Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 43537-KE

PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING CREDIT

IN THE AMOUNT OF

SDR 172.0 MILLION (US$253.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF KENYA

FOR THE

NORTHERN CORRIDOR TRANSPORT IMPROVEMENT PROJECT

March 5,2009

Transport Sector Country Department Eastern Africa 2 Africa Regional Office

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

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CURRENCY EQUIVALENTS (Exchange Rate Effective February 28,2008)

AFD AfDB AFREX AG AIDS BD BER BOQ CAS C M DGIPE DIR DOT E A C EIA EIB ERR EO1 ERB ESW EU EXT FAA FMR GAP GDP GNSS G O K GPS GSPK GSU

Currency Unit = Kenya Shilling (KSh.) US$1.0 = K S h 78.40 US$1 .O = SDR 0.68

FISCAL YEAR July 1 -June 30

ABBREVIATIONS AND ACRONYMS

Agence Franqaise de Dkveloppement (French Development Agency) African Development Bank Africa Region External Affairs Attorney General Acquired Immune Deficiency Syndrome Bidding Document Bid Evaluation Report Bill o f Quantities Country Assistance Strategy Centimeter Department o f Government and Public Enterprises Detailed Implementation Review Department o f Transportation East Afr ican Community Environmental Impact Assessment European Investment Bank Economic Internal Rate o f Return Expressions o f Interest Engineers Registration Board Economic and Sector Work European Union External Affairs Federal Aviat ion Administration Financial Monitoring Report Governance Action Plan Gross Domestic Product Global Navigation Satellite System Government o f Kenya Global Positioning System Governance Strategy for Building Prosperous Kenya General Service Unit

FOR OFFICIAL USE ONLY

HDM HIV IASA ICAO ICB IDA IEK IFC IMO INT IRI IRR JBIC JKIA KA KAA KACC K C A A KeNHA KeRRA KfW KIHBT KM K N B S KPA KPIA KR4 KRl3 KRC KURA LIB M&E MOF MOR M O T MTD N C A NCB NCTIP NCTTCA NDF NEMA NGO N-PV

Highway Design Management Model Human Immune Deficiency Virus International Aviation Safety Assessment International Civil Aviation Organization International Competitive Bidding International Development Association Institution o f Engineers o f Kenya International Finance Corporation International Maritime Organization Department o f Institutional Integrity International Roughness Index Internal Rate o f Return Japan Bank for International Cooperation Jomo Kenyatta International Airport Kenya Airways Kenya Airports Authority Kenya Anti-Comption Commission Kenya Civi l Aviation Authority Kenya National Highways Authority Kenya Rural Roads Authority Kreditanstalt Fur Wiederaufbau Kenya Institute o f Highways and Buildings Technology Kilometer Kenya National Bureau o f Statistics Kenya Ports Authority Kenya Poverty and Inequality Assessment Kenya Revenue Authority Kenya Roads Board Kenya Railways Corporation Kenya Urban Roads Authority Limited International Bidding Monitoring and Evaluation Ministry o f Finance Ministry o f Roads Ministry o f Transport Mechanical and Transport Department National Construction Authority National Competitive Bidding Northern Corridor Transport Improvement Project Northern Corridor Transit Transport Coordination Authority Nordic Development Fund National Environmental Management Authority Non Governmental Organization Net Present Value

This document has a restricted distribution and may be used by recipients only in the performance o f their of f ic ia l duties. I ts contents may not be otherwise disclosed without Wor ld Bank authorization.

ODM OECD OPRC PAD PDO PIP PPIAF PPOA PRG PSU PTT QCBS

RAP RFP ROW RPF SBD SOE sss TOR TSA TTL U N E S us U S A VAT V C T VPD

QBS

Vice President: Obiageli K. Ezekwesili

Sector Manager: C. Sanjivi Rajasingham Country Director: Johannes Zutt

Task Team Leader: Ani1 S. Bhandari -

Orange Democratic Movement Organisation for Economic Co-operation and Development Output and Performance Based Road Contract Project Appraisal Document Project Development Objective Performance Improvement Project Public Private Infrastructure Advisory Facility Public Procurement Oversight Authority Partial Risk Guarantee Preventive Services Unit Project Technical Team Quality-and Cost-Based Selection Quality-Based Selection Resettlement Action Plan Request for Proposal Right o f Way Resettlement Policy Framework Standard Bidding Document Statement o f Expense Single Source Selection Terms o f Reference Transport Security Administration Task Team Leader University o f Nairobi Enterprise Services United States United States o f America Value Added Tax Voluntary Counseling and Testing Vehicles Per Day

KENYA

NORTHERN CORRIDOR TRANSPORT IMPROVEMENT PROJECT

ADDITIONAL FINANCING

TABLE OF CONTENTS

I . INTRODUCTION ................................................................................................................. 1

I1 . BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING ........................ 2

I11 . PROPOSED CHANGES ..................................................................................................... 10

IV . CONSISTENCY WITH COUNTRY ASSISTANCE STRATEGY .................................. 19

V . APPRAISAL SUMMARY ................................................................................................. 20

V I . EXPECTED OUTCOMES ................................................................................................ -34

VI1 . BENEFITS AND RISKS .................................................................................................... 35

VI11 . FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING ... 39

Annex 1: Due Diligence on Procurement Actions ....................................................................... 41

Annex 2 : Progress in Strengthening Governance in the Road Sub-sector ................................. 51

Annex 3: Economic Analysis o f the Roads Component ............................................................. 52

Annex 4: Results Framework ....................................................................................................... 60

Annex 5: Revised Results Monitoring Framework ...................................................................... 62

Annex 6: Road Sector Governance and Integrity Improvement Action Plan .............................. 66

Annex 7: Overall Revised Project Costs (US$ million) ............................................................... 71

Annex 8: Transport Sector at a Glance ....................................................................................... 75

Annex 9 : Status o f Institutional and Policy Reforms .................................................................. 76

Annex 10: Project Supervision Plan ............................................................................................. 79 . .

PROJECT PAPER DATASHEET

Date: March 5,2009 Country: Republic o f Kenya Project Name: Northern Corridor Transport

Team Leader: Ani1 S. Bhandari Sector Manager: C. Sanjivi Rajasingham Country Director: Johannes Zutt , 1 Environmental Cate or : B

Source

Recipient: Government o f Kenya Responsible Agency: Ministry o f Roads, Ministry o f Transport, Kenya Airports Authority and Kenya Civ i l Aviation Authority

Have these been a

The pol icy exception relates to the Bank requiring the Recipient to include in i t s road works contracts financed under the Additional Financing a provision allowing the Recipient to terminate the contract should the contractor be debarred by the Bank under any project financed by the Bank and also allowing the Bank to cancel or reallocate to other project activities the amount o f the Additional Financing allocated to such contract if the Recipient opts not to exercise this early termination right (seeparagraphs 94 and 95 ofthe Project PaDer) .

Local I Foreign I Total Recipient IDA

idditional financing wi l l supplement resources provided under the original Credit (US$207 million).

i

NORTHERN CORRIDOR TRANSPORT IMPROVEMENT PROJECT ADDITIONAL FINANCING

I. INTRODUCTION

1. This Project Paper seeks the approval o f the Executive Directors to provide an additional credit in the amount o f US$253 mi l l ion equivalent to the Republic o f Kenya to support the Northern Corridor Transport Improvement Project (NCTIP) Cr. 3930-KE to meet a financing gap in accordance with OP 13.20 - Additional Financing for Investment Lending. The original credit amount i s US$207 mi l l ion equivalent.

2. The proposed additional credit would help finance the costs associated with: (i) completion o f the original project activities, whose scope and costs have increased significantly; (ii) implementing expanded project activities that scale-up the development effectiveness o f the project by addressing further institutional capacity constraints, strengthening governance in the construction industry, and carrying out feasibility and design studies for two new activities-the Sudan Link Road and Urban Public Transport; and (iii) implementing a new component for the rehabilitation and replacement o f infrastructure and public assets damaged as a result o f the political crisis that followed the general elections in December 2007. The Project Development Objective (PDO) i s modified accordingly, to reflect the additional objective o f responding to the 2007 post-election recovery needs.

3. The Project Paper also includes a proposal for restructuring the project, consisting of: (i) canceling one component, namely, the construction o f the North Airport Road (which has been assumed by the government o f China in a parallel project); (ii) replacing one component, namely, the rehabilitation o f the O ld Embakasi Airport, with another, namely, the construction o f a new passenger terminal (Unit 4) at Jomo Kenyatta International Airport (JKIA), Nairobi; (iii) reallocating finds among the disbursement categories (12 percent o f the credit); and (iv) extending the closing date o f the Credit by 36 months from December 3 1,2009, to December 3 1, 2012, to allow sufficient time to implement the expanded and new activities.

4. The project further supports the active dialogue o f the Bank with the government regarding governance in the road sector. Building on experience in this sector, the government’s commitment to improve accountability and transparency, and the conclusions from a Detailed Implementation Review (DIR) conducted by INT over 2005-2006 and finalized in January 2007, this project includes a wide-ranging action plan for further improving and strengthening road sector governance (Annex 6).

5. Outcomes Expected from the Proposed Additional Financing. The proposed additional financing and restructuring wil l advance the attainment o f the project objectives by: (i) completing the re-construction o f the remaining unfunded road works contracts, and scaling-up the institutional strengthening, capacity building and institutional and policy reform components o f the project; (ii) enabling the urgent repair and restoration o f public infrastructure and assets- including roads, bridges, public buildings, vehicles and equipment-destroyed or damaged during the post-election political crisis in selected parts o f the country; (iii) further strengthening governance in the construction industry, to provide for better regulation and oversight o f the

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professional conduct o f engineers, contractors, consultants and other related professionals; and (iv) better management o f periodic road-related disasters such as road and bridge washouts due to heavy rainfall and floods experienced in some parts o f Kenya.

6. Partnership Arrangements. The government has agreed to increase i t s counterpart share f rom 25 percent to 33 percent for road works (Le. from US$47.0 mi l l ion equivalent to US$177 mi l l ion equivalent). The Nordic Development Fund (NDF) i s co-financing the project with a Credit o f US$19 mi l l ion equivalent, including an additional credit o f US$4 mi l l ion to cover the higher than estimated bid prices for the components i t i s co-financing. Financing for the increased scope o f the JKIA expansion program is supported by International Development Association (IDA) (US$14 million), local private banks (US$30 million), the European Investment Bank (ED) (about US$70 mi l l ion expected) and the Kenya Airports Authority (KAA), which wil l finance the balance from i t s own funds (about US$92 mi l l ion equivalent). The French Development Agency (AFD) has also expressed interest in financing the expansion o f JKIA and a pre-appraisal mission has recently been concluded. The North Airport Road is to be financed by the government o f China as part o f the proposed Eastern by-pass in Nairobi, in a parallel project. The African Development Bank (AfDB), German Kreditanstalt fur Wiederaufbau (KfW), AFD and European Union (EU) are already financing in parallel other sections o f the Northern Corridor and connecting roads to complete the total rehabilitation o f the corridor from Mombasa to Malaba and from M a u Summit to Kisumu and the border with Uganda.

11. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING

Background

7. Poli t ical Developments. General elections were held on December 27, 2007, to elect a President, members o f the National Assembly, and members o f local authorities. Concerns were subsequently raised about the accuracy o f the final Presidential results, and dissatisfaction with the results led to violent protests and fighting that left over 1,000 people dead and more than 300,000 displaced. Critical infrastructure and public assets, including buildings, vehicles and equipment, were damaged or destroyed in some areas. After intensive diplomatic efforts, led by prominent regional leaders and international figures, including former Secretary General o f the United Nations, a peace accord was signed on February 28, 2008, between the incumbent President, who was also the leader o f the Party o f National Unity, and the leader o f the Orange Democratic Movement (ODM). The agreement created the post o f a Prime Minister, to be occupied by the leader o f the party with the largest number o f Members o f Parliament (in this instance, the ODM). A coalition government, which includes members o f both o f the major political parties, was announced on April 13,2008.

This agreement i s now entrenched in the Constitution o f Kenya.

8. The post-election crisis brought to the foreground some long-term systemic issues in Kenya. These include, among others, the need for constitutional and electoral reforms, judicial and land reforms, greater equity in the use and distribution o f public resources (including for regional development), the reduction o f poverty and job creation (collectively identified under the February 28, 2008, Peace Accord as the “Agenda 4” items for long-term reform). The post-

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election crisis further demonstrated the strategic importance o f Kenya within the East African region, and particularly o f i t s critical infrastructure assets such as the port o f Mombasa and the Northern Corridor road and rai l transport systems, to neighboring countries that experienced a severe disruption to trade and commerce during Kenya’s political crisis.

9. The Coalition Government continues to address the “Agenda 4” challenges in collaboration with development partners and with independent oversight provided by the K o f i Annan Secretariat. Over the past year, reports on the election process were prepared by two independent commissions (the Waki Commission’ and the Kriegler Commission2), publicly endorsed by the President and the Prime Minister, and adopted by the government for implementation. The reports were also released to the public and have been the subject o f open discussion and debate in the press, c iv i l society, and the general public. While the principal political parties in the last year have at times espoused different approaches to the problems confronting Kenya, the leaders o f the parties have remained committed to the process o f governing as a coalition, and the business o f government has returned to some degree o f normalcy.

10. Economic Developments. The political crisis following the December 2007 elections resulted in major economic disruptions. The latest International Monetary Fund (IMF) Staff Report for the Article IV Consultation (October 2008) reported that, while Gross Domestic Product (GDP) growth reached seven percent in 2007, first quarter GDP in 2008 contracted by 1.3 percent (year-on-year), with tourists arrivals down by over 50 percent and most sectors hampered by disruptions to supply chains and displacement o f productive resources. The resulting shortages compounded inflation pressures arising f rom an earlier accommodative monetary pol icy as wel l as from rising international fuel and food prices. Inflation for the official headline consumer price index was 26.5 percent in July 2008 (year-on-year), though current IMF assessments suggest that number wil l adjust downwards. The impact o f the current global financial crisis i s not yet clear, but the GDP growth rate has already been projected to be as l ow as two percent, which is less than the projected population growth rate o f 2.9 percent. Recent shortages o f maize (a staple in the Kenyan diet), due to the failure o f the short rains and some misguided government policies, hrther complicate the economic picture.

11. Kenya’s current account deficit i s now projected to widen from three percent o f GDP in 2007 to six percent o f GDP in 2008 - a gap that could become worse, as the depreciating shilling pushes up the import bil l and disruptions to remittance and portfolio flows make it harder to finance the gap. Remittance inflows, which have been volatile over the last year, are showing signs o f declining and are l ikely to fal l W h e r as growth slows down in the source for Organisation for Economic Co-operation and Development (OECD) countries. Moreover, aid

The W a k i Commission was set up to inquire into the facts and circumstances surrounding the post-election violence. I t s report was submitted to government o n October 15,2008 and adopted for implementation. Progress has been set back somewhat by Parliament’s recent failure to enact the required legislative instruments for i t s implementation.

a view to recommending improvement o f the electoral system in Kenya. I t s report was presented to government o n September 17,2008, adopted for implementation, and made public.

The Kreigler Commission was set up to inquire into the electoral process preceding the post-election violence with

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inflows are also likely to fal l o f f as major donors grapple with their own tightening fiscal space. Foreign currency reserves have been falling and, at just over three months o f imports, Kenya’s reserve cover is barely adequate. Also, given the unsustainability o f current negative real interest rates, the government’s domestic borrowing costs can be expected to r ise significantly. In sum, the government is working to pull together a program to address the new global financial environment in the context o f its budget discussions, and has issued a call for donor assistance in this regard. Whi le the IMF does not currently have a program in Kenya, the government has approached the IMF for access to i t s Exogenous Shocks Facility to help cope with the potential impact o f the financial crisis and the impending food crisis in the country.

12. The percentage o f individuals living below the poverty line declined slightly between 1997 and 2005/06, from 52.6 percent to 46.6 percent, as reported by the Kenya National Bureau o f Statistics (KNBS),3 but the number o f poor remains large and poverty remains widespread and there are s t i l l significant geographical differences in the incidence o f poverty.

13. Country Governance. Governance remains a serious concern in Kenya. Corruption i s frequently cited as a key inhibitor to attracting private investment, and many Kenyans believe that poor governance and corruption contribute to Kenya’s continued poverty. Against this backdrop, Kenya has a historically free and vibrant press as well as an active and engaged c iv i l society that help to expose poor governance and demand action to address it. Parliament i s also increasingly active in holding government accountable. The government has taken action to address these issues. Recent measures include enhancing government-employee accountability through placing employees on performance contracts (an area in which Kenya i s a leader in the region), deepening fiduciary reforms, promoting transparency and accountability, and preventing, investigating and prosecuting corruption and economic crimes involving officials. The government i s also currently assessing i t s Governance Strategy for Building a Prosperous Kenya (GSPK) and preparing the second phase o f i t s Governance Action Plan, in a cross-sectoral collaboration involving the Ministry o f Finance (MOF), the Ministry o f Justice, the Kenya Anti- Corruption Commission, and the Attorney General (AG). While these initiatives are resulting in some progress in this difficult area, much more needs to be done, and the government’s response to a series o f recent scandals in the maize, oil, and tourism sectors wil l provide an important indication o f i t s continuing commitment.

14. The road sector in many countries worldwide i s notorious for corruption, inefficiency, lack o f transparency, and poor governance. Kenya has not been any different historically, and its road sector has faced similar challenges4 including: (i) unclear ownership arrangements o f the road network; (ii) questionable quality o f construction works and supervision with serious concerns for value for money; (iii) inadequate transparency and accountability in the provision and maintenance o f roads; (iv) weakening institutional capacity o f the road implementing agencies, with particularly serious deficiencies in the planning and management systems; and (v) difficulties in developing expenditure priorities and monitoring impacts.

Governance in the Road Sector.

The estimate o f the incidence o f poverty for 2005/06 i s not directly comparable to the earlier one because o f

W o r l d Bank Report: Kenya - Maintaining and Rehabilitating the Road Network for Growth, PREM, M a y 2007.

differences in methodology, so these results need to be treated with caution.

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15. To address these governance challenges, the government has moved on several fronts. Most importantly, i t has prepared a Road Sector Strategy (Box 1) that underpinned the Kenya Roads Act 2007 and gave rise to several important institutional and pol icy initiatives, including: (i) establishing three autonomous road authorities, namely, the National Highways Authority, the Rural Roads Authority, and the the Urban Roads Authority; (ii) requiring the Kenya Roads Board (KRB) to undertake a nationwide road classification study to delineate the ownership o f the road network; (iii) strengthening o f the Engineers Registration Board (ERB) and i t s associated institutions; (iv) initiating actions to establish a National Construction Authority (NCA) responsible for the regulation and promotion o f the construction industry; and (v) improving transparency and accountability in the provision and maintenance o f roads by requiring road agencies to prepare and publish their annual road sector investment programs, showing clearly the planned priority works which, for maintenance, are independently monitored and evaluated by KRB. The three autonomous road authorities are overseen by independent Boards, consisting o f representatives o f the road users and stakeholders, with a majority from the private sector. The legislation establishing these authorities gives them full powers to make decisions and carry out their functions in a business-like fashion at arm’s length from government officials and politicians. Similarly, the N C A and ERB will have the legal mandate to register professionals and engineering firms, assess their qualities, monitor their performance, and exercise r ights to sanction poor performance or unethical behavior. Annex 2 and Annex 9 take stock o f the institutional and policy reforms to date at the sub-sector level.

16. The Bank i s actively engaging with the government to advance the implementation o f the Road Sector Strategy. More specifically, the Bank (with inputs from INT) and the government have joint ly prepared and adopted a wide-ranging action plan to improve integrity in the road

5

sector and to help manage some o f the key sector r isks facing the project (see h e x 6). The action plan specifically addresses issues o f integrity and good governance by adopting measures related to: (i) improving transparency - e.g., through publicly disseminating the overall roads program and business opportunities in the road sector, establishing a well-documented and consistently implemented system for debarment o f poor performers and contractors engaged in fraudulent and corrupt practice, establishing a communications strategy through radio programs and talk shows where the issues facing the road sector are discussed and the general public i s asked to participate through expressing their views and comments; (ii) improving accountability - including through exercising the Bank’s audit rights in the works contracts, reviewing on-going or recently completed contracts to check for fraud, strengthening the use o f contractual remedies (such as performance bonds) in case o f project delays and poor performance, conducting quarterly and random independent reviews o f the activities o f axle-load weighing stations (including fines imposed and collected), undertaking performance reviews to ensure that poor performers are identified and sanctioned, strengthening systems to handle and effectively respond to complaints in a timely manner; and (iii) improving road sector performance - including through strengthening the Recipient’s capacity to design and supervise the construction o f roads (with particular emphasis on quality and contract management), reviewing current efforts to address corruption in the control o f axle-loads and recommending appropriate measures to mitigate such risks (including provision o f additional automated weight control infrastructure), developing construction cost estimates from f i rst principles and adjusting them for prevailing market conditions, and finally strengthening the planning, programming, budgeting, execution, monitoring and evaluation capacity o f the three newly established autonomous road agencies.

17. The Bank’s Country Assistance Strategy (CAS) and the Governance Framework. In the background o f the broader country and sector governance-related developments seen above, the Bank Group committed i tself in the CAS Progress Report (Report No. 38055-KE) to support a subset o f short-term priority actions in the government’s Governance Strategy for Building Prosperous KenydGovernance Action Plan (GSPWGAP), while maintaining a longer-term focus on governance.

18. As discussed in the CAS Progress Report, the Bank i s taking a three-part approach to new lending: (i) proceeding with operations, with safeguards, where risks are manageable; (ii) undertaking additional safeguard and other technical work in areas where corruption r isks are high before proceeding with operations; and (iii) completing due diligence Economic Sector Work (ESW) before considering development policy operations. In the case o f the proposed additional financing for NCTIP, which i s an investment operation, additional safeguard and other technical work has been undertaken (as noted in para 17) to bring project-level risks down to manageable levels.

19. The CAS Progress Report also identified a governance monitoring framework to enable feedback on the success or failure o f anti-corruption efforts across a variety o f sectors. In the case o f the transport sector, the key reform that the CAS aimed to support was the establishment o f the three autonomous road authorities to clarify and streamline the ownership, management, accountability, and financing o f al l road networks. Moving beyond the transport sector, the World Bank in Kenya i s increasingly supporting government initiatives in areas that are

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fundamental to improving governance, including land reform, parliamentary capacity-building, police oversight reform, judiciary performance reform, transparency initiatives using e- government applications, procurement and financial management reforms, increasing stakeholder participation in the monitoring and evaluation o f Bank projects, and sector-level governance (inter alia through establishing a risk management framework in al l Bank projects).

20. The period o f the Bank’s previous CAS for Kenya expired in June 2008, but the CAS program, which includes the Northern Corridor Transport Improvement project, remains relevant and several projects identified in that CAS remain to be delivered. A CAS Completion Report is being prepared, and a Country Portfolio Performance Review (CPPR) i s underway, to take stock o f the implementation o f CAS program and to provide direction to the way forward. A new CAS i s also under preparation, for Board presentation in early FY 10.

Rationale for Additional Financing

2 1. The development objective and the implementation progress ratings for NCTIP are satisfactory; physical works on the four major road contracts financed by IDA have commenced and are progressing well. The project has no unresolved fiduciary, environmental, social or other safeguard issues and compliance with legal covenants i s satisfactory. About 90 percent (US$186 million) o f the Credit proceeds (US$207 million) is already committed but disbursements are s t i l l low at about US$98 mil l ion as o f February 15, 2009.

Project Implementation Status.

22. This low disbursement can be attributed to several factors: (i) a delay in start-up activities arising from overall country-level concerns that resulted in a Detailed Implementation Review, by INT, o f four projects in Kenya, including NCTIP; (ii) staff changes within the project management unit for the road component; and (iii) the more recent post-election political crisis, which delayed physical implementation and processing o f the request for additional financing. I t i s expected that disbursements wil l accelerate as implementation regains momentum, and concomitant actions on improving capacity, governance, and accountability in the sub-sector, as noted below, increase overall efficiencies.

23. indicators, as specified in the project appraisal document, the progress i s as follows:

Performance Indicators. With regard to the four key results and their performance

(i) Reduction in freight and passenger travel times from Mombasa to Malaba and Busia. Construction work i s in progress o n four o f the five major road works contracts and bids for the unfunded road works contracts (Mau Summit - Kisumu road section) have been received. The travel time at appraisal for cars was about 14.5 hours from Mombasa to Malaba and Busia i s expected to reduce to less than 11 hours when al l the five road contracts along the Northern Corridor are completed. As an interim indication o f the high impact o f the project in reducing transport costs and travel times, i t is notable that after the improvement o f the M a j i ya Chumvi - Miritini road section, financed by the Nordic Development Fund (NDF) under the project, the travel time has reduced significantly from Nairobi to Mombasa - from about eight hours to less than six hours. A similar impact i s expected when the road sections between Nairobi and the

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Uganda border, including the current unfhded sections from M a u Summit to Kisumu, are improved. With high volumes o f truck traffic, the deterioration o f this road section has been rapid and travel time has doubled since appraisal in 2003. The JKIA - Machakos Junction and the Machakos Junction - Sultan Hammud road contracts are about 60 percent and 50 percent completed, respectively; the Lanet - Njoro section i s substantially completed (95 percent); and Njoro Turn-off - M a u Summit - Timboroa section i s about 40 percent completed.

(ii) International Aviation Safety Assessment (IASA) Category 1 clearance for KCAA and direct flights tolfrom United States of America (USA) at JKIA. K C A A is now nearly fully staffed with regard to flight safety and airworthiness inspectors and licensing specialists, although retaining qualified and experienced local staff i s difficult because o f the high demand and better pay in the private sector. The installation and operation o f the financial and management systems has been completed. In collaboration with the Safe Skies for Africa program o f the United States Department o f Transportation (DOT), a common regulatory framework for aviation safety and security has been adopted at the East African Community level and the joint C iv i l Aviation Safety and Security Oversight Agency has been established. Arrangements are under way for i t s full implementation. Security systems at KAA have been revised, specialized security screening equipment has been supplied, and extra staff has been trained in security screening procedures. All o f the design, engineering and c iv i l works contracts are at various stages o f preparation and implementation - with some delays, but generally on target and satisfactory.

(iii) Award of one long term performance-based road maintenance and management contract to the private sector. This i s effectively under implementation as a consultant has been hired to design and prepare the bidding documents (BDs). Additional funds that wil l be provided by this proposed additional credit will help to implement this component.

(iv) One road segment along the Northern Corridor offered for concession to the private sector. The government has met the objective o f this component by offering a section o f the Northern Corridor adjoining Nairobi (included under the project as the Nairobi Urban Tol l Road) to the private sector. Only one consortium, out o f three pre- qualified bidders, submitted a bid. This bid has been evaluated and negotiations are advanced for concessioning this portion o f the road corridor. The outcome o f the ongoing negotiations has been weighed down by significant uncertainties, including the projected overall cost, the affordability o f the resultant toll, and the current global financial crisis.

24. Cost Increase. The funds available under the IDA Credit for road construction works proved to be adequate for only four o f the seven major road sub-projects slated for IDA support. At the time o f appraisal in early 2004, the funds were expected to cover al l seven sub-projects, with IDA financing 75 percent o f the expenditure. The three that remained to be funded are: (i) a pi lot long term Output and Performance-based Road Contract (OPRC); (ii) one major road sub- project in the Northern Corridor (Mau Summit - Kisumu, in three large works contracts); and

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(iii) the North Airport Road in Nairobi, which, at the request o f the GOK, the Government o f China has now agreed to finance as part o f an Eastern By-pass for the city o f Nairobi.

25. The key reasons for the cost overruns associated with the NCTIP are (i) the significant r ise in input unit costs since appraisal; (ii) much higher-than-expected growth in traffic since project appraisal, resulting in a need for upgraded designs; (iii) significant additional deterioration occurring in the project road sections, as a consequence o f the delays in project- financed rehabilitation; and (iv) additional costs incurred for supporting post-election reconstruction.

26. Unit costs o f road construction more than doubled between appraisal (early 2004) and the time that the road sections were put out to bid (mid-2008), due to a disproportionate r ise in international prices o f basic construction materials (see Annex 1). Between October 2006 and August 2008 alone, fue l costs rose 53 percent, bitumen 63 percent, steel 45 percent, and cement 40 percent, and while the prices o f many o f these inputs have recently fallen,5 they remain significantly higher than that o f the original appraisal estimates (see also paragraphs 61 to 63). These unit construction cost increase were also seen in neighboring countries such as Uganda, Ethiopia, Tanzania, and Mozambique, and so were part o f regional and global market movements. Also contributing to higher prices when the contracts were put out to bid were: (i) the recent imposition of income tax on turnover (foreign 20 percent and local 4 percent); (ii) high demand on the construction industry worldwide, occasioned by rapid economic growth in some economies combined with a slow supply response; (iii) inadequate competition because o f a decrease in the number o f large contractors active in Africa; and (iv) the steady decline in the exchange rate o f the U S dollar.

27. As a result o f Kenya’s economic growth over 2003 to 2007, the number o f vehicles nearly doubled in the major cities and the average annual daily traffic o n selected road sections in the Northern Corridor varied from about 3,000 vehicles per day (VPD) to 20,000 VPD in 2006, compared to 2,000 to 12,000 VPD in 2003. Bottlenecks along the Northern Corridor not only cause congestion and delays to the traffic in Kenya but also to the transit traffic going to the neighboring countries such as Uganda, Rwanda, Burundi, Democratic Republic o f Congo, Sudan, and Ethiopia, adding substantially to the cost o f doing business in those countries. With traffic growth having r isen from a projected five percent per year over 2004 to 2008 to seven percent to 10 percent per year, i t has been necessary to complete an upward revision in the road designs.

28. The un-rehabilitated road sections covered by the additional financing also experienced much greater deterioration than expected over the last few years, due partly to the heavy growth in traffic, partly due to damage resulting from unusually heavy rains and floods, and partly to inadequate maintenance (as routine maintenance was repeatedly deferred on the expectation that rehabilitation would begin soon). Over time, heavy wear-and-tear, climate-induced damage, and

To deal with price volatility, the large road contracts to be financed out o f the additional financing include formula-based provisions for adjusting material prices every month, o n the basis o f the weighted average change in the relevant material price indices, adjusted in accordance with the exchange rates o f the currency o f payment and the source o f the input materials (see Annex 1).

9

indefinitely deferred maintenance resulted in such poor road conditions in some places that resources needed to be diverted to hnd emergency repairs. . 29. Finally, the post-election crisis in the country saw extensive damage to some critical infrastructure, public buildings, vehicles and equipment, particularly in the west. Sections o f the Uganda-Kenya railway line were uprooted, trenches were dug across critical trunk roads, vehicles were burned, and several key bridges and public buildings were damaged or destroyed. Except for major infrastructure assets that were destroyed during the post-election crisis, the government has now restored most o f the services that were disrupted. The emergency works component being supported by the additional financing proposed for NCTIP will help finance the purchase and installation o f bailey bridges, the repair o f damaged sections o f roads, bridges and public buildings, the replacement o f other damaged public assets (such as equipment and vehicles), and the completion o f feasibility and design studies for rerouting a section o f the Kenya-Uganda railway l ine which at present passes through a heavily populated s l u m area in Nairobi (Kibera).

30. The post-election crisis resulted in population displacements and migration by choice that also had a temporary impact on the availability o f labor in several locations. That said, the normal resumption o f ongoing construction works on the Lanet-Njoro Turnoff-Timboroa road sections indicates that there does not seem to be any sustained shortages o f skilled or unskilled labor at construction sites because o f the post-election political crisis.

3 1. Sustainability. The need to complete the originally planned and new activities is strong, given that the implementation o f these activities wil l put the road sub-sector on a sustained, steady path o f reform and growth. In the absence o f the additional financing, the project would be unable to complete the planned activities, the envisaged momentum in the reform process would be lost and the sustainability o f the development outcomes would not be assured. Furthermore, without the additional fhding, the objective o f obtaining Category 1 safety clearance under the I A S A for K C A A and Category 1 clearance o f JKIA by the United States Txansportation Security Administration (TSA) for direct flights between U S airports and Nairobi would be at risk.

111. PROPOSED CHANGES

Original Project Objectives, Design and Scope

32. Original Project Development Objectives (PDO). The Board approved the NCTIP on June 17, 2004, and the Credit (US$207 million) became effective on September 16, 2004. The original PDOs o f the project are to: (i) increase efficiency o f road transport along the Northern Corridor to facilitate trade and regional integration (60 percent weight); (ii) enhance aviation safety and security to meet international standards (30 percent weight); and (iii) promote private sector participation in the management, financing and maintenance o f road assets (10 percent weight).

33. components (as detailed in the PAD dated April 30,2004 - Report No. 28826):

Original Project Scope and Design. The original project consists o f the following eight

10

A. Rehabilitation of the Northern Road Corridor. Strengthening and rehabilitation o f about 381 km o f selected priority road sections along the Northern Corridor; improvement o f the Nor th Airport Road connecting the Mombasa Highway to the old Embakasi airport (about 8 km); and consultant services for supervision o f works.

B. Socio-economic Enhancement, Roadside Amenities and H I W A I D S Mitigation. Construction o f proper bus and truck stops at key selected locations, off-road booths for sale o f local produce and specific interventions along the Northern Corridor to mitigate HIV/AIDS, such as awareness campaigns, distribution o f condoms, strengthening o f local health centers as needed, voluntary counseling and testing, and support and care for affected persons.

C. Private Sector Participation in Road Management and Maintenance. Provision o f technical assistance to facilitate the concessioning o f selected sections o f the Northern Corridor road link; and implementation o f a pi lot program o f long-term output and performance based maintenance and management o f a selected sub-network (about 300 km) o f lower volume roads.

D. Provision o f consultant services to prepare and implement a program o f specific actions designed to reduce the number o f accidents and fatalities on the road network.

E. Institutional Strengthening in the Roads Sector and Technical Assistance. Provision o f technical assistance and training to enhance institutional capacity and support pol icy reforms in the road sector, including establishment o f an autonomous National Highways Authority. I t also includes provision o f consultant services for design, engineering and preparation o f bid documents for selected road projects.

F. Financing o f c iv i l works, consultant services, purchase o f equipment, information technology and training to improve the operations, search and rescue capacity, and the safety and security standards at the Nairobi Jomo Kenyatta International Airport (JKIA), Mombasa M o i International Airport , Wilson Airport, Kisumu Airport and other selected minor airports.

G. Support to the Kenya Civil Aviation Authority (KCAA). This includes: (i) technical assistance for safety inspection, training, implementation o f Global Navigation Satellite System/Global Positioning System (GNSS/GPS) for en route and approach procedures at minor airports; and (ii) support to the East Afr ican School o f Aviation (EASA) for training o f trainers, purchase o f training equipment for airworthiness, air traffic control systems, and engineering services, as well as an air accident investigation laboratory.

H. Support to the Ministry of Transport (MOT). This includes the provision o f technical assistance to strengthen institutional capacity in MOT and Bandari College, review maritime legislation, and train specialist staff in the transport sector.

Road Safety Improvement.

,

Support to the Kenya Airports Authority (KAA).

34. the Development Credit Agreement was amended as follows:

In December 2005, the project scope was modified without any change in the PDO and

11

(i) Deletion o f the renovation o f Old Embakasi Airport (Nairobi) and introduction instead o f the expansion o f JKIA, with corresponding reallocation o f the credit proceeds.

Increase in the government’s counterpart share in financing the road works from 25 percent to 33 percent, reducing the IDA share from 75 percent to 67 percent.

(ii)

Revised Project Development Objectives 35. The original PDOs are being revised by the addition o f one more PDO to respond to the government’s urgent appeal to IDA to support the implementation o f the post-election recovery program, which in part involves the reconstruction o f vital infrastructure and replacement o f vehicles and equipment damaged during the crisis, thereby facilitating the provision o f essential services. The revised PDOs are to: (i) increase the efficiency o f road transport along the Northern Corridor to facilitate trade and regional integration (58 percent weight); (ii) enhance aviation safety and security to meet international standards (30 percent weight); (iii) promote private sector participation in the management, financing and maintenance o f road assets (10 percent weight); and (iv) restore vital infrastructure and public assets damaged as a result o f the 2007 post-election crisis (2 percent weight).

Changes in Project Design and Scope

36. The project wil l support: (i) additional financing to cover the shortfall in financing three original components (A, C and E), including the expanded or new activities within the components; and (ii) restructuring o f component F (Support to KAA) without additional financing. The rest o f the original components (B, D, G and H) remain unchanged.

(a) ComDonents to be financed with Additional Credit

37. Damaged Public Assets, IDA US$220.43 million)

ComDonent A (Rehabilitation o f Northern Corridor and Emergency Restoration o f

(i) This component involves improvement o f about 383 km o f the Northern Corridor (MAU Summit Kisumu, (158 km).r. The works will comprise major reconstruction works, including some sections with climbing lanes. The major items o f work will comprise undertaking earthworks; providing for the reprocessing o f the existing pavement and mixing with natural materials for sub-base and base; laying o f graded crushed stone sub-base, dense bitumen macadam base or crushed stone base as appropriate; asphalt wearing course; constructing culverts and other drainage structures; constructing facilities for socio-economic enhancement and roadside amenities along the corridor, including service roads and non-motorized traffic facilities o f the M a u Summit Kericho-Nyamasaria Kisumu road. In addition, the Nyamasaria-Kisumu road section will involve pre-stressed concrete bridge works and reinforced earth structures, a by-pass to the city o f K isum and partial interchanges at major junctions.

12

(ii) I t also includes a new sub-component for the repair and replacement o f roads and bridges damaged or destroyed by floods in late 2006 and early 2007 and other public infrastructure assets including buildings, vehicles and equipment damaged following the general elections in December 2007. Several bridges,' public buildings and other public assets are expected to be restored, along with several sections o f national roads where trenches were dug across the pavement to prevent traffic flow. In addition, about three pi lot te rm contracts will be awarded on the basis o f retainership in flood prone areas, and bailey bridges wil l be procured and stocked in support o f the disaster management sub- component. This new sub-component wil l also support the completion o f a feasibility study and designs for rerouting a section o f the Kenya-Uganda railway line traversing Nairobi. There wil l also be implementation o f mitigation measures specified in the Environmental Impact Assessment (EIAs) and provision o f support to Project Affected Persons (PAP), including resettlement activities and compensation.

38. Component C (Private Sector Participation in Road Management, IDA US$8.82 million)

(i) This component involves financing the pi lot output and performance based contract for maintenance and management o f about 200-300 km o f lower volume roads (existing component).

(ii) It also involves provision o f technical assistance to facilitate the concessioning o f selected sections o f the Northern Corridor road link. (Proposed Nairobi Urban To l l Road - existing component).

39. Component E (Institutional Strengthening in the Road Sector and Technical Assistance, IDA US$23.75 million)

(i) This component includes feasibility, engineering and design studies for the Kibwezi-Isiolo road, the Lakeside N. Tanzania Narok road, and the Mombasa by-pass, including the M o i Airport access road (meeting a financing shortfall in the existing component). I t will also finance design studies for the Sudan Link Road and the Urban Public Transport improvement study in Nairobi (new component).

(ii) It also involves strengthening governance in the road construction industry (a new sub-component) through: (a) establishing a road infrastructure disaster management and response unit within the Kenya National Highways Authority (KeNHA) (this unit wil l hire term contractors in areas prone to rainfall related disasters, through a competitive and transparent process, to maintain readiness to restore damaged sections o f roads and bridges at pre-determined prices; bailey bridges wil l be purchased for emergency works; and a pi lot system wil l be established for responding to and managing disasters such as road or bridge washouts); (b) establishing a N C A which wil l promote and oversee professional and ethical conduct in the construction industry; and (c) strengthening the Engineers' Registration Board (Em) and i t s associated institutions, including the Institution o f Engineers o f Kenya (IEK), through provision o f appropriate training, knowledge sharing, office space, and technical assistance to enhance self-regulation and sanctioning o f unethical conduct by practicing engineers.

13

(iii) This component also involves helping to strengthen the capacity o f KeNHA, the Kenya Rural Roads Authority (KeRRA), the Kenya Urban Roads Authority (KURA), the Mechanical and Transport Department (MTD), KIHBT, the Materials Department, the Department o f Government Investments and Public Enterprises (DGPE) and the State Law Office through acquiring critical equipment and providing technical assistance and consultant services to develop suitable strategy and reforms for the Department and to conduct relevant studies in the transport sector (this wil l scale-up an existing component).

Financing Plan

40. The additional financing plan and details o f the activities to be financed from the additional credit are given in Table 1, while Table 2 gives further details about the Post-election Emergency Rehabilitation and Recovery sub-components, i.e., components A.4 and AS in Table 1. The financing plan (Table 1) indicates the additional funds to be made available from IDA. The Bank has agreed with the government that should the costs increase further in future, and the available funds from IDA be inadequate to cover the current financing percentages, the government would cover the extra costs through budget allocation, or explore the possibility o f bringing in other development partners.

14

Table 1: Financing Plan (Additional Credit)

Indicative Additional

Cnsts

Financing Plan YO of Financing (US$M)

Component I US%M I IDA I GOK I IDA I GOK A. Rehabilitation of Northern Corridor and Emereencv Restoration o f Damaeed Public Assets 1. Mau Summit-Kericho (55 km)* 2. Kericho-Nyamasaria (81 km)* 3. Nyamasaria-Kisumu Airport (22 k m l 6 km dual)**

(New)

Repairs (New)

4. Emergency Post-election Reconstruction and Recovery

5. Supervision and consultants' services for Emergency

Sub-total

0 " 0

100.50 67.34 33.17 67% 33% 117.80 78.93 38.87 67% 33% 78.60 52.66 25.94 67% 33% 19.00 19.00 0.00 100%

2.5 1 2.5 1 0.00 100%

318.41 220.43 97.98 I I

C. Private Sector Participation in Road Management and Maintenance 1. Output and Performance Based Road Contract - works I 11.701 7.84

12. Transaction Adviser-Nairobi Toll Rd. (additional funds I 1 .ool 0.981 0.021 98%1 2%1 3.86 67% 33%

Sub-total 12.701 8.821 3.881 E. Institutional Strengthening in Road Sector and Technical Assistance I 2%

12. Emergency Equipment (Bailey Bridges) and Vehicles Sub-total (9-12)

Total

1 1 .oo 10.78 0.22 14.20 13.92 0.28

335.35 253.00 102.35

* Includes construction o f roadside statiodmarkets and climbing lanes ** Includes three interchanges and 2 bridges.

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Table 2. Breakdown of Emereencv Rehabilitation and Recoverv Sub ComDonent

Total

Item

21.51

(i) Supervision o f emergency works (ii) Feasibility and Design study for railway track relocation

1.00

1.51

(b) Components Restructured without Additional Credit

41. without any additional financing, through:

Component F (Support to KAA). This involves restructuring the original component

Cancelling the component for rehabilitation o f the Old Embakasi Airport (Nairobi), including external electrical works and renovation o f the old terminal building;

Introducing a new project activity for the expansion o f JKIA, including construction o f a new passenger terminal building (Unit 4) and car park, and reconfiguration o f terminals 1 , 2 and 3;

Reallocating IDA funds earmarked for construction o f the terminal building and extension o f the runway at Kisumu airport and for renovation o f the terminal and upgrading o f security at Wilson airport (to be fully financed by KAA) to expansion o f JKTA;

Reallocating IDA funds for rehabilitation o f O ld Embakasi Airport (US$5.09 million) and part o f the funds (US$5.42 million) allocated for the expansion o f Kisumu and Wilson airport terminals to the expansion o f JKIA;

Introducing a new project activity for the supervision o f expansion works at JKIA Units 1-4 and arrivals building (US$4 million);

Reducing IDA’S financing percentage for c iv i l works at JKIA Unit 4 and car park from 25 percent to 19 percent; and

Consolidating the sub-components for security perimeter lighting, surveillance system, and support to emergency centers, into the sub-component for security and communications equipment and vehicles (totaling US$5.82 million) and

16

readjusting the allocated funds for feasibility, design and supervision o f Kisumu and Wilson airport reconfiguration (US$1.93 million) and for training (US$0.86 million).

42. Over the last four years, JK IA has experienced a high growth in passenger flows due to the sudden turnaround in the economy and the strong performance o f Kenya Airways (KA). The increased passenger flows at JKIA warrant the addition o f a new terminal (Unit 4) to the existing three units. JKIA terminal facilities are being upgraded to handle both international and domestic traffic to the year 2021, thereby increasing capacity from 2.5 mil l ion to 10 mi l l ion passengers annually.

43. Improved financial performance has enabled KAA to leverage i t s own funds with those from the local private banks, IDA, the ED3 and possibly AFD in order to fund the expanded scope o f works. KAA will fully fund the improvement o f Kisumu and Wilson Airports. IDA funds which were allocated to improving the Kisumu and Wilson Airports and rehabilitating the Old Embakasi Airport have been reallocated to support the expansion o f JKIA, including consultant services for supervision o f works, without any additional financing. The revised scope and financing plan for this restructured component i s detailed in Table 3.

Implementation Arrangements

44. No modifications to the implementation arrangements are required. The Project Technical Team (PTT) in each o f the four implementing agencies, namely, Ministry o f Roads (MOR), Ministry o f Transport (MOT), Kenya Airports Authority (KAA), and Kenya C iv i l Aviation Authority (KCAA), are wel l constituted and have been implementing the project since i t s inception. The teams are also adequately staffed and generally wel l resourced, with good oversight arrangements at higher level o f management.

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I Actual or 1 Financing Plan YO Financing

Component

F. SUDDOrt to KAA

Estimated IDA KAA EIB Local IDA KAA EIB Local

Banks Banks

Works

Infrastructure (dropped) 1’

(dropped) 2’

Aii-port (dropped) 3 4. Expansion of JKIA - Passenger Terminal

1. Rehabilitation of Old Embakasi Airport

2. External Electrical Works - Old Embakasi Airport

3. Renovation o f terminal building - Old Enibakasi

0.00

0.00

0.00

Sub total (1-7) Goods, Equipment and Vehicles 1. Perimeter Fencing for Major Airports (Materials) 2. Security screening, baggage, access control,

Sub total (F) KAA I 297.451 34.821 162.631 70.001 30.001 I/, 21, and 31 Sub components dioppcd IDA (USSS 09 million) to bc ieallocated to iniptovement of.IKIA

276.23 14.00 162.23 70.00 30.00 98% 2%

2.16 2.12 0.04 1.08 1.06 0.02

41 and 51

61

71 and 81

3. FIDS with Installation at Mo i Aimort Mombasa

IDA allocation ofUSS8.6 million for iniprovcment o f Kisuniu and Wilson airports i s reallocated as follows USS5.42 million to .IKIA expansion; US$O.40 million, design and supcrvision of expansion o f Kisumu aiiport; and US$2.68 niill ion for supervision o f JKIA units 1-4. Part o f IDA funds (USSI .47 million) reallocated to iniprovcment o fJKIA (USSO. 15 million) and the balance USSl.32 million to supervision ofworks at JKIA Units 1-4. Combined with security and communication and vehicles sub component.

0.701 0.691 0.011

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4. Fire Tenders (6) 5 . Security perimeter lighting and detection at four airports 7’ 6. Security and communication Equipment and Vehicles at four airports 7. Support to Emergency Operation Centers 8

Sub total (1-7)

2.60 2.55 0.05

5.94 5.82 0.12

0.00

12.48 12.24 0.24 0.00 0.00 Consultant Services 1. FeasibilityiDesigdSupervision: Kisumu and Wilson Airports and JKIA Runway Rehab. Design (expanded) 2. Works supervision o f JKIA Units 1-4 and Arrivals Building (new) Training

98% 2% 3.80 3.72 0.08

4.08 4.00 0.08

0.86 0.86 100%

IV. CONSISTENCY WITH COUNTRY ASSISTANCE STRATEGY

45. The previous CAS lapsed in June 2008 and the process of preparing a new CAS has started. The main pillars o f the lapsed C A S and the more recent C A S Progress Report, dated February 16, 2007, remain relevant and are l ike ly to continue to in form the new CAS. The design and objectives o f the NCTIP, which was approved under the previous CAS, remain largely unchanged and support the objectives o f the CAS and the CAS Progress Report. The project objectives are strategically aligned w i th some o f the CAS pillars, particularly: (i) strengthening public sector management and accountability - through the development and adoption o f the road sub-sector po l icy and establishment o f the three autonomous road authorities; and (ii) reducing the cost o f do ing business and improving the investment climate - through rehabilitating major sections o f the Northern Corridor, which i s the main transport artery o f Kenya and much o f east Africa. Similarly, improvement o f security and safety at the major airports and expansion o f capacity at J K I A to handle the growing air traffic demand for the next 15 years wi l l help to remove constraints to doing business. NCTIP also encourages the participation o f the private sector in managing and financing infrastructure services through concessions, local lending and the introduction o f output and performance based road maintenance and management.

Relevarice to the CAS.

46. The additional financing also supports the pi l lar o f targeting investments to poorer areas o f the country in an effort to promote equity, as proposed by the Poverty and Inequality Assessment (KPIA) completed in July 2008 (Wor ld Bank Report No. 44190-KE). Due to the poor condition o f the M a u Summit- Kisumu road section, the t ime and cost associated w i th road transport to western Kenya has increased tremendously in recent years, adversely affecting the poorer communities, who rely heavily on that road section to obtain services and engage in market activities. Whi le airfares to western Kenya have fallen due to increased demand and introduction o f new airlines to this region, this development has benefited the r i ch but not directly the poor.

47. Specific Link to the CAS Progress Report. The C A S Progress Report recognized that the governance trigger for the road sector has been achieved through strengthening the pol icy and institutional framework (Annexes 2 and 9). In addition, progress toward supporting the economic growth pi l lar i s we l l underway. The total number o f passengers passing through J K I A has increased from 2.8 m i l l i on in 2002 to about 4.5 mi l l ion in 2007, and new airlines continue to introduce their operations from JKIA; the staff and capacity o f K C A A to conduct aviation safety inspection has been enhanced under the project; aircraft movement and parking facilities at J K I A have been augmented by the construction o f additional aprons and taxiways; and over 40 km o f the M a j i ya Chumvi-Miritini road (including 5 km o f dual carriageway funded from savings) has been reconstructed, thereby reducing the travel t ime between Nai rob i and Mombasa by nearly two hours. Finally, the provision o f social amenities such as a new secondary school constructed at Tam in Coast Province and new roadside stations including markets and HIV related facilities wil l significantly benefit the poor, including particularly women.

48. The Coalit ion Government fully supports the project, as evidenced by its reconfirmation, endorsement and commitment to the project and its financing p lan from its two letters to IDA

19

dated April 16, 2008, and April 17, 2008, respectively from the Minister for Roads and Permanent Secretary, and a further letter dated April 23, 2008, from the Minister for Finance. The improvement o f the Northern Road Corridor and related infrastructure, such as the port o f Mombasa, are priorities in the Vision 2030 document and figure prominently in the strategy statements o f the Coalit ion Government. In spite o f the current financial challenges facing the government, improvement o f infrastructure remains its top priority. The Ministry o f Finance has declared that budgeted investments for infrastructure wil l be honored and in that regard in January 2009 introduced a 12-year “infrastructure bond” into the local market to finance such planned expenditures.

V. APPRAISAL SUMMARY

Economic Analysis

49. Rehabilitation and Inzprovenzent of Northern Corridor Road Sections. A revised economic analysis was done for the rehabilitation and improvement o f the Northern Corridor, including the M a u Summit - Kisumu road section, using the latest increased prices obtained f rom actual bids, the expanded scope o f works, and the latest traffic data (see Table 4). The project’s ma in benefits are the savings to be made by road users on vehicle operating costs and passenger t ime costs. Since appraisal o f the original project in 2004, not on ly have the construction costs and scope o f works increased but also the traffic levels and expected growth rates.

Table 4 Revised Economic Evaluation

Road Section Number

1 2 3 4 5

6 7

8

Road Section Name

Maji ya Chumvi - Mirtini (2007) Sultan Hamud - Machakos Turiioff(2007) Macliakos Turnoff- JKlA (2007) Lanet - Njoro Turnoff (2007) Njoro Turnoff - Timboroa (2007) Sub-total (1-5) Mau Suminit - Kericho (2008) Kericho - Nyamasaria (2008)

Nyamasaria - Kisumu Airport (2008) 1 Sub-total (6-8)

* Base costs excluding contiiigcncies

Section Length (km) 35.00 55.00 33.00 16.00 84.00

223.00 55.00 81.00

24.00

Road Works

Description

Rchabilitation Rehabilitation

Widening Wid en i ng

Rehabilitation

Rehabilitation Rehabilitation Widening +

Reconstruction

Road Works

cost ($m)* 24.55 39.20 61.57 39.20 56.55

221.07 86.44 101.66

66.88

Net Present Value

49. I O 36.60 142.10 97.20 47.10

372.10 14.42 39.70

11.60

($m)

Internal Rate

Of Return

44% 28% 39% 3 7% 28% 34% 17% 24%

( Y O )

16% 160.00 I ] 254.99 1 65.72 I 19.2”Lo

50. The revised Net Present Value (NPV) o f the rehabilitation o f the M a u Summit - Kericho - Kisumu road in 2008 i s US$65.72 mil l ion, w i th an overall Internal Rate o f Return (IRR) o f 19.2 percent, varying on individual sub-sections f rom 16 percent to 24 percent. Similarly, o n the already awarded f ive major road contracts, the revised N P V in 2007 was US$372.10, w i t h the overall IRR o f 34 percent, varying o n individual sub-sections f rom 28 percent to 44 percent. Annex 3 gives the details o f the economic re-evaluation.

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5 1. JKIA Expansion. The main benefits o f expanding the facilities at the JKIA comprise: (i) increased revenue for the KAA; (ii) reduced congestion at the airport; (iii) increased safety and security; (iv) increased reliability and reduced delays in passenger and cargo handling; and (v) multiplier effects o f reduction in the cost o f doing business, particularly in the horticulture and fresh flower industries. The feasibility and design studies conducted by international consultants (Canada) established the Rate o f Return on the investment for the sub-project o f 19 percent, with a payback period o f 5 years6 (Annex 3).

Strengthening Governance in the Construction Industry

52. The NCTIP additional financing will help to strengthen governance in Kenya’s construction industry through: (i) competitive selection and award o f term contracts to road contractors in disaster-prone areas, to enhance the government’s level o f readiness to respond to road infrastructure damages experienced during heavy rains, floods and other calamities and also at pre-determined prices; (ii) establishment o f a road sub-sector disaster response unit that will facilitate advance selection o f term contractors competitively and be responsible for managing road and bridge damages from floods or heavy rain; and (iii) supporting the development o f the local construction industry by establishing the N C A to ensure that qualified contractors undertake construction work, assist in training contractors, and oversee professional and ethical conduct in the construction industry. I t also requires the strengthening o f the ERB and i t s associated institutions to permit the institution to provide relevant training, sharing o f knowledge, office space and expertise to strengthen self-regulation and sanctioning o f ,

unprofessional and unethical conduct by practicing engineers.

53. The establishment o f the N C A requires enactment by Parliament o f a new law and complementary amendments to the ERB Act. The enactment o f a new law involves a number o f processing steps, including the approval o f a Cabinet Paper, which in this case involves consultations among al l the Ministries directly related to the construction industry, such as the Ministr ies o f Roads, Public Works, Local Government, and Housing; preparation o f the relevant Parliament Bill by the Attorney General’s (AG) office, and solicitation o f comments from stakeholders; scheduling the Bill for Parliamentary discussion; approval and enactment by Parliament o f the Bill into an Act o f Parliament; and assent o f the Act by the President before i t becomes effective. Each process element has the mandatory lead time requirements.

54. The Finance Bill which has been approved by Parliament for 2009 contains an explicit provision for setting up the NCA; what remains is to follow due process in legislating it. I t i s currently anticipated that the Cabinet Paper wil l be approved by Cabinet in mid-2009; that the AG’s office wil l draft the Bill by September 2009; that stakeholders wil l be allowed to comment and that the AG’s office will prepare a revised Bill for presentation to Parliament by late 2009 for the f i rst reading; that Parliament will approve a Bill sometime in early 2010; and that the N C A wil l be established soon thereafter (expected by end-March 2010).

Queens Quay (Canada): Feasibility and Design Study for JKIA, 2005.

21

Safeguard Policies

55. None o f the modified, expanded or new activities included in this additional financing for NCTIP raise the environmental category o f the project, which remains at level B. N o new safeguard policies are triggered by the restructured component. All the safeguards reports required for the project, namely: (i) the Environmental Impact Assessment (EIA) approved by the National Environmental Management Authority (NEMA); (ii) the Resettlement Pol icy Framework; and (iii) the specific Resettlement Action Plans (RAP) for the project components, including those for the M a u Summit - Kisumu road section, were reviewed and cleared by the Bank and disclosed both in the country and the Bank’s Info Shop on January 14, 2004. In the case o f the M a u Summit - Kisumu road section, the major increase in cost i s due partly to the disproportionate increase in the unit cost o f construction and partly to the increase in the scope o f works necessitated by the high growth in traffic since 2004, consisting mainly o f a much stronger pavement design within the existing Right o f Way (ROW). The EIA for this road section includes the identification o f anticipated environmental impacts and their corresponding mitigation measures for the construction o f major drainage structures, bridges and climbing lanes. Since the preparation o f the EIA, the designs have been modified to include three interchanges in place o f at-grade intersections. The main portion o f the interchanges comprising the bridge i s confined largely to the ROW and the environmental impacts are not significant or diverse, nor are they expected to be cumulative or irreversible, as confirmed during a supplementary due-diligence site visit by the Environmental and Social Development Specialists in November 2008.’ While the latest design changes add to the l ikely impact on environment and project affected persons, the specialists have confirmed that no new safeguard policies are triggered and that the mitigation measures and the pol icy frameworks currently specified in the EIA and RAP adequately cover the additional impacts. The supervision plan (Annex 10) calls for at least two visits by social and environmental specialists per annum during construction to ensure satisfactory compliance with Bank’s safeguard policies.

56. The RPF covers al l the impacts o f the original and the additional financing project components, and individual specific RAPS (with detailed names and entitlements o f individual project-affected persons) have been prepared in accordance with Bank guidelines. The experience o f implementing the RAPS for the road works currently under implementation has been satisfactory. Quarterly progress reports are submitted to the Bank by the internationally- recruited supervision consuItants for each contract, and these reports are reviewed by the Bank’s team to ensure compliance with agreed policies. Any shortcomings in complying with the RAP or the respective EIAs observed during the Bank’s regular supervision missions are promptly identified and reported for rectification to the Recipient or the supervision consultant, as the case may be. Funding for implementation o f the RAPS and the environmental mitigation measures i s adequately provided for by inclusion o f a provisional sum in each construction contract. Acquisition o f land is minimal since the works involved are mainly rehabilitation o f existing assets. Construction o f new assets, including bridges, drainage structures, climbing lanes and the new by-pass, i s largely within the R O W owned by the Recipient, with minor realignments and land acquisition.

World Bank, Mau Summit - Kericho - Kisumu EIA Mission Report, November 2008.

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57. For the extension o f the terminal building at JKIA, neither land acquisition nor project- affected persons are involved, since the full extent o f the works i s concentrated within the land and air-side security boundary o f property owned by the airport authority. The EIA report for the JKIA expansion program has been prepared and approved by NEMA and the Bank and disclosed in-country on March 28, 2008, and at the Bank’s InfoShop for disclosure on May 7,2008.

Implementation Issues

58. The capacity o f the implementation agencies and the staffing o f the Project Technical Teams is generally satisfactory, bolstered by technical assistance and consultant services, particularly in the areas o f design studies, works supervision (four internationally recruited firms), project coordination, monitoring and evaluation (University o f Nairobi), HIV/AIDS mitigation (an NGO is to be engaged), user satisfaction surveys (local consultant or c iv i l society organization to be engaged), independent review o f on-going and recently completed contracts (independent firm to be recruited through International Competitive Bidding (ICB)) and independent random technical audits during construction (external finance to be facilitated by IDA). W h i l e the implementation o f the project and the progress toward achieving the development objectives to date is satisfactory, three important implementation issues should be flagged:

(i) Private Sector Participation in Road Financing and Maintenance. Negotiations are underway with the only bidder for the proposed Nairobi Urban To l l Road concession facilitated under the project (the transaction adviser assisting with the procurement and negotiations is financed under the project), but the process has taken a much longer time than expected. The Recipient has requested an IDA Partial Risk Guarantee (PRG) to support the proposed 30-year concession. The bidder has quoted very high prices for constructing the major structures involved in his alternative bid (new by-pass, flyover, to l l plazas and rehabilitation and expansion o f existing carriageways). The main issues under discussion are ensuring that the project provides value for money and that the tol l rate i s affordable. The government is exploring various available options, including l ow cost alternative design standards, phased construction, increased IDA participation, and the use o f financial instruments that wil l allow longer loan repayment periods from local financiers. However, the current unfavorable financial climate, the high costs involved, and the uncertainty in financing o f investments required for the second phase (years three to six) as proposed by the preferred bidder have made it more difficult to reach agreement. In the event the value-for-money objective cannot be achieved and negotiations are not successful, the options would be: (i) to restructure the concession to a smaller size by modifying the scope to include only some o f the phase 1 works (Le. the flyover and rehabilitation o f critical portions o f the Waiyaki Way) and invite fresh bids (though interest during this period o f ongoing financial crisis i s likely to be very low); or (ii) to inject public sector financing (including IDA support) to construct the southern by-pass (which wil l reduce congestion on the main highway through Nairobi), prepare the detailed designs for the flyover and construct i t using financing from other Development Partners, and then offer the constructed facilities for tolling in a competitively bid concession. Recently, the preferred bidder has made a proposal for increasing the level o f the PRG (from US$120 mi l l ion to about US$390 million) and

23

reducing the amount o f private sector capital expenditure by using IDA support to construct the southern by-pass and the second carriageway from Athi River to Machakos Junction. This proposal may be bankable and could form the basis for an IDA-supported project. Meanwhile, no funds from the additional financing proposed in this credit are earmarked for this concession.

(ii) Road Works and Related Consulting Services. The four major road works contracts financed by IDA as well as one financed by NDF, which have already been awarded under the project, are progressing well. The M a j i ya Chumvi - Miritini section (35 km), which i s funded by NDF, has been successfully completed, including social amenities such as the construction o f a new secondary school for the community at Tam, Coast province - on time and under budget. Furthermore, additional works were completed by the contractor, namely, a dual carriageway for the first five kilometers, funded from savings partly resulting from the strengthening o f the Euro against the U S dollar. Works on the four contracts financed by IDA-namely, the Sultan Hamud - Machakos Turn O f f section (55 km); the Machakos Turn Off - JKIA section (33 km, o f which 12 km i s dual carriageway); the Lanet - Njoro Turn Off section (16 km o f dual carriageway); and the Njoro Turn O f f - Timboroa section (84 km)-are at different stages o f construction, but are expected to be completed (taking into account some delays due to the December 2007 post-election political crisis) within the next 24 months. The works include the provision o f roadside amenities at selected market centers and other social enhancement features, including HIV/AIDS mitigation measures, to increase the positive impact on local communities. The cost implication o f the political crisis in extension o f time and damage claims i s under review. While preliminary indications are that some o f the extra costs can be covered from the provision for contingencies, i t is conceivable that because o f the past high rate o f inflation, the contingencies (17.5 percent) may not be sufficient to meet the price adjustment needs. In the event the extra costs are much higher, it has been agreed that they wil l be met by the government from i t s own resources, or assistance would be sought from other Development Partners.

(iii) Airport Civil Works and Aviation-Related Construction and Consulting Services. Construction works o f the expansion o f the apron and additional taxiways at JK IA have been completed. Meanwhile, designs for a new terminal building (Unit 4) at JKIA have also been completed and bids have been received for i t s construction (the closing date for receipt o f bids was March 5, 2009). The detailed designs for the rehabilitation and expansion o f the JK IA runway have also been completed and those for the reconfiguration o f JKIA’s Units 1, 2 and 3 are about 90 percent completed. Bids for the improvement o f Kisumu Airport were received and evaluated and the selected contractor has commenced construction works. Detailed designs for the improvement o f Wilson Airport are being finalized. KA4 has committed i t se l f to finance, in part, the improvements o f Kisumu and Wilson Airports, while EIB has confirmed i t s willingness to finance the reconfiguration works for terminals 1, 2 and 3. However, even though the detailed designs for the rehabilitation o f JKIA runway are completed, there i s no financing available for the construction works. The government is considering approaching other possible financiers for assistance and AFD has shown some interest.

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Institutional Capacity Building

59. Road Authorities. The project will assist in building institutional capacity in KeNHA and the other two road authorities that have recently been established (KeRRA and KURA). Key members o f the M O R project technical team responsible for implementing and managing the Project are scheduled to j o i n KeNHA and continue to manage the Project within a unit dedicated to externally financed projects in KeNHA. The capacity o f the three road agencies wil l be enhanced selectively, through the provision o f training and technical assistance for: (i) planning, programming and budgeting for annual programs; (ii) installing systems and making staff knowledgeable in Management Information Systems; (iii) updating design and specifications manuals; (iv) setting up o f a Road Disaster Response Unit in KeNHA; and (v) undertaking critical studies such as the National Transport Development Plan, Urban Public Transport Improvement, Feasibility and Design o f selected road projects. Regular workshops and training sessions are also conducted by Procurement and Financial Management staff in the Bank’s Country Office to share knowledge and strengthen capacity in the areas o f procurement and financial management in the various project implementing agencies.

60. The project has already facilitated the establishment o f the three autonomous road authorities. It wil l hr ther assist the government to establish the N C A and strengthen the ERB and i t s associated institutions through the provision o f training, workshops and study tours and technical assistance to develop relevant rules and regulations, promote small and medium sized contractors, and establish systems to’ oversee the performance and professional conduct o f contractors, engineering f i r m s and technical professionals in the construction industry (Annex 6).

Promoting Good Governance and Professional Integrity.

Due Diligence on Construction Costs

61. Appraisal o f the original project was done in 2004 and appraisal o f the additional financing was conducted in April 2008, when the cost estimates were based on prices prevailing in October 2007 (prepared by the design consultant and appraised by the Bank’s team). At that time, and based on those parameters, the government made a request for additional financing from IDA in the amount o f US$191 million. IDA negotiated an additional financing credit in that amount in M a y 2008, including US$21 mi l l ion for emergency funds to restore public assets damaged or destroyed during the post-election violence in Jan/Feb 2008. For a variety o f reasons, including ongoing dialogue with INT concerning how best to protect the project from fraud and corruption risks, the planned Board date (July 10, 2008) was postponed. In the meantime, bids for the M a u Summit - Kisumu road section (three contracts) were received in August 2008, with the lowest bid prices exceeding the October 2007 estimates by 45 percent but falling about 8 percent below revised estimates that had been prepared in August 2008, before bid submission, in an effort to keep abreast o f a rapidly changing construction market. The inflation rate in the five months preceding bid submission ranged from 26 percent to 31 percent per annum, and the risk factors associated with the project probably rose in early 2008 as a result o f the post-election violence, because the road sections to be rehabilitated are in the Western region, which i s the poorest region in Kenya and also the region where the post-election violence was most prevalent. Based on the bids received, the government requested an increase in IDA’S

25

share o f the additional financing required, from the initial estimate o f US$191 mi l l ion to the current amount o f US$253 million.

62. The Bank’s team examined in detail the unit prices for major construction items in the Bill o f Quantities (BOQ) submitted by the bidders (four f i r m s bid on one contract and three on each o f the remaining two). The bid prices individually range from 0.88 to 1.28 times the Engineer’s estimates o f August 2008, which i s not unusual in such bids. Further analysis o f the key items o f the BOQ, which together amount to about 70 percent o f the total cost, showed them to be consistent with the prevailing market prices, and no unusual trends or anomalies were found when compared across the bid prices o f a l l the four bidders. The bids were also subjected to a review by an independent procurement specialist who found no anomaly or matter o f serious concern in the procurement documents as issued, in the bid submissions as received, or in the range and trend o f unit prices quoted by the bidders (Annex 1). Some relatively minor adjustments have been suggested in some o f the items related to the Preliminaries, which wil l be taken into consideration prior to signing o f the contracts with the winning bidders.

63. Impact of Changes in Market Prices. Although in the last few months, market prices for key materials, including fuel and bitumen, have moved downward and could continue to do so with a world recession underway, i t i s unlikely that the overall cost to the government will change drastically, since the short term price advantage may be offset by long term disadvantage, given the 24 - 36 month duration o f the contracts. Contract terms provide for price adjustment on the basis o f a formula that takes account o f changes in the price indices (from source countries) o f key materials in proportion to their relative contribution to the total cost. The price adjustment formula also takes account o f the relative changes in the foreign exchange rates between the currency o f the country where the material i s sourced and the payment currency. The effect o f the price adjustment may therefore be to increase or decrease the cost to the government from month to month. The contract sums include a price and physical contingency allowance o f 17.5 percent, but the overall cost at the end o f the contract could be lower than the contract sum should the price adjustment remain favorable to the government during the implementation period.

Road Maintenance

64. In the years prior to 2003, very little attention was given to road maintenance in Kenya, as a result o f which the proportion o f road network in good or fair condition in 2003 was only about 60 percent. Today it i s about 73 percent. The public sector retains a monopoly o f control and management o f the road network, although representatives o f private stakeholder groups have majority representation on the Kenya Roads Board and the Boards o f the newly created KeNHA, KeRRA and K W . There are no private to l l roads in Kenya, nor i s management o f roads done by the private sector. Despite i t s retention o f ownership and management, the public sector i s playing a diminishing role in the execution o f road works:

u Road construction and improvement works are entirely undertaken by the private sector; Major maintenance works (resealing, re-carpeting and re-graveling) are almost entirely undertaken by the private sector;

26

. Off-pavement maintenance and small drainage works on unpaved roads are increasingly being undertaken by small local contractors; and

Much o f the maintenance plant and equipment used by the District Engineers and small and medium sized contractors is now hired from the private sector, rather than provided by the Mechanical and Transport Department (MTD) o f the Ministry o f Roads.

.

65. The nationwide force account maintenance and works system, with permanent laborers and road camps, collapsed in the late 1980s and early 199Os, to be replaced by private sector contractors. Despite the substantially increased maintenance funding, there i s s t i l l no coherent routine road maintenance program, although periodic maintenance is now programmed well. The Kenya Roads Act 2007 specifies a system for the allocation o f fhds for maintenance among various classes o f roads, approval o f the annual work programs, and supervision to ensure that the work programs are followed and that the works are undertaken satisfactorily. This new system has the potential for a much greater degree o f transparency and accountability in the maintenance and management o f the road network and i t introduces a much more businesslike approach to the development and maintenance o f the road sector, setting priorities and basing decisions on clear and objective economic and social criteria, rather than responding to political expediency.

66. Furthermore, the KRB has the responsibility for overall supervision o f the road sector. I t i s responsible for: (i) distributing the funds from the Road Maintenance Fuel Levy to road agencies for the implementation o f approved work programs; and (ii) auditing both the financial and technical compliance with these work programs. The Fuel Levy has transformed the financing o f the sector, eliminating dependence on the size o f and uncertain releases from the recurrent budget. Funding for maintenance i s no longer the subject o f debate by politicians. 40 percent o f the Road Fund revenue i s allocated to the National Highways Authority, which plans and carries out maintenance- largely by contract -on national roads; 32 percent is allocated to Rural Roads Authority, which continues to employ and assist District Road Committees to prioritize and implement rural and district roads maintenance and work closely with the donor funded Roads 2000 program; 15 percent i s allocated to the Urban Road Authority, which maintains urban roads; 1 percent to the Wildlife Services, to fund and maintain forest and national park roads; a maximum o f 2 percent to KRB for i t s administrative expenditure; and the 10 percent balance i s used to support the annual road development plan. All maintenance contracts are randomly audited by KRB and each future year’s funding wil l depend on the past year’s performance by each road agency. Even though the government has been experiencing major financial problems, the Fuel Levy to date has been subjected to neither diversion nor borrowing.

67. The progressive increases in the level o f Fuel Levy funding (from Ksh. 8 bi l l ion in 2003 to Ksh. 18 bi l l ion in 2007) have resulted in a major increase in the number o f road maintenance contracts. For the f i rst time in many years, Districts now have funding to maintain rural roads; the condition o f the classified road network in good and fair condition has increased from 60 percent in 2003 to about 73 percent at present; there has been no uncertainty in the f low o f hnds for maintenance; and small contractors now have a steady f low o f jobs. Nevertheless, the key challenge facing the KRB i s to ensure that road-users receive full value-for-money from this

27

funding. The project has a provision for undertaking a pi lot program o f long-term output and performance based contracts for road maintenance and management, which if successful, could become the preferred method o f maintaining the majority o f roads in Kenya.

68. The Rapid Disaster Response Unit to be established on a pi lot basis under the project wil l be a separate unit within the Maintenance Department o f KeNHA, dedicated to the management o f emergency repairs o f damaged bridges and road sections resulting from heavy rains and floods. Term contracts wil l be awarded to three competitively selected contractors, in three disaster-prone areas, who will be paid on the basis o f retainership to maintain a specified level o f readiness to respond to disasters. Payment for actual work, carried out when needed, wil l be made on the basis o f the competitively bid unit prices for common works items, paid under the emergency repairs allocation from the Road Fund. Such term contracts for emergency works will enhance good governance in the sector and achieve better value for money, by ensuring that only qualified contractors are retained for this purpose, that the prices obtained are competitive, and that the response during emergency wil l be swift and effective.

Financial Management and Monitoring

69. There are no changes in the implementation arrangements with the four implementing agencies, namely the MOR, KAA, KCAA, and MOT. The financial management systems in each agency are operating satisfactorily. Quarterly Financial Management Reports have been submitted on a timely basis and have been assessed as satisfactory. All audit reports due have been received, and issues highlighted in the audit reports are being satisfactorily addressed. The Project has adopted the International Public Sector Accounting Standards Cash Basis o f Accounting, with effect from June 30, 2008. New Terms o f Reference (TOR) have been issued to the external auditors enhancing the scope o f the audit. The external auditors are now required to conduct procurement audits as part o f the annual financial audit and they will also submit management letters reflecting on any internal control weaknesses, starting from the ongoing FY2008 audits. The new TORS also provide for corruption and fraud reviews by the external auditors.

Procurement

70. Overall, the procurement management function o f the project has continued to be satisfactory. The Project Technical Teams (PTT) in the implementing agencies are al l adequately staffed with qualified and experienced Procurement Specialists and have access to appropriate tools and knowledge, including continuing assistance from the Bank’s Country Office, to enable them carry out their functions effectively. The implementation o f contracts already awarded i s proceeding in accordance with the revised work program, and payment for work done is made timely. Contract supervision i s adequate. The procurement related activities o f the other non-road components o f the project are also progressing satisfactorily. The M O F has posted a senior procurement specialist with the MOR, which has the largest component, to handle al l procurement matters. National procurement rules and procedures have been streamlined and the contract approval thresholds for the implementing agencies, without prior clearance o f MOF, have been raised. No undue delays have been witnessed in the approval and countersigning o f large contracts by the MOF. Therefore the procurement risk o f the project i s assessed as

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moderate. The revised Procurement Plan was discussed and agreed during negotiations for the restructured and expanded components and wil l be updated on the Bank’s website.

71. At the country level, the oversight function o f government has been strengthened by the establishment o f the Public Procurement Oversight Authority, which is responsible, inter alia, for ensuring that al l government agencies follow a fair, transparent and competitive procedure for the procurement o f goods, c iv i l works and services; poor performers are identified and appropriately sanctioned; and value for money i s ensured in al l procurement activities. The Kenya Anti-Corruption Commission (KACC), in collaboration with KfW, has installed a web- based system for reporting o f any wrongdoing, including fraud and corruption, without fear o f victimization.

72. The independent procurement specialist who has so far reviewed the procurement o f the bids and their evaluation for the M a u Summit-Kericho-Kisumu contracts wil l be retained to conduct independent reviews o f all other major procurement actions under the project. Major contract awards wil l also be subjected to review by the recently established autonomous Public Procurement Oversight Authority and Bank supervision missions will ensure that the government follows al l Bank guidelines and wil l conduct post-reviews for contracts awarded that are not subject to prior review.

Communication Strategy

73. Communication is an important and integral part o f this project, not only in terms o f updating the stakeholders about implementation progress o f the physical works, but also on how the project is pushing for increased transparency and accountability in public investments, while supporting the government’s fight against corruption and fraud; i t wil l also demonstrate the government’s response to the new priorities and needs that emerged following the December 2007 post-elections crisis. As part o f the communications strategy, the Bank’s External Affairs (EXT) office and Africa Region External Affairs (AFREX) through the Kenya Country Office will work closely with the M O R and the K e N H A to hold jo int public workshops and briefing sessions, and assist KeNHA to develop i t s own website where documentation on sensitive issues (such as the road tolling strategy, affordability and benefits that wil l accrue from the proposed Urban To l l Road Project) would be available online for public comment. In addition, appointment o f key staff (such as Directors o f the Boards o f the road authorities), award o f contracts, and other social issues associated with recruitment o f workers by contractors for upcoming works’ contracts would be placed online, helping promote transparency in these transactions.

74. Furthermore, the project’s communication strategy will seek to create awareness about the project’s contribution to infrastructure improvement and efficiency in the transportation system o f Kenya, and the neighboring countries that depend on Kenya for international trade and exchange. It wil l focus on the economic and social benefits to the people o f Kenya and the neighboring countries in terms o f job creation, market efficiency, and the welfare benefits o f better equity in the distribution o f income and creation o f economic opportunities in the medium and long-term. The Kenya Country Office wil l attempt to mobilize the suppo~? o f several eminent personalities and c iv i l society leaders who wil l provide credible third-party voices and

29

communicate the benefits o f the project to diverse audiences, including the project’s development objectives and how these contribute to institutional reforms in the road sector. Similar outreach efforts will be made with relevant Parliamentary Sub-committees to increase awareness o f the proposed reforms and the benefits that will accrue to Kenyans and citizens of neighboring countries.

75. Strategy:

Key Messages. The following messages would be emphasized in the Communication

rn

rn

76.

The role o f transport sector in reducing poverty, promoting economic growth and improving equity, both in Kenya and the wider sub-region; The critical role o f the project in supporting Kenya’s economic transformation and the realization o f the Government’s Vision 2030 agenda; The importance o f public-private partnerships in addressing the challenges o f infrastructure development, and narrowing the financing gap; The convening role o f the World Bank in creating a platform for mobilizing financial resources and knowledge for sustainable development o f the transport sector; The regional dynamics o f the project, including i t s contribution to growth, trade and poverty reduction in neighboring eastern African countries; The project’s contribution to Kenya’s broader governance agenda, including the Governance and Ant i -Comption Strategy being implemented with World Bank support (e.g. updates on National Construction Authority, Proceeds o f Crime and Anti-Money Laundering and Freedom o f Information legislation; updates on implementation o f Pending Bills and Closing Committee recommendations); and The importance o f institutional reforms in the transport sector designed to strengthen governance and improve efficiency in the implementation o f transport sector programs.

Key Audience. The communication strategy wil l address, inter alia, the following audiences:

e Government and project teams involved in the project - Ministr ies o f Roads, Public Works, Finance, Transport and Labor; East African regional economic communities; Media - local and international, print, broadcast and online; Parliamentary Committees - transport, roads, public works and finance; Parliamentarians from Kenya, and where possible, neighboring countries; Private sector and business associations including Kenya Association o f Manufacturers, East African Business Council and Chamber o f Commerce; C iv i l Society Organizations; and Development partners and agencies involved directly in the project and broadly in the transport sector.

77. Communication Products and Timelines. The Communication Strategy will use, among others, the communication instruments and products shown in Table 5 (including radio programs where appropriate) in accordance with the timelines indicated.

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Table 5. Communication Products and Key Outputs

Governance and institutional reforms . . . Current project implementation and progress towards additional financing

Engage and inform internal audiences including INT, Senior Management and Country Team. Engage and inform government and other development partners involved in the transport sector. Sensitize media and other stakeholders on the status and benefits o f transport sector governance and institutional reforms.

Develop dialogue with the government, civil society, media and other stakeholders about the current project, the need for additional financing, post-election crisis and concerns about governance, balanced with potential benefits o f the project in relation to Vision 2030 including poverty reduction, efficiency o f the transport system, equity, reconstruction of the western corridor affected by post-election crisis and regional connectivity.

Prepare and disseminate press releases and project information to the media following Board approval. Develop and distribute a project brief, project Q&As including project objectives, structure, milestones and references. Article on the project to be published on WB Kenya website and Africa Connections. Post information brief and updates on the Kenya website: http://www. worldbank.ora/ke and Africa website: m v . worldbank. or,g/afiica

Project approval by Board . . . Supervision Plan

Continuous

Continuous

March 3 1, 2009

Task leader TTL/AFREX/EXT

TTL/AFREX/EXT

AFREX/EXT/TTL

78. Under the contract provisions stipulated for Bank-financed large c iv i l works contracts, an Independent Engineer who i s internationally qualified and recruited competitively, i s required to be retained by the Recipient under each contract to oversee the day-to-day progress o f works on the site and to certify each payment invoice, including compliance by the contractor with al l technical specifications, environmental and social mitigation plans, and contractual provisions. Such an independent Engineering Consultant (from USA) has already been recruited and has been assisting the government with design review, cost estimates and bid evaluation for the M a u Summit - Kericho - Kisumu road contracts. The same consultant wil l mobilize three separate teams to supervise construction under the three contracts to be awarded under the project. Given the complexity o f the project, and the heightened attention to be given to governance and sector reforms, the importance o f close supervision by the Bank i s abundantly clear. The Region wil l mobilize a strong team in the Kenya Country Office (knowledgeable in procurement, financial management, highway construction and contracts management, social development, transport economics, and M&E) supported by staff in the Headquarters (environmental specialist, PPP specialist, urban transport specialist, aviation safety and security) and reinforced by consultant specialists in selected areas (architecture, airports planning and construction, airport electrical and information systems, mechanical specialist). The engineering team in the Country Office

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wil l monitor progress and supervise the project on a continuous basis, with site visits planned every three months. Supervision in selected areas (such as environment, social development, procurement and financial management) will be planned as needed, but at least twice a year, and Specialist Consultant visits would be planned at least once a year or as needed. In collaboration with the implementing agency, an active C iv i l Society Organization assisted by a local consultant would be engaged to conduct user satisfaction surveys to complement the University o f Nairobi in their Monitoring and Evaluation task. A detailed Supervision Plan i s shown in Annex 10.

Overall Revised Project Costs and Financing Plan

79. which are provided in Annex 7. The financing breakdown i s summarized in Table 6.

The indicative overall project cost for the NCTIP is USUS$920 million, the details o f

* Does not include the Nai rob i Urban Toll Road ** Under appraisal

80. to be financed out o f the proceeds o f the Credit (including additional financing).

Withdrawal of Proceeds of the Credit. Table 7 summarizes the revised category o f items

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Table 7: Withdrawal of Proceeds of the Credit

Category Amount of Credit Allocated 1 % of Expenditures to be 1 - - financed

Original Amended Additional Original Additional (in SDR Original (in Credit (US% Credit Credit

Equivalent) SDR equivalent) Equivalent)

Works (a) Support to M O R except 76,640,000 89,640,000 196,230,000 67% 67% for Emergency works ~ I (b) Support to KAA for 11,150,000 I 9,360,000 I 19% I JKIA Unit 4

Goods 100% foreign 100% (c) Emergency Works 16,500,000 100%

exp. and 90% foreign exp. o f local exp. and 90% o f

I localexp. (a) Support to M O R 450,000 I 450,000 I 11,740,000 I

I local exp. I local exp. (a) Support to M O R except I 15,900,000 I 16,200,000 I 12,880,000 1 for supervision o f - 1 I I I I I emergency works (b) (i) Support to JSAA 350,000 5,120,000

(c) Emergency works 2,050,000 100%

(ii) Support to KCAA 3,000,000 3,700,000 (iii) Support to M O T 350,000 350,000

Unallocated MOR 13,300,000 1 1,200,000 KAA 2,700,000 KCAA 700,000 MOT 150,000 TOTAL 138,440,000 138,440,000 253,000,000

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VI. EXPECTED OUTCOMES

‘ 8 1. Results Framework. As a result o f the addition o f the fourth PDO o f restoring damaged or destroyed vital infrastructure and public assets and restructuring and scaling up o f the original project components (including enhancement o f the institutional strengthening and governance improvement), the results framework is also revised by the addition o f the following outcomes and indicators (see Annex 4 and 5 for details).

Component A: Rehabilitation of Northern Corridor and Emergency Rehabilitation

2 Outcome: Damaged or destroyed assets restored.

Indicators: (i) Three bridges repaired and functional; (ii) three public buildings restored and functional; and (iii) three pi lot term contracts awarded for disaster response readiness.

Component E: Institutional Strengthening in Road Sub-sector and Technical Assistance

Outcome: Governance improved in the road sector, as shown by User Surveys.

Indicators: (i) Timely public disclosure o f national program and business opportunities in the road sub-sector; and (ii) N C A established and functioning satisfactorily, as shown by User Surveys.

Component F: Support to KAA (restructured)

Outcome: Capacity at J K I A expanded.

Indicators: (i) Number o f passengers handled at JKIA increased from 4.8 mi l l ion (in 2007) to 6.4 mi l l ion by end o f 2012; and (ii) amount o f air cargo handled at J K I A increased from 278,000 tons per annum (2007) to 383,000 tons per annum by end o f 2012.

82. Monitoring and Evaluation (‘&E). M&E in the MOR has not functioned to expectations and requires strengthening. As part o f the reforms in the roads sub-sector, the three roads authorities, KeNHA, KURA, and K e R R 4 are expected to manage the road network and wil l have specific responsibilities to undertake this function. The institutional strengthening component o f the project wil l support this effort. In the interim, the University o f Nairobi in collaboration with the N C T T A has been contracted by the government to monitor and evaluate the outcomes o f the project. The University has collected al l the necessary data related to the performance o f the Northern Corridor and the aviation sector and finalized the baseline data on performance and outcome indicators (including traffic volumes) and submitted its f i rst report to the government and the Bank for review. The data collected by the University has also proved useful to students pursuing graduate studies in transportation at the University for their theses and class projects.

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VII. BENEFITS AND R I S K S

83. The benefits o f improving the road sections along the Northern Corridor comprise largely o f savings in vehicle operating costs, passenger travel time costs and road crash related costs. The reduction in transport costs wi l l make Kenyan products more competitive in regional and international markets. Nearly 70 percent o f the population in Kenya i s served by the Northern Corridor, where also nearly 70 percent o f GDP i s generated. I t i s also a transit route to the landlocked countries o f Uganda, Rwanda, Burundi and eastern Democratic Republic o f Congo and it partly serves southern Sudan and Ethiopia. For these places, Kenya provides the most logical outlet to the sea, at the port o f Mombasa; hence, the prices o f goods and services rendered in these countries depend greatly on the efficiency and cost o f transport over the transit route in Kenya. Improvement o f the road-along with improvements in port services, customs and border crossings being facilitated under the complementary IDA financed East Afr ica Trade and Transport Facilitation project-will not only greatly reduce travel time and transport costs but also increase reliability, thereby reducing the cost o f doing business and promoting growth in Kenya as well as the neighboring countries. The investments planned for the aviation sector are required largely for upgrading the c iv i l aviation safety and security status, but would also serve to increase the capacity o f JK IA and Kisumu Airport to cater for the projected traffic over the next 13-15 years and open Western Kenya to international and regional markets. Direct flights to and from the USA and the increased efficiency at JKIA wil l also enable Kenya to benefit further from the African Growth Opportunity Act passed in the US, through increased exports to the U S and Europe o f horticultural products, including cut flowers. Improved air travel services at JKIA and Kisumu will further promote inter-regional air travel from neighboring countries and increase tourism and regional trade.

Benefits.

84. The additional financing supports the key objective o f improving transport efficiency, which has been identified as one o f the main drivers o f economic growth. I t would also support the continued implementation o f policy and institutional reforms and enhance governance in the road sub-sector. The revised economic analysis (Annex 3) for both the ongoing road works and for the road sections for which the additional financing is required, demonstrates that even with the increased cost o f road construction, improvement o f the selected road sections i s highly beneficial to Kenya and i t s neighbors.

85. A great deal o f progress has already been made in institutional strengthening and capacity building in the roads and the aviation sectors (Annex 9), and the additional financing wil l consolidate the achievements made so far, enhance hr ther the efficiency and effectiveness o f service delivery, and promote good governance and professional integrity in the roads sector. By establishing a dedicated disaster management unit in K e N H A and awarding term contracts for responding to emergency repair works in heavy rainfall and flood prone areas, the government i s expected to save money (due to the advance competitive bidding o f term contracts) and reduce the response time significantly, should the areas be hit by a disaster. The proposed N C A wil l ensure that only qualified contractors undertake construction work, thereby ensuring good quality and timely completion o f contracts and strict oversight o f professions! conduct and support the development o f local construction industry. Strengthening o f the ERB and its associated institutions and IEK through the provision o f training and knowledge sharing, wil l result in further benefits to society in terms o f higher professional standards, reduction in

35

premature construction failures, and higher level o f ethics in the practice o f engineering in the country.

86. Poverty Reduction, Gender and HIV/AIDS Mitigation. The Kenya Poverty and Inequality Assessment Report (World Bank Report No. 441 9O-KE, July 2008) underscores the existence o f underlying structural inequalities in Kenya, which need to be addressed in order to enable inclusive growth and development, so that a vicious circle o f elite capture, skewed distribution, social exclusion and poverty is not enabled to persist. The road sections to be rehabilitated under the NCTIP are centered in the Western and Nyanza provinces, two o f the poorer regions in Kenya, which have suffered from inequitable development and wealth distribution in the past and have a higher than national average H IV /A IDS prevalence rate. The project is consistent with the Report in that the major investments o f the project which are being made in these provinces will increase the likelihood o f Kenya moving out o f poverty and hence out o f conflict, and help to ensure a balanced approach to the development effort. The impact o f the project i s firther enhanced by the fact that the Western Region is densely populated and supplies a major portion o f the food and labor in the country; hence, a reduction in transport costs would result in greater direct and indirect benefits to the local population.

87. While the project design i s not focused specifically on investments to promote poverty reduction, gender equality and HIV/AIDS mitigation, it addresses al l o f these issues by mainstreaming them within the project components. The M a u - Summit - Kisumu highway i s the lifeline o f the Western region and provides access to the major ci ty o f Kisumu. Given that the transport industry in Kenya (mainly trucking and water transport on Lake Victoria) is highly competitive, the savings in transport cost due to improvement in the road infrastructure are likely to be passed on in part to the local farmers in terms o f higher f m - g a t e prices, hence contributing to poverty reduction. The project also has a sub-component for improving road-side stations and converting them into socio-economic centers that will allow local traders (mainly women) to set up small-scale businesses (agricultural products, tea stalls, and handicraft) to serve road-users and the local communities. The HIV/AIDS sub-component (including the mitigation measures contained within each road construction contract) targets, among others, female sex workers along the Northern Corridor and makes provision for health kiosks at the planned roadside stations. The new secondary school built in Tam, Coast Province, to replace an o ld one close to a quarry site in one o f the contracts already has 504 students o f which 145 are girls.

88. Ensuring the attainment o f regional and gender balance in appointments to government positions is a stated policy o f the Coalition Government and o f serious concern, especially after the recent post-election crisis. One o f the three chairpersons o f the recently established road authorities i s a woman and the three director generals are from three different regions o f Kenya. Given the sensitivity o f this issue, a deliberate effort has been made by the government in recognizing this challenge and ensuring that the appointments to these positions display regional and gender balance.

89. Employment Creation. The eight major road construction contracts, two airport expansion contracts, and one planned output and performance based road contract, along with al l other c iv i l works contracts (amounting to US$860 mi l l ion out o f the total US$920 million) are together expected to generate direct employment amounting to 500,000-600,000 person-months,

36

spread throughout the country. The multiplier effect, in terms o f generating further employment in secondary industries and with materials suppliers within the construction sector would further enhance the generated benefits. W h i l e not directly targeted, the institutional and pol icy reforms being promoted under the project wil l also enhance the parallel Roads 2000 program (supported by a number o f bi-lateral Development Partners), which addresses the rehabilitation and maintenance needs o f the lower volume rural roads, hence enhancing further opportunities for employment and access to social amenities and economic markets and thus contributing to poverty reduction in rural areas.

90. Risks. The government has already taken a number o f steps to reduce the risks defined in the original project. For example: (i) the autonomous KeNHA has been established (and the chairperson and members o f i t s Board have been appointed; the chief executive has been competitively selected; and the recruitment o f the other senior management staff is underway); (ii) two more road authorities (KeRRA and KURRA) have also been established under the same Kenya Roads Act (2007), and members o f their Boards and chief executives have already been appointed; (iii) K C A A has hired an adequate number o f aviation safety inspectors; (iv) KAA has taken full responsibility for security checks at its airports; (v) KAA staff have received adequate training to undertake this task, and appropriate regulations have been adopted by the c iv i l aviation authorities o f the E A C for management o f safety and security in the aviation sector; (vi) except in the ,immediate aftermath o f the post-election crisis, counterpart funding has been adequate and timely; and (vii) al l changes in the leadership and staff o f the project technical teams have been undertaken in consultation with IDA.

91. Nevertheless, the overall risk rating for this project remains substantial, given that the country risk is substantial in light o f the recent political crisis and the challenges faced by the Coalition Government. The risks and mitigating areas are as follows:

(i) Political Environment. The Coalition Government formed in April 2008 by the two major political parties i s functioning. The partnership and commitment expressed by both sides needs to be sustained in order to move the country forward and push through a reform agenda for the benefit o f al l Kenyans. In the event the power sharing formula weakens, the reform agenda and project implementation would be at risk. This risk, however, i s mitigated by the fact that the power sharing arrangement was implemented under the Kenya Accord and Reconciliation Act 2008 and entrenched in the Constitution o f Kenya through the Constitution o f Kenya (Amendment) Act passed at the same time (March 18, 2008). Two other bills have also been tabled before the Parliament and are expected to be passed soon, namely, the Establishment o f Truth, Justice, and Reconciliation Commission Bill, and the Establishment o f the Ethnic Relations Commission o f Kenya Bill. The new coalition cabinet i s functioning in line with the Kenya Accord and Reconciliation Act 2008 and this i s a promising indicator o f progress towards normalcy. In addition, a number o f National Committees have been set up to work out the roadmaps for addressing specific aspects o f the long-term pending issues that were identified as the main cause o f the political crisis. For instance, on September 17, 2008, the Independent Review Commission (the Kreigler Commission) on the improvement o f the electoral system in Kenya presented i t s findings and recommendations after intensive consultations countrywide; the Coalition Government

37

made the report public and began i t s implementation with the disbandment o f the Electoral Commission and appointment o f new Commissioners.

(ii) Due to the post-election challenges prevailing in the country at the moment and the effects o f the global financial crisis, possible shifts in public expenditure priorities may occur and slow the pace o f implementation o f the infrastructure program. However, this risk i s believed to be low. Improving the road network i s a key development priority across the political spectrum and i s also critical for East Afr ican regional development. Through its public lectures and other outreach efforts, the Bank wil l continue to inform through public debate on key economic development issues, and the critical role o f infrastructure for economic growth.

Country Engagement.

(iii) Country Governance. Implementation o f the GSPK and related Governance Action Plan (GAP) (ref.: Kenya CAS Progress Report 2007, Annex 2) could be delayed. As envisioned in the CAS Progress Report, the lending program would be delayed to the extent that progress in relevant areas o f the GSPWGAP i s delayed (see Table 2 in the Kenya CAS Progress Report). According to the CAS Progress Report, about 60 percent o f the GAP has been implemented, including most o f the governance actions in the roads sub-sector, which were formulated and agreed with the government after presentation o f the INT Detailed Implementation Report (DIR) o f 2005-2007. The latest Transparency International Bribery Index (August 2007) shows that areas that are undergoing governance reforms have experienced a ‘marked reduction’ in bribery. Further progress i s envisaged through enacting key proposed anti-corruption legislation (e.g., Freedom o f Information Bill and Anti-Money Laundering Bill). The K A C C i s active in supporting the National Governance Action plan. The Bank i s working with the authorities to improve the performance o f the judiciary and processing o f cases. This, coupled with other Development Partners’ efforts in improving the performance o f the police and State Law Office through the Governance, Justice, Law and Order Sector Program, should help to ensure effective processing o f fraud and corruption legal actions.

(iv) Governance and Professional Integrity in the Roads Sector. The DIR o f selected projects in Kenya conducted over 2005-2007, along with the Bank team’s own assessment o f governance and professional integrity in the road sector and hr ther guidance from INT, led to the conclusion that investments in the road sector in Kenya entail substantial risks. K e y among these risks i s collusion and other forms o f bid rigging, fraud during implementation, and corruption that allows overloaded vehicles to destroy road infrastructure. As mentioned earlier, significant progress has already been made in improving governance in the roads sector and mitigating the sector r isks following the recommendations o f the DIR (Annex 2). However, in order to further mitigate the risks and enhance professional integrity in the sector, the Bank and the government have agreed on a Roads Sector Governance and Integrity Improvement Action Plan which i s being implemented under the project (Annex 6) and will be monitored closely during supervision. Some key actions include third party review o f procurement (as was initiated by the Bank for the major contracts under this project), the establishment o f the NCA, prompt payments by the government, strict monitoring o f road usage to prevent overloading, periodic technical audits, and a detailed review o f ongoing and recently completed projects to check for non-compliance with technical specifications and

38

contractual terms. To further safeguard the Bank against reputational risk, i t has been agreed with the government that, should any o f the contractors executing contracts financed under the Additional Credit be debarred by the Bank during implementation o f such contracts, the government may terminate such contracts (exercising a legal provision to be included in the contracts) or, if the government does not do so, the Bank may terminate the government’s right to withdraw funds to finance the contracts (see paragraphs 94 and 95).

IX. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING

92. The additional financing would be availed to the government on the same terms and conditions as the original credit, namely, standard IDA terms with a maturity o f 40 years including 10 years o f grace.

93. Legal covenants in the restated Financing Agreement o f the Project wil l include establishing the N C A no later than March 31, 2010, and implementing the Governance and Integrity Improvement Action Plan, in l ine with the provisions o f the Anti-Corruption Guidelines.

94. In addition to the above, the Recipient would be required, as an exception to current Bank policy, to include in each o f its large works contracts (signed after the Executive Directors’ approval o f this Additional Financing) a provision giving the Recipient the right to terminate such contract early should the contractor be debarred by the Bank under any project at a h t u r e date during the l i fe o f the contract. Should the Recipient opt not to exercise this early termination remedy, the Bank would have the right to cancel or reallocate to other Project activities the remaining (not withdrawn) proceeds o f the Additional Financing allocated to finance such contract. In addition, the Recipient would indemnify the Bank from losses resulting from the exercise by the Recipient o f its early termination right.

95. In furtherance o f the above covenants, the following provision would be included in Section VIII, Particular Conditions, Part B - Specific Provisions, Sub-clause 15.6 o f the Bank’s Standard large works contract (additional sentence):

“Ifthe Contractor, or in the case of a joint venture any member, has been declared by the Bank ineligible to receive the proceeds of any financing or loan provided by the Bank or otherwise to participate in the preparation or implementation of any project financed, in whole or in part, by the Bank, as a result of a determination by the Bank pursuant to paragraph I. I4(d) of the Guidelines: Procurement under IBRD loans and IDA credits, paragraph I .22 (d) of the Guidelines: Selection and Employment of Consultants by World Bank Borrowers, or paragraph I I of the Anti-Corruption Guidelines, that the Contractor, directly or through an agent, has engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in connection with the use of the proceeds of any financing whatsoever provided by the Bank to any entity whatsoever (including, without limitation, competing for, or in executing, a contract financed by the Bank out of the proceeds of any such financing or loan), and whether or not such determination is related to this Contract or the territory of the Employer and irrespective of whether or not such ineligibility relates only to future contracts not yet awarded to or signed by

39

the Contractor, then the Employer may, after giving fourteen (14) days notice to the Contractor, terminate the Contractor's employment under the Contract and expel him from the Site, and the provisions of Clause 15 shall apply as if such expulsion had been made under Sub-clause 15.2 [Termination by Employer]. ' I

40

ANNEX 1 : DUE DILIGENCE ON PROCUREMENT ACTIONS

I tem

A. D u e Diligence on Bids Received for Road Contracts

Engineer’s Engineer’s Lowest Bid YO Increase over YO Increase Original Revised 2007 over 2008 Estimate Estimate Estimate Estimate

1. Bids were received for the M a u Summit - Kericho - Kisumu road works (three contracts) in August 2008. Four responsive bids were received for one contract and three for the other two (see Table 1.1 below).

(2007)

* At bid opening; lowest bids are shown in bold.

(2008)” I

2. The total o f the lowest bids received (US$296.9 million) i s about 45 percent higher than the engineer’s original estimates (US$205 million), made in 2007 and used during appraisal o f the additional financing project. Due to the unexpectedly high inflation rate in Kenya in the five months immediately preceding the bid submission date (26 - 31 percent per annum) and the additional design changes made subsequent to project appraisal, the engineer’s estimate was revised in August 2008 prior to the submission o f bids. The total o f the lowest bids received for the three contracts i s about 7.8 percent lower than the revised Engineer’s estimate (US$322.1 million), as shown in Table 1.2. A comparison o f the unit prices as bid for key items o f the BOQ, which together comprise over 70 percent o f the total cost, shows them to be consistent with the prevailing market prices.

Mau Summit - I 66.0 114.5 100.5 52% -12.2% Kericho

Nyamasaria

Kisumu (urban + by-pass)

Kericho - Nyamasaria -

Total

84.0 134.5 117.8 40% -12.4%

55.0 73.1 78.6 43% +7.5%

205.0 322.1 296.9 45% -7.8%

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Review and Comparison of Bid Prices

3. Table 1.3 shows a comparison o f the bid prices quoted by different bidders for key items in the BOQ, along with the updated market prices independently estimated by the engineer (August 2008). The table shows no apparent trend or anomaly among the bidders and their prices. Further analysis shows that: (i) the average o f al l bidder prices for each bill item compared to the engineer's estimate ranges from 0.64 to 1.36; and (ii) the range o f average unit prices quoted by each bidder in comparison to the engineer's estimate is, respectively, 0.84 - 1.34, 0.44 - 1.46, 0.68 -1 -52, and 0.3 1 - 1.28, where the l ow and the high values correspond to the same bill items, except for one case. This shows that the unit prices are well distributed, more or less consistent within each bidder and having a wide range among bidders (10-75 percent, except in one case with a high o f 168 percent for one item).

4. Table 1.4 shows the yearly trend in the market rates', indicating clearly a sharp increase in unit prices in 2008 compared to 2007, particularly for bitumen (and fuel) intensive actives. This sharp increase i s in line with the sharp increase in the inflation rate prevailing in Kenya in the first ha l f o f 2008 (26-3 1 percent per annum). In recent months, prices have declined 15-20 percent in the construction industry; i t remains to be seen whether this trend wil l continue. Whether the trend continues or not, the price adjustment provisions in the c iv i l works contract provide formulae for adjusting prices every month on the basis o f the weighted average change in the relevant material price indices, adjusted in accordance with the exchange rates o f the currency o f payment and the source o f the input materials.

' Review and Analysis o f Construction Unit Costs in the Road Sector, Messrs. Sheladia Associates Inc. July 2008

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D

P

R

g, P

E

Q m*

8 r: N

l- f E A “E “E “E z “E

x

Independent Review by Procurement Specialist

5. The bids were subjected to an independent review by a senior procurement specialist with a highway engineering background. The findings in his Interim Report are summarized below. I t should be noted that this Interim Report has focused only on the BDs, procurement process, bid prices, and any obvious “red flags”. The specialist wil l prepare his Final Report on the basis o f his review o f the government’s Bid Evaluation Report (BER), and his Final Report wil l in turn be reviewed by the Bank before the Bank provides clearance to the government to proceed.

Task Item (4: Review and comment on the bid specijkations and bids evaluation reports for the three road contracts to establish the rationality of the proposed intervention works.

6. According to the specialist, the BDs for al l three contracts were prepared on the basis o f the Bank’s Standard Bidding Documents (SBDs) - Works 2006, as revised in April 2007. Consequently, the three sets o f BDs are similar in format, and the differences are those necessary to provide for the specifics o f the respective contracts. Generally, the specialist found the BDs to be of adequate quality. H e found that the evaluation and qualification criteria (Section I11 o f the BDs) are formulated adequately, in accordance with the User Guide accompanying the Bank’s SBD: the bid evaluation i s to be based on price solely (lowest evaluated price among the responsive bids) and the qualification criteria are clearly formulated, including for any combination of the three contracts. Nonetheless, the specialist also made the following comments and observations:

7. ~o l l ows :

Some entries in the Bid Data Sheet were misunderstood and not used adequately as

BDS-ITB ll.l(h) was improperly filled and by and large duplicates the requirements in ITB 1 l,l(f)-(g); the specialist noted that this error would not have any impact on the bidding process, unless the government decided to use the additional entries for the purpose o f rejecting a bid, in which case the Bank should consider whether the reasons given for such rejection are acceptable.

BDS-ITB 18.4(b) i s a provision which requires adjusting the fixed portion o f the bid price in case the award i s delayed by more than 56 days beyond the expiry o f the initial bid validity. This provision i s part o f the Bank’s SBD and a protection against undue delays in awarding contracts; unfortunately, i t would be extremely difficult to implement in this case and should not have been introduced.

8. -of-the-art engineering; though the specialist did observe that i t may be better to measure the bituminous mixes (Bill No 16) on the basis of metric tons as opposed to cubic meters (as was done in this BD), as metric tons are relatively easy to control (by requesting / collecting the formal weighting receipts for trucks hauling bituminous mixes) whereas cubic meters as spread on the road surface may be subject to errors in measurement (inadvertently or not). Measurement errors

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in this area are particularly troublesome, as these price items represent a large proportion o f the contract costs (about 30 per~ent).~

9. The specialist noted that al l three BDs provide for contracts with a price adjustment provision through the use o f price adjustment formulae, which i s consistent with the Procurement Guidelines (paragraphs 2.24-25).

Task Item (ii): Review and determine the reasonableness of the cost estimate.

10. The specialist noted that estimating the cost o f road constructionhehabilitation work in any specific environment i s better done by a professional highway engineer who is h l ly familiar with this environment and with prices obtained competitively on similar contracts, preferably in the same country and recently. As the specialist does not himself have this sort o f topical expertise, he noted that he was unable to speak authoritatively about the prevailing market prices in Kenya for similar works, and so he was limiting his assessment to the question whether the engineer’s cost estimate was prepared with appropriate diligence.

11. ‘The specialist noted that the bid prices appeared to be in l ine with the engineer’s estimates as updated in August 2008 (before the bids were submitted, based on a software prepared for Kenya road works by an internationally-reputable consultancy firm). H e also noted that the spread o f prices versus the estimate i s 0.88-1.13 for RD421, 0.88-1.10 for RD 422 and 1.07-1.28 for RD505 and that this type o f distribution o f bid prices i s not unusual.

12. Having undertaken an analysis o f a few major price items (August 2008 revised engineer’s estimate versus averaged tendered rates) which account for a large share o f the contracts (Items 5.01, 5.09, 13.03, 14.01, 15.02, 16.01 and 16.02), the specialist found that the tendered rates are consistent with the 2008 estimates, except for cement stabilizer (Item 14.01) where the average tendered rate is 36 percent higher than estimated. H e also noted that the 2008 prices (both tendered and engineer’s estimate) for these items are on average 50 percent higher than the 2006- 2007 average price for similar items, that the increase in hel , bitumen and cement prices contributed the largest share o f this increase, and that there may be other reasons.”

I

Task Item (iii): Review and establish the fairness of the procurement procedures adopted for these contracts.

M a n y countries use the weight measurement method, but the volume method i s the prevail ing practice in Kenya and several other countries in the region, and acceptable under international practice.

lo The Bank team indicated that another contributing factor may be the complex nature o f the operation in preparing, spreading and compacting cement stabilized layers, particularly with high input o f plant and machinery. This type o f operation was recently introduced in Kenya; it i s uncommon but found to b e effective. At the same time, the bui lding construction boom in Kenya in recent years has led to periodic shortages in the supply o f cement, requiring importing f rom abroad with long lead times and the possibil i ty o f rejection for no t meeting specification ( th is occurred, e.g., during the construction o f the Nai rob i A i rpor t apron and taxiway).

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13. The specialist found that the procurement procedures adopted for the three contracts have been straightforward: the BDs are o f good quality and fully consistent with the Bank’s Guidelines; the bidders were given the opportunity to attend a pre-bid conference and site visit; and the bid preparation time was largely sufficient for a l l bidders to prepare responsive bids (they were init ial ly given 90 days, but this was eventually extended to 120 days).”

Task Item (iv): Comment and determine the sensibleness of the size and the packaging of these contracts in light of the prior review thresholds.

14. The specialist noted that the road works were sliced into three contracts (RD421, RD422 and RD505) and that these contracts are all subject to prior review, as the prior review threshold for I C B is US$2million. H e also noted that these are large contracts (though for work without much complexity, except perhaps for the requirement to maintain the road under traffic at al l times), to be completed over a period o f 24 to 30 months (depending on the contract), which could reasonably be expected to attract strong competition from regionally-established contractors and other international contractors. H e also noted that three large contractors who had representatives attending the site visit or the pre-bid conference or both eventually chose not to bid.I2

Task Item (v): Review in detail the bids submitted and the evaluation report to assess compliance with the bidding documents and the fairness and accuracy of the evaluation and recommended preferred bidder.

15. The specialist found that the bids submitted do not warrant detailed comments at this point, especially as the BER had not yet been submitted yet, but he also noted that the government i s expected to: (i) thoroughly verify the BOQ calculations for arithmetic errors (he observed apparent errors in one o f the bidder’s bids for RD421 and another’s bids for RD421-422); and (ii) ascertain that the experience claimed by the bidders to justify their qualification is valid.

Task Item (vi): Identifi any other anomaly or matter of concern that should be taken into account before the Bank gives its no objection to the award of the contract.

16.

Independent Review by INT Advisory Staff

The specialist did not find any other anomalies or matters o f concern at that time.

17. INT’s Preventive Services Unit (PSU) has also reviewed the bids for the three road re- construction contracts as well as the contract for the supervision consultant, and i t made several

The Bank team reported that some potential bidders, due to delays in Board presentation, made inquiries with the Bank whether indeed the Bank was going to approve the credit. Subsequently, bidders requested more time and the government agreed, which was a good decision.

l2 The Bank team reported that one o f the contractors who chose not to bid was informed by the Bank that it was under suspension, as a Notice o f Sanctions Proceedings had been issued against the contractor. In addition, European contractors have at times indicated that they choose no t t o bid when there i s h igh competit ion f r o m certain Asian bidders; they have tended instead to bid on EU-funded projects which are restricted and which sustains a reasonably large roads program in Kenya.

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recommendations to reduce the risk o f corruption and misuse o f public funds during implementation. As a result, the following actions will be taken during execution o f the contracts:

0

0

0

0

0

0

19.

Close monitoring (by the Bank’s team) and regular reporting (by the supervision engineer) o n the allocation, maintenance and use o f assets, such as houses and vehicles being provided by the contractor for the staff o f the supervision consultant and supervisory staff o f the Ministry o f Roads. This wil l include verification o f the quality o f housing and vehicles as provided compared to the specifications. Verification that assets that are fully paid by the employer revert to the employer at the end o f the contract. Transfer o f some o f the prime cost items in the construction contract BOQ to the contract with the supervision consultant, especially where the likelihood o f a conflict o f interest or misuse i s high. Review o f the allowances paid to on-the-job trainees to ensure they are in l ine with government regulations and financing parameters agreed with IDA. Provision o f extra due diligence in reviewing the evaluation o f the technical and financial proposals for consultant services prior to clearing the recommendations for award o f the contracts. Ensure that the supervision consultant i s the designated engineer in the contract (as opposed to the Chief Engineer, MOR).

Other recommended actions for due diligence to be taken in procurement related activities - are summarized in the next section (B) below.

B. Due Diligence on Other Procurement Actions

The following due diligence procedures wil l take place for the remaining procurement actions to be taken under the project.

Procurement Plan

1. The Client wil l prepare a detailed procurement plan, cleared by the Bank, and utilize the plan for monitoring al l procurement actions, including timely implementation o f the actions in l ine with the timeline stated in the approved procurement plan; and

2. The procurement plan will be updated annually and wil l reflect the project’s on-going and upcoming procurement actions, as approved by the Bank.

Works Contracts

1. Consultants wil l be hired to develop/review/finalize the detailed design, BOQ, and BDs for each works contract. In preparing the BDs, the consultant wil l pay close attention to the principles o f efficiency, economy, and accountability and ensure that:

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2.

3. 4.

5.

(i) The requirements for engineer’s site operations match the supervision consultancy contract (if already available) in terms o f key staff and other requirements; Assets fully paid and acquired under the project revert to the Employer; All such assets are documented and registered in the Employer’s asset registry; and Any disposal o f assets belonging to the client at the end o f the contract wil l be in l ine with the client’s asset disposal policy.

(ii) (iii)

(iv)

Consultants responsible for the design work and preparation o f the BDs wil l also assist the client in the evaluation o f the received bids and preparation o f the BER; Supervision consultants will be the designated engineers for al l the works contracts; The Bank’s standard Bid Evaluation form will be used for preparation o f the BER, and the BER will provide detailed information on reasons for (i) rejection o f the losing bids and (ii) recommendation for award; and A final quality control process wil l ensure the terms as stipulated in the issued BDs and the winning bid wil l be reflected in the draft contract before signing.

Goods Contracts

1. If required, an independent consultant wil l be hired to help prepare and/or finalize the technical specifications for the large goods procurement action. The same consultant may also participate in the bid evaluation process and ensure the technical specifications as stated in the BDs are met by the winning bidder;

2. The Bank’s standard Bid Evaluation form wil l be used for preparation o f the BER; the size o f the bid evaluation committee should be kept manageable, preferably not more than five members, including a qualified procurement officer who can clarify the related procurement rules; and the BER will provide detailed information on reasons for (i) rejection o f the losing bids and (ii) recommendation for award;

3. An independent inspection agency wil l certify al l the goods delivered under internationally awarded contracts in line with the applicable laws o f the country;

4. A quality control process wil l be in place to ensure the draft contract i s in line with the issued BDs and the winning bid in terms o f quality and quantity o f the goods procured;

5. All goods received wil l be immediately registered in the Recipient’s asset management system; and

6. A quality control process wil l be in place for distribution o f the goods procured, to ensure the goods are received by the recipient in accordance with the original plan andor if any revisions are made to the distribution o f the goods, they are approved by the concerned parties.

Consultancy Contracts

1. The TOR for al l consultancy contracts will clearly identify the line item activities, outputs, and timeline for their completion. Depending on the length o f the assignment, the TOR wil l include the requirement for quarterly progress reports that lists al l implementation related issues/problems with a plan o f action on how they can be resolved;

49

2. Close attention will be given to the preparation o f the Request for Proposal (RFP) with focus on the required technical qualifications, evaluation criteria, and type o f contract required for the assignment;

3. Individual Request for Expressions o f Interest wi l l be published for each I C B consultancy procurement action and a detailed evaluation report for the short listing process wil l be prepared, listing the reasons for the selection o f the shortlisted f irms;

4. As in the case o f goods procurement, the proposal evaluation committee will preferably have no more than five members, including a qualified procurement officer who can clarify the related procurement rules; technical evaluation reports wil l provide detailed narrative/assessment o f the submitted technical proposals and present justifications for the given scores to each proposal; and

5. A quality control process will be in place to ensure the draft contract is in line with the issued RFP and the winning proposal in terms o f key personnel, scope o f services/TOR, and form o f contract.

Bank 's Role

The project team wil l monitor the above due diligence procedures for the on-going procurement actions through:

(i) Detailed review o f the submitted procurement documents (BDs/RFPs, bidproposal evaluation reports, and draft contracts) by both the procurement specialist and the related sector specialists;

(ii) Random review o f the submitted bids together with the bidproposal evaluation reports; (iii) Follow up with the client on timely submission o f the procurement documents in

accordance with the approved procurement plan; (iv) Close monitoring o f requests for change orders and their assessment by the respective

expert in the project team; (v) Physical verification o f goods/works, services received under the project through site

visits; and (vi) Conduct o f annual procurement post reviews, including physical verification o f the

contractual outputs.

50

ANNEX 3: ECONOMIC ANALYSIS OF THE ROADS COMPONENT

Base Costs (US$'M) NPV (US$ M) EIRR (%)

A. Mau Summit - Kericho - Kisumu (revised 2008)

198.89 65.72 19.2%

1. A revised economic analysis was done for the road work to be supported with the additional financing proposed for the Northern Corridor Transport Improvement project. The road work in question consists mainly o f rehabilitating and improving three roads totaling 158 krn (Mau Summit - Kericho, Kericho - Nyamasaria and Nyamasaria - Kisumu Airport). The main benefits are the savings to be made by road users on vehicle operating costs, maintenance costs, and passenger travel time costs. The Net Present Value (NPV) o f the rehabilitation and improvement program i s US$65.72 million, at a 12 percent discount rate, and the overall Economic Internal Rate o f Return (EIRR) i s 19.2 percent. The following table presents the economic evaluation summary.

Table 3.2 Vehicle Fleet

Vehicle Characteristics

Km driven per year Hours driven per year Number of passengers Gross vehicle weight (tons) ESA loading factor Economic Unit Costs New vehicle price (US$) New tire price (US$) Fuel cost (US$/liter) Lubricants cost (US$/liter) Maintenance labor (US$/hr) Crew cost (US$/crew-hr) Passenger working time (US$/pa-hr) Passenger non-working time (US$/pa-hr) Cargo Time (US$/hr)

Service l i fe (years)

Annual interest rate (%)

Characteristics and Economic Unit Costs (2008) Light Medium Heavy

Car Truck Truck Truck Matatu' Bus

6 10 8 8 6 7 20000 60000 80000 60000 100000 150000 400 1300 2500 2500 1600 3000 2 0 0 0 12 40 1.6 5 12.3 25 3.2 12.6 0.00 0.03 4.30 4.60 0.10 1.20

19300 34783 65217 135263 24325 77075 55 397 397 435 58 298

0.78 0.78 0.78 0.78 0.78 0.78 2.08 2.08 2.08 2.08 2.08 2.08 7.38 7.38 9.53 9.53 7.38 7.38 0.00 1.63 3.29 3.29 1.63 1.63 1.80 0.67 0.67 0.67 0.67 0.67 0.45 0.18 0.18 0.18 0.18 0.18 0.00 0.02 0.04 0.13 0.00 0.00

12 12 12 12 12 12

2. M a i n Assumptions. Net benefits were computed using the Highway Development and Management Model (HDM-4), which simulates highway l i f e cycle and vehicle operation conditions and costs for multiple road design and maintenance alternatives. The discount rate was set to 12 percent and the evaluation period to 20 years. Maintenance and rehabilitation costs were estimated in financial and economic terms (net o f taxes and subsidies), economic costs being on average 78 percent o f financial costs. Vehicle fleet characteristics and economic unit costs were defined for six vehicle classes reflecting 2008 costs, which are given in the following table.

* Matatu = mini-bus with 8-12 passengers

52

3. The value o f working time o f car passengers was estimated considering an average economic annual income o f Kshs 275,000 per annum and 2,000 working hours per year (250 days at 8 hours), and the value o f working time o f public transport was estimated as twice the minimum wage rate. The value o f non-working time was considered as 25 percent o f working time and the percent o f work journeys to be 35 for cars and 25 for public transport. The value o f cargo time has been estimated o n the basis o f an average cargo value o f US$400 per ton and a cost o f working capital o f 15 percent. The following tables present typical road user costs at different roughness levels, in US$ per vehicle-km, and typical road user costs composition for a road roughness equal to 2.0 International Roughness Index (IRI) (newly constructed asphalt surface).

Roughness (IRI) 2 4 6 8 10 12 14 16

*

Light Medium Heavy Car Truck Truck Truck Matatu Bus 0.313 0.351 0.583 1.083 0.318 0.635 0.319 0.370 0.615 1.142 0.328 0.670 0.329 0.400 0.667 1.249 0.345 0.728 0.346 0.428 0.715 1.350 0.366 0.796 0.372 0.460 0.771 1.470 0.395 0.887 0.401 0.497 0.833 1.601 0.429 0.989 0.432 0.536 0.899 1.735 0.466 1.094 0.464 0.577 0.965 1.871 0.504 1.202

RUC Component Fuel and Oil Tires Parts and Labor Depreciation and Interest Crew Time Passenger and Cargo Time Total

Light Medium Heavy Car Truck Truck Truck Matatu Bus 0.083 0.120 0.179 0.346 0.110 0.219 0.003 0.023 0.023 0.039 0.003 0.023 0.049 0.127 0.245 0.389 0.108 0.157 0.162 0.064 0.100 0.269 0.043 0.078 0.000 0.017 0.035 0.038 0.017 0.019 0.017 0.000 0.000 0.002 0.037 0.139 0.313 0.351 0.583 1.083 0.318 0.635

4. The following table presents typical road maintenance unit costs.

Table 3.4 Maintenance Unit Costs

Double Surface Treatment 3.00 0.043 Routine Maintenance 0.07 0.001

5. Three homogeneous road sections in terms o f traffic and road condition were evaluated. The following table presents the road section lengths, the proposed road works and estimated financial base investment costs. The road sections are currently in very bad condition with average speeds in the range o f 40-50 kmhour.

53

Excluding Contingencies

Road Section Name Mau Summit - Kericho Kericho - Nyamasaria Nyamasaria - Kisumu Airport

6. The following table presents the results o f the traffic count survey done in 2008. The individual average daily traffic on these road sections varies from 3,139 to 6,094 VPD and the percent o f trucks and buses varies from 55 percent on M a u Summit - Kericho and Kericho - Nyamasaria roads and 26 percent on the Nyamasaria - Kisumu Airport road.

2008 Average Annual Daily Traffic (AADT, vpd) Light Medium Heavy Total

Car Matatu* Bus Truck Truck Truck Truck 582 821 372 584 354 426 3,139 582 821 372 584 354 426 3,139

3,004 1,517 329 469 268 506 6,094

Net N P V Economic Road Present Per Internal Rate Section Value, N P V Investment o f Return, EIRR

7. The economic evaluation considered an average traffic growth rate o f 5 percent per year in years 1 to 10 and 4 percent per year in years 11 to 20. The traffic growth rates are based on historical traffic data along the corridor between 2003 and 2008 and economic trends in the country. Generated traffic was estimated to correspond to 22 percent o f the normal traffic. The 'without-project' case considers routine maintenance and patching and road rehabilitation (without widening) when the roughness reaches 12 IRI, d k m , and the 'with-project' case considers routine maintenance and patching, rehabilitation or widening o f the roadway during the first year o f the evaluation period, followed by a 50 mm overlay when the road roughness reaches 4.5 IRI, m/km.

Mau Summit - Kericho

8. The following table presents the economic evaluation results that show that the total NPV of the rehabilitation and improvement program is US$65.72 mi l l ion and the overall EIRR is 19.2 percent, with the ERR varying from 16.0 percent to 23.5 percent.

14.42 0.17 17.0% Kericho - Nyamasaria Nyamasaria - Kisumu Airport Total

39.70 0.39 23.5%

11.60 0.17 16.0% 65.72 0.26 19.2%

54

9. Sensitivity and Switching Value Analysis. The table below presents the results o f the EIRR sepsitivity analysis. The results show that assuming a 15 percent increase in project costs would decrease the EIRR to 15.7 percent. If benefits only materialized to 85 percent o f the original estimates, the EIRR would decrease also to 15.7 percent. In a worst case scenario o f a simultaneous 15 percent increase in project costs and 15 percent reduction o f benefits the overall EIRR will be 12.5 percent. The switching value analysis shows that project costs have to increase by 35 percent or benefits decrease to 74 percent o f the original estimates to yield a NPV equal to zero.

Road Section

Base A: Cost B: Benefits Case +15% -15% A + B

Name I (%) (%) (%) (%) Mau Summit - Kericho I 17.0% 13.5% 13.5% 10.4%

I Kericho - Nvamasaria I 23.5% 19.4% 19.4% 15.6% I Nyamasaria-- Kisumu Airport I 16.0% 13.3% 13.3% 10.9% Total I 19.2% 15.7% 15.7% 12.5%

B. Five Other M a j o r Road Works (revised 2007)

10. The economic analysis was also revised in 2007 for the rehabilitation and improvement o f five road sections located at the Northern Corridor, totaling 223 km, for which the scope o f works was significantly increased, such that bid prices were much higher than the appraisal estimates. As in the case o f M a u Summit - Kericho - Kisumu, the main benefits for the five road sub-projects are the savings to be made by road users on vehicle operating costs and passenger travel time costs. The Net Present Value (NPV) o f the rehabilitation and improvement o f these five road sections is US$373.2 mi l l ion (at a discount rate o f 12 percent) and the overall IRR i s 34 percent, with the I R R s varying from 28 percent to 44 percent.

11. Main Assumptions. Net benefits were computed using the same Highway Development and Management Model (HDM-4), with discount rate o f 12 percent and the evaluation period o f 20 years. Maintenance and rehabilitation costs were estimated in financial and economic terms (net o f taxes), economic costs being on average 78 percent o f financial costs. Vehicle fleet characteristics and economic unit costs were defined for six vehicle classes reflecting 2007 costs, which are given on the following table.

55

Table 3.9 Vehicle Fleet

Vehicle Characteristics Service l i f e (years) Km driven per year Hours driven per year Number o f passengers Gross vehicle weight (tons) ESA loading factor Economic Unit Costs New vehicle price (US$) New tire price (US$) Fuel cost (US$/lt) Lubricants cost (US$/lt) Maintenance labor (US$lhr) Crew cost (US$/crew-hr) Passenger working time (US$/pa-hr) Passenger non-working time (US$/pa-hr) Cargo Time (US$/hr)

I Annual interest rate (%) * Matatu = mini-bus with 8-12 passengers

12. The value o f working time o f car passengers was estimated considering an average economic annual income o f Kshs 250,000 per annum and 2,000 working hours per year (250 days at 8 hours), and the value o f working time o f public transport was estimated as twice the minimum wage rate. The value o f non-working time was considered as 25 percent o f working time and the percent o f work journeys to be 35 for cars and 25 for public transport. The value o f cargo time was estimated on the basis o f an average cargo value o f US$400 per ton and a cost o f working capital o f 15 percent. The following tables present typical road user costs at different roughness levels, in US$ per vehicle-km, and typical road user costs composition for a road roughness equal to 2.0 IRI.

Characteristics and Economic Unit Costs (2007) Light Medium Heavy

Car Truck Truck Truck Matatu* Bus

6 10 ' 8 8 6 7 20000 60000 80000 60000 100000 150000 400 1300 2500 2500 1600 3000 2 0 0 0 12 40 1.6 5 12.3 25 3.2 12.6 0.00 0.03 4.30 4.60 0.10 1.20

15440 27826 52174 108211 19460 61660 44 318 318 348 46 238 0.76 0.62 0.62 0.62 0.62 0.62 1.66 1.66 1.66 1.66 1.66 1.66 6.71 6.71 8.66 8.66 6.71 6.71 0.00 1.48 2.99 2.99 1.48 1.48 1.64 0.61 0.61 0.61 0.61 0.61 0.41 0.16 0.16 0.16 0.16 0.16 0.000 0.015 0.038 0.133 0.000 0.000 12 12 12 12 12 12

Roughness (IN) 2 4 6 8 10 12 14 16

56

Light Medium Heavy Car Truck Truck Truck Matatu* Bus 0.269 0.289 0.480 0.881 0.266 0.530 0.273 0.305 0.506 0.930 0.275 0.559 0.281 0.331 0.550 1.017 0.290 0.608 0.294 0.354 0.590 1.100 0.308 0.667 0.315 0.381 0.636 1.198 0.333 0.745 0.340 0.412 0.688 1.305 0.363 0.831 0.366 0.444 0.742 1.415 0.395 0.922 0.394 0.478 0.798 1.525 0.427 1.014

RUC Component Fuel and Oil Tires Parts and Labor Depreciation and Interest Crew Time Passenger and Cargo Time Total

Light Medium Heavy Car Truck Truck Truck Matatu Bus 0.080 0.096 0.143 0.275 0.087 0.174 0.002 0.018 0.018 0.031 0.003 0.018 0.041 0.108 0.206 0.324 0.093 0.133 0.130 0.051 0.080 0.215 0.035 0.062 0.000 0.016 0.032 0.034 0.015 0.017 0.016 0.000 0.000 0.001 0.033 0.126 0.269 0.289 0.480 0.881 0.266 0.530

13. Economic Evaluation. For the economic evaluation, the corridor was subdivided into the five homogeneous road sections, in terms o f traffic and road condition, which are given in the following table along with the estimated financial investment costs.

Road Section Work Length Description (km) (text) 35.0 Rehabilitation 55.0 Rehabilitation 33.0 Widening 16.0 Widening 84.0 Rehabilitation 223.0

Road Road Work Work Cost * Unit Cost (M US$) (M US$/km) 24.55 0.701 39.20 0.713 61.57 1.866 39.20 2.450 56.55 0.673 221.07

Component 1 2 3 4 5 Total

14. The following table presents the results o f the traffic count surveys done in 2006. When compared to the traffic on the same sections in 2003, the traffic on average has grown by 34 percent in the three years from 2003 to 2006. The individual average daily traffic on these road sections varies from 3,200 to 14,700 vehicles per day

Road Section Name Maji ya Chumvi - Mirtini Sultan Hamud - Machakos Turnoff Machakos Turnoff - JKIA Lanet - Njoro Turnoff Njoro Turnoff - Timboroa

Component 1 2 3 4 5 Total

Section Length

35.0 55.0 33.0 16.0 84.0 223.0

(km)

Table 3.12 R Road 2006 % Work Total , Trucks Description Traffic Buses

Rehabilitation 4,020 56% Rehabilitation 3,170 63%

(text) (AADT) (%)

Widening 9,336 3 9% Widening 14,716 25% Rehabilitation 3,246 53%

5,073 52%

Road Section Name Maji ya Chumvi - Mirtini Sultan Hamud - Machakos Turnoff Machakos Turnoff - JKIA Lanet - Njoro Turnoff Njoro Turnoff - Timboroa

Component 1 2 3 4 5 Total

Road Net Internal Road Section Work Present Rate Section Length Description Value of Return Name (km) (text) (M US$) (%) Maji ya Chumvi - Mirtini 35.0 Rehabilitation 49.1 44%

Machakos Turnoff - JKIA 33.0 Widening 142.1 3 9% Lanet - Njoro Turnoff 16.0 Widening 97.2 37% Njoro Turnoff - Timboroa 84.0 Rehabilitation 47.1 28%

223.0 372.2 34%

Sultan Hamud - Machakos Turnoff 55.0 Rehabilitation 36.6 28%

15. The following table presents the revised economic evaluation results that show that the Ne t Present Value (NFV) o f the rehabilitation and improvement o f these five Northern Corridor road sections i s $372.2 mi l l ion and the overall IRR is 34 percent, with the IRR varying from 28 percent to 44 percent.

57

16. The evaluation considered a traffic growth rate o f 5 percent per year in years 1 to 10 and 3 percent per year in years 11 to 20 for buses and trucks; and 7 percent per year in years 1 to 10 and 5 percent per year in years 11 to 20 for matatus and cars. The traffic growth rates are based on historical traffic data along the corridor between 2003 and 2006 and economic trends in the country. For a conservative analysis, no generated traffic was included in the analysis. The 'without project' case considers routine maintenance and patching and rehabilitating the road (without widening) when the roughness reaches 12 IRI and the 'with project' case considers routine maintenance and patching and rehabilitating or widening the roadway during the first year o f the evaluation period.

Base Case (%)

44% 28% 3 9% 31% 28% 34%

17. Sensitivity Analysis. The table below presents the results o f the sensitivity analysis with increasing costs and decreasing benefits, which show that the overall IRR for the five road sections is greater than 12 percent in al l cases. Even under the worst case sensitivity scenario o f increasing the construction costs by 20 percent and reducing the project benefits by 20 percent, the overall IRR i s at 26 percent.

A B Worst costs Benefits Case +20% -20% A+B (%) (%) (%)

3 9% 39% 33% 24% 24% 20% 34% 34% 30% 33% 33% 29% 24% 24% 19% 3 0% 30% 2 6%

Component 1 2 3 4 5 Total

Component 1 2 3 4 5 Total

Base Case (M US$)

49.1 36.6 142.1 91.2 47.1 372.2

Table 3.14 Economic Evalual

A B costs Benefits +20% -20% (M US$) (M US$)

45.3 37.8 30.5 25.4 132.5 110.4 91.1 15.9 38.3 31.9

331.8 281.5

Road Section Name

Maji ya Chumvi - Mirtini Sultan Hamud - Machakos Turnoff Machakos Tumoff - JKIA Lanet - Njoro Turnoff Njoro Turnoff - Timboroa

Road Section Name Maji ya Chumvi - Mirtini Sultan Hamud - Machakos Turnoff Machakos Tumoff - JKIA Lanet - Njoro Tumoff Njoro Turnoff - Timboroa

Worst Case A+B (M US$)

33.9 19.4

100.8 69.8 23.1

247.1

B. Expansion and Improvement of Jomo Kenyatta International Airport

18. The main benefit from the improvements at JK IA were valued at US$16 per passenger charged as net Airport Improvement Fee applied to ha l f o f the total international and domestic enplaned and deplaned passengers. The evaluation was conducted in 200513 with the following parameters and results:

l3 Queens Quay (Canada): Feasibil i ty and Design Study for JKIA, Submitted to KAA, 2005.

58

Item Domestic passenger ('000) International passengers ('000)

2006 201 1 2016 2021 2025 609 706 818 948 1,067

2,822 3,513 4,535 5,733 6,771 Transit Passengers ('000)

Total ('000) Annual growth rate (%) Net cash f low after debt

19. The traffic growth rate through JKIA since 2006 has been much greater than the 2-4 percent assumed in the study and even with the recent downturn in the global economy, growth i s expected to be within or exceed the 4-5 percent assumed rates. Construction costs, on the other hand, have increased nearly 40 percent but the negative impact on the Rate o f Return i s expected to be offset by the greater than assumed growth rate in the passenger traffic.

140 166 204 243 274 3,571 4,385 5,557 6,924 8,112

2.0 4.6 4.7 4.2 3.8 27.44 33.75 42.82 53.45 62.71

59

ANNEX 4: RESULTS FRAMEWORK

PDO Increase efficiency o f road transport along the Northern Corridor.

Enhance aviation safety and security to meet international standards.

Promote private sector participation in the management, financing and maintenance o f road assets.

Restore public infrastructure and assets damaged as a result o f the December 2007 post-election crisis.

Intermediate Results One per Component

Component One (A): Contracts awarded and construction satisfactory o n 38 1 km o f selected priori ty road sections along the Northern Corridor.

Damaged or destroyed assets restored.

Component Two (B):

(i) Effective functioning o f bus and truck stops at key locations and satisfactory construction and uti l ization o f booths for sale o f local produce and products by roadside communities.

Outcome Indicators Freight and passenger travel t ime by road from Mombasa to Malaba and Busia reduced by 25 %.

KCAA cleared for International Av iat ion Safety Assessment (IASA) Category 1 safety status and K I A cleared by the United States T S A for direct flights to/from U S Airports.

One long term performance based road management and maintenance contract awarded to the private sector and effectively under implementation.

One segment o f the Northern Corridor offered for concessioning to the private sector.

Damaged public infrastructure and assets restored.

Results Indicators for Each Component

Component One (A): Average roughness less than IN 3.0 d k m o n completed sections o f the project roads.

(i) 3 bridges repaired and functional; (ii) 3 public buildings restored and functional; and (iii) 3 term contracts awarded for disaster response readiness.

Component Two (B):

(i) At least three roadside stations and amenities constructed and functional as per designs and serving road users and local communities.

Use of Outcome Information Check if physical improvement o f individual sections o f the road lead to reduction in travel times - if not, then identi fy causes and implement corrective measures.

Adjust safety and security interventions to ensure compliance with ICAO and U S F A A I T S A requirements.

If p i lo t program o f long-term performance based contracts and concessioning to private sector i s successful, then scale up with more road sections.

Adjust post-election recovery program.

Use of Results Monitoring

Component One (A): Check construction quality and performance o f the contractor and take remedial actions as necessary.

Ensure expeditious re tum to normalcy in confl ict affected areas and enhance government’s preparedness to respond to disasters.

Component Two (B):

(i) Reassess location o f roadside facilities if no t adequately ut i l ized by road users and local communities.

60

PDO (ii) Health kiosks constructed and HIV/AIDS awareness campaigns undertaken at key locations along the Northern Corridor.

Component Three (C): Private Sector involved in road management and maintenance.

Component Four (D): Road safety improved.

Component Five (E): Management and governance improved in the road sector.

Component Six (F): Security improved at major airports.

Capacity at JKIA expanded.

Component Seven (G): Aviation safety and air navigation standards improved.

Component Eight (H): Compliance with I M O conventions and NCTTCA treatv.

Outcome Indicators (ii) A t least 70% o f road users and local persons surveyed become aware o f or make use of the Voluntary Counseling and Testing (VCT) and other facilities for HIV/AIDS campaign along the Northern Corridor. Component Three (C): Legislation enacted for private sector participation in roads.

Component Four (D): At least 10% reduction in road related fatalities per annum.

Component Five (E): (i) KeNHA established and fully functional. (ii) All feasibility and design studies carried out satisfactorily. (iii) Timely public disclosure o f national program and business opportunities in the road sector. (iv) N C A established and functioning satisfactorily.

Component Six (F): JKIA meets ICAO and US TSA security requirements.

(i) Annual passengers handled at JKIA increased from 4.8 mil l ion in 2007 to 6.4 mil l ion in 2012. (ii) Cargo by air handled at JKIA increased from 278,000 tons in 2007 to 383,000 tons in 2012. Component Seven (G): K C A A meets ICAO and US FAA Category 1 safety requirements. Component Eight (H): I M O and NCTTCA certify compliance.

Use of Outcome Information (ii) Expand the campaign along

other important transport corridors.

Component Three (C): Prepare bids for road concessioning and long term performance based road management and maintenance contracts. Component Four (D): Adjust awareness campaign and hazardous spot improvements to achieve maximum benefit. Component Five (E): Mobilize greater support for road sector investments from Development Partners and ensure government follows up on the agreed Road Sector Governance and Integrity Action Plan.

Component Six (F) Required for obtaining clearance for direct flights to USA and code sharing with U S airlines. Ensure adequate designs and reconfiguration o f the JKIA terminals to cope for added capacity.

Component Seven (G): Required for obtaining clearance for code sharing with US airlines.

Component Eight (H): Required for overall improvement in the transport supply chain in the Northern Corridor.

61

ANNEX 5: REVISED RESULTS MONITORING FRAMEWORK

Outcome Indicators

1. Freight and passenger travel time by road from Mombasa to Malaba reduced by 25 percent.

2. KCAAand JKIA (Nairobi) respectively cleared for FAAIIASA Category 1 and TSA security status 3. Onelong term performance based road mgm! and maintenance contract awarded to the priva!e sector and effectively under implementation 4 Bids for concessioning o f one road segment invited 5. Damaged public infras. and assets restored. Component One (A):

1 Average roughness less than IRI 3.0 m/km on completed sections o f the project roads

2. (i) Bridges repaired and functional

Baseline

Truck 24 hours

Bus 18 hours

Car 14.5 hours

Less than 20% o f project road length.

0

YR5

100%

YR6

100%

100%

50%

3

Target Valu YR7

18 hours

13.5 hours

11 hours

100%

100%

30%

YR8

18 hours

13.5 hours

11 hours

100%

100%

Status YR4

Travel time on Mombasa- Nairobi section reduced by 33%, other sections still under construction.

Progress slow but satisfactory.

Consultant hired for preparation of bid documents.

Achieved. Negotiations with winner in progress.

New objective.

12%

0

Data Frequency

and Reports

Quarterly progress report.

Quarterly progress report.

Quarterly progress report.

Quarterly progress report.

Quarterly progress report.

Quarterly progress report.

Quarterly

:ollection and 1 Data

Collection Instruments

Field Survey.

FAA, TSA and ICAO inspections.

Field Supervision.

Field Supervision.

Field Supervision.

Field measurement.

Field

porting Responsibility

for Data Collection

Supervision Consultant.

MOR.

MOR.

MOR.

Supervision Consultant.

Supervision

62

Target Valuc YR7

:ollection and Data

Collection Instruments

measurement

porting Responsibility

for Data

Data Frequency

and Reports

progress report

YR5 YR6 YR8 Status YR4

Outcome Indicators

(ii) Public buildings restored and functional.

(iii) Term contracts awarded for disaster response readiness.

Baseline

Component Two (B) :

1 At least three roadside stations and amenities constructed and functional as per designs and serving road users and local communities.

2 At least 70% of road users and local persons surveyed become aware of or make use o f the ACT and other facilities for HIV/AIDS campaign along the Northern Corridor.

Component Three (C): Legislation enacted for private sector participation in roads

Quarterly progress report.

Field inspection.

None Designs finalized for one station.

MOR. 1

10%

3

50%

3

70% None Quarterly progress reports.

Questionnaire. HIV/AIDS mitigation action plan prepared. Plan i s yet to be h l l y implemented.

MORand I

University o f Nairobi (Consultant).

None 100% Done

Kenya Roads Act 2007 passed.

Quarterly progress report.

MOR. government gazette.

Component Four @):

At least 10% reduction in road related fatalities per annum.

3150 2800 Only baseline survey has been conducted. Follow up survey in 2009.

Quarterly progress report.

MOR Annual Report.

MOR. 3000 2700

63

Target Valuc YR7 Status

YR4

Data Frequency

and

:ollection and Data

Collection Instruments

Draft paper and memo presented to Cabinet sub- committee.

Action Plan agreed with GoK

Consultant and NGO yet to be recruited to conduct surveys

Annual Progress Reports.

Annual Progress Reports.

Annual Survey report

porting Responsibility

for Data Collection

YR5 YR6 YR8 Outcome Indicators

Baseline

Re orts -r- Component Five (E): 1 Kenya National Highway Authonty established and functional as evidenced by annual reports

2 All feasibility and design studies carried out satisfactorily 3 Timely public disclosure of national

busiqess opportunities in the road sector. 4. NCA established and functional as evidenced by annual reports

5 . Governance and Integrity Action Plan implemented satisfactorily

5 User perception and satisfactron improved in the road sector

Legislation passed, Board members selected, committee set up to hire key staff.

Quarterly progress report.

MOR KeNHA.

government gazette.

None

None

KeNHA Established.

50%

KeNHA Effective.

75%

Plans Disclosed.

MOR. 100%

Plans

Disclosed.

NCA established.

60%

>75% o f users surveyed are satisfied

100%

Plans Disclosed.

NCA established.

100%

>75% o f users surveyed are satisfied

MOR Reports.

None Media. Strategic Road Investment Study completed.

Legislation Drafted.

MOR, KRB andKeNHA. .

None government gazette.

Act passed

Parliament. by

30%

50% o f users surveyed are satisfied

MOR

None 10% Field inspection.

MOR

KeNHA

UNES

Annual Surveys along Northern Corridor

None Consultant

NGO ._

64

Baseline Target Valui

YR? Dat:

Frequency and

Reports

:ollection and I Data

Collection Instruments

port ing Responsibility

for Data Collection

YRS YR6 YR8 Outcome Indicators

Status \RJ

Component Six (F): I . JKlA nieets ICAO and US TSA Catcgory I security requirements.

h’onc 50% 70% 100% Progress i s slow but satisfactory.

Quarterly progress report.

ICAO and TS A inspection

K A A .

2. No. o f Passengers handled at JKlA (mi I I ion ) 3 . Cargo handled at JKlA (tons).

4.7

(2007)

5.0 5 .5 6.0 6.4 Annual growth i s 7- IO%

K A A annual report.

K A A statistics

K A A

300.000 330.000 K A A statistics

K A A .

KCAA.

278,000

(2007)

360.000 3S3,OOO Annual growth i s 7- 10%.

K A A annual report.

Component Seven (C): KCAA meets ICAO and US FAA Category I safety requirements.

None 70% 100% 100% 100% Progress is satisfactory.

Quarterly progress report.

ICAO and FAA Inspection

Component Eight (H): IMO and NCTTA certify compliance with respective treaties.

KCTTCA 70% 100% 100% 100% Zonsultant i i red to w i e w laws md ~gulat ions.

Quarterly progress report.

NCTA monitoring system.

65

ANNEX 6: ROAD SECTOR GOVERNANCE AND INTEGRITY IMPROVEMENT ACTION PLAN

Risk I . col l~isiol l a d hid rigging.

2. Fraiitl mid Corwptiori it1 the Rotid Cotistrirctioti ~llf/llstly.

ControYAction Client: (a) U s e post-qualification, instead o f pre-qualification, to avoid advance knowledge o f the firms invited to bid.

(b) Public dissemination o f the overall roads program and business opportunities in the road sector, reinforce government’s and Bank’s coninlitnient to fight corruption. This will also include publication o f the project’s detailed and updated procurement plan on the website.

Bank: (i) Engage an independent procuremen specialist charged with reviewing bid specifications and bids for Bank-funded contracts, and reporting directly to MOF, MOR and Bank.

(ii) Include the Bank’s audit rights in the works contracts.

(iii) Ensure works contracts are large enough to attract international and large domestic firms to bid.

(iv) Ensure that contracts are not deliberately split to circumvent the Bank’s prior review thresholds or to limit conipetition.

Key monitoring indicator: Increase in the number of qualified bids obtained [4-51

Baseline: 2-3 bids. Client: (a) Establish a transparent, well documented and consistently implemented system for debarment o f poor performers and contractors engaged in fraudulent and corrupt practice through NCA.

(b) Strengthen the Recipient’s capacity to design and supervise the construction o f roads, with particular emphasis on quality and :ontract management.

:c) Review on-going or recently completed :ontract(s) to check for fraud such as inbalanced bid, use o f substandard materials, ower quantities used than paid for, and other ion-compliance with specifications.

Status Client: (a) Post-qualification will be used for a l l major civil works contracts.

(b) The Client has already held two such public dissemination workshops (June 2004 and August 2005) and participated in a third organized by the Bank during i t s Public Foruni (October 2007). This wil l be made a regular feature under the new KeNHA and the media will continue to be present for these events. The project will assist the new authority to establish a website that will be regularly updated and available to the public. Already KRB publishes the annual road program financed through the Road Fund and has established a website, www. krbxo. ke.

Bank: (i) An independent qualified procurement specialist, financed by the Bank as an adviser to the Bank’s team, has reviewed al l the bids as received (he has not identified any major anomalies or “red flags”). H i s f inal report i s due after the BER i s issued. Based on his final report, 3dditional control measures wi l l be incorporated into the project activities. :ii) The Bank’s audit rights are already in SBDs;(iii) and (iv) A l l major contracts are more than US$30-US$40 million each and ire sliced and packaged together to attract international and large domestic firms.

Client: (a) (i) This i s already part of the Function o f the recently established Public ?rocurement Oversight Authority (PPOA), ind the project would assist the agency to mild and enhance capacity and become :ffective; ii) The NCA to be established under the iroject (approximately March 2010) will lave specific provisions for registering :ontrac tors, monitoring their performance ind publishing names o f poor performers ind those that are debarred. The draft hbinet Paper i s before the Cabinet sub- :omit tee and wil l follow the due process )f Cabinet approval o f such papers, drafting he Bil l and presentation o f the same to ’arliament for discussion and enactment;

66

(d) Determine through an independent survey why some bidders who buy bid documents choose not to submit bids.

Bank: (i) A technical audit to be conducted independently o f the implementing agency o n a l l contracts. (ii) Strengthen use o f contractual remedies, such as performance bonds, in case of project delays and poor performance.

Key monitoring indicator: Percentage o f government-funded projects completed o n time, within budget, and in compliance with specifications (measured by periodic review o f random sample o f large projects). Baseline: Less than 40% completed o n time and within budget.

Client: (a) Review current efforts to address corruption in control o f axle loads, recommend appropriate measures to mitigate such risks, and examine need for additional weight control infrastructure, preferably automated.

(b) Ensure that road designs are commensurate with the prevail ing traffic and axle load projections.

(c) Institute a f ine that i s commensurate with damages to the roads plus additional deterrent measures to ensure compliance.

(d) Establish quarterly and random independent reviews o f the weigh stations’ activities including fines imposed and collected.

(iii) IDA is considering support for a Judicial Performance Improvement Project that will a i m to strengthen judicial procedures to ensure fast and effective process o f fraud and corruption legal actions.

(b) The project has a training component and a technical assistance component to strengthen the capacity o f the soon to be established K e N H A .

(c) and (d) This will be financed under the project.

Bank (i) Three internationally recruited and qualif ied engineering f m s are already in place to perform day-to-day independent certification o f the quality o f works, payment certificates and compliance with contract terms. A fiuther independent audit o f the major works and supervision contracts would be undertaken 12-18 months into the implementation o f the project should there b e concern for poor performance and extraordinary deviations f r o m contract terms.

(ii) Performance bonds are n o w required to be unconditional and would b e invoked along with other remedies should the contractor perform poorly.

Client: (a) The EU financed an axle load study recently and government is committed to implement i ts recommendations, particularly with regard to weigh-in-motion axle load control with private sector operators ( th is i s being implemented along the Northern Corridor under Bank funded projects). Through an Administrative Order, the use o f four-axle trucks i s banned and the Order has been effectively implemented. Meanwhile, the bids for the improvement o f communications and management o f the first batch o f 10 weigh stations have been received and their evaluation i s ongoing.

(b) Current road designs are based o n actual axle load surveys and projected design l i fe Equivalent Standard Ax le loads (ESALs) which produce higher designs but are more economic in the long run.

67

4. Delays in Value Added Tax (VAT) refunds, causing inflated prices in construction bids.

5. Weakdue diligence on bidders. The integrity and past oerformance of contractors is a key determinant of fiaud and corruption risks.

6. Absence of

K e y mon i to r i ng indicator: At least 50% decrease in the percentage o f overloaded trucks traveling o n Northern Corridor. Baseline: Will be established once the first automated axle-load weighing station i s constructed and functioning - expected in one year f r o m credit effectiveness.

Client: (a) Assess the amount o f VAT outstanding for reimbursement to contractors and liaise with MOF and KRA to put in place a system to minimize delays.

(b) Provide guidance notes and instructions to the contractors o n VAT procedures and timeline.

K e y mon i to r i ng indicator: T ime elapsed between receipt o f required VAT documentation by KRA and issue o f refund to contractors decreased by at least 50%. Baseline: T o be established by MOR after survey o f local contractors (within 3-6 months o f effectiveness).

Client: (a) Recipient must increase its efforts in conducting due diligence o f bidders, particularly with regard to past performance, financial and technical capacity, equipment holding, and compliance with tax laws and site safety regulations.

(b) Undertaking performance reviews to ensure poor performers are identified.

K e y mon i to r i ng indicator: Extra due diligence in verifying qualifications and past performance i s carried out by the Recipient o n a l l preferred bidders, as verif ied in the bid evaluation reports. Baseline: Insufficient due diligence o n companies bidding for roads contracts.

Client: (a) Cost estimates should be

(c) The current regulation and penalty scheme has been reviewed and legislation passed that prescribes considerable increases in penalties (Traffic Act). An action p lan has also been agreed with the government t o periodically revise the regulations as needed and enforce the rules.

(d) Revise TOR o f the M&E Consultant (University o f Nairobi) t o include review o f weigh stations. Client: (a) KRA maintains that some o f the delay comes f r o m contractors lack o f proper understanding o f h o w to handle VAT and that often delays are due to faulty filing. The project will assist in mounting regular workshops to be conducted by KRA for contractors to explain procedures and resolve any issues. The timelines o f refunds wil l be a government performance indicator under the project and will be monitored during supervision.

The President has directed that a l l the outstanding eligible tax refunds be made within the current fiscal year and KRA is implementing the directive.

(b) A workshop was held in November 2008 where KRA made a presentation to contractors and consultants o n VAT pr6cedures. (a) The project will promote greater scrutiny, in l ine with the provisions o f the BDs. The results will be made public by the Roads Authority and the PPOA.

(b) The proposed National Construction Authority, t o be facilitated under the project, would be tasked with licensing national contractors, and setting minimum qualif ication requirements, among others. Names o f poor performers and debarred fums will b e published in accordance with the NCA regulations.

(c) Clari fy roles and responsibilities for due diligence, and develop capacity to monitor the performance o f contractors [companies under temporary Bank suspension were informed that they were ineligible for Bank financed contracts, and none bid for the M a u Summit - Kisumu contractsl. Cl ient: (a) & (b) A final report o n road

68

robust cost estimates.

7. Weak capacity to detect and deal with fraud and corruption.

8. Weak complaint handling mechanisms

developed from first principles and adjusted for prevailing market conditions and, if possible, also comparable to markets in the region (i-e., East Africa).

(b) Hire a consultant to develop new, robust cost-estimates and regularly update the cost methodology and estimates as necessary to reflect prevailing market conditions.

(c) Exercise the audit rights under the contract to review true cost structure o f recently completed project.

Key monitoring indicators: Robust cost estimates developed; capacity developed in National Highway Authority to monitor actual costs obtained in the field. Baseline: There i s no systematic monitoring o f unit costs by the Ministry o f Roads and Public Works.

Bank (a) Facilitate training workshops focused on identifying red flags and establishing controls in procurement, financial management, and human resource management particularly in the road sector, including prevention o f fraud in works contracts.

Key monitoring indicators: At least three (3) key people from each o f the four (4) Project Technical Teams have participated in the training workshops. Baseline: N o training has taken place.

Client: (a) Strengthen systems to handle and effectively respond to complaints in a timely manner.

(b) Establish and implement a communications strategy to build awareness o f fraud and corruption and provide the means for al l parties to register their complaints.

(c) Encourage the appropriate authority to institute strong whistleblower protection regulations.

Key monitoring indicators: (1) Internet- based complaint lodging system established. (2) N C A established and hnctioning satisfactorily as judged from i t s annual reports. Baselines: (1) There i s no Internet-based

construction unit costs has been prepared by an international consultant and submitted to the Client. Preliminary analysis o f recent bids under Bank financed projects shows the r ise in unit construction costs i s widespread in the region.

(c) The contract provisions already in the SBD o f the Bank pennit such an audit and an independent review w i l l be undertaken as per Item 2 (c) above.

Bank and Borrower to conduct such workshops. KACC already conducts such workshops for selected sectors, and Bank w i l l collaborate with it for the road sector.

(a) Bank will collaborate with INT

Client: KfW (Germany) i s already assisting Kenya Anti-Corruption Commission to ro l l out an internet based complaint lodging system. This i s for all sectors, and was launched with special provisions to protect the confidentiality o f those lodging the complaints. The project w i l l facilitate establishment o f the N C A and support building capacity in that Board and also in other professional bodies, such as the Engineers Registration Board o f Kenya and its associated institutions, including the Institution o f Engineers o f Kenya.

69

9. Weakroads management capacity.

10. Overall transparency and social monitoring of the road construction

complaint lodging system. (2) There i s no Construction Authority to register and monitor contractors.

Client: (a) Strengthen planning, programming, budgeting, execution, monitoring and evaluation capacity o f the road agency.

(b) Ensure the key positions for the three roads authorities are selected through a competitive process based on their qualifications against the established TOR.

K e y monitoring indicators: (1) Key staff in the National Roads Authority, Rural Roads Authority, and Urban Roads Authority i s in place, and trained in work program and budget planning, execution, monitoring and evaluation. (2) Annual work programs, budgets and progress reports are prepared and published. Baseline: The three Roads Authorities are not yet fully functional. Client, Bank, Civil Society: (a) Take - . , additional practical steps to foster a culture o f transparency and probity in the road sub- sector. (b) Establish a communications strategy

through radio programs and talk shows where the issues facing the road sector are discussed and the general public i s asked to participate through expressing their views and comments

Key monitoring indicator: (i) Communication strategy in place and (ii) at least two road-user satisfaction surveys carried out during project implementation, by NGO/Civil Society Organization. Baseline: No system in place for transparency and social monitoring o f road construction outside o f Ministry or Roads.

Client: (a) Legislation has been enacted (Kenya Roads Act 2007) which provided for the establishment o f the three autonomous roads authorities - KeNHA, KeRRA and KURA. Project w i l l finance TA and training as needed.

(b) Recruitment o f senior staff i s on-going. The development o f a 5-year Road Sector Maintenance Plan i s being finalized and w i l l form the basis o f annual work plans for the road agencies and for KRB to approve financing the maintenance components.

A Marketing Research Consultant has been approached to prepare a draft proposal for conducting a road user satisfaction survey which w i l l involve an NGO/Civi l Society Organization.

70

ANNEX 7: OVERALL REVISED PROJECT COSTS (us$ MILLION)

Responsible Contract Cost with Component Agency Type Contingencies

Financing Plan NDF Others GOK ' IDA *

A. Rehabilitation of Northern Corridor and Emergency Restoration of Public Infrastructure Assets Road Works 1. Maji ya Chumvi - Miritini (35 km and ICB 24.55 0.00 16.94 0.00 increased to 40 km) 2.Sultan Hamud-Machakos Turnoff (55 km) ICB 38.30 25.66 0.00 0.00 3. Machakos Turn o f f - K I A 33 km (1 2 km of ICB 60.67 40.65 0.00 0.00

7.61

12.64 20.02

which dual) 4. Lanet-Njoro Turnoff (dual 16 km) 5. Njoro Turnoff-Timboroa (84 km) 6. Mau Summit-Kericho (55 km) 7. Kericho-Nyamasaria (81 km) 8. Nyamasaria-Kisumu Airport 24 km (6 km of which dual) 9. Emergency Restoration o f Public Assets

ICB 39.20 26.26 0.00 0.00 12.94 RD ICB 56.55 37.89 0.00 0.00 18.66

ICB 100.50 67.34 0.00 0.00 33.17

71

ICB 117.80 ICB 78.60

NCB 19.00

78.93 0.00 0.00 38.87 52.66 0.00 0.00 25.94

19.00 0.00 0.00 ' 0.00 - . Sub total (1-9)

Consultant Services - Design and Supervision of works

2. Sultan Hamud-KIA 3. Lanet-Timboroa 4. Mau Summit-Kisumu 5. Emergency Works and Consultants services

1. Maji ya Chumvi-Miritini

RD

534.17 347.39 16.94 0.00 169.85

QCBS 0.90 0.88 0.00 0.00 0.02 QCBS 3.26 3.19 0.00 0.00 0.07 QCBS 3.02 2.96 0.00 0.00 0.06 QCBS 3.00 2.94 0.00 0.00 0.06 QCBS 2.51 2.51 0.00 0.00 0.00

Rd**. 3. Design & supervision of LTPBC

Sub totals (C) D. Road Safety Improvement Works Road Safety Parks

Sub total (1-3) QCBS 1.65 1.43 0.00 0.00 0.03

4.84 4.57 0.00 0.00 0.27 16.54 12.41 0.00 0.00 4.13

RD NCB 0.57 0.38 0.00 0.00 0.19

Component Type

I Consultant Services

Contingencies IDA NDF Others GOK *

Design, implementation and Supervision of I action olan

ICBMCB

QBS

Sub totals (D) E. Institutional Strengthening in Rd & TA Goods, Equipment & Vehicles 1. Equipment for Materials Dept. & ERD Consultant Services 1. TA for setting up KeNHA, KeRRA and KURA and strengthening of MTD, KIHBT, Materials Dept, GDIPE and State Law Office 2. Support to KRB Studies Feasibility & Detailed Eng. Design Studies & TA 3. Kibwezi-Kitui-Mwingi-Maua-Isiolo 4. Lakeside N.Tanzania-Narok

1.79 1.75 0.00 0.00 0.04

3.60 3.53 0.00 0.00 0.07

I 5 . Mombasa Bvoass

. 19.89

6. Sudan Road Link 7. 10 Yr Transport Devt. Plan and Sector Studies 8. Capacity Building MOR, ERD and KRB 9. Urban Public Transport Improvement Study 10. Project M&E, Ext. Auditor, Project Coordination and independent technical audits for road contracts**

Strengthening Governance in Construction I 1

1 1. Establishment of Roads Disaster

Sub total (1-10) 17.26 2.25 0.00 0.38

Management Unit 12. Bailey Bridges & Emergency Equipment

QBS

ICB - . ~.

and Vehicles 13. Establishment ofNCA

1.00 0.98 0.00 0.00 0.02

11.00 10.78 0.00 0.00 0.22

14. Strengthen ERB and associated Institutions Sub total (11-14)

Responsible Agency

RD

RD

RD

RD

ustry

RD

RD

Contract I Cost with I Financing Plan

~

4.97 4.69 0.00 0.00

I I I I I

2.30 I 0.00 1 2.25 I 0.00 I 0.05 QCBS I

OCBS QCBS 3.80 3.72 0.00 0.00 0.08 QCBS 1.10 1.08 0.00 0.00 0.02

Training QCBS

QBSISSS

72

Responsible Agency

0.00

ICB 40.63

75.50

90.00

Contract I Cost with I Financing Plan

0.00

0.00

14.00

0.00

Component

F. Support to KAA

70.00

100.00 0.00 0.00

0.00

100.00

0.00

0.00

0.00

Works 1. Rehab. o f Old Embakasi Airport Infra.6' 2. External Electric. Works - Old Embakasi Airs4' 3. Renovation o f terminal Build.- Old Embakasi" 4. Expansion of JKIA -Passenger Terminal

(i) Unit 4 Apron Extension and Taxiways (New) (ii) Unit 4 Terminal Building & Car park** (New) (iii) Units 1-3 Blds Renovation and Modification**

'

Sub total (item 4) 5. Terminal Building - Kisumu Airport 6. Rehab. & Extension of Runway - Kisumu Airport 7/ 7 . Renovation & upgrading security - Wilson Airport Sub total (1-7)

20.00

92.13 7.10

43.00

20.00

162.23

0.02

0.04

0.01

Goods, Equipment & Vehicles 1. Security screening, baggage, access control, etc 9/ 2. Perimeter Fencing for Major Airports (materials) 3. FIDS with Installation at Moi Airport

~~

ICB ICB

ICB

ICBI NCB ICB

ICB Mombasa 4. Fire Tenders6 5. Securit Perimeter light and detection

6. Security and Comm. Equip. and Vehicles airports 7 . Support to Emergency Operation Centres"' Sub total (1-7)

airports Id;

206.13 14.00 7.10 0.00

43.00 0.00

20.00 0.00

276.23 14.00

1.08 1.06

2.16 2.12

0.70 0.69

Consultant Services 1. FeasibilityhIesigdSupervision Kisumu and Wilson Airports and JKIA Runway Rehabilitation Design 2. Works Supervision for JKIA Units 1-4 and Arrivals building (New) Training Project Operating Costs

QCBS

Sub total (F) KAA

4.08 4.00

KAA

Training

KAA

0.86 0.86 0.45 0.00

297.90 34.81

KAA

Type I Contingencies

0.00

ICB/ I 5.94 I 5.82 =+ipT-l 12.48 12.23

NDF

0.00 0.00

0.00

0.00

0.00

0.00

0.00 . 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00 0.00 0.00

i

0.00

1

0.00 0.25

0.00

73

Component

QCBS QCBS

Responsible Agency

4.54 4.45 0.00 0.00 0.09 0.59 0.58 0.00 0.00 0.01

G. Support to the KCAA Goods, Equipment & Vehicles

Training

.~ I 1. support to KCAA for IT

0.81 0.81 0.00 0.00 0.00 0.10 0.00 0.00 0.00 0.10

10.31 10.02 0.00 0.00 0.29

._ I 2. Support to EASA, ATS &Eng. Equip and I

ICB

Lab. Sub total (1-2)

0.44 0.43 0.00 0.00 0.01 0.83 0.81 0.00 0.00 0.02

I Consultant Services I

QCBS

KCAA

0.28 0.27 0.00 0.00 0.01

1. TA to KCAA for Flight Inspection, Training 2. Implementation of GNSS/GPS

QCBS

I Training at EASA and KCAA

0.33 0.32 0.00 0.00 0.01 0.61 0.59 0.00 0.00 0.01

- Project Operating Costs (KCAA) Sub total (G) KCAA

Training

H. Support to the M O T Good, Equipment & Vehicles 1. Suvvort to New Maritime Authoritv for I T

0.83 0.83 0.00 0.00 0.00 0.22 0.00 0.00 0.00 0.22

. I 2. Strengthening of MOT in I T

919.83

1 3. Support in enhancement maritime capacities I

460.00 19.19 100.00 340.61

Sub total (1-3) Consultant Services 1. Support for Implementation of maritime

MOT

2. Support to MOT, National Trans. Policy Sub total (1-2) ! Training of MOT and Sector staff

I

Project Operating Costs (MOT) I Sub total (€n MOT . ,

COMPONENTS TOTALS (A,B,C,D,E,F,G&H)

Contract I Cost with I Financing Plan

ICB/NC B L I B

ICB I 0.17 I 0.17 I 0.00 I 0.00 I 0.00 I I I

ICB I 0.22 I 0.22 I 0.00 I 0.00 I 0.00

2.49 I 2.23 I 0.00 I 0.00 I 0.25

I/ Included in the main road works. IDA funds (US$1.86 million) to be reallocated to consultant's service (Institutional TA) 21 Merged with supervision under main road works. IDA (USS0.21 million) to be reallocated to Supervision of road works 3/ GOK funded. IDA funds (USSO.2 million) to be reallocated to PSP Transaction Adviser for Nairobi Urban Toll Road 4/5//6/7/8/ Sub components dropped. IDA (USS18.49 million) to be reallocated to improvement of JKIA 9/ Part o f IDA funds (USS1.45 million) to be reallocated to improvement o f JKIA 101 &1 I/ Combined with security and communication and vehicles sub component. USS4.85 million to be transferred to this sub component * Financiers under consideration include European Investment Bank and Kenya Local Banks ** Includes reallocation of USS1.09 million IDA funds from supervision of works for North Airport Road

74

ANNEX 8: TRANSPORT SECTOR AT A GLANCE

1. Road. The road network i s fairly large providing a dense coverage in the highly populated parts o f the country and some level o f access throughout the country. Only about 42 percent o f the classified road network i s in good condition and sizeable resources are required to bring the rest o f the network to a maintainable level. The road subsector accounts for about 94 percent o f the movement o f the cargo by surface transport handled through the port o f Mombasa and the balance i s by rail. The increased household incomes realized over the last six years in Kenya have resulted in an unprecedented growth in the levels o f traffic. Major cities, such as Nairobi, are experiencing serious congestion and the need to respond rapidly with improvement and expansion o f infrastructure has become imperative.

2. Rail. The rai l system i s skeletal but links the major population and production centers, and provides access to the port o f Mombasa for both Kenya and much o f East Africa.

3. Ports. The port o f Mombasa i s now operating on a 24 hour work schedule, up from 12 hours a day previously, and the government has appointed a new Managing Director o f the Kenya Ports Authority (KPA), based on a competitive recruitment process. 4. Air. Air transport has become increasingly important to the economy o f Kenya and provides excellent connections to the global economy. Air transport sustains the tourist industry and has been instrumental in facilitating Kenya’s entry into the fresh flower and horticulture markets. Through i t s fresh produce exports, Kenya has shown that i t can develop world-class logistic chains with 24 hour delivery periods from farm to European markets if given the opportunity and incentives. Kenya Airways has become a market leader in Africa. C iv i l aviation infrastructure improvement, including aviation safety and security, i s underway under this project to keep pace with the required quality o f the air transport services.

5. Above all, despite being better developed relative to regional neighbors, the economy i s underdeveloped relative to faster growing economies in the world with which Kenya should compare i tself4.

l4 World Bank. Kenya: Accelerating and Sustaining Inclusive Growth. Report No. 42844-KE

75

ANNEX 9: STATUS OF INSTITUTIONAL AND POLICY REFORMS

1. The government has made significant progress under the project in improving the pol icy and operational environment for management o f the transport sector, such as:

Roads sub-sector

The government established a secure funding mechanism for road maintenance with the introduction o f the road maintenance fuel levy and the creation o f a Road Fund.

The funding o f road maintenance was separated from implementation o f the road program, through the establishment o f the Kenya Roads Board (KRB) which has the mandate to manage the Road Fund.

The government has adopted a comprehensive road pol icy and approved the new Kenya Roads Act 2007, which, inter alia, enables the establishment o f three autonomous road authorities, namely, the Kenya National Highways Authority (KeNHA), the Kenya Rural Roads Authority (KeRRA), and the Kenya Urban Roads Authority (KURA). The government has advanced the establishment o f these three road authorities with the appointment o f the members and chairpersons to their respective Boards. The three authorities were officially launched on September 12, 2008. The Chief Executives have been competitively selected and the recruitment o f the other senior managers has commenced.

Measures have been taken by the government to enhance road maintenance funding by harmonizing and consolidating most o f the road user charges. The collections are channeled to the Road Fund, thereby enhancing the domestic contribution for road maintenance. About US$200 mi l l ion will be collected annually from these road user charges. *This amount i s about 90 percent o f the road maintenance requirement, once the entire road network has been improved to a maintainable condition.

Important steps have been taken to ensure better governance and cost control in the road sector, such as: (i) revision o f the Procurement Law (to enhance competition, fairness, and transparency); (ii) advance publication o f annual work programs by the Kenya Roads Board (KRB) and the road agencies; and (iii) equitable sharing o f Road Fund resources across all road categories and country-wide as provided for in the Kenya Roads Act 2007.

A policy has been adopted to involve the private sector in the management o f weigh stations in the country and control overloading o f trucks.

Use o f four axles in a group on trucks using Kenyan roads has been banned, in l ine with the agreed Common Market for Eastern and Southern Afr ica (COMESA) protocol.

The government plans to establish a N C A to support the development o f the local construction industry; enhance and oversee the level o f professionalism in the industry; promote ethical behavior among contractors; sanction poor performers; and assist in the

76

training o f construction personnel. Plans are also undehay to strengthen the ERB, to allow the ERB to provide relevant training, share knowledge’and strengthen s e l f regulation and the sanctioning o f unprofessional and unethical conduct by practicing engineers and firms.

(ix) Unit cost analysis o f road construction has been undertaken, with comparative data from other countries similar to Kenya’s situation. This new development and use o f the methodology based on f i rst principles to estimate and benchmark road construction costs are improving project cost estimation prior to inviting bids.

Aviation sub-sector

(i) The responsibility for passenger, baggage and mai l security screening at the airports has been transferred from the police to KAA, allowing for better monitoring, control and training o f security staff.

(ii) Security at airports has been improved with the deployment o f the paramilitary unit (General Service Unit - [GSU]) personnel patrols and heightened surveillance around the airports and key airport installations.

(iii) Aviation safety and security regulations have been harmonized and adopted by each member o f the East African Community (EAC), including an agreement on sharing o f resources, particularly safety inspectors.

(iv) K C A A has established an airport security oversight unit, which i s responsible solely for monitoring security issues and ensuring compliance with security regulations.

(v) K C A A i s now well established and fully autonomous. K e y professional staff have been recruited and offered better terms o f service compared to the past, although retaining very highly qualified staff in K C A A i s st i l l a problem because o f better opportunities in the private sector.

(vi) Both organizations, KAA and KCAA, have been given financial autonomy and now retain the revenue generated from their operations, which had been previously remitted to the government’s general revenue kitty.

(vii) Technical assistance in K C A A has been mobilized and i s effectively providing support for airworthiness and flight safety inspections, licensing o f aircrafts and pilots, training and institutional capacity building.

Railways sub-sector

2. The Kenya-Uganda Railway has been concessioned to the private sector, and retrenchment o f staff and restructuring o f the Kenya Railways Corporation (KRC) is underway, with a view to making it function effectively as a holding company and managing staff pension benefits (assisted under the IDA financed East Afr ica Trade and Transport Facilitation Project - Cr. 4248-KE). To date, the concessionaire has not been able to inject the required

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capital to improve the infrastructure and rol l ing stock. As a consequence, IFC and the government are examining alternative shareholding structures and investment financing plans to rescue the concession, which i s now seriously under stress.

Maritime sub-sector

3. A study i s ongoing for review o f maritime legislation to ensure compatibility with International Maritime Organization (IMO) treaties and for drafting the relevant maritime regulations.

Administrative Reforms and Government Commitment

4.

(i)

(ii)

(iii)

(W

(9

(vi)

(vii)

(viii)

Government ownership and commitment to the project has significantly increased compared to previous IDA funded projects in the road sub-sector, which saw protracted delays in processing o f payments, inadequate counterpart funding and frequent staff changes without specific terms o f reference and with minimal authority to make decisions. In the case o f NCTIP, the commitment i s evidenced by:

Mainstreaming o f the project management activities within the Roads Department, KAA, K C A A and the MOT, for their respective components.

The increase in the counterpart financing by the government from 25 percent to 33 percent for c iv i l works and its timely allocation.

The project components being fully managed by implementing agencies staff - through significant Bank investment in capacity building, including constant on-the-ground training and problem-solving with the help o f Bank staff in the field.

The government’s successful management and steering of, and active participation in, the development o f a new road sub-sector pol icy and strategy, and enactment o f the institutional reforms.

KAA fully funding major capital works contracts from i t s own resources.

Reduction in the number o f signatories and approval steps in processing payments from 23 to 7 within MOR.

Appointment o f an experienced and empowered team with clear terms o f reference for the management o f the project.

Implementation o f an integrated financial management and information system that provides better control and monitoring o f public funds throughout the entire government.

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ANNEX 10: PROJECT SUPERVISION PLAN

Project Team

The Project Task Team comprises:

Task Team Leader (Country Office based) Co-Task Team Leader (Country Office based) Senior Environmental Specialist Senior Procurement Officer (Country Office based) Financial Management Specialist (Country Office based) Senior Social Development Specialist (Country Office based) Highway Engineer (Country Office based) External Affairs Officer (Country Office based) Senior Highway Engineer (Country Office based) Operations Analyst Program Assistant (Country Office based) Program Assistant

Consultants

(i) Social Development Specialist (local) (ii) (iii) (iv) (v) (vi)

Aviation Planner (to be shared with other projects) Airport /Electrical Works (to be shared with other projects) Mechanical (to be shared with other projects) Architect (To be Identified - local) Monitoring and Evaluation (to be shared with other projects)

Monitoring and Evaluation

(i) University o f Nairobi

Focus o f Supervision

2. Project supervision wil l focus on implementation activities that are critical for project success, particularly quality o f works; technical compliance; timely payment o f contractors, suppliers and consultants; timely award o f contracts; and adherence to implementation schedules. The Bank’s project members form an “all-inclusive” project implementation team with appropriate skill m i x and most o f them are based in the Country Office. This will therefore enable continuous and cost-effective supervision o f the project.

3. Emphasis wi l l be placed on upstream reporting, auditing and accountability, and technical compliance measures to ensure early detection and remedy o f problems through on-going oversight o f the project implementation activities. With respect to the three road works contracts,

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this wil l be achieved by prompt review o f project implementation progress reports prepared by the three international engineering f i r m s that perform day to day independent certification o f the quality o f work, payment certificates and compliance with contract terms. The appropriate experts in the project team wil l review the project’s main technical documents/reports, conduct site visits for verification o f the progress as noted in the reports, and provide advice to the client on various aspects o f the project.

4. Procurement documents subject to prior review wil l be carefully reviewed by both the technical expert(s) and the senior procurement specialist on the team to ensure that they comply with the project’s technical requirements and the Bank’s procurement and consultants guidelines. Furthermore, to ensure compliance, random reviews o f the submitted bids/proposals against the submitted bidproposal evaluation reports will be carried out. For procurement actions subject to post reviews, annual assessments wil l be carried out by the procurement team in the Country Office. The Financial Management specialist wil l carry out periodic reviews o f the project’s four implementing agencies’ Financial Management systems and controls and where necessary wil l conduct reviews o f statements o f expenditure (SOEs). These reviews wil l be utilized for improving the implementing agencies’ systems and performance in these areas.

5. Before each supervision mission, the client will submit to the Bank a detailed consolidated project implementation progress report which wil l provide the status o f the project activities and identify al l implementation issues facing the project. These reports combined with site visits will be the basis for reaching agreement with the client on the activities for the upcoming period and resolution o f implementation issues facing the project.

6. Annual audit reports with accompanying management letters will be submitted to the Bank for i t s review. The TOR for the auditors wi l l include compliance reviews through technical and physical verification o f the project activities. I t wil l further include the requirement for the auditors to carry out mid-year reviews with finalization o f their audit by the end o f each year. I t i s anticipated that a further independent audit o f the major works and supervision contracts would be undertaken 18 months into the implementation o f the project should there be concern for poor performance and extraordinary deviations from contract terms.

7. For the f i rst three large works contracts under the additional financing, the Task Team engaged an independent procurement specialist who was charged with reviewing the procurement documents (bid specifications, bids, and bid evaluation report). The specialist has examined in detail the unit prices for major construction items in the BOQ submitted by the bidders and concluded that there was no major anomaly or any serious “red flags” (see Annex 1). This conclusion i s in line with the Task Team’s findings. Some o f the recommendations made by the specialist with regard to selected bill items in the Preliminaries will be taken into account prior to the signing o f the contracts with the winning bidders. The specialist’s final report i s pending his review o f the Bid Evaluation Report.

Capacity building

8. Based on the performance o f the project’s four implementing agencies, periodic procurement and financial management capacity-building workshops will be organized by the

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Bank’s procurement and financial management specialists. This focused approach to capacity building will provide the Recipient the necessary training that also helps to address the specific issues facing the project. Other training workshops, including joint IDA/Recipient workshops focused on improving governance and integrity and assessing corruption r isks and other vulnerabilities, particularly for the newly formed KeNHA, wil l also be organized by the project team. Such training sessions are expected to yield workable control mechanisms to be adopted by the implementing agencies to enhance governance in the sector.

Mode of Supervision

9. The Task Team wil l undertake supervision as follows:

(i)

(ii)

On-going technical, procurement and financial management support to the project’s implementing agencies from the country based team; Quarterly supervision reviews o f the project, including visits to the project sites. The review teams wil l comprise an engineer, procurement specialist, financial management specialist, social development specialist and TTL/and or Co-TTL; Annual full fledged supervision missions involving al l the key Task Team members; With the assistance o f the External Affairs Specialist, a br ief on the implementation status of the project wil l be prepared and posted on the external Country Office website semi-annually; and The Recipient wil l hold briefing sessions to the public on the implementation progress o f the project, with the External Affairs Specialist providing assistance as requested.

(iii) (iv)

(v)

Monitoring

10. On the side o f the Recipient, the capacity o f the implementation agencies i s augmented by technical assistance and consultant services, particularly in the areas o f designs, supervision, project coordination, monitoring and evaluation, HIV/AIDS mitigation (an N G O i s to be engaged), and user satisfaction surveys (local consultant or c iv i l society organization to be engaged). The annual monitoring and evaluation (M&E) reports produced by the M&E consultants (University of Nairobi) wil l be discussed at workshops with stakeholders, both during their preparation and on finalization.

Budget

11. Accomplishing the above activities would require both the Bank and the Recipient management to allocate adequate resources for their staff to be able to carry out comprehensive project supervision. Inadequate resources wil l hamper the implementation o f the proposed intensive fol low up and monitoring required for mitigating the potential risks identified. On i t s part the Afr ica Region has committed itself to provide the requisite resources to the Bank’s Team to undertake comprehensive and intensive supervision missions as needed.

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