FOR OFFICIAL USE ONLY

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1 Document of The World Bank FOR OFFICIAL USE ONLY Report No: PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF USS MILLION (USD MILLION EQUIVALENT) TO THE REPUBLIC OF KENYA FOR A NORTHERN CORRIDOR TRANSPORT IMPROVEMENT PROJECT April 30,2004 Transport Sector Country Department 5 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

2 CURRENCY EQUIVALENTS (Exchange Rates Effective February 29,2004) Currency Unit = Kenya Shilling (Ksh.) Ksh. 77 = US$1 US$ = SDR 1 FISCAL, YEAR July 1 - June 30 AAA ACT AfDB AFTTR AGOA BOT CBO CAS EA EAC EASA EIA ERD EMP ERR ESMP EU FAA GOK IASA ICAO ICB ICR IDA JKIA KAA KCAA KPA KPC KRC KRB M&E MOF MIA MOTC MORPWH NCB NCTTCA ABBREVIATIONS AND ACRONYMS Analytical and Advisory Activity Advising, Counseling and Testing African Development Bank Africa Transport African Growth Opportunity Act Built Operate Transfer Community Based Organization Country Assistance Strategy Environmental Assessment East African Community East African School of Aviation Environmental Impact Assessment External Resources Department, Ministry of Finance Environmental Management Plan Economic Rate of Return Environmental and Social Management Plan European Union United States Federal Aviation Administration Government of Kenya International Aviation Safety Assessment International Civil Aviation Organization International Competitive Bidding Implementation Completion Report International Development Association Jomo Kenyatta International Airport Kenya Airports Authority Kenya Civil Aviation Authority Kenya Ports Authority Kenya Pipeline Company Kenya Railways Corporation Kenya Roads Board Monitoring and Evaluation Ministry of Finance Moi International Airport Ministry of Transport and Communications Ministry of Roads, Public Works and Housing National Competitive Bidding Northern Corridor Transit Transport Coordination Authority

3 FOR OJ?FIcIAL USE ONLY NCTIP NDF NEMA NEPAD NHA NPV POC PIP PMR PPIAF PS PCT PTT QCBS RAP R&R RMI SA SEA SSATP TSA Northern Corridor Transport Improvement Project Nordic Development Fund National Environment Management Authority New Partnership for Africa s Development National Highway Authority Net Present Value Project Oversight Committee Project Implementation Plan Project Management Report Public Private Infrastructure Advisory Facility Permanent Secretary Project Coordination Team Project Technical Team Quality and Cost Based Selection Resettlement Action Plan Resettlement and Rehabilitation Road Management Initiative Social Assessment Sectoral Environment Assessment Sub-Saharan Afhca Transport Program United States Transport Security Administration Vice President: Country ManagerlDirector: Sector Manager: Task Team Leader: Callisto E. Madavo Makhtar Diop C, Sanjivi Rajasingham Ani1 S. Bhandari This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 KENYA Northern Corridor Transport Improvement Project CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE Country and Sector Issues... 1 Rationale for Bank involvement... 1 Higher level objectives to which the project contributes... 2 B. PROJECT DESCRIPTION Lending Instrument... 3 Project Development Objectives and Key Indicators Project Components 4 4. Lessons learned and reflected in the project design Alternatives considered and reasons for rejection... 7 C. IMPLEMENTATION Partnership Arrangements... 8 Institutional and Implementation Arrangements Monitoring and evaluation of outcomeslresults Sustainability Critical risks and possible controversial aspects *. Loadcredit conditions and covenants D. APPRAISAL SUMMARY Economic and Financial analyses (see Annex 9): Technical Fiduciary Social Safeguard policies Policy Exceptions and Readiness Annex 1: Sector Background Annex 2: Major Related Projects Financed by the Bank andlor other Agencies. 29 i

6 Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Annex 9: Economic and Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance Kenya Map. IBRD

7 KENYA NORTHERN CORRIDOR TRANSPORT IMPROVEMENT PROJECT APPRAISAL DOCU1MENT AFRICA AFTTR Date: May 21,2004 Country Director: Makhtar Diop Sector MangerlDirector: C, Sanjivi Raj asingham Project ID: PO82615 Lending Instrument: Specific Investment Loan Team Leader: Ani1 S. Bhandari Sectors: Roads and highways (72%);Aviation (1 5%);Central government administration (1 O%);Other social services (2%);Health (1 %) Themes: Trade facilitation and market access (P);Infiastructure services for private sector development (P);Regulation and competition policy (P);Regional integration (S);Administrative and civil service reform (S) Environmental screening category: Partial Assessment Safeguard screening category: Limited impact [ ]Loan [XI Credit [ ]Grant [ ]Guarantee [ ]Other: For LoanslCreditslOthers: Total Bank financing (US$m.): Proposed terms: Standard IDA Credit ASS OCMTION IDA GRANT FOR POOREST COUNTRY Total: Borrower: Ministry of Finance The Treasury P 0 BOX: Nairobi Kenya Tel: Fax: njasu@treasury.go.ke

8 Responsible Agency: Ministry of Roads, Public Works and Housing Roads Department P 0 Box: Nairobi Kenya Tel: Ministry of Tyransport and Communications Transcom House P. 0. Box: Nairobi, Kenya Telephone : Cumulative1 Project implementation period: Start March 30,2004 End: June 30,2009 Expected effectiveness date: September 30,2004 Expected closing date: December 31, I I I ~ I I C Does the project depart from the CAS in content or other significant respects? [ ]Yes [XjNo Ref: PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated substantial or high? [XIYes [ ]No Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The Project Development Objectives are to: (a) increase efficiency of road transport along the Northern Corridor to facilitate trade and regional integration (60% weight); (b) enhance aviation safety and security to meet international standards (30% weight); and (c) promote private sector participation in the management, financing and maintenance of road assets (10% weight). Project description [one-sentence summavy of each component] Re$ PAD B.34 Technical Annex 4 A. Rehabilitation of selected road sections in the Northern Corridor B. Roadside Amenities and HIVlAIDS Mitigation C. Private Sector Participation in Road Management and Maintenance D. Road Safety Improvement E. Institutional Strengthening in the Roads Sector and Technical Assistance

9 F. G. H. Support to Kenya Airports Authority. Support to Kenya Civil Aviations Authority. Support to Ministry of Transport and Communications, Which safeguard policies are triggered, if any? Re$ PAD D.6, Technical Annex 10 Environmental Assessment; and Involuntary Resettlement. Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: No. Loadcredit effectiveness: No. Covenants applicable to project implementation: No.

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11 A. STRATEGIC CONTEXT AND RATIONfiE 1. Country and Sector Issues After two decades of weakening economic growth, low productivity and high unemployment, the new Govemment in Kenya has launched its Economic Recovery Strategy for Wealth and Employment Creation for the period (ERSWEC, October 2003). The first priority is to restore the economy on a path of high growth as a condition for the achievement of all other developmental objectives. The strategy calls for redefining the role of the state as a facilitator for private sector growth and investment. This will entail strengthening policy and regulatory functions of the state and transferring productive and service delivery activities to the private sector. Within this framework, the government has committed itself to maintaining a stable macroeconomic framework, reforming the financial sector and strengthening its regulations to increase savings and investment, implementing mechanisms for private sector participation in provision of infrastructure services, and establishing a competitive environment which is able to attract increased private investment in productive sectors such as tourism, industry and trade. The main objective of the Government in the transport sector is to spur private sector led economic growth through reducing the cost of doing business in Kenya and increasing its competitiveness in the domestic, regional and international markets. However, the sector is constrained by lack of adequate funds; institutional inefficiencies; weaknesses in the policy, legal and regulatory environment; poor safety and security standards at the airports and Mombasa port; and inadequate institutional capacity and human resource skills. As a result, the transport costs and travel times are high and reliability is low. To address these issues, the Govemment has taken a number of steps, such as: (i) establishment of a Road Maintenance Fund fed by a fuel levy that generates about $1 10 million annually, which would be just adequate to maintain a core network of strategic roads that are in maintainable condition; (ii) setting up of the Kenya Roads Board with representation from road users, Govemment agencies and other stakeholders to oversee the allocation and utilization of the Road Fund; (iii) improvement of rural roads and labor based construction and maintenance strategy (Roads 2000 Strategy); (iv) decentralization of the flow of funds and decision making that has enabled funds for road maintenance to reach every district of the country; (v) significant improvement in axle load control; (vi) setting up of two national task forces, one to draw up a national transport policy and the other to prepare a plan of action for institutional reforms in the road sector; (vii) operational improvements at the Port of Mombasa; (viii) enactment of the Civil Aviation Act of 2002 leading to the establishment of the autonomous Kenya Civil Aviation Authority; and (ix) initiation of public-private partnerships including the concessioning of Grain Bulk Cargo handling at Mombasa Port, Cargo handling in KIA and the privatization of Kenya Airways. The Government has also taken steps to concession the Kenya Railways, amend the Roads Act to permit concessioning of roads, improve the institutional set up of road maintenance and improve the legal and regulatory framework for the transport sector (See sector background in Annex 1). 2. Rationale for Bank involvement The Bank has played a leading role in the development of the road sector since independence and has maintained a continuous dialogue with the Government on appropriate strategies for the transport sector (See references of related Bank and other Development Partner funded projects in Annex 2). The recent report Kenya Transport Sector Memorandum was prepared as part of an Analytical and Advisory Activity (AAA) financed by the Bank and discussed extensively with the Government including at a stakeholders meeting in Nairobi on November 11, The report is being revised as a result of the feedback from the participants and forms the basis for the involvement of the Bank and other Development Partners in the transport sector. Work has also been recently completed on developing a new strategic plan for the road sector, which will have as its principal objective the attainment of sustainability through assured funding for adequate routine and periodic maintenance. External funding -1-

12 will then concentrate on the improvement of the network rather than remedying the effects of inadequate maintenance, Achieving sustainability, however, will require substantial assistance to clear the backlog of periodic maintenance, strengthening and rehabilitation work that has accumulated so far, Further assistance by the Bank, within an agreed strategy for the sector, will help mobilize other development partners to maintain or extend their funding in the sector. The Bank has accumulated a great deal of knowledge and experience in transport sector reform in the region over the last 10 years under the Sub-Saharan Africa Transport Program (SSATP) and more specifically under one of its components, the Road Management Initiative (RMI). This has provided the Bank with the good will of the beneficiaries and development par!" in creating a cooperative framework where sector reforms have gradually been shaped, implemented and monitored. This will also help ensure, for the road sector, further institutional and financial sustainability of road management by helping to define and implement efficient, effective and sustainable policy frameworks, institutional arrangements, financial management systems, and financing mechanisms, which have been tested and endorsed under the RMI. Moreover, through its worldwide involvement, the Bank has gained substantial experience related to multi-year performance-based contracts for road network management and maintenance. The private sector in Kenya is reasonably well developed and well suited to carrying out area-wide rehabilitation and maintenance of roads under longer term performance based contracts (or concessions where feasible) such as those being carried out in Latin America (Brazil, Argentina, Chile), USA (Virginia, Oregon, Washington DC), Spain, New Zealand, UK, and more recently in Africa (Chad) and India. Maintenance costs have been known to reduce by percent after such arrangements are set up. Through the private sector participation component of the project, the experience gained worldwide will be put into practice in Kenya. A pilot performance based contract will be implemented under the project, which will allow the Government to gain experience in this area and to gradually expand the concept to a larger part of the road network. In the transport sector as a whole, the Bank has been involved, especially through the Public Private Infrastructure Advisory Facility (PPIAF) and the International Development Fund (IDF), in policy developments involving private sector participation in financing and operation of transport infrastructure. It has been involved worldwide in Ports modernization and Airport infrastructure financing projects. It has also recently helped to develop a policy framework in air transport safety and security in West and Central Africa, consistent with the objectives of GOK in this respect. 3. Higher level objectives to which the project contributes The new Government that recently came to power at the end of December 2002 sought and secured the electoral mandate of the people on the pledge to work together with all progressive forces to bring about comprehensive political and economic change. In line with that pledge, the govemment has prepared its Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC, 2003) emphasizing the creation of productive employment to address simultaneously three challenges: the social problem, underutilization of production capacity, and poverty reduction. Through improving the Northern Transport Corridor which connects the port of Mombasa with Nairobi, Uganda, Rwanda, Burundi and Democratic Republic of Congo, the project is expected to enhance domestic and regional trade and create job opportunities in the construction industry. Similarly, enhancing the safety and security status of civil aviation and major airports will enable direct flights to and from USA which would promote tourism and increase trade under the Afhcan Growth Opportunity Act (AGOA). It will also reduce insurance costs for Kenyan airlines and have an indirect impact on trade and tourism fkom other developed countries. -2-

