall ensure implementation of the following measures: (i) anticorruption provisions acceptable to ADB shall be included in all bidding documents and contracts, including provisions specifying the right of ADB to audit and examine the records and accounts of the executing agencies and all contractors, suppliers, consultants, and other service providers as they relate to the Project; (ii) all decisions relating to procurement shall be made by the Tendering Committee that comprises representatives of the MOED, MOF, MOT, and the State Procurement Agency (as observer) and other relevant agencies in accordance with ADB’s Procurement Guidelines; and (iii) the Construction Supervision Consultant shall verify the contractors’ invoices in accordance with working drawings and contract specifications. MOF and MOT shall also cause ARS and other involved agencies to

Loan 2354 Schedule 5 Para 28

Complied OAI investigated allegations that fraudulent practice and conflict of interest occurred in the bidding for one of the contracts under the project. The investigation resulted in the debarment of two companies and two individuals.

Appendix 7 31

undertake additional measures to improve governance, accountability, and transparency, including (i) independent external auditing of contracts, accounts, and financial statements; (ii) timely disclosure of information on selection of consultants and contractors through local newspapers. MOT shall ensure that ARS, with the assistance of the PIU and the Construction Supervision Consultant, monitors and evaluates Project impacts to ensure that the Project facilities are managed effectively and the Project benefits are maximized. MOT shall ensure that ARS collects the data agreed with ADB at the inception, Project completion, and 3 years after Project completion.

Loan 2354 Schedule 5 Para 29

Complied With the assistance of the PIU and the Construction Supervision Consultant, AYY regularly collected data and closely monitored management of the Project facilities. AYY produced reports on the project impacts and shared them with ADB.

MOT shall ensure that within three months of the effective date of this Loan Agreement, ARS shall have established a Project Performance Management System (PPMS) in a form and substance acceptable to ADB, in accordance with the Project performance indicators agreed with ADB. MOT shall ensure that ARS undertakes periodic Project performance review in accordance with the PPMS to evaluate the scope, implementation arrangements, progress and achievements of objectives of the Project.

Loan 2354 Schedule 5 Para 30

Complied PPMS developed and submitted to ADB in 2014.

MOT shall ensure that ARS prepares and submits to ADB quarterly progress reports for the Project. The reports will include a description of physical progress, problems, and difficulties encountered and a summary of financial accounts that will consist of loan expenditures during the period, year to date, and total to date, and include a report on progress of the implementation of mitigation measures as specified in the contracts and EMP and measures to ensure environmentally responsible procurement.

Loan 2354 Schedule 5 Para 31

Complied AAY submitted implementation reports as regularly as required under the loan agreement.

MOT shall ensure that the Project Completion Report is submitted to ADB within three months following completion of the Project. It shall cover a detailed evaluation of the Project, including design, costs, contractors’ and consultants’ performance, social, environmental and economic impact, economic rate of return, and other details pertinent to Project performance as may be requested by ADB.

Loan 2354 Schedule 5 Para 32

Complied The AAY submitted draft PCR in Dec 2017, and final PCR in April 2018.

II. LOAN 2355

Covenant Reference in

Loan Agreement Status of Compliance

Section 4.01. In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to the Ordinary Operations Loan Agreement.

Loan 2355 Article IV, Section 4.01.

Complied

Section 4.02. (a) The Borrower shall (i) maintain, or cause to be maintained, separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications,

Loan 2355 Article IV, Section 4.02.

Partially complied The AAY maintaining separate accounts for the project and submitting certified copies of audited accounts and financial statements and reports of the auditors. Submission of

32 Appendix 7

experience and terms of reference are acceptable to ADB; (iii) furnish to ADB, as soon as available but in any event not later than six months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the financial covenants of this Loan Agreement as well as on the use of the procedures for imprest account/statement of expenditures) all in the English language; and (iv) furnish to ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. (b) The Borrower shall enable ADB, upon ADB’s request, to discuss the Borrower’s financial statements for the Project and its financial affairs related to the Project from time to time with the auditors appointed by the Borrower pursuant to Section 4.02(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of the Borrower unless the Borrower shall otherwise agree.

APFS for 2009, 2010, 2011, 2013, 2014, 2015 and 2016 was significantly delayed ranging from 6 to 8 month after the deadline. Complied

Section 4.03. The Borrower shall enable ADB’s representatives to inspect the Project, Project facilities, the Goods and Works financed out of the proceeds of the Loan, all other plants, sites, properties and equipment of the Borrower, and any relevant records and documents.

Loan 2355 Article IV, Section 4.03.

Complied

Appendix 8 33

ENVIRONMENTAL SAFEGUARDS AUDIT SUMMARY 1. INTRODUCTION AND PROJECT BACKGROUND

The Masalli to Astara (border with Iran) section of the M3 Motorway was constructed as part of the ADB’s $600 million Multitranche Financing Facility (MFF) for Road Network Development Program (RNDP) in Azerbaijan. This segment was comprised of two sections namely:

(i) Masalli to Lenkaran, from km 142.9 to km 165.05 (Tranche 1 or Project 1); and (ii) Lenrakan to Astara, from km 165.05 to km 201.9 (Tranche 3 or Project 3).

Both projects were completed on 28 September 2017. The financial closure for Tranche 1 was on 12 January 2018, while that of Tranche 3 was on 30 April 2018. During the PPTA in late 2007 of the project an Environmental Impact Assessment (EIA) document was prepared for the entire section under ADB’s Category A project categorization. During the implementation, Tranche 1 was to be implemented in accordance with Azerbaijan’s applicable laws and regulations and ADB’s Environment Policy (2002). While Tranche 3 was to be implemented in accordance with Azerbaijan’s applicable laws and regulations and ADB's Safeguard Policy Statement (2009). The Executing Agency for the project was the Azeravtoyol (AAY) Open Joint Stock Company (formerly referred to as Azerbaijan Road Service, ARS). The Construction Supervision Consultant (or the Engineer) was Nippon Koei UK Ltd., supervising the Projects with the corresponding Contractors as follows:

Table 1: Project Sections and Contractors Tranche Project Contractor

Tranche 1 Section A (0 - 22.15 km)

− Azerinşaatservice LLC (first Contractor,

Azerbaijani) − KOLİN İnşaat, Turizm Sanayi ve Ticaret

A.Ş. (second Contractor, Turkish) Lenkaran Bridge (km 31+555 - 32+350) − Ganja Korpu Tikinti-2 OJC (Azerbaijani)

Tranche 3 Section B (22.15 - 45.00 km) − Özgün Construction Industry and Trading

Co. Inc. (Azerbaijani) Section C (45.00 – 62.14 km) − Polat LLC (Turkish)

One important feature in Section B was the existence of the plain part of the Hirkan Forest Reserve (called informally "Moscow forest" as referred, since this placed was worked on by professors and students from Moscow State University during the Soviet times) This is a protected and preserved plot of rare lower forest of the Hirkan type, which not long ago covered almost the whole Lenkaran Lowland. Owing to the protected stature of this plot, it became necessary to deploy a biodiversity specialist by the Engineer prior to actual construction at the site to undertake a detailed study of the area and to propose additional measures to mitigate any adverse impact to its ecosystem. The result of the specialized study was considered in the construction activities particularly in the vicinities of the “Moscow Forest”. As part of Project Completion Report (PCR) preparation, it became necessary to conduct an independent environmental audit, generally to ensure that all environmental safeguards have

34 Appendix 8

been fully implemented and that there are no issues which remain unresolved. A field mission to Azerbaijan was arranged on 10-15 November 2019 for direct collaboration with AZRM, PIU, and the conduct of actual field visit. The actual field visit was done on 12 November 2019.

2. REVIEW OF PROJECT ENVIRONMENTAL DOCUMENTS

The AZRM has provided several previous documents for both Tranche 1 and Tranche 3 Projects. This consisted of Environmental Impact Assessment (EIA) document, Bi-annual Environmental Monitoring Reports, Monthly Progress Reports and other project related documents. All of these were utilized to gain familiarity of the relevant issues that the project had during the phases of the construction and form part of the Environmental Audit. The Environmental Impact Assessment for the Masalli – Astara Section was done in 2007 during the PPTA, which produced the EIA report with the corresponding Environmental Management Plan (EMP). During the construction stage, a basic requirement on the part of the Contractors was to draft their own Site Specific Environmental Management Plan (SSEMP) following the requirements of the Project EMP at the initial stages of the construction activities. These SSEMPs were reviewed by the Construction Supervision Consultant (CSC) in accordance with the stipulated project requirements. The Bi-Annual Environmental Monitoring Reports for Tranches 1 and 3 by the CSC provided information regarding the implementation of environmental safeguards for Section A road, Lenkaran Bridge, Sections B and Section C projects. Complaints and grievances from the public were recorded in Grievance Registers of each project and which were mainly on local access impacts and dust. Practically, all of these project related issues were resolved and considered closed prior to end of the project. The production of these documents in a detailed manner and with all the numerous non-conformance letters sent to the Contractors, manifest the satisfactory performance of the Engineer’s duty. Based on the assessment of the environmental monitoring and management activities, the first Contractor of Section A (Azerinşaat) as well as for the Lenkaran Bridge (Ganja Korpu) failed to fulfill the environmental aspects of the project. The second Contractor for Section A, Kolin, did far better than Azerinşaat, and the site conditions improved. The final report revealed that those initial issues in Section A were somewhat resolved at the end of the project. For the Lenkaran Bridge, the slopes underwent gradual natural revegetation and was no longer a concern at the final inspection. The implementation of the Environmental Safeguards requirements for Sections B and C was quite satisfactory. At the final part of the construction phase, the Project Road vicinities were generally acceptable in terms of the environmental requirements and the documentary portions were also satisfactory. Section C Contractor demonstrated better capacities in fulfilling the environmental requirements of the Project.

3. INSPECTION OF THE PROJECT ROAD

During actual site visit along the Project Road for this mission, on-the-spot field inspections were conducted along the corridor, material sources and former Contractor’s work camps and to other areas with access from the motorway. The objective of the site visit was to ascertain the conditions of the previously impacted areas and to determine the degree with which they were reinstated as per requirements of the Project.

Appendix 8 35

A site visit to the Masalli-Astara project road was done on 11 November 2019 with the assistance of designated person by AYY-PIU. The inspection of sites started at Section A, Interchange A1, to Section B, Lenkaran Bridge, Section C and ending at Astara Interchange. In addition, some sites accessible to the project road were also inspected like former contractors’ camps, and materials sources. During the inspection, photos were taken and the general surroundings were assessed to ascertain the environmental conditions of the sites. Overall the following are the general observations for all the sites inspected:

• Vegetation, mainly grasses, and bushes are now established along the roadsides, bridge embankments characterized as fair to good. Most of the sites previously stripped for the construction were already covered with grasses.

• The corridor is generally clean also, with no remnants of used materials for the construction.

• Embankments are generally stabilized with grass covers against surficial erosion. • Former camp sites also were generally leveled with few floorings remaining, possibly with

owner’s permission. • The inspected materials sites were still being operated by others and the current condition

might have been due to these operations.

4. CONCLUSIONS AND RECOMMENDATIONS

The Environmental Audit generally evaluated the project’s compliance to prescribed environmental safeguards. Sufficient information were gathered and utilized to examine how the Contractors implemented the required environmental measures and responded to local issues under the supervision of the Engineer. The Final Environmental Monitoring Reports provided a good summary of the environmental aspects of all the contracts. Based on the documentary review, Section C Contractor (Polat) comparatively performed very well than the rest of the contractors. Internal management issues were encountered by the first Contractors in Section A (Azerinşaat) and in Lenkaran Bridge (Ganja Korpu) with both contractors judged as non-compliant. The replacement Contractor in Section A (Kolin) managed to provide a better environmental manage performance than the previous one; thus, environmental conditions were acceptable in the end. Section B Contractor (Özgün) and Section C Contractor (Polat) maintained a generally good level of environmental management, and their documentation was in good order. Most of the issues encountered during the construction phase were mainly on site contamination, dust control, solid/construction waste management and general house-keeping. Based on the site visit, the impacted areas are already well recovered, a manifestation of the satisfactory implementation of the Project Environmental Management Plan. No major adverse impacts were discovered, largely reinstatement of the environment is at acceptable levels and all previously raised issued were resolved. Among the lessons learnt from the project are as follows:

• Environmental compliance stems from a well prepared SSEMP; this should become indispensable requirement prior to the start of any construction activities.

• Supportive management is necessary to have satisfactory level of environmental compliance.

• Some sanctions should be introduced in the Contract as part of the enforcement mechanisms.

36 Appendix 9

GENDER ACTION PLAN IMPLEMENTATION MATRIX MFF Road Network Development Program, Project 1

Output 1: Enhanced road safety and improved travel condition Status Provide gender-sensitive road safety awareness training to all community members

At least 50% of participants involved in awareness training are female

Training was held on 28 September 2016 for local communities from Yukhari Nuvedi, Burjali, and Shiyakaran villages. Total number of participants was 21 and 12 of them were female (57%).

Improve road network with aim of making it safer to use compared with alternative routes

Road built to international safety standards Complied

Creation of roadside rest areas with separate sanitary facilities for female travelers including breastfeeding and changing room for women travelling with babies

Separate toilets for women in place and separate baby changing/feeding room in place

Not complied

Output 2: Improved livelihoods for residents of local villages

Implementation of equal opportunities for women to be employed during the construction phase with equal pay

Allocation of at least 20% of local construction workforce jobs to women with 10% of these to be female heads of households. Equal pay for equal work at all grades where both genders are employed doing work of equal value

Not complied. No involvement of women in the construction industry mainly because of cultural restrictions.

Announce recruitment opportunities and display recruitment notices widely, clearly targeted at women as well as men

Culturally appropriate recruitment announcements and notices to attract female workers disseminated via local media, such as newspapers and radio, or displayed in local facilities frequented by women, prior to commencement of local hiring

Complied

Provide the basic facilities for female and male construction workers at construction sites

Separate toilets for women Separate toilets were provided for women and men during construction

Conduct trainings on financial management, entrepreneurship and business development

At least 100 women participate in trainings; At least 20 women drew up business plans for micro/small enterprises

Overall, 100 women were targeted through trainings in Lenkaran, Masali, Astara and Lerik. Trainings covered the topics on how to start and expand business. 30 business plans were developed. The activities were implemented by Sidus Group

Appendix 9 37

Inform potential female employees about training opportunity prior to recruitment; Disseminate and display notices about the training opportunity in local media and in local facilities frequented by women

Announcements The program was planned to be announced to the local NGOs and representatives of the banks, local women associations, to the social department of State Government Agency. The information would be disseminated through local newspapers

Output 3: Reduction in road construction related health and safety threats to local females

Provide awareness training on risk of sexually transmitted infections and human trafficking and how to avoid and/or reduce threats of exposure to these risks

At least 1 STI and drug/human trafficking awareness-raising training event conducted for all project staff and per each civil works contract package

Trainings are conducted on continuous basis

4 STI (including a focus on HIV/AIDS) and drug/human trafficking awareness-raising training events conducted for residents of all project feparticipation by women per civil works contract package (minimum age of 16 years for attendance)

At least one training is held per month with the participation of minimum 10 to 12 participants.

2 women only STI (including a focus on HIV/AIDS) band drug/human trafficking awareness-raising training events per civil works contract package conducted for women from project affected villages

At least one training is held per month with the participation of minimum 10 to 12 participants.

Output 4: Gender-related institutional capacity strengthening

Preparation and dissemination of GAP Implementation Manual

GAP Manual known and implemented by key managers

Manual developed in local language

DSC to recruit SSS to support capacity in implementing and monitoring the GAP

One SSS recruited for 2 years period for intermittent time inputs during completion phase

Complied

Ensure inclusion of gender-sensitivity in the terms of reference for all new staff and consultants of DSC and ARS

Clause requiring gender sensitivity prepared and included as a non-negotiable requirement in the template used to prepare terms of reference for all new staff and consultants

Complied. The DSC staff was recruited with gender sensitivity training background.

Ensure the use of gender sensitive indicators, sex-disaggregated data in PPMS monitoring and presentation of results

Gender disaggregation required by PPMS Monitoring Plan

Not complied

38 Appendix 10

ECONOMIC REEVALUATION

ECONOMIC REEVALUATION OF TRANCHES 1 AND 3, PROJECT NO 39176

A. Background and scope 1. This appendix contains the economic re-evaluation of projects completed under tranches 1 and 3 of the Multi-Tranche Financing Facility (MFF) for the Azerbaijan Road Network Development Program (project number 39176 with RRP dated Sep 2007). The principal output of these two tranches was approximately 59 kilometers (km) of limited-access four lane road on a new alignment between a point south of Masalli via the city of Lankaran to Astara on the Iranian border.49 This project included the Lankaran bridge and vehicle weighing and road maintenance equipment. An additional output was rehabilitation of 39.5 km of rural roads in Ganja region. The four lane road and the rural roads projects are entirely independent in economic terms and are therefore re-evaluated separately. 2. The rationale for the Masalli-Astara road was the addition of road transport capacity to the international corridor between Baku and Iran; in 2010 the Astara border crossing point (BCP) was reported to be Azerbaijan’s busiest international road border50. The principal expected source of benefits was the saving in road user costs (RUCs) arising from traffic diverting from the old two lane M3 road to the new alignment (also referred to as the M3). At the time of appraisal it was assumed that the new road would be open in 2010, but in the event substantive construction started at various dates between 2011 and 2016, was completed in September 2017 and formally opened in September 2018. 3. The rationale for the rural roads was that of ensuring continued, and improved access by people in the Ganja region to the M2 east-west highway between Azerbaijan and Georgia. The roads were upgraded from categories III and IV to category II. They were constructed in 2011-12. 4. At the time of the RRP in 2007, buoyed by high oil prices, GDP was forecast to rise by 9% per year from 2008 to 2012, falling to 8.1% from 2013 to 2027. However, oil prices fell sharply in 2008-9, rose in 2011 to 2014 but fell again in late 2014 and have remained low. GDP growth was 5.5% per year from 2008 to 2012 and just 1.2% from 2013 to 2018. The drop in GDP rendered traffic forecasts made in 2007 over-optimistic. At the time of the RRP the manat was trading at $1=AZN0.85, but after floating in December 2015 it fell to its current parity of $1=AZN1.7. This has had an adverse effect on the dollar value of journey time savings.

5. The city of Lankaran (2019 population of 229,000) is mid-way between the start and end points of the M3. It is the center of an important agricultural area, known for tea and fruit. The coastal towns north and south of Lankaran attract domestic tourism. B. Economic analysis at appraisal 6. The Masalli-Astara project was appraised at the time of the original RRP in 2007 and updated, in support of a Periodic Financing Request (PFR), in 2011. At the time of the original appraisal it was assumed, based on 2006 traffic counts and 2006 origin and destination (OD)

49 The intention had been to take the M3 to a new BCP, but agreement on its location could not be reached and the

final 2.8km to the border was scrapped 50 in tonnage terms. See Ziyadov, T, 2012. Azerbaijan as a Regional Hub in Central Eurasia. Azerbaijan Diplomatic

Academy, Baku

Appendix 10 39

surveys, that around 75% of traffic would divert to the new road. Normal corridor traffic was forecast to grow at 8% annually over the evaluation period. Completion of the entire north-south road link from Russia to Iran would increase traffic by a further 10.5%. Project financial cost at 2007 prices (excluding taxes, duties, price contingencies and financing costs) was $176 million (around $210 million at 2018 prices) and the EIRR 12.8%. Benefits included vehicle operating cost (VOC) and journey time savings, and safety benefits. The new road was expected to open in 2010. 7. The 2011 update used 2008 traffic and the same 2006 OD survey results to estimate diversions. Traffic between 2006 and 2008 had not grown as expected at RRP and forecast traffic was growth was reduced to 5% per year. Despite an increase in initial financial cost to $286 million (at 2010 prices, excluding taxes, duties and price contingencies), the EIRR was little different at 12.9%. The 2011 evaluation estimated much higher journey time and crash cost savings when compared with those at RRP. The rural roads were not subject to appraisal, while Lankaran bridge was treated as an integral part of the Masalli-Astara project and not appraised separately. C. Re-evaluation of Masalli-Astara road Sectioning for analysis 8. For economic analysis purposes the new M3 is divided into four sections from north to south, each connecting two interchanges (ICs). Section A (22.1 km) from IC1 (with the old M3 south of Masalli town) to IC2 (local road that connects Girdani to Lankaran), section B1 (7.9 km) from IC2 to IC3 (R48 junction), section B2 (5.3 km) from IC3 to IC4 (old M3 connecting to Lankaran south), and section C (23.8 km) from IC4 to IC5 (old M3 approximately 5 km from Astara town and 7 km from the BCP). Demand estimates 9. There are traffic data for the old M3 from 2005 to just before opening of the new M3 in 2018. In preparation for this re-evaluation seven day 24h classified counts were undertaken at four sites along the new M3 between 26 Sep and 2 Oct 2019. These data make it possible to estimate historic traffic growth in the corridor and diversions from the old to the new M3. Table 1 summarizes average daily traffic (ADT) estimates on the old M3.

Table 1: Motorized traffic demand on old M3, 2005-18

Year Location Small passenger

Buses & MGVs

3-4 axle trucks

>4 axle trucks

ADT, vehicles/day

2005a Liman (Lankaran N) 4,756

2005a N of Lankaran 4,292

2006b Masalli-Lankaran 3,952 477 301 265 4,995

2006b Lankaran-Astara 3,136 274 191 174 3,775

2008c Masalli-Lankaran 4,870 422 247 266 5,805

2008c Urga-Lankaran 3,936 755 579 478 5,748

2008c Lankaran urban (N) 5,785 773 252 170 6,980

2008c Lankaran urban (S) 7,847 715 342 234 9,138

2008c Lankaran-Astara 6,030 591 371 262 7,254

2018d Masalli-Lankaran 4,733 646 189 259 5,827

2018d Lankaran-Astara 3,587 592 54 187 4,420 Note: values shown have not been adjusted for seasonal effects

40 Appendix 10

Sources: (a) World Bank, 2005. Azerbaijan Second Highway Project: Project Appraisal Document. Washington, DC (b) ADB, 2007. Proposed MFF for Republic of Azerbaijan Road Network Development Program. Manila (c) ADB, 2011. Periodic Financing Request Report: Azerbaijan Road Network Development Program, Proposed Tranche 3. Manila (d) Sheladia for ADB and AAY, 2018. Draft FSR for Installation of a Toll Collecting System along the M3 Alat-Astara Highway. USA.

10. The salient features of Table 1 are: (i) with the exception of 2008, ADT on the section south of Lankaran is approximately 75% of the traffic to the north, (ii) growth since 2005 has been very low, typically 1-2% per year (compared with GDP growth of 3 to 9%), (iii) small and medium vehicles have been responsible for most of the recorded growth, and (iv) the absolute volume of the largest trucks (>4 axles) has remained fairly constant at around 180-250 vehicles (veh)/day. The strongest historic traffic growth was between 2005 and 2008, when annual rates of 9-20% were recorded (and GDP growth was 23-25%). 11. Separately, truck traffic at the Iran/Azerbaijan BCP was put at 150 per day in 200551 and 180 per day in 2010Error! Bookmark not defined., consistent with Table 1 data. 12. Table 2 shows the ADT estimates for the new M3 derived from the counts in September 2019. These values are used to generate with-project (WP) base year traffic on the project road.

Table 2: Motorized traffic demand on new M3, 2019, veh/day

Location Section Cars Pick-ups Mini-

buses Bus

medium 2-axle trucks

3/4-axle trucks

Art trucks

ADT

Km142.9 A 4,119 151 319 177 17 205 274 5,262

Km165.05 B1 2,730 69 146 80 11 174 226 3,436

Km184.4 C 2,116 44 106 54 14 43 203 2,580

Weighted av 3,002 90 195 106 14 133 234 3,774 Source: ADB estimates 13. The drop in traffic on section B1 suggests that around 1,800 veh/day turn off the new M3, either east to Lankaran city or to join the R48 westbound, which terminates at the small town of Lerik, 44km west of Lankaran. 14. By comparing Table 1 without-project (WOP) corridor traffic measured in 2018 on the old M3 with Table 2 traffic on the new M3 it is possible to estimate the percentage of corridor traffic that diverts to the new road; see Table 3. The diverted percentage is approximately 80% when estimated using traffic weighted by distance52, compared with approximately 76% at RRP and approximately 60% at PFR. Weighted average diverted traffic in 2019 was 3,770 veh/day, 64% of the 5,900 veh/day forecast for 2019 at PFR (see Table 5).

Table 3: Diverted and corridor traffic, 2018-19

Corridor/old M3 traffic Section Av veh/day

Corridor WOP IC1-LCa LC-IC4 IC4-IC5 IC2-LC

51 TERA International for ADB, 2006. TA4684: Preparing the Southern Road Corridor Improvement Project. USA 52 The WP network is much longer than the WOP network, which distorts diversion estimates based on distance-

weighted averages.

Appendix 10 41

km 26.6 9.8 24.5 6.2

ADT, veh/dayb 5,830 4,420 4,420 1,000d 4,600

WP Post-diversion ADT, veh/dayc 570 980 1,840 2,820d 1,250

Diverted traffic (new M3)

New M3 (WP) IC1-IC2 (A) IC2-IC3 (B1) IC3-IC4 (B2) IC4-IC5 (C)

km 22.1 7.9 5.3 23.8

ADT, veh/day 5,260 3,440 3,440 2,580 3,800

Notes: (a) LC=Lankaran center (b) taken as old M3 traffic prior to 2019 (c) traffic on old M3 after diversion (d) 1,000 veh/day local traffic added to this section both in the WOP and WP post-diversion cases Source: ADB estimates 15. Forecast annual GDP growth to 2024 is between 2.4 and 2.7%. Between 2006 and 2008 passenger and small vehicle growth was approximately the same as GDP growth, and for these vehicle classes future growth is taken as 2.5% for 2019 to 2028, thereafter dropping to 2%. For medium and heavy goods traffic, regional trade is an additional explanatory factor. Trade turnover with Iran, Russia and Georgia between 2011 and 2018 fell to a minimum in 2015, but has since recovered, growing at 12% annually from 2016 to 2018 (in nominal dollar terms). Growth in trade with Iran, particularly relevant to demand for the project road, has grown even more strongly, at 56% from 2016-18. Medium and heavy goods, and truck-trailer traffic is therefore forecast to grow at 3.8% per year (1.5 times GDP growth) to 2028, thereafter dropping to 3.5%.

Table 4: M3 corridor forecast traffic growth rates

Period Cars Pick-ups Mini- buses

Bus medium 2-axle trucks 3/4-axle trucks

Art trucks

2019-28a, b 2.5% (1.0) 2.5%(1.0) 2.5%(1.0) 2.5%(1.0) 3.8%(1.5) 3.8% (1.5) 3.8%(1.5)

2028-42b 2.0% (0.8) 2.0%(0.8) 2.0%(0.8) 2.0%(0.8) 3.5%(1.4) 3.5%(1.4) 3.5%(1.4)

Notes: (a) zero growth assumed prior to 2019 (b) elasticities shown in parentheses Source: ADB estimates 16. The table below compares revised forecasts on the project road with those made at PFR.

Table 5: Traffic forecasts, veh/day

Year 2019 2025 2030 2037

This re-evaluation 3,774 4,411 4,979 5,790

PFR, 2011 5,886 7,767 9,787 13,525

Note: table shows weighted average traffic on new M3 Source: ADB estimates Economic costs 17. Investment costs. Economic costs include (i) capital investment, which includes civil works, consulting services (CS), land acquisition and resettlement (LAR) and (ii) road maintenance. Costs related to taxes, duties, and financing charges during implementation have been excluded, as was the case at appraisal. Table 6 gives a breakdown of the actual investment costs of both projects. (Actual financial costs are incremental and exclude taxes, duties and interest during construction.)

42 Appendix 10

18. All predicted project costs and benefits are measured in 2018 economic prices expressed in $. Traded goods are measured at world prices and non-traded inputs at domestic prices less indirect taxes multiplied by a standard conversion factor (SCF) estimated at 0.9853. A shadow wage rate factor (SWRF) of 0.954 was estimated and applied to unskilled labor used in road construction. A SWRF of 1.0 was applied to skilled and professional labor.

19. A residual value equivalent to 20% of the investment cost—estimated by applying the straight-line depreciation method to individual project items based on assumed lifespans—is included in the economic analysis.

Table 6: Actual investment costs of tranches 1 and 3

Tranches km Component Financial costa Economic costb

$million $million $million/km

1 & 3 59 M3 sections A-Cc 333.7 341.3 5.79

22.1 M3 section A 151.3 155.4 7.0

36.5 M3 sections B&C 182.4 185.9 5.1

39.5 Rural roads 13.6 14.0 0.35

Construction supervision

13.9

14.3

Land acquisition and resettlement

2.9 3.0

Total 364 373

Source: Asian Development Bank estimates Note: (a) current prices excluding taxes and duties (b) constant 2018 economic prices (c) civil works, including Lankaran bridge and weigh stations 20. Maintenance costs. Identical maintenance regimes were assumed for both the project and without project cases of the M3, as shown below. Tranche 1 rural roads used the maintenance interventions shown below in the WP case, but in the WOP scenario no overlay was included.

Table 7: M3 maintenance interventions

Intervention Unit cost Works effect

financial economic

Routine maintenance $4,720/km $3,850/km

Pothole patching (annual) $16.5/m2 $13.6/m2

Elapsed time 6 months. 80% patched

Crack sealing (annual) $5.3/m2 $4.4/m2

80% of transverse thermal & 80% of wide cracks repaired

Edge break repair (annual) $14.2/m2 $11.7/m2 90% repaired

40mm overlay (IRI>10 and interval of ≥ 8 years triggers) $29.5/m2 $24.5/m2 HDM-4 default

km = kilometer, m2 = square meters, Source: Asian Development Bank estimates

53 Using the ADB simplified method based on merchandize imports of $9.200bn (CIF basis), exports of $21.03bn (FOB

basis) and taxes on trade of $649m (averages in current $ for 2013-17 from Azeri national statistics and World Bank data)

54 An approximation based on the ratio of rural and urban incomes from all sources for 2016 (Azeri National Statistical Service: household income per head, 2016)

Appendix 10 43

21. Economic benefits Using standard HDM-4 software the economic benefits considered at re-evaluation were (i) VOC savings and (ii) time savings. The data needed to make reliable estimates of crash cost savings were not available. Detailed without-project condition data were also not available. At appraisal in 2006 IRI roughness was put at 9-11, with the southern section at the upper end of this range. For this re-evaluation initial (2014) without-project IRIs were assumed to be 12 on the southern section (IC4-IC5) and 11 elsewhere. The with-project IRI was set to 2.0 on opening. The 2018 toll road study55 reported small passenger vehicle speeds of 62km/h in 2018 over 200km of the old M3, and estimated 110km/h for the new four lane road. 22. Assumed vehicle fleet characteristics are shown below. Values of passenger working time, crew and maintenance labor costs range from $3.5 to $1.9 per hour at 2018 shadow prices. (GDP per head in 2018 was $2.46/h). Non-working time is values at 30% of working time. Time values are increased by 1.7% per year from 2019 to reflect expected growth in GDP per head.

Table 8: Vehicle fleet

Item Unit Cars Pick-ups Mini- buses

Bus medium

2-axle trucks

3/4-axle trucks

Art trucks

Axles No 2 2 2 2 2 4 5

Km/year km 10,000 50,000 80,000 100,000 100,000 100,000 100,000

Service life Years 10 10 10 10 8 8 8

No of passengers No 3 2 13 35 1 0 0

Operating weight tonnes 1.4 1.8 3.2 15 6 20 30

VEF axles 0.02 0.02 0.14 1.41 0.91 3.5 3.8

Vehicle cost $ 23,000 19,000 18,000 43,000 21,000 90,000 100,000

Tire cost $ 125 80 80 150 170 240 240

Maintenance labor $/h 1.5 1.5 1.5 1.5 1.5 1.5 1.5

Crew $/h 0 0 2.5 2.5 2.5 2.5 2.5

Passenger working time

$/h 3.5 3.1 1.9 1.9 1.9 - -

Passenger non-working time

$/h 1.1 0.9 0.6 0.6 0.6 - -

% of work related trips % 75 85 75 50 50 - -

Source: Asian Development Bank estimates 23. The shadow price of gasoline and diesel is estimated at $0.6 per liter (higher than the November 2019 retail price of approximately $0.45). This estimate is based on World Bank price forecasts for crude oil for the period 2019-3056. Results of economic re-evaluation of M3 24. The results of the economic re-evaluation are summarized in Table 9 and shown in more detail in Table 15. The economic indicators provided are: EIRR, net present value (NPV) and benefit-cost Ratio (BCR). The appraisal discount rate of 12% is applied.

55 Sheladia for ADB and AAY, 2018. Draft FSR for Installation of a Toll Collecting System along the M3 Alat-Astara

Highway. USA. 56 World Bank Commodity Markets Outlook, Oct 2019

44 Appendix 10

Table 9: M3 re-evaluation results

Costs as PVs ($million) Benefits as PVs ($million) NPV ($m)

BCR (ratio)

EIRR (%) Capex Mtce VOC Journey time

245 1.0 51.6 23.7 -171 0.31 3.8 BCR = benefit-cost ratio; EIRR = economic internal rate of return; NPV = net present value Source: Asian Development Bank estimates 25. The result indicates that the M3 project represented poor value for money. There are two reasons for this. First, the actual cost was approximately 60% higher than that expected at appraisal in 2007. Second, traffic has been significantly lower than that expected: average traffic on the new M3 over the period 2019-37 is now estimated at 4,800 veh/day, compared with 9,200 expected at PFR (see Table 5). The predicted journey time saving for vehicles traveling the entire 59km of the new M3 is approximately 30 minutes, and the average annual RUC in the with-project case is 27% less than that in the without-project scenario. 26. Neither the cost overrun for section A nor the sharp fall in GDP and traffic growth could reasonably have been foreseen at RRP. An alternative evaluation has therefore been prepared that takes into account the financial consequences of the failure of the section A contractor and uses the traffic growth rates from the PFR (but applied to this re-evaluation’s opening 2019 traffic). The former has the effect of reducing the total economic cost of civil works from $341.3m (Table 6) to $329m, while the latter increases average traffic levels after 2019 by approximately 37%. The results are summarized below.

Table 10: M3 re-evaluation results – alternative scenario

Scenario Costs as PVs ($m) Benefits as PVs ($m) NPV ($m)

BCR (ratio)

EIRR (%) Capex Mtce VOC Journey time

PFR traffic 245 0.9 70.8 34.9 -141 0.43 6.4 Cost 237 1.0 51.6 23.7 -163 0.32 4.0 Both 237 0.9 70.8 34.9 -133 0.44 6.6

BCR = benefit-cost ratio; EIRR = economic internal rate of return; NPV = net present value Alternative scenario reduces initial investment cost by 3.3% to allow for section A contractor failure, and uses PFR traffic growth rates Source: Asian Development Bank estimates 27. Table 9 demonstrates significant sensitivity to traffic growth, bringing the EIRR from 3.8 to 6.4%. D. Evaluation of tranche 1 rural roads 28. 39.5km of rural roads were upgraded under tranche 1. They were not subject to economic appraisal as part of the RRP in 2007 or as part of the PFR in 2011. No traffic or condition data are available. All the roads, listed in Table 9 below, are minor roads in categories III and IV providing access to the M2 east-west highway between Azerbaijan and Georgia. Under tranche 1 they were upgraded to category II. 29. For evaluation purposes it was assumed that the existing roads had SBST57 wearing courses, last receiving treatment in 1990 and with an initial IRI of 10 in 2015. Initial traffic and fleet composition in 2011 were taken as the average of the 2019 counts on the local roads constructed

57 SBST = single bituminous surface treatment (on a granular base)

Appendix 10 45

under tranche 4, i.e. 964 veh/day. It was assumed that traffic growth between 2011 and 2019 was zero. In the absence of local data, M3 growth rates from 2019 were taken from Table 4 and 10% generated traffic (passenger vehicles only) was added.

Table 11: Tranche 1 rural roads traffic, 2011, veh/day

Cars Pick-ups Mini- buses

Bus medium 2-axle trucks 3/4-axle trucks

Art trucks Total

878 14 34 18 3 15 2 964

Note: zero growth assumed from 2011 to 2019 Source: ADB estimates

30. The upgrade comprises an AMGB58 pavement. Maintenance in both the with- and without-project cases followed Table 7.

Table 12: Project 1 rural roads

Road name Length, km

M2-Nemetabad (cat IV) 4.2

M2-Kemerli (cat III) 14.0

M2-Samedabad-Ahmadabad (cat IV) 7.4

M2-Delimmemedi-Qushchular (cat IV) 4.5

M2-Ashagi Salahli (cat IV) 7.0

M2-Nadirkend (cat III) 2.4

39.5 31. HDM4 was used to evaluate the rural roads as a single project, with benefits confined to VOC and journey time savings. The results are summarized below and shown in more detail in Table 16.

Table 13: Project 1 rural roads re-evaluation results

Costs as PVs ($m)

Benefits as PVs ($ million)a NPV ($m) BCR (ratio) EIRR (%)

VOC Journey time

5.47 7.51 1.59 3.63 1.66 16.2

BCR = benefit-cost ratio; EIRR = economic internal rate of return; NPV = net present value Note: (a) including generated traffic benefits Source: Asian Development Bank estimates 32. While Table 12 demonstrates a sound case for the upgrades, the lack of data at any stage during project processing renders them purely indicative. Some validation of the results is provided by the results for tranche 4 local roads: the present values of benefits per km are similar: $0.23 m/km for tranche 1 and $0.21 m/km for tranche 4. (Both packages have similar traffic and road lengths, although tranche 4 has lower unit initial investment costs.) E. Evaluation of combined tranches 1 and 3 33. Table 16 shows detailed evaluation results for the M3 and the tranche 1 rural roads. The combined summary, inevitably dominated by the results of the much larger M3 investment, is shown below.

58 AMGB = asphaltic mix on a granular base

46 Appendix 10

Table 14: Tranches 1 and 3 re-evaluation results

Costs as PVs ($m) Benefits as PVs ($million) NPV ($m)

BCR (ratio)

EIRR (%) Capex Mtce VOC Journey time

251 1.0 59.1 25.4 -167 0.34 4.2 BCR = benefit-cost ratio; EIRR = economic internal rate of return; NPV = net present value Source: Asian Development Bank estimates 34. Traffic growth emerged as a key variable in the re-evaluation of the M3. The table below shows sensitivity of the combined project to adoption of the M3 PFR traffic growth rates, and to a conventional range of costs and benefits.

Table 15: Sensitivity analysis

Item Sub-project Tranches 1 and 3

M3 Rural roads

EIRR% NPV $m EIRR% NPV $m EIRR% NPV $m

Base case 3.8 -171 16.2 3.6 4.2 -167

M3 PFR traffic growth 6.4 -141 16.7 4.2 6.7 -137

Costs x 1.2 2.8 -221 14.5 2.5 3.2 -219

Benefits x 0.8 2.6 -187 14.1 1.3 2.9 -185

Switching values:

Costsa -69.5 +67 -67

Benefitsa +329 -60 +300

Source: Asian Development Bank estimates a The percentage by which costs or benefits need to change to give an EIRR of 12%

Appendix 10 47

Table 16: Tranches 1 and 3 re-evaluation results (at 2018 world prices)

M3 (tranches 1 and 3) Tranche 1 rural roads

Combined Incremental cost Benefits Total benefits

Net benefits

Incremental cost Benefits Total benefits

Net benefits Investment Maintenance VOC Time Investment Maintenance VOC Time

2011 20.43 0 0 0 0.0 -20.4 6.99 -0.15 0.00 0.00 0.00 -6.99 -27.42 2012 44.93 0 0 0 0.0 -44.9 6.99 0.00 0.00 0.00 0.00 -6.99 -51.92 2013 42.85 0 0 0 0.0 -42.9 -5.92 -0.06 1.54 0.32 1.86 7.85 -35.00 2014 67.03 0 0 0 0.0 -67.0 0.00 0.00 0.82 0.15 0.97 0.97 -66.05 2015 56.19 0 0 0 0.0 -56.2 0.00 0.00 0.89 0.16 1.05 1.05 -55.14 2016 78.49 0 0 0 0.0 -78.5 0.00 0.00 0.96 0.17 1.13 1.13 -77.36 2017 48.64 0 0 0 0.0 -48.6 0.00 0.00 1.04 0.18 1.22 1.22 -47.43 2018 0.05 0 0 0 0.0 -0.1 0.00 -0.03 1.12 0.20 1.32 1.35 1.29 2019 0.00 0.23 8.52 3.31 11.8 11.6 0.00 -0.04 1.20 0.22 1.42 1.46 13.07 2020 0.00 0.23 9.77 3.87 13.6 13.4 0.00 -0.05 1.32 0.25 1.57 1.62 15.03 2021 0.00 0.23 11.15 4.51 15.7 15.4 -5.92 -0.01 1.45 0.29 1.74 7.68 23.11 2022 0.00 0.23 12.70 5.23 17.9 17.7 0.00 0.00 0.75 0.16 0.91 0.91 18.61 2023 0.00 0.23 14.42 6.05 20.5 20.2 0.00 0.00 0.83 0.17 1.00 1.00 21.25 2024 0.00 0.17 16.33 6.98 23.3 23.1 0.00 0.00 0.91 0.19 1.10 1.10 24.23 2025 0.00 0.16 18.40 8.02 26.4 26.3 0.00 0.00 0.99 0.21 1.20 1.20 27.46 2026 0.00 0.18 20.68 9.18 29.9 29.7 0.00 0.03 1.08 0.23 1.31 1.28 30.96 2027 0.00 0.23 11.86 5.35 17.2 17.0 0.00 0.04 1.18 0.26 1.44 1.40 18.38 2028 0.00 0.23 13.36 6.15 19.5 19.3 0.00 0.02 1.29 0.30 1.59 1.57 20.86 2029 0.00 0.28 14.89 7.02 21.9 21.6 -5.92 0.04 1.41 0.34 1.75 7.63 29.26 2030 0.00 0.37 16.56 7.98 24.5 24.2 0.00 0.05 0.57 0.21 0.78 0.73 24.90 2031 0.00 0.40 18.40 9.05 27.4 27.1 0.00 0.05 0.62 0.22 0.84 0.79 27.84 2032 0.00 0.39 20.42 10.25 30.7 30.3 0.00 0.05 0.66 0.23 0.89 0.84 31.12 2033 0.00 0.35 22.62 11.57 34.2 33.8 0.00 0.05 0.70 0.25 0.95 0.90 34.73 2034 0.00 0.35 24.86 12.94 37.8 37.5 0.00 0.05 0.74 0.27 1.01 0.96 38.41 2035 0.00 0.42 13.26 7.38 20.6 20.2 0.00 0.05 0.78 0.29 1.07 1.02 21.23 2036 0.00 0.42 14.83 8.33 23.2 22.7 0.00 0.05 0.83 0.32 1.14 1.09 23.83 2037 0.00 0.42 16.55 9.37 25.9 25.5 0.00 0.05 0.88 0.35 1.23 1.18 26.68 2038 0.00 0.42 18.44 10.51 28.9 28.5 0.00 0.02 0.94 0.39 1.33 1.31 29.83 2039 0.00 0.42 20.50 11.75 32.2 31.8 -5.92 0.04 1.01 0.44 1.44 7.33 39.15 2040 0.00 0.40 22.77 13.11 35.9 35.5 0.00 0.05 -0.08 0.23 0.15 0.10 35.57

48 Appendix 10

M3 (tranches 1 and 3) Tranche 1 rural roads

Combined Incremental cost Benefits Total benefits

Net benefits

Incremental cost Benefits Total benefits

Net benefits Investment Maintenance VOC Time Investment Maintenance VOC Time

2041 0.00 0.36 25.18 14.58 39.8 39.4 0.00 0.05 -0.10 0.23 0.13 0.08 39.48 2042 0.00 1.41 27.73 16.15 43.9 42.5 0.00 0.05 -0.11 0.23 0.12 0.07 42.55 2043 -71.72 0.42 13.36 8.34 21.7 93.0 -2.80 0.05 -0.12 0.22 0.10 2.84 95.84

PV at 12% 245 1.0 51.6 23.8 75.4 -171 5.51 -0.04 7.51 1.59 9.11 3.63 -167 NPV -171 NPV 3.63 -167

EIRR 3.8% EIRR 16.2% 4.2%

BCR 0.31 BCR 1.66 0.34

Source: Asian Development Bank estimates

Appendix 10 49

LIST OF PARAMETER VALUES/ASSUMPTIONS

Price base year: 2018

Discount year: 2011

Currency of analysis: $

Construction start year: 2011 (M3 and tranche 1 rural roads)

Construction end year: 2017 (M3 – opened 2018); 2013 (tranche 1 rural roads)

First year of benefits: 2019 (M3); 2013 (tranche 1 rural roads)

Appraisal period: to 2043 (25 years M3 operation plus implementation period)

Numeraire used: World price numeraire

Income elasticity of demand: 1.0 falling to 0.8 (passenger vehicles), 1.5 falling to 1.4 (goods vehicles)

Value of time (in work, 2018): $3.5/hour (car passengers) - $1.9/hour (bus passengers)

Value of time (non-work, 2018): $1.1/hour (car) - $0.6/hour (bus passengers)

GDP growth assumption: 2019 2.5%, 2020 2.7% (ADB ADO 2019), 2024 2.4% (IMF WEO Oct 2019)

Shadow price of labor: 0.9 (unskilled)

Standard conversion factor: 0.98

Conversion factor applied to works, LAR and physical contingencies: 0.98

Conversion factor applied to supervision: 1.0

Conversion factor applied to taxes, duties, profits, transfers: 0.0