13 Country Assistance Strategy. The CAS is a strategy of re-engagement with the Govemment. The project is designed to contribute to two important objectives emphasized by the CAS (draft dated January 2004): (i) economic growth and (ii) improving govemance. One of the key components of the growth strategy of Kenya's new Government under its Economic Recovery Program is the promotion of reliable and least cost infrastructure services, particularly roads, ports, water and communications. Over the last several years, the private sector has consistently pointed out the poor state of roads as one of the most critical constraints to the competitiveness of Kenya's goods and services and to promotion of tourism. Similarly, the creation of an autonomous Roads Authority and strengthening of the newly created Kenya Civil Aviation Authority and the Kenya Roads Board will contribute significantly to improving govemance in the transport sector. B. PROJECT DESCRIPTION 1. Lending Instrument The SIL (Specific Investment Loan) instrument has been chosen for this project because the credit will support the rehabilitation and maintenance of identified economic, social and institutional infrastructure. It will, furthermore, finance consultant services and training to establish technical, financial, environmental and economic viability of sub-projects; enhance institutional capacity; and improve management of the project. The investments against which funds are to be disbursed are well defined and specific. The Kenyan Government feels that subsequent projects in the transport sector should be designed on the basis of broader Bark lending instruments, preferably Adaptable Program Loans (APL) or Sector Investment Loans given the recent trend towards programmatic lending and budget support. The project will assist in building the necessary institutional capacity and policy environment conducive to support such programmatic lending. However, it is only after the relevant institutional arrangements are fully in place, and harmonized procurement and financial management systems have been adopted by the Borrower and agreed with the Development Partners, that the capacity will be in place for adoption of a Sector Wide Approach to Projects (SWAP) in the transport sector 2. Project Development Objectives and Key Indicators The Project Development Objectives are to: (a) increase efficiency of road transport along the Northem Corridor to facilitate trade and regional integration (60% weight); (b) enhance aviation safety and security to meet intemational standards (30% weight); and (c) promote private sector participation in the management, financing and maintenance of road assets (10% weight). -3-

14 The progress toward achieving the development objectives will be measured by the following indicators: (i) (ii) (iii) (iv) Freight and passenger travel time by road from Mombasa to Malaba reduced by 25 percent; Kenya Civil Aviation Authority cleared for International Aviation Safety Assessment (USA) Category 1 safety status by the United States Federal Aviation Administration (FAA) and Jomo Kenyatta International Airport (Nairobi) cleared by the United States Transport Security Administration (TSA) for direct flights tolfrom US Airports; and One long term performance based road management and maintenance contract awarded to the private sector and effectively under implementation; and One road segment along the Northern Corridor offered for concessioning to the private sector. 3. Project Components The proposed project will consist of the following eight components: A. Rehabilitation of the Northern Road Corridor'. This component comprises: (a) strengthening and rehabilitation of about 373 km of selected priority road sections along the Northern Corridor to cope with projected traffic and provide efficient and reliable road transport services; (b) improvement of the Airport North Road connecting the Mombasa Highway to the old Embakasi airport (about 8 km); and (c) consultant services for supervision of works. B. Socioeconomic Enhancement, Roadside Amenities and W/AIDS Mitigation'. This component involves: (a) Roadside Amenities comprising the identification and construction of proper bus and truck stops at key selected locations including parking areas and utilities infrastructure; construction of off-road booths for sale of local produce and products in selected areas by roadside communities; bicycle paths and pedestrian sidewalks; and any other roadside features to enhance the safety and socioeconomic impact on roadside communities and road users. It will also include re-settlement and rehabilitation of any Project Affected Persons (PAPS) as appropriate, and mitigation of negative environmental impacts; (b) HIV/MDS Mitigation. In collaboration with the National HIVlAIDS program, the International Transport Federation and the Truckers Association, this sub-component will provide for specific interventions along the Northem Corridor, including awareness and information dissemination, kiosks for provision of public health and social awareness services for HIVIAIDS, distribution of condoms, strengthening of local health centers as needed, voluntary counseling and testing, and support and care for affected persons. To ensure sustainability, this component will ultimately be linked to the MAP program in Kenya. The civil works contracts will contain appropriate clauses for HIVlAIDS mitigation measures. C. Private Sector Participation in Road Management and Maintenance3. This component will promote public-private partnership in the road sector and comprises: (a) technical assistance for facilitating concessioning of selected sections of the Northern Corridor road link and (b) initiating a pilot program of long-term performance based maintenance and management of a selected sub-network (about 300 km) of lower volume roads. ' Part of the feasibility and design studies have been financed under the Nairobi-Mombasa Road Rehabilitation Project (Cr $E) The preparatory work for this component has been financed under Nairobi-Mombasa Road Rehabilitation project (Cr f<e' This component follows from the recommendations of the Roads Concession Study funded under PPIAF -4-

15 D. Road Safety Improvement. This component is designed to reduce the number of accidents and fatalities on the road network and comprises the formulation, implementation and monitoring of a three year road safety program consisting of, inter alia: (i) road safety education, (ii) public awareness campaign, (iii) public transport safety support, (iv) emergency services support, (v) enforcement of road safety regulations support, (vi) hazardous location improvement, (vii) Road Safety Unit s organizational strengthening and capacity building, and (viii) construction of five new children s Traffic Safety Parks and re-equipping the existing five Parks. E. Institutional Strengthening in the Roads Sector and Technical Assistance. This component will support government s efforts in capacity building and consolidating or promoting further institutional and policy reforms in the roads sector, including establishment of an autonomous National Highways Authority; strengthening the Materials, Research and Development Department of MORPWH (including strengthening of the Environmental and Social Management Unit)and the External Resources Department (ERD) of the Ministry of Finance; supporting the Kenya Roads Board; and conducting selected feasibility, engineering and design studies including the Mombasa bypass, development of 10 year Transport Development Plan, M&E by the University of Nairobi and project auditing. F. Support to the Kenya Airports Authority (KA.4). This component will provide support in the form of civil works, consultant services, purchase of equipment, IT support and training to improve the operations, search and rescue capacity, and the safety and security standards at the Nairobi Jomo Kenyatta Intemational Airport (JKIA), Mombasa Moi Intemational Airport (MIA), Wilson Airport, Kisumu Airport and other selected minor airports. G. Support to the Kenya Civil Aviation Authority (KCAA). This includes: (a) support to the KCAA for safety inspection, training, implementation of reforms, purchase of equipment and implementation of Global Navigation Satellite SystemlGlobal Positioning System (GNSSIGPS) en route and approach procedures; and (b) support to the East African School of Aviation for training of trainers, purchase of 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 and Communications (IMOTC). This comprises strengthening of MOTC through purchase of equipment, support to Bandari College, technical assistance and training, and includes sector studies related to maritime laws and regulations, implementation of the new transport sector policy and regional trade and transport facilitation. Annex 3 gives the results framework and the monitoring indicators related to each of the above components. Table 1 below shows the summary of the indicative costs of the project while Annex 4 and Annex 5 give respectively the detailed project description and project costs. -5-

16 Indicative YO of Component Costs Total (US$M) A. Rehabilitation of Northern Corridor B. Roadside Amenities and HIVlAIDS Mitigation C, Private Sector Participation in Road Management and Maintenance D. Road Safety Improvement E. Institutional Strengthening in the Roads Sector and Bankfinancing Bank- (US$M) financing ?A0 of Lessons learned and reflected in the project design Previous experience with road sector projects, and their implementation record in Kenya hold a number of useful lessons: Project design must reflect the intent, interests and priorities of the beneficiaries and the stakeholders to ensure ownership of the project and particularly the reform process. There must be an emphasis on capacity building of project agencies. Experience in Kenya and elsewhere confirm that sustained project impact depends less on the physical works financed and more on well-managed, well-financed executing agencies. Preparation and implementation of the project by the responsible ministries of roads and transport will ensure the integration and follow-up activities within these ministries. The decision by the Government to set up "all inclusive" Project Technical Teams to prepare and implement the project will avoid previous experiences where the focus was more on physical works and less on financial management and other institutional aspects. Explicit provision for adequate (and assured) domestic funding for maintenance must be made for project-financed infrastructure to ensure sustainability after project completion. In general, any first effort in a sector, or a sub-sector, needs to be supported by a sustained sector dialogue aimed at defining and implementing the necessary institutional and financial reforms to achieve goals and policies. Follow-up operations, appropriately timed, are required to cement the gains and extend the policy and institutional reforms which may be left incomplete by the predecessor project These lessons are particularly relevant for the Northern Corridor Transport Improvement project. The proposed public- private partnership element of the project is the first of its kind in Kenya's road sector. It aims at improving the long term maintenance environment of the roads by facilitating concessioning of selected road sections of the Northern Corridor and initiating a pilot program of long-term performance based maintenance and management of a selected sub-network of lower volume roads. Project preparation effort and project design reflect deliberate and sustained dialogue between IDA and GOK. In addition, based on prior experience, the project, through the internalized Project Technical Teams (PTT) will -6-

17 emphasize upstream implementation of reporting, auditing and accountability measures to ensure early detection and remedy of implementation problems. Moreover, the establishment of the inter-ministerial Reform Task Force (RTF) to spearhead the implementation of the reform agenda, will ensure full ownership and contribute to making the road sector more efficient and sustainable. The project has also drawn lessons from the Kenya Urban Transport Infrastructure Project (KUTIP), which was suspended after allegations of corruption and mismanagement. Lessons learned from that experience include: - Ensuring early composition of the Project Technical Teams in adequate numbers and with specialist staff covering all aspects of the project and headed, as in the case of the roads sector PTT by a Team Leader with a proven management record from a past project, such as the Nairobi Mombasa Road Rehabilitation Project; - Advance training sessions for the PTTs in procurement and financial management, and specific sensitization of all involved stake holders; - On the Bank side, extensive reviewing of the main procurement bids and related documents by: (i) the Country Office technical staff (economist, engineer, FMS, procurement, and social development), and (ii) in the Washington Office, the Task Team Leader, a procurement accredited senior consultant, and Procurement staff. The composition of project task teams both on the side of the Borrower and the Bank is all inclusive and with diverse skill mix required for this project. In addition, the project is integrated in the line activities of Implementing Agencies. 5. Alternatives considered and reasons for rejection Specific Investment Loan (SIL) versus Adaptable Program Loan (APL). A SIL is considered more appropriate for this project than an APL because the major physical investments and their implementation timetables have been well defined by the Client. The Government has requested specific assistance for improvement of the Northern Corridor, given the importance of this route to domestic and regional trade and transport and the high priority that the government has accorded it in the context of its capital investment plan and commitment to the East African Community and NEPAD for regional integration. It is expected that Bank support for the transport sector, and similarly other infrastructure sectors, will adopt a program approach in the form of a series of SILs or a follow up APL, under which a step-by-step program of stronger policy and institutional reforms will be adopted, supported by activities conducted within the Poverty Reduction Strategy framework and the Economic Recovery Program. The strengthening of the main public actors under the proposed project, deeper reforms in the governance structures for procurement and financial management, and a harmonized and coordinated approach by the Development Partners should allow the use APLs initially, followed by Sector Wide Approach to Projects (SWAP) in the future. This incremental deepening of reforms requires reasonable time in order to be done well, while the poor state of the core road network requires immediate attention since it is a major constraint to economic growth. Public versus Private Financing The Northern Corridor has the highest vehicular traffic volumes among all the major roads in Kenya and a recent study conducted by international consultants financed through a PPIAF grant (Kenya Road Concession Study by Messrs. BKS Global) established that concessioning this corridor to the private sector would be viable, but with very high toll rates. Hence a public-private partnership has been found to -7-

18 be a more reasonable approach, where the government will rehabilitate some of the critical sections of the corridor with public funds (including development partner funds) and then offer the entire corridor to the private sector to fund rehabilitation of the remaining sections and maintain the entire corridor during the concession period. The project will facilitate such public-private partnership through technical assistance, C. IMPLEMENTATION 1. Partnership Arrangements A number of Development Partners are active in the transport sector in Kenya. For example, on the Northern Road Corridor, EU is financing the reconstruction of the Mtito Andei - Sultan Hamud section (135 lun) for which the construction works began in April It is planning to finance the Mai Mahiu - Naivasha - Lanet (85 km) section. EU is also engaged actively in the Roads 2000 program along with DANIDA (Denmark), SIDA (Sweden), KfW (Germany), AfD (France) and AfDB for rehabilitation and periodic maintenance of rural roads in about 26 districts. United States of America and UK are also assisting the government to improve the aviation safety and security and in this regard, the Bank is working closely with the US Department of Transportation (Safe Skies Initiative for Africa) and DfID to ensure coordination and harmonization of our involvement and avoidance of any duplication. The Nordic Development Fund (NDF) will co-finance (under parallel financing arrangements) one of the road sections under the project and part of the road sector institutional strengthening component (support to KIU3). The different sector ministries hold regular roundtable discussions with the major Development Partners to coordinate their activities in the infrastructure sector. A joint appraisal mission was conducted with NDF (February 2004) to agree on the components to be funded by NDF and respective implementation arrangements. 2. Institutional and Implementation Arrangements Project Management There are primarily four Project Implementing Agencies (PIAS), namely, MORPWH, KAA, KCAA and MOTC. Each Implementing Agency has an empowered Project Technical Team (PTT) responsible and accountable for implementation of its respective components on a day-to-day basis in line with procedures governing project preparation and implementation relevant to each of the PIAs. A Team Leader will lead each PTT. Overall, project coordination will be by a Project Coordinating Team (PCT) comprising of Team Leaders of each implementing agency. The PCT will be responsible for overall reporting and coordination of the project and will raise any issues that may hamper the smooth preparation and implementation of the project to a Project Oversight Committee (POC). The Team Leader, Roads component (MORPWH) will head the PCT deputized by the Team Leader from MOTC. MORPWH will provide the secretariat, The POC will be co-chaired by the Permanent Secretaries of MORPWH and MOTC and will provide overall policy direction and project oversight, and resolve any issueshottlenecks that may otherwise hamper project preparation and implementation (see Annex 6). The project is an integral part of the respective implementing agency s investment program and each PTT is fully staffed by the agency s regular staff. The POC will comprise PS MOTC; PS MORPWH; representative of the PS, Ministry for Finance, Managing Director, KAA; Director General, KCAA, and Chief Engineer (Roads), MORPWH. The POC will oversee project preparation and implementation. However, as may be desirable by the two Ministries, the POC will have a much broader role to oversee the Government s transport program, For the purpose of ensuring smooth project implementation, the Government shall maintain at all times a POC, PCT and MORPWH-PTT, MOTC-PTT, KAA-PTT and KCAA-PTT during project implementation. All the PTTs shall have staff in adequate numbers with qualifications and experience satisfactory to the Government and IDA. -8-

19 As regards the roads component, which amounts to about 80% of the total project scope, the PS, MORPWH has appointed a Team Leader for the MORPWH-PTT with experience and successful track record in implementation and management of Bank financed projects. The MORPWH-PTT Team Leader will report to PS MORPWH, in consultation on technical matters with the Chief Engineer (Roads), and will manage the day-to-day activities of the road component. The members of MORPWH-PTT will include: 0 Team Leader - Principal Superintending Engineer 0 Pavementhlaterials Specialist 0 Economist'Social Development Specialist 0 2 Engineering and Design Specialists 0 1 construction specialist 0 Environmental Specialist 0 Procurement Specialist 0 Financial Specialist As for the MOTC component, the PS, MOTC has appointed the following as members of the MOTC-PTT to manage the day-to-day activities of this component. MOTC-PTT Team Leader will report to PS MOTC and the team will comprise the following members: 0 Team Leader - Principal Economist 0 Procurement Specialist 0 Financial Management Specialist 0 Maritime and Port sector specialist 0 Air Accident Specialist 0 Monitoring and evaluation specialist 0 Northern Corridor Specialist 0 Assistant to Team Leader (Economist) With regard to the KAA component, the Managing in collaboration with the PS, MOTC has appointed the following KAA-PTT members to manage the KAA component. The KAA-PTT Team Leader will report to the MD, KAA and the team will comprise: 0 Team Leader - General Manager, Engineering services 0 Deputy Team Leader - Resident Engineer 0 Electrical Engineer 0 Electronics Engineer 0 Architectural Specialist 0 Aviation Security Specialist 0 Procurement Specialist e Financial Specialist 0 Economist 0 Civil workslbuilding specialist 0 Electromechanical expert 0 Electricallelectronic inspectors For the KCAA component, the Director General (DG), KCAA in collaboration with the PS, MOTC has appointed the following KCAA- PTT members to manage the KCAA component. The KCAA-PTT Team Leader will report to the DG, KCAA and the team will comprise: 0 Team Leader (Principal, EASA) 0 Procurement Specialist: -9-

20 0 Financial Specialist 0 Senior Airworthiness Inspector 0 Superintending Engineer 0 Operations Officer 0 Economist The Terms of Reference for the PTTs, PCT and the functions of the POC are shown in Annex 6. The arrangement has been designed to ensure that the proposed project is implemented smoothly and speedily without compromising on quality, transparency and fiduciary responsibilities of the Government, and the Bank. The project teams draw on staff from various Departments of MORPWH and MOTC, KAA and KCAA as relevant and needed. The aviation sector, which also has a key component for institutional strengthening, is represented on the PCT. The parastatals involved in the various sub-components of the project, namely, KAA, KCAAlEASA will be responsible for the implementation of their respective sub-components. Because of past and on-going Bank financed projects, the Roads Department in MORPWH is very familiar with Bank procedures and will provide the secretariat for overall program coordination, On the other hand, MOTC, KAA and KCAA have not been involved in Bank financed projects for more than 10 years and therefore have limited experience with Bank financed projects. The Team Leaders for each PTT are the project anchors identified for each implementing agency and they have already started to receive training in Bank procedures to ensure satisfactory and timely project implementation. The Kenya Country Office in Nairobi has mounted a number of training sessions in procurement, financial management and disbursement to familiarize the project team members with Bank procedures. During the last CPPR (January 2004), it was recommended that the key project management positions for all Bank financed projects, be advertised and filled competitively. However, as an exception, it was agreed that the current PTTs under the project, be retained because of their past track record and current performance during project preparation and appraisal. In addition, it was agreed that the POC, PCT and PTTs will be maintained until the completion of the project. During the implementation of the project, the POC and PTTs will be maintained with staff in adequate numbers and with satisfactory qualifications and experience. The performance of the PTTs and POC will be reviewed every year and if need arises, corrective measures will be taken where performance is not satisfactory. Implementation of Institutional Reforms The project will contribute to Institutional reforms in the roads sector (private sector participation and institutional framework for maintenance), as well as the aviation and maritime sectors (setting up a functioning Civil Aviation Authority, reviewing maritime laws and their compliance with international standards). To oversee these reforms, in the roads sector, the Government has established the interministerial Reform Taskforce (RTF) chaired by MORPWH to implement policy, institutional and financial reforms that will make the road sector more efficient and sustainable. The Reform Taskforce has been established to coordinate, explicitly outline, recommend and assist in the implementation of agreed institutional and policy reforms. A similar task force was set up by MOTC to prepare the national transport sector policy for Kenya, oversee reforms in the transport sector and set up national strategies. This will ensure early involvement and ownership of key stakeholders, smooth implementation of the recommendations and minimize any possible disruptions that may ensue. -10-

21 Financial Management The PTT for each Implementing Agency will be responsible for financial and procurement management under the project. Accordingly the management of the Special and Operating Accounts will be carried out by the PTTs (in collaboration with the respective agency s accounting department) in accordance with sound accounting principles and standard guidelines acceptable to IDA. The PTTs will oversee these Accounts, verify invoices and approve payments. The PTT will also prepare all financial management reports, financial statements, payment requests, refund reimbursement requests and any other relevant documentation as required by POC and IDA. These reports will be prepared and copies submitted to IDA quarterly and will form the basis for replenishment of the Special Accounts and the operating bank accounts. The PTTs will ensure that the respective agencies financial statements are audited as required and contracting, procurement, disbursement and financial management are carried out efficiently. A11 the necessary documentation supporting project related disbursement and financial transactions will be maintained by each PTT for inspection by IDA supervision missions, Government, and independent auditors. The proposed project will be fully integrated into the activities of the MORPWH, MOTC, KCAA and KAA, and the accounting and budgeting systems will therefore be fully compatible with the Government systems. MORPWH and MOTC will both have an accountant on the project teams to handle the financial management matters (see Annex 7 for details of financial management and disbursement arrangements). Special Accounts - GOK will establish two US dollar special accounts, one each for MORPWH and MOTC, and the MOTC account will receive the proceeds of the Credit for MOTC, KAA and KCAA. The special accounts would receive the dollar depositsltransfers from the IDA main credit account. Two separate special accounts will be required owing to the distinct nature of project components and the two separate Ministries involved. Separate periodic financial reports will be prepared by each PTT. The estimated cash flow projections for each of the implementing agencies is given in the Table below: Subtotal MOTCiKAAlKCA A Total Operating Accounts - In addition, four local currency operating accounts would be opened, one each by MORPWH, KAA, KCAA and MOTC. These will form the primary source of finance for project activities and will be managed directly by the respective implementing agencies. Funds to be channeled to KAA and KCAA will be drawn from the MOTC special account. KAA and KCAA will be required to present periodic financial reports to MOTC for consolidation and reporting. Funds to be channeled to the Roads Department will be drawn fiom the MORPWH special account. As the operating accounts will be denominated in the local currency, requirements for foreign currency denominated payments will be met using the Payment Authority (PA) system, under which funds will be remitted by the Central Bank of Kenya on the instruction of the Ministries Accounting Officers

22 Project Account: A Project Account in local currency would be opened, where the government will deposit in advance, counterpart funding for the specific needs of the Components A to E managed by the MORPWH,. Counterpart Funds: The Government will ensure that the required counterpart funding for each Implementing Agency is made available at the beginning of each financial quarter, Estimated counterpart funds required during the project period are given in the table below, KCAA Total , ,177.9 Project Auditing - An independent private Auditor acceptable to IDA will be appointed by the Controller and Auditor General in collaboration with MORPWH responsible for auditing the entire project annually during the life of the project. Subsidiary Agreements - Furthermore, KAA and KCAA would be required to enter into subsidiary loan agreements, respectively for the funds that will be made available to finance airport and civil aviation related activities, in accordance with prevailing government practice. The on-lending terms and conditions will be agreed between the Government and KAA and KCAA. Retroactive Financing The credit will provide for retroactive financing of up to US$7.5 million (or SDR 5 million equivalent) of the proposed credit amount, to finance expenditures incurred before credit approval and after December 3 1,2003. Procurement Each Implementing Agency (IA) will be responsible for managing the procurement process relating to their components starting from contract documentation, advertisements, evaluation, approval process, etc. as spelt out in each PTTs TORS. As a legal requirement, the Ministry of Finance (MOF) requires countersigning of contracts above a certain threshold (currently Kshs 10 million or US$ 133,500 equivalent). This often results in delays because of duplication of checks and verifications undertaken by MOF before countersigning. Since each Ministry has an elaborate system for procurement processing, including a well established Tender Committee, in the interest of reducing delays, the MOF will dedicate a Senior Procurement Specialist for the review of the project contracts in order to expedite the countersigning.. This is not an issue,with the parastatals such as the KAA and KCAA. However, for the Roads Department, the situation is expected to improve as soon as the National Highways Authority is established. Details of project procurement arrangements are given in Annex 8. Exemption of taxes and duties: as per the letter provided by the Ministry of Finance dated March 5,2004, the Implementing Agencies will be exempted fiom paying VAT and duties. It is understood that for all locally available or manufactured or assembled goods, including those previously imported, the bid prices shall include all duties, sales, and other taxes, and for works contracts, the bidders shall be required to quote unit prices or lump sum prices that include all duties, taxes and other levies. -12-

23 3. Monitoring and evaluation of outcomeslresults The main tool for monitoring the project performance will be the results framework and monitoring arrangements spelled out in Annex 3. The main outcome indicator will be the reduction of travel time and transport cost on the Northern Road Corridor. To ensure that the results achieved in this respect will not be offset by poor performance on the other supply chain links, specific monitoring tools will also be defined to measure the performance of the Mombasa Port as well as other impediments to traffic not directly related to the road condition. This may include the average release time for transit and locally imported containers, as well as the level of Port levies for import or export containers, and total transit time through Kenya for goods bound for neighboring land-locked countries. There will be other performance and outcome indicators specially related to the socio-economic impacts and CAS objectives which will also be monitored, using the framework designed under the IDF Grant strengthening capacity for monitoring and evaluation. Results will be monitored, by a team of experts from the University of Nairobi under contract with MORPWH but working in close collaboration with the Northem Corridor Transit Transport Coordination Authority (NCTTCA). The reason for assigning this task to the University of Nairobi is to permit continuity in long term monitoring of the results and their impact on the economy. The NCTTCA has the specific mandate to monitor performance of the Northern Corridor, but it does not have the necessary resources or the manpower to do this on a continuous basis. However, engaging the University of Nairobi as a consultant, along with NCTTCA s long standing partnership with the SSATP, will ensure quality and sustainability of the monitoring function. Furthermore, NCTTCA will be able to use the performance indicators not only to inform the truckers and shippers of travel characteristics of the Northern Corridor, but also use the information to fwther improve trade and transport facilitation along the corridor. The University of Nairobi will liaise with the Ministry of Planning, which is in charge of the management of the above mentioned IDF Grant, in order to support the implementation of a global monitoring and evaluation framework within MOTC and MORPWH. 4. Sustainability The project is likely to be implemented successfully and in a timely fashion because of the early and full involvement of the key stakeholders and the project team. The timely flow of counterpart funds will be critical, but so far all indications are that the govemment is committed to funding this project in a timely manner given its high priority and regional significance. The govemment has included the project in its fiscal budget and has invested a substantial amount of resources and manpower in conducting some of the environmental, design and engineering studies, civil works and supervision of works (e.g. feasibility and design studies, Mau Summit - Kisumu 145 km and Maji ya Chumvi - Miritini (35 km) road sections; construction of alternative offices for the military from the Old Embakasi terminal; engineering and supervision for the re-organization of KIA passenger terminal and Old Embakasi airport). The benefits of the project are likely to be sustained because maintenance and management of the Northern Corridor, after rehabilitation, is to be concessioned to the private sector. Similarly, the KAA and the KCAA have made proposals to the government for retaining directly passenger service and aviation user charges respectively, which will allow them to continue to maintain the high standard of safety and security required for continuous growth in intemational air traffic. The upcoming options study for private sector participation in the aviation sector financed by a grant from PPIAF, should also lead to greater involvement of the private sector in the operation and management of airports. -13-

24 5. Critical risks and possible controversial aspects Risk To Project Development Objectives Risk Mitigation Measure Risk Rating Newly improved capacity of project roads is The Northern Corridor will be not managed well through sound traffic concessioned to the private sector for operations and control of ribbon long-term management and maintenance. development The private sector is not willing to take risks Use of Partial Risk Guarantees would be in long term road concessions and discussed with GOK performance based management KCAA is not able to recruit enough Adequate number would be hired under qualified aviation safety inspectors to meet contract with project funds till such time IASA requirements for Category 1 as inspector trainees can be recruited and clearance trained The institutional set up for security The US Transport Security administration at Kenyan Airports does not Administration has delegated a security lead to a clear distribution of specialist for one year in Nairobi, who responsibilities and fails to meet the will coordinate the re-organization of the requirements of the US security clearance airport security systems and institutional set up To component results Adequate counterpart funds are not Advance assurance from government allocated in a timely fashion followed by quarterly joint reviews with MOF, implementing agency and Bank Procurement of Contracts is not done in a Sustained training of implementing satisfactory manner agencies staff, and double check of all procurement documents within the Bank Execution of civil works contracts by poorly Strict pre-qualification criteria and qualified contractors, leading to supervision by qualified and experienced construction delays, low quality and cost consultants. overruns Competitive and reasonable bids not Extensive consultations would be held received for road concessioning and long with the private sector prior to finalizing term performance based maintenance the bid documents so as to take account contracts of their concerns and incorporate their views. Leadership and key staff of the PTTs are not Strong commitment has been obtained maintained throughout the project period from the Government at the highest levels from the start of the project ' Overall Risk Rating S M S S S M M M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), Nmegligible or Low Risk) Possible Controversial Aspects: None. -14-

25 6. Loadcredit conditions and covenants 1. Effectiveness Conditions (4 the KAA Subsidiary Loan Agreement has been executed on behalf of the Govemment and KAA; (b) (c) (d) (e) (0 the KCAA Subsidiary Loan Agreement has been executed on behalf of the Govemment and KCAA; the Govemment has opened the Project Account specified in Part C, Section 2 of the Development Credit Agreement (DCA) and has deposited therein the Initial Deposit of 90,000,000 Ksh; the Govemment has established the financial management system for the Project defined in Part C, section 2 of the DCA, in form and substance satisfactory to IDA, the KAA Project Agreement has been duly authorized or ratified by KAA, and is legally binding upon KAA in accordance with its terms; the KAA Subsidiary Loan Agreement has been duly authorized or ratified by the Borrower and KAA and is legally binding upon the Borrower and KAA in accordance with its terms; (23) the KCAA Project Agreement has been duly authorized or ratified by KCAA, and is legally binding upon KCAA in accordance with its terms; and (h) the KCAA Subsidiary Loan Agreement has been duly authorized or ratified by the Borrower and KCAA and is legally binding upon the Borrower and KCAA in accordance with its terms; 2. Legal Covenants (a) The government shall take all measures necessary to establish NHA on or about June 30, 2007; (b) For purposes of Components A and C of the Project, the Borrower shall prior to the approval of bid documents, prepare and submit to the Association: (1) an Environmental Impact Assessment (EIA), acceptable to the Association, giving details of the social and environmental status, and potential environmental risks and adverse impacts, which are specific to Parts A and C of the Project, along with proposed mitigation measures; and (2) wherever applicable, a Resettlement Action Plan (RAP), acceptable to the Association, giving details of measures consistent with the RPF, and designed to facilitate the compensation and resettlement of PAPS, including the magnitude of displacement, proposed compensation and resettlement arrangements, and budget and cost estimates, together with adequate institutional, monitoring and reporting arrangements capable of ensuring proper implementation of, and regular feedback on compliance with, the RAP; -15-

26 (c) (d) (e) (f) The Borrower shall implement: (a) the applicable RAP in accordance with the guidelines, timetable, and other specifications set forth in the RAP; and (b) the mitigation measures specified in the EL4 in accordance of the guidelines, timetable, and other specifications set forth in the EIA. The govemment shall, at quarterly intervals, replenish the Project Account by the amounts required to finance its contribution for expenditures under the Project other than those financed from the proceeds of the Credit, as shall be agreed upon between the Borrower and the Association; and ensure that funds deposited into the Project Account shall be used exclusively to finance expenditures under Parts A through E of the Project other than those financed from the proceeds of the Credit; The KAA, KCAA and MOTC will provide adequate counterpart funds in a timely manner to cover their respective expenditure requirements under the project; and The government shall cause KCAA to appoint and thereafter retain at all times during the implementation of the Project staff with adequate experience and qualifications satisfactory to the Association to manage and operate KCAA s office of aviation security oversight. D. APPRAISAL SUMMARY 1. Economic and Financial analyses (see Annex 9): The various road sections to be rehabilitated or reconstructed under the project have been studied at a detailed design level. The economic feasibility study has been done for every road section, but at different times. The economic rates of return vary from about 16 to 44 percent and the estimated NPV at 12 percent discount rate is about US$125 million for road works costing about $ million4 (representing about 66% of the total project costs). The investments in the aviation sector are required for upgrading the aviation safety and security status, They are based on internationally accepted standards and have not been subjected to economic analysis, given the non-quantifiable benefits associated with increased safety and security. Financial The total estimated project cost is US$276.5 million (about KShs billion) including contingencies, of which IDA is expected to fund about 75.0 percent (US$207 million or KShs billion), while the Nordic Development Fund will finance 5.5 percent ( about $15.23 million equivalent) and GOK about 19.5 percent (about US$54.26 million or KShs billion). All costs include indirect taxes, but do not include direct taxes such as import duties and Value Added Tax (VAT) which will be the additional responsibility of the Government. IDA will finance 75 percent of the expenditures related to civil works and percent of expenditures for purchase of goods, vehicles and consultant services, and 100 percent of training costs. Project implementation is planned to start in FY04105 and should cover a five year period. Project disbursements are expected to follow the standard bell shape curve. This will mean that project expenditures will range from a low of about US$25-30 million (KShs billion) in FY04105 to a maximum of about US$70-80 million (KShs billion) probably in FY During the peak year in terms of disbursements, GOK s counter-part funding contribution will reach about US$15 million (KShs billion). Taking into consideration the planned increases in developmentlcapital expenditures - base cost, excluding contingencies -16-

27 over the next five years, GOK should be able to meet the expected funding requirements of the project, and the two parastatals that have to bear counterpart funding (KAA and KCAA) are revenue generating entities that should meet the funding requirements (KAA is already in a position to meet them, while KCAA s requirements are minimal as shown below). However, if the increase in development expenditure for the transport sector does not materialize, there could be delays in implementing the large road component of the project. Of the four main project implementing agencies, MORPWH will be responsible for about US$46.7 million (KShs billion) in counterpart funding, followed by KAA with US$7.1 million (KSh547 million), MOTC with about US$0.27 million (KShs 21.O million) and KCMEASA with about US$O. 19 million (KSh 14.3 million). See Annex 9 for a financial assessment of the four implementing agencies. 2. Technical The road design standards being applied under the project conform to the MORPWH standards and specifications and compare well with intemational practice. Where the traffic levels are expected to exceed the generally accepted capacity of two lane roads, the sections will be widened to four lanes. With respect to perimeter fencing at airports, runway rehabilitation and extension, and terminal building reconstruction or extension, the minimum acceptable and cost effective designs are advocated conforming to local architectural and building codes. 3. Fiduciary The financial management capacities of the four primary implementing agencies, namely, MORPWH, KAA, KCAA and MOTC have been assessed and found to be generally satisfactory. After a recent suspension of procurement staff in the civil service, the government has reappointed Procurement officers in both the ministries, and KAA and KCAA now have procurement specialists within their PITS. Procurement, financial management and disbursement training sessions have been conducted at the Kenya Country Office in Nairobi for the project staff of the four agencies. A financial operations manual has been prepared by the MORPWH PIT, which will form the basis for managing project related funds and expenditures for all components of the project under the respective implementing agencies. 4. Social Key social issues relevant to project objectives are: Safeguarding in relation to social impacts of resettlement and loss of property, HIV /AIDS and its negative consequences, Road safety and overall participation of key stakeholders in this project. Safeguarding for social Impacts of resettlement and loss of property The potential social impacts may include permanent andlor temporary land acquisition and landscape disturbance, disturbance of roadside vendors and in very few cases loss of personal property. No cumulative impacts are anticipated at this point. The Resettlement Policy Framework has been prepared and submitted to the Bank. The framework provides and clarifies the key principles underlying mitigation and compensation to local communities and others who will be adversely affected by relocation or loss of property due to the road works and in general for the affected persons. This framework outlines how the affected people will be compensated for loss of wages, loss of assets at replacement costs and also given the opportunity to share project benefits. All identified cases of relocation enumerated in the RAP will receive assistance on resettlement. -17-

28 The Borrower, with the assistance of a Consultant, has prepared, on the basis of the Resettlement Policy Framework, Resettlement Action Plans (RAPS) for all road works contracts. The Resettlement Policy Framework has been reviewed and cleared by the Bank and disclosed to the public in accordance with Bank guidelines ( January 14,2004 to the Infoshop). The RAPS will be reviewed and cleared before commencement of any road construction. Bidding documents for all civil works will be based on the Bank models and will include the necessary provisions for temporary resettlement as well as chance finding of archeological items or cultural properties. In addition to the above measures, the project has a roadside amenities and social and economic enhancement component (including HIVlAIDS mitigation) to support improvement of livelihoods of the communities around the Northern Corridor. This component will provide facilities that will encourage the long distance drivers to stop and rest between long driving spells. The component will also spur social and economic activities that will benefit the local communities as well. A program of education will accompany the provision of these facilities so that the local communities are aware of and can participate in, own, manage and protect the assets that are realized from this development. The corridor also presents opportunities for the local communities to be involved in road works through provision of manual and skilled labor where appropriate, and especially when the construction commences (see Annex 10 on Social Safeguard procedures). HIv/AIDs HIVlAIDS presents a major social issue which is in a crisis situation in Kenya today. The project will provide US$1.6 million for programming HIVlAIDS interventions within the framework of the National Kenya Government HIVlAIDS Strategic Plan and in collaboration with the International Federation of Transport Workers, the Kenya Truckers Association and the National HTVlAIDS Control Program. These interventions will bridge the gaps in needs that exist along this Corridor, given the local communities are in constant danger particularly along the rest stop areas, and will enable the implementing agents to be linked with national programs (including Bank hded MAP) to ensure sustainability. A Gender responsive program of intervention will ensure coverage and involve: Capacity building for roads and public works stakeholders along the transport corridor Mobilization of truckers and their transport associations, local communities at stopover points to prevent and control HNlAIDS and its impacts Dissemination of Gender appropriate HIVlAIDS information and services such as condom distribution, Voluntary Testing, as well as management of the Sexually Transmitted Infections Gender responsive interventions aimed at dealing with risky factors and behaviors among vulnerable and risky target groups such as the truck drivers and commercial sex workers along this route, A comprehensive monitoring and evaluation framework with measurable indicators will be developed that will help determine progress and achievement in the proposed intervention for both men and women. Road Safety A key objective in this project is the improvement of road safety for road users as well as roadside communities. Safety issues are a major concern in Kenya that claims a total of nearly 3000 lives annually. To deal with this issue, attention will be given to increasing community awareness of road safety through information provision and education of adults as well as children. The road safety component will provide for increased number of and improved traffic safety parks and conduct public awareness campaigns on -18-

29 road safety aimed at reducing accidents, fatalities and severity of injuries as well as property damage which have been the main features of the Northem Corridor in the past. The design of the project will include widening of the existing road in critical places to allow for bicycle paths and pedestrian side walks to enhance safety in selected areas. Community Participation Community participation approach will be adopted to increase interest and awareness of local communities on transport and road issues and more appropriately on issues along the corridor that may affect their lives positively or negatively. Stakeholder forums with women groups, farmers, local government, central government associations of business community, individual farm units, school and health facilities personnel, parent-teachers associations at all levels will be held. Town hall meetings will be conducted where same information will be given to all stakeholders and their opinions sought on issues of provision of amenities, resettlement plans and their implementation including matters of compensation. Key indicators for monitoring and evaluation of the social impacts The following indicators will be considered for monitoring the social impacts: 0 Increased condom distribution in numbers among road users and communities along the corridor 0 Number of ACTS registered and facilities along the corridor 0 Reduced travel time to facilities as a result of improved access 0 Improved sanitation in the road side markets 0 Reduction in road accidents 0 Increased dialogue and participation by private sector (particularly at the local levels) and local communities in provision of roadside services and in road maintenance activities 5. Environment The project is a category B for environment. The potential environmental impacts may include: soil erosion and disturbance of water flows, water pollution, traffic disruption, noise, gaseous and dust pollution, and disturbance of flora and fauna. Environmental assessments (EA) for the five road sections along the Northem Corridor have been reviewed and cleared by the Bank and disclosed to the public, both in the country and in the Bank's InfoShop (January 14,2004). The EA and the RAE' for the Airport North Road improvement component will be prepared during project implementation, along with its design and submitted to the Bank for its clearance prior to execution of works. Any other infrastructure rehabilitation that will take place during project implementation that has not already been subjected to the environmental and social impact assessment, will be subject to the same safeguard policies and procedures which include EAs and RAPS to be prepared, approved and disclosed prior to execution of works. An Environmental Unit in MROPWH was established in The Unit is staffed with one Senior Environmentalist seconded from NEMA, where she has had access to consultants and other professionals for the various activities. To date, the Unit has undertaken environmental sensitization workshops for engineers in four provinces. It has also carried out environmental assessments for various road projects, Monitoring and ensuring that mitigation measures, as they relate to project environmental and social impacts, are properly and timely implemented, is paramount to the success of the project. It was agreed that the responsibility of the Environment and Social Management Unit (ESU) of the MORPWH needs to -19-

30 be strengthened in order to effectively carry out their mandate. The project should facilitate the M&E process through contractual agreement and liaison with the Ministry of Environment and Natural resources, the National Environmental Management Authority (NEMA), Ministry of Land and Settlement and other relevant institutions - in charge of handling project social impact issues - which will provide the technical backstopping for monitoring of complex mitigation issues. The ESU will submit quarterly reports on the status of and progress on the implementation of mitigation measures, as recommended by the EMPs andor RAPS, the PTT, MORPWH and the Bank. The Unit has not yet set up an environmental management system where EAs and EMPs are routinely monitored. The Unit will set up such a system, to be assisted under the project (proposed structure and responsibilities, see Annex lo), and be responsible for ensuring that all the EAslEMPs for the proposed road project are monitored and supervised in accordance with the recommendations. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPIBPIGP 4.0 1) [x 1 [I Natural Habitats (OPIBP 4.04) [I [x 1 Pest Management (OP 4.09) 11 [x 1 Cultural Property (OPN , being revised as OP 4.11) E l [x 1 Involuntary Resettlement (OPIBP 4.12) [x 1 11 Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I Ex 1 Forests (OPIBP 4.36) [I Ix 1 Safety of Dams (OPIBP 4.37) [I Ex 1 Projects in Disputed Areas (OPIBPIGP 7.60)* E l [x 1 Projects on International Waterways (OP/BP/GP 7.50) I:] [x 1 Safeguard Screening Category s2 Environmental Screening Category B Safeguard Studies to the InfoShop sent on and made public Policy Exceptions and Readiness The project does not require any exceptions from Bank policies. Regional criteria for readiness for implementation: Financial management staff have been identified. Project staff and consultants have been mobilized. Counterpart fundsfbudgets have been estimated and Government has committed itself to providing them in a timely fashion. Tender documents for first year s procurement - Nearly 70% of all road works procurement documents have been prepared and pre-qualification documents for four road sections have been reviewed and cleared by the Bank. The contract for perimeter fencing of KIA is close to being awarded. Disclosure requirements - EAs and the Resettlement Policy Framework were sent to InfoShop on December 26,2003 and made public on January 14,2004. Land acquisition plans - RAPS for each contract have been prepared by a consultant in accordance with the Resettlement Policy Framework and submitted to the Borrower for review. * By supporting the proposed project, the Bank does not intend to prejudice thefinal determination of the parties claims on the disputed areas -20-

31 The Transport System in Kenya Annex 1: Sector Background KENYA: Northern Corridor Transport Improvement Project Kenya has a comprehensive multi-modal transport infrastructure system of roads, railways, maritime transport, and pipeline transport and air transport networks. The heaviest concentration of transport facilities is along the Northern transport corridor from the port of Mombasa through the capital city, Nairobi, continuing on to the western region and to the KenyaAJganda border. Road traffic along the Northern Corridor averages about 2,500 vehicles per day and as much as 5,000-10,000 vpd closer to Mombasa, Nairobi and Nakuru. The railway network is about 1,920 km. The main line connects the Mombasa port to Nairobi and continues to the Uganda border. It carries about 2.4 million tons per annum, with a potential to carry double that amount. The total road network is about 194,000 km long, of which, about 63,000 km of classified roads. Class A, B and C are under the Ministry of Roads, Public Works and Housing (MOPWH) and about 1 16,000 km of local authority roads are under the District Roads Committees (DRCs) and Urban Councils. The balance of the road network represents special purpose roads, such as those in the national wildlife parks. Primary responsibility for the other transport infrastructure systems is vested in four autonomous parastatal entities: the Kenya Ports Authority (KPA), Kenya Railways Corporation (KRC), Kenya Airports Authority (KAA) and Kenya Pipeline Company (KPC). Government regulation of the transport sector is minimal and market forces are generally the basis for traffic allocation. Road transport, which is almost entirely run by the private sector, dominates the overall transport sector except for heavy cargo and petroleum products, which move largely by rail and by pipeline. The road transport industry is competitive and relatively efficient. Bus and mini-bus (matatu) transport modes dominate the fare paying passenger transport market and, like truck transport, are largely run by the private sector. The overall contribution of the transport, storage and communication sub-sector to the GDP has been estimated at about 8% in recent years. The Kenyan transport system is not only essential to its domestic economy but also plays a very significant role as a transit network for the neighboring countries in the Eastern Africa region. Almost 90 percent of the Ugandan trade with countries outside the East African Community area passes through the Northern Corridor, as well as most of the bilateral trade with Kenya, which represents 30 percent of Ugandan imports. Rwanda and to some extent Eastem Tanzania, Eastem Burundi, Eastern DRC and Southern Sudan also use the corridor. Transit traffic generates foreign exchange earnings of about US$70 million annually for Kenya. Transport was not a major constraint to Kenya's economic growth until about the mid-1980's and Kenya enjoyed a higher standard of transport infrastructure and lower transport costs than most other countries in the region. However, the transport system has suffered from under-investment, inadequate maintenance and inappropriate policy environment for many years, to the point that it now represents a serious impediment to economic growth. The prospects for expanding Kenya's traditional exports are limited. The GOK's current economic reform program recognizes that export oriented nontraditional commodities, particularly manufactured goods, must lead future growth. The quality of Kenya's land transport system is inadequate to support such future growth and the diversification of production and exports. Resulting transport costs are extremely high, and the reliability of service delivery is low. -21-

32 Road Sector Recent Developments in the Sector Kenya has in the last decade introduced a number of important initiatives. The notable achievements include: (i) establishment of the Kenya Roads Board (KRB) which provides an opportunity for improvements in policy direction, expenditure priorities and accountability; (ii) substantial increase in domestic funding for road maintenance from the fuel levy which generates about US$l 10 million annually; (iii) development of rural roads and labor based construction strategy (Roads 2000 Strategy); (iv) decentralization of the flow of funds and decision making that has enabled funds for road maintenance to reach every district of the country; (v) significant improvement in axle load control; and (vi) setting up of two national task forces to draw up a national transport policy and prepare a plan of action for institutional reforms in the road sector. Size and Condition of the network The available data on the road sector shows that Kenya s total network is about 194,000 km as detailed below. The exact classified length will be known on completion of the road inventory and condition survey that is ongoing under funding from the Nairobi-Mombasa Road Rehabilitation project (Cr, KE). Preliminary data shows that about 57% of the classified road network is in good and fair condition, and the remainder 43% is in poor condition. Road Type Paved Gravel Earth Total Classified roads 8,937 27,181 27,172 63,290 Urban Roads 2, , ,525 County/Council 7 116, ,261 Total length (km) 11, ,644 27, ,079 Funding Gap in Road Sector Capital Expenditure. The sector is currently only funded by the revenues of the fuel levy for an amount totaling $1 10 million annually. Capital expenditure by government and from development partners has been almost nonexistent for the last 8-10 years. ~uintenunce Funding: Estimates of the annual funding needs for the maintenance (routine and periodic) of classified road network average around US120 million (Ksh 9.4 billion) per annum and for urban roads is estimated at about US$14 million (Ksh 1.1 billion). Overall, between US$l20 - $130 million is needed for maintenance once the network is maintainable. This is not greatly different from the present fuel levy revenue. Capital Funding: About US$I billion (Ksh.80 billion) is required to rehabilitate the network and clear the backlog, and additional funding would be needed to upgrade the heavily trafficked unpaved roads. It is very unlikely that GOK can provide funding of this magnitude within a reasonable period of time. To bridge the gap, other sources of funding will be needed, and donor support seems critical in this respect. Bridging the Funding Gap: Road users are the logical source for the funding of maintenance as, otherwise, they will pay through deteriorated roads and higher vehicle operating costs. Such funds can also be used for the rehabilitation and upgrading of the road network once adequate maintenance is assured. If government and external funding is not adequate for capital expenditures, an alternative is to use private sector finance, serviced either directly through tolls or through an increased fuel levy over and above what is required to cover maintenance expenditure. Long-term performance based rehabilitation and maintenance contracts can be funded through an agreed schedule of annual payments, or on the basis of shadow tolls. Private sector capital funding may appear expensive, but it can be viable on heavily trafficked roads. The Government has therefore to make strategic choices in programming its -22-

33 maintenance, rehabilitation and construction works in order to ensure the most efficient use of scarce resources. Interventions on the ~ o~hern Corridor Road Link As for the Northern Corridor road link rehabilitation, Government, together with development partners, has funded or is considering funding rehabilitation of critical sections. East of Nairobi, the Mombasa- Miritini (22km) and Maji ya Chumvi-Bachuma Gate (48km) sections have been repaired with funding from the fuel levy. This has substantially improved the road condition. Bachuma Gate-Mtito Andei (1 55km) has recently been reconstructed with funding from IDA (Nairobi-Mombasa Road Rehabilitation Project) and is in a good condition, Reconstruction works for the Mtito Andei-Sultan Hamud (135km) begun in April 2003 with funding from EU. These interventions leave the Maji ya Chumvi-Miritini (35km) and Sultan Hamud-Nairobi (81km) sections on the east of Nairobi, which are in a poor condition and require immediate attention. The feasibility and design studies for these sections have been completed with funding from the Nairobi-Mombasa Road Rehabilitation project. To the west of Nairobi, the Nairobi (Westlands)-Limuru section (32 km) urgently requires periodic maintenance. Limuru-Uplands (12 km) section has recently been rehabilitated through fuel levy funding. On the Uplands-Longonot section (40 Km), a contractor is currently undertaking repairs with funding from the fuel levy. Longonot-Naivasha section (25 km) is in a good condition after rehabilitation through fuel levy funding a year ago. The section from Naivasha to Lanet (55 km) is in a very bad condition and requires reconstruction. EU has proposed funding its reconstruction. Tenders are expected around JunelJuly The Lanet-Timboroa Section (97 lan) requires reconstruction. The feasibility and design studies have been completed with funding from the Nairobi-Mombasa Road Rehabilitation Project. The Timboroa-Eldoret-Malaba border section (1 83 km) requires rehabilitation of some climbing lanes and repairs for most of the road carriageway. Meanwhile the Mau Summit-Kisumu-Yala-Busia border (295 km) section requires rehabilitation for the stretch from Mau Summit to Yala. Yala-Busia stretch requires only periodic maintenance. Feasibility and design studies for the Mau-Summit-Kisumu section (140 km) are being undertaken in-house by the Roads Department. Government s strategy is to rehabilitate a significant portion of the Northern Corridor using public and external partner funds and leveraging this with private sector funding for the remaining sections by concessioning the entire corridor in three separate segments. Effective Road Maintenance DeZiveiy The Main Road Network The comprehensive force account system has collapsed but no systematic replacement has been introduced. Periodic maintenance is contracted out while recurrent maintenance is undertaken by a combination of force account, using casual labor, and single activity contracts. Comprehensive maintenance contracts have been discussed for several years but have yet to be implemented. Rural Roads: A comprehensive program, Roads 2000, was designed in the late 90 s. However, only 14 districts out of 70 were covered by the year It is acknowledged that this strategy has been too much donor-driven in the past and needs appropriation and leadership. Good leadership is needed to provide coordination, standardization of documentation and reporting, and possibly also develop a basket of funds approach to funding. Roads 2000 could also be promoted as the appropriate technology for the Kenyan environment and rural economy. Increased donor funding is of course important, but relaunching of Roads 2000 needs an inclusive approach, under which even those districts without donor funding would be covered. -23-

34 Institutional Reforms Eflective Road Implementing Agencies: Through the KRB Act 1999 and the Road Maintenance Levy Fund 1994, Kenya has put in place a very effective funding arrangement for road maintenance, The KR.B has been given overall responsibility for managing the Fund and advising the Govemment on policy issues. While it should develop the sector strategy, KRB is neither a detailed planning nor an implementing agency. Its role is to review and approve work plans developed by the implementing agencies, in conformity with the strategic priorities and the Road Fund financial position, and then to monitor their efficient and cost-effective implementation. The responsibility for detailed planning and subsequent work implementation rests with the implementing agencies. The KRB and the implementing agencies must agree on a separation of powers, functions and responsibilities. The effective funding arrangement must therefore be complemented by effective implementing agencies. Kenya needs to determine the number of agencies required and how they should be established. An Inter-ministerial Task Force has been formed to address this issue and assist in its implementation. IDA provides some technical assistance to the Reform Task Force under the Nairobi-Mombasa Road Rehabilitation Project to enable it to achieve its objective. Sector Ownership and ~esponsibilities: The total road network in Kenya is very large, although the size of the engineered road network is rather small. Much of the network has minimal traffic (less than 500 vehicles per day) and serves very small communities and comprises tracks rather than roads. For the effective maintenance of such an extensive network it is essential that responsibilities are devolved to where ownership is perceived. Prior to the KRI3 Act, responsibilities were clear - central government was responsible for the classified road network and local authorities were responsible for the rest. In reality, past inadequate funding resulted in maintenance being undertaken on a limited part of the classified road network, and on an extremely small part of the unclassified network. Under the new arrangements, central government is responsible for the maintenance of a much smaller network of national roads, while the District Road Committees (DRCs) have responsibility for the rest of the network. DRCs, however, have not yet completely taken over this responsibility. Moreover, within the DRCs, priorities are established on a constituency rather than district basis, and, in this process, important intra and interdistrict roads often receive little priority. Meanwhile, local authorities still perceive ownership of parts of the network and continue to allocate some of their funds (admittedly limited) for road maintenance and improvement. For urban roads, the government has recently recognized six major municipalities as designated road agencies that will receive funds from the Road Fund and be responsible for maintaining the city roads in their jurisdiction. Private Sector Involvement In recent years and following the KRB Act, the private sector has been playing a much larger role in road management through its involvement in the KRB and the contracting out of maintenance operations, It however has not expanded its role into undertaking long-term performance based maintenance and management of road sub-networks, nor has it played any significant role in financing the Build-Operate- Transfer (BOT) type of road projects. Recent studies undertaken with a PPIAF grant to the Government of Kenya have indicated, however, that it would be possible to concession the entire main paved road network to the private sector through concessions (directly tolled or through shadow tolls). This could transform management of the road sector. However, the private sector is unlikely to finance all the rehabilitatio~recons~ction costs under maintenance concessions and might well take a very conservative view toward country risk, especially regarding the payment of shadow tolls. Donor assistance is evolving and can have a key role for mitigating the risks of private sector concessions. Partial funding is possible for construction,' rehabilitation and new instruments have been designed through the provision of partial risk guarantees to mitigate the risks of Government default. New models of road management will involve challenges for both the private and public sectors. -24-

35 Road Safety Road accidents (crashes) result from the interaction of human behavior, vehicle condition and road conditions, all of which can be influenced by public policy if effectively implemented. With nearly 3,000 deaths on the roads annually for 30 million inhabitants, Kenya has one of the worse records in Afiica. Reducing the overloading of buses and matatus (mini-buses), enforcing speed limits, and checking tire condition could have a dramatic impact on the number of road fatalities (vehicle passengers account for 40% of road deaths). While enforcement of traffic laws would be the most cost-effective way to reduce accidents, other interventions have been identified that can make a contribution to the reduction of road deaths and injuries, such as: (i) preventive engineering and hazardous spot improvement programs; (ii) road marking; (iii) separation of pedestrians and vehicular traffic; (iv) introduction of smart cards to reduce congestion and control bus and matatu schedules; (v) privatization of vehicle inspection; (vi) closer coordination with the health sector to provide faster response and care to the injured; and (vii) introduction of traffic education in all schools. To this end, the first steps toward a coherent road safety program would be: (a) political will to tackle the problem; and (b) establishment of a Road Safety Agency or similar institution, bringing together the key public and private sector stakeholders to develop and implement annual action plans. Regional Gateways Port of Mombasa The port of Mombasa is Kenya s only intemational seaport and handles cargo not only for Kenya but also for Uganda, southem Sudan, Rwanda, Burundi and DRC. It handles 11 million tons a year with imports exceeding exports 4: 1. However, the annual growth rate in has only averaged about 1.4 percent. Container traffic has increased from 50,000 to 300,000 TEUs in the same period. It has now reached 385,000 TEUs in Nearly 25 percent of the traffic is transit traffic, largely destined for Uganda (about 80 percent). Dar-es-Salaam has now become competitive, despite the longer distance from Uganda and transshipment over Lake Victoria, largely due to the privatization of the container terminal in Dar-es-Salaam. The key issue facing Mombasa Port is how to raise the level of service to internationally competitive standards. The low levels of service manifested in dilapidated navigational systems and marine services; conventional berths and handling equipment in disrepair; low levels of container productivity - handling about 11 containers per hour, or about half the usual international norms; and inefficient operations (including inadequate inter-administration coordination, specially with Customs). Inadequate safety and security measures are additional issues, and congestion for containerized cargo is very high given the dramatic rise in container traffic in Financially, the port has performed relatively well, with operating surpluses during most of the years in However, it has large contingent liabilities for back taxes and penalties, pension payments, and capital investments needed to improve the level of service. Staff costs account for about 50% of total operating expenditure. A new management at KPA has introduced many improvements in Port operations and security since 2000, and a comprehensive strategy has been designed. Introducing private sector management and financing into the Port sector is one of the options contemplated to improve the port s performance. The government is contemplating several proposals affecting container terminal, conventional berths, oil terminals and marine craft. However, the Government and the KPA need to quickly agree on the strategy as regards container operations investment and management to avoid complete breakdown of the operations. -25-

36 Improving the Northern Corridor Competitiveness The Mombasa-Nairobi-Malaba road is the main trade corridor for most of the Kenyan industrial centers and for the neighboring countries, especially Uganda. A comprehensive institutional set up was designed and established in 1985, in the form of the Northern Corridor Transit Transport Coordination Authority, to improve the flow of passengers and goods traffic. However, despite some improvements in customs procedures and harmonization of documents, corridor operations remain characterized by high transport costs and long transit times. For example, the cost to deliver a container from Mombasa to Nairobi is equivalent to its shipping cost from Europe to Mombasa and the cost to deliver the same container to Kampala equals three to four times the shipping cost from Europe to Mombasa. Similarly, the average dwell time of containers at the Port exceeds 10 days and the transit time to Kampala is more than 3 to 4 days. Factors contributing to such poor performance include inadequate arrangements between administrations at the Port, lengthy police escort system, and excess of various controls en route and at borders, poor infrastructure and costly insurance schemes to prevent smuggling. Most operators describe the current poor state of several sections of the Northern Corridor as one of the main impediments to smooth flow of traffic and a major factor resulting in high operating costs. Airports and Aviation Kenya has three international airports - Nairobi (Jomo Kenyatta International Airport - JKIA), Mombasa (Moi International Airport - MIA) and Eldoret. The Kenya Airports Authority (KAA) is responsible for managing all large and small airports. JKIA has the potential, and is heading towards becoming a regional hub. Currently Rwanda, Burundi, Tanzania and Uganda are depending at least partially on Nairobi for their connections to the rest of Afica and the world. The JKIA already operates over its design capacity with 3 million passengers against the design capacity of 2.5 million. Flowers and horticulture exports are becoming increasingly important (more than 100,000 tons of cargo handled in JKIA in 2002) and Kenya Airways is profitable and becoming a major airline in the region after being privatized. Domestic air services have significantly improved after liberalization and the General Civil Aviation remains vibrant under private sector operation. The KAA needs to review its management structure for large and small airports with a view to involve greater participation of the private sector. The government has obtained a grant from PPIAF to review the options for Private sector participation in management and development of airport infrastructure and services. The assignment will be carried out in JKIA needs to be remodeled and upgraded to meet the international security and safety standards set by ICAO and also meet the United States FAA safety and TSA security clearance requirements, which would allow direct flights to the US. The sustainable financing of the sector as well as private sector involvement would also be key factors for JKIA to allow it to cope with the increasing traffic. Currently, KAA and KCAA do not benefit directly from all the revenue generally attributed to Airports and Civil Aviation Authorities to cover the service they provide. The Civil Aviation Act was amended in late 2002 to comply with ICAO international safety standards and the Kenya Civil Aviation Authority (KCAA) was established at the same time. The main challenge facing this Authority is to ensure that airlines meet the ICAO operations standards and to get the FAA clearance to allow KCAA-supervised carriers (including Kenyan Airways) to fly to the USA and to ensure the safety levels required for smooth implementation of the Yamoussoukro decision on air transport. Liberalization can only take place if the technical regulator is able to ensure that airlines comply with safety standards. KCAA also needs to upgrade its air navigation systems, The KCAA is involved within the East African Community (EAC) framework in a regional project supported by the US -26-

37 Department of Transportation, whose goals are to secure compliance with ICAO standards and provide economies of scale through sharing of human resources. This project may lead to a common regional safety agency. Government Strategy. The newly elected Kenyan administration has undertaken a review of its transport strategy and is moving fast to complete a comprehensive framework for its transport policy, with dedicated government task forces. Even if no strategy existed as such during the last few years, the current government is however, building on some significant achievements of the late 90 s and is engaged in making in-depth analysis of the sector constraints with the assistance of its development partners. It has undertaken a strategic review of opportunities for public-private partnerships in infrastructure, which were presented and discussed at a high level conference funded by PPIAF with representatives of the private sector and development partners. Some of the recent achievements include: 0 enactment of the KRB Act and the dedication of significant hds for road maintenance; 0 the definition of a thorough rural roads strategy (Roads 2000); 0 operational improvements at the Port of Mombasa - a consequence of the Management change in 2000; 0 the enactment of the Civil Aviation Act (Amendment) of 2002 and the establishment of Kenya Civil Aviation Authority (KCAA); 0 successful Public Private Partnerships including the concessioning of Grain bulk cargo handling in Mombasa Port, Cargo handling in Nairobi Airport and the privatization of Kenya Airways. Road Sector In the roads sector, the current administration has already adopted most of the conclusions of the workshop on public private partnerships and is working on appropriate legislation to allow concessioning of road assets to the private sector and mobilizing additional resources from the capital markets. The strategy of the government is to ensure adequate funding of road maintenance using the road maintenance fuel levy channeled through the KRB. The long-term goal is to outsource most of the activities related to road design, construction and maintenance to the private sector. With regard to institutional reforms, it has set up a high level task force to review the current set up of the Roads Department and make recommendations for modernizing the institutional structure, including setting up of an autonomous roads agency as appropriate for the efficient and effective delivery and management of roads in Kenya. The KRB has engaged consultants to develop a long-term road sector strategy, which will include optimal multi-year plans for road development and maintenance and their effective implementation. Transport Sector In the transport sector in general, the government has set up a National Transport Policy Task Force, inclusive of all parastatals as well as public and private stakeholders, in order to define a comprehensive sector strategy. The general principle of this strategy has been prepared and submitted to the MOTC in February Railway Sector In the railways sector, the government has engaged IFC as the transaction adviser to assist with the concessioning of the Kenya Railways. It has also engaged international consultants (under a PPIAF grant) to develop an appropriate legal and regulatory framework for the railway sector. Studies have indicated minimum track and rolling stock rehabilitation needs amounting to US$30-40 million. Since Uganda is also in the process of concessioning its railway, the two governments have agreed to set up a joint committee to arrange for joint concessioning of the two railways. -27-

38 Aviation and Ports Sectors In the aviation and ports sectors, the government's strategy is to continue with the privatization and liberalization policies. The government has taken the first step in renewing the policy reforms by appointing a new management in KAA. The goal for the K IA (Nairobi) is to enhance its safety and security status to ICAOlStandards and Recommended Practices (SARPS) Category 1 and meet the US FMTSA Category 1 requirements, which would allow direct flights to the US. The govemment is contemplating privatization and public-private partnerships in key operations and services at the airport in order to increase efficiency and promote tourism. With regard to the Mombasa Port, the KPA's strategy, pending government approval, is to introduce private sector management and financing so as to improve the port's performance. The government is contemplating several proposals affecting container terminal, conventional berths, oil terminals and marine craft. Of special concern to the government is to raise the level of security and safety at the port, for which support from the SSATP Program has been sought. Studies are already underway to fine-tune the regulatory framework to improve market efficiency and implement the new worldwide security requirements in the sector. A comprehensive corridor approach is also envisaged at the regional level with the support of the Northern Corridor Transit Transport Authority, of which Kenya is part. The GOK also supports at the regional level the implementation of an EAC initiative for pooling of airworthiness inspectors, and deepened cooperation with the other member states' Civil Aviations. -28-

39 Annex 2: Major Related Projects Financed by the Bank andlor other Agencies KENYA: Northern Corridor Transport Improvement Project Major related projects financed by the Bank andlor other development Agencies (completed, ongoing and planned). Sector Issue Project Latest Supervision (PSR) Ratings (Bank-financed projects only) Bank-financed High transport costs along the Mtito Andei -Buchuma Gate section (150km) of the Nairobi-Mombasa road. High transport cost in major towns Other development agencies European Union (EU) Maintenance of rural roads through the Roads 2000 Program: (i) EU - 8 districts, on-going. (ii) DANIDA - 6 Districts ended in 2002 (iii) SIDA - 2 districts on-going and - 8 districts under consideration (iv) African Development Bank - 6 districts on-going (v) KfW - 5 districts on-going (vi) French Development Agency - 4 districts on-going. Nairobi - Mombasa Road Rehabilitation Project (PO Cr KE) Urban Transport Infrastructure Project (ISUTIP-Cr KE) Reconstruction and strengthening of Mtito hdei-sultan Hamud (1 35km) funded by EU. Construction works begun in April 2003 Reconstruction of the Mai- Mahiu-Naivasha-Lanet section of the Northern Corridor (under consideration for funding by the EU) Implementation Development Progress (IP) Objective (DO) S S U U IPlDO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) -29-

40 Annex 3: Results Framework and Monitoring KENYA: Northern Corridor Transport Improvement Project Results Framework Increase efficiency of road transport along the Northem Corridor Enhance aviation safety and security to meet international standards. Promote private sector participation in the management, financing and maintenance of road assets I Component One (A): Contracts awarded and construction satisfactory on 373 km of selected priority road sections along The Northern Corridor and 8 km of the Airport North Road. Component Two (B): (i) Effective functioning of bus and truck stops at key locations and satisfactory construction and utilization of booths for sale of local produce and products by roadside communities. Outcome Indicators Freight and passenger travel time by road from Mombasa to Malaba reduced by 25 percent KCAA cleared for Intemational Aviation Safety Assessment (IASA) Category 1 safety status and K IA cleared by the United States TSA for direct flights to/from US Airports. One long term performance based road management and maintenance contract awarded to the private sector and effectively under implementation One segment of the Northem Corridor offered for concessioning to the private sector Results Indicators for Each Component Component One (A): Average roughness less than IRI 3.0 mkm on completed sections of the project roads 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 of individual sections of the road Lead to reduction in travel times - if not, then identify causes and implement corrective measures. Adjust safety and security interventions to ensure compliance with ICAO and US FANTSA requirements. If pilot program of long-term performance based contracts and concessioning to private sector is successful, then scale up with more road sections, Use of Results Monitoring Component One (A): Check construction quality and performance of the contractor and take remedial actions as necessary Component Two (B): (i) Re-assess location of roadside facilities if not adequately utilized by road users and local communities -30-

41 (ii) Health kiosks constructed and HIVlAIDS 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 of the road sector improved (ii) At least 70% of road users and local persons surveyed become aware of or make use of the ACT and other facilities for HIVlAIDS 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): National Highway Authority established and filly functional (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 Component Six (F): Security improved at major airports Component Seven (G): Aviation safety and air navigation standards improved Component Eight (H): Compliance with IMO conventions and NCTA treaty All feasibility and design studies carried out satisfactorily Component Six (F): KIA meets ICAO and US TSA security requirements. Component Seven (G): KCAA meets ICAO and US FAA Category 1 safety requirements Component Eight (H): IMO and TTCA certify compliance Component Six (F) Required for obtaining clearance for direct flights to USA and code sharing with US airlines Component Seven (G): Required for obtaining clearance for code sharing with US airlines Required for overall improvement in the transport supply chain in the Northern -3 1-

42 Arrangements for Results Monitoring Outcome Indicators 1. Freight and passenger travel time by road from Mombasa to Malaba reduced by 25 percent Baseline Truck 24 hours Bus 18 hours Car 14.5 hours YR1 YR2 -.. YR3 YR4 18 hours 13.5 hours 11 hours YR5 Data Frequency and Reports Quarterly progress report ollection and 1 Data Collection Instruments Field Survey porting Responsibility for Data Collection Supervision Zonsultant 2. KCAAand KIA (Nairobi) respectively cleared for FANIASA Category 1 and TSA security status 100% Quarterly progress report FAA, TSA and ICAO inspections KCAA, KAA 3. Onelong term performance based road management and maintenance contract awarded to the private sector and effectively under implementation 4. Bids for concessioning of one road segment invited 100% 100% Quarterly progress report Quarterly progress report Field Supervision Field Supervision MORPWH MORPWH Results Indicators for Each Component Component One (A): Average roughness less than IRI 3.0 mlkm on completed sections of the project roads Less than 20% of project road length 50% 80% 100% Quarterly progress report Field measurement Supervision Consultant Component Two (B) : At least three roadside None Quarterly progress report Field inspection MORPWH -32-

43 Outcome Indicators stations and amenities constructed and functional as per designs and serving road users and local communities Baseline YR1 Ta YR2 et Values YR3 YR4 YR5 Data Frequency and Reports ollection and I Data Collection Instruments porting Responsibility for Data Collection At least 70% of road users and local persons surveyed become aware of or make use of the ACT and other facilities for HIVIAIDS campaign along the Northern Corridor None 10% 50% 70% Quarterly progress report Questionnaire MORPWH Consultant Component Three (C): Legislation enacted for private sector participation in roads Component Four (D): At leastlo% reduction in road related fatalities per annum none % Quarterly progress report Quarterly progress report Government Gazette MORPWH Annual Report MORPWH MORPWH -33-

44 Outcome Indicators Component Five (E): National Highway Authority established and fully functional Ta et Values nata ollection and 1 Baseline yr1 YR2 YR3 YR4 YM Frequency Data and Collection Reports Instruments None Legislation enacted NHA established NHA Effective Quarterly progress report Government Gazette porting Responsibility for Data Collection MORPWH All feasibility and design studies carried out satisfactorily Component Six (F): JKIA meets ICAO and US TSA Category 1 security requirements. Component Seven (G): KCAA meets ICAO and US FAA Category 1 safety requirements Component Eight (H): IMO and NCTTA certify compliance with respective treaties 20% 50% 50% 70% 100% 50% 70% 100% 70% 100% 75% 100% Quarterly progress report Quarterly progress report Quarterly progress report Quarterly progress report MORPWH Reports ICAO and TSA Inspection ICAO and FAA Inspection NCTA monitoring system MORPWH KCAA NCTTCA -34-

45 Annex 4: Detailed Project Description KENYA: Northern Corridor Transport Improvement Project The proposed project will consist of the following eight components: Project Component A - Rehabilitation of Northern Corridor: US$ million (including contingencies) This component comprises: (a) about 373 km of selected priority road sections along the Northem Corridor to be rehabilitated and strengthened to cope with projected traffic and provide efficient and reliable transport services. The proposed sections are: (i) Maji ya Chumvi - Miritini (35 km, to be funded by NDF); (ii) Sultan Hamud - Machakos Tumoff (55 km); (iii) Machakos Turnoff - Nairobi (dual carriage way, 33 km); (iv) Lanet - Timboroa (97 km); and (v) Mau Summit - Kisumu (145 km); (b) improvement, including widening of about 8 km of Airport North Road connecting the old Embakasi airport to the Mombasa highway (to be constructed as a turnkey project - design and build); and (c) consultant services for supervision of works. The total estimated costs include the costs of re-settlement and rehabilitation of any Project Affected People (PAPS) as appropriate, and mitigation of negative environmental impacts (approximately $5.O million). NDF will co-finance the civil works related to Maji ya Chumvi - Miritini road section. Project Component B -, Roadside Amenities and HIVlAIDS Mitigation: US$4.36 million (including contingencies) (a) Roadside Amenities ($2.71 million). This sub-component involves the identification and construction of proper bus and truck stops at key locations including parking areas and utilities infrastructure; construction of booths for sale of local produce and products by roadside communities; bicycle paths and pedestrian sidewalks; and any other roadside features to enhance the safety and socioeconomic impact on roadside communities and road users. Full fledged development of 3-5 roadside stations is expected along with other roadside socio-economic enhancement. (b) HIV/MDS Mitigation Measures($l. 65 million). In collaboration with the National HNlAIDS program, the International Transport Workers Federation and the Truckers Association, this subcomponent will provide for specific interventions along the Northern Corridor, including awareness and information dissemination, kiosks for provision of public health and social awareness services for HIV/NDS, distribution of condoms, strengthening of local health centers as needed, voluntary testing and counseling, and support and care for affected persons. The civil works contracts will contain appropriate clauses for HIVlAIDS mitigation measures. The program will be developed by a consultant and implemented by a locally selected NGO. Project Component C - Private Sector Participation in Road Management and Maintenance: US$10.66 million (including contingencies) This component comprises technical assistance for facilitating concessioning of a selected section of the Northern Corridor road link and initiating a pilot program of long-term performance based maintenance and management of a selected sub-network (about 300 km) of lower volume roads. The cost includes services of a consultant to prepare the bid documents, a transaction adviser, and civil works for at least three years. Project Component D - Road Safety Improvement: US$4.97 million (including contingencies) This component comprises improvement of selected hazardous locations in the road network, road safety awareness campaign, including education of children in road safety, and construction of 5 children s traffic safety parks and re-equipping of existing 5 parks. -35-

46 Project Component E - Institutional Strengthening in the Roads Sector and Technical Assistance: US$10.36 million (including contingencies) This component will support government s efforts in consolidating and promoting further institutional and policy reforms in the roads sector, enhance human resource skills through appropriate training, and finance priority feasibility, design and sector studies. The component includes: establishment and strengthening of the proposed National Highway Authority (NHA), including technical assistance to help it get started and functioning. It would include developing a corporate business plan, key operating procedures, an effective management information system, etc; support to KRB for strengthening its operations including reforming its mandate through training, conducting a road user charges study, developing an appropriate road classification method, inventory o f unclassified roads, and a review of truck traffic flows in Nairobi and their regulation (to be funded by NDF); consultant services for detailed design and engineering study of the Kibwezi-Kitui-Mwingi- Maua-Isiolo corridor; feasibility and detailed design and engineering studies of the best altemative route (road) linking lakeside northern Tanzania to Narok and widening of the access road to the Moi Intemational Airport, Mombasa; preparation of a 1 0-year transportation development plan; strengthening of the materials, research and development department and the ERD; support for capacity building and training of staff in MORPWH (including the proposed Environmental and Social Management Unit and axle load monitoring and control), the proposed NHA, ERD and KRB; consultant services for external audit; consultant services for project monitoring, evaluation and impact assessment (to be provided by the University of Nairobi working in close collaboration with the Northem Corridor Transit Transport Authority); and Selected transport sector studies, including feasibility and design of the Mombasa bypass. Project Component F - Support to the Kenya Airports Authority (KAA): US$41.54 million (including contingencies) This component will support KAA in improving the operations and security systems at four major airports and includes the following: (a) Rehabilitation of old Embakasi airport terminal including surrounding infrastructure; and renovation and re-configuration of the main terminal to enhance security at JKIA ; (b) Perimeter fencing, lighting and surveillance system at JKIA, Moi Intemational Airport, Wilson Airport, Kisumu Airport, Malindi Airport and Ukunda Airport; (c) Reconstruction of terminal building at Kisumu airport and rehabilitation and extension of its runway; (d) Renovation and reconfiguration of the terminal and upgrading of security at Wilson airport; (e) Purchase of equipment and vehicles for enhancing security, flight information system, search and rescue capacity, communications, and emergency operations centers; and (f) Training of staff for capacity building Project Component G - Support to the Kenya Civil Aviation Authority (KCAA): US$lO. 11 million (including contingencies) This component: (i) consultant services for implementation of KCAA reforms and providing technical assistance for safety inspection and training; (ii) Equipment for KCAA and the East African School of Aviation (EASA) including an Accident investigation laboratory; (iii) implementation of the GNSSlGPS enroute and approach procedures; and (iv) training of trainers. -36-

47 Project Component H - Support to the Ministry of Transport and Communications (MOTC): US$2.26 million (including contingencies) This component comprises: (i) equipment for MOTC, the maritime administration and the Bandari College, (ii) training and capacity building in procurement, project management and financial management, (iii) implementation of maritime laws, compliance with the MO conventions and set up of the new Maritime administration, (iv) support to the implementation of the national transport policy including compliance of Kenya with the Northern Corridor Treaty and (v) training of MOTC and sector staff. Miscellaneous (Incremental Project Operating Costs): US$1.83 million (including contingencies) These costs include the incremental costs of operating and managing the project, including travel, fuel, office stationery, communications and supervision costs. These costs, comprise about US$ 183,300 equivalent (or Kshs 14.1 million) per annum for MORPWH, and US$36,700 equivalent (or Kshs million) per annum for MOTC, and will be fully funded by the Government. The costs for KAA comprise about US$82,000 (or Kshs 6.3 million) per annum and for KCAA comprise about US$20,000 (or Kshs 1.54 million) per annum. ILL4 and K C M will fund the incremental operating costs from their internal funds. -37-

48 Annex 5: Project Costs "YA: Northern Corridor Transport Improvement Project Component Responsible Base Costwith Bank NDF GoK GoK Agency Contract Cost contingencies Financing Financing Financing Financing Type ($M) ($M) (SM) (SM) (SM) (Shs.M) A - Rehabilitation of Northern 1. Supervision of Works Subtotals (A) - Socioeconomic Enhancement, oadside Amenities and IVlAIDS Mitigation QcBs , I l l 3-Design & Supervision of the LTPBC Subtotals (C) QcBs

49 ~ :: 1 ComDonent I Reseonsible I Base I Costwith I Bank 1 NDF 1 GoK :ontract Cost contingencies Type l($m)l (%M) GoK Enancing (Shs.M) - Road Safety Improvement I 'Works: Road Safety Parks Consultant services: Design, supervision and safety education Subtotals 0) E - Institutional Strengthening in the Roads Sector & Technical ssist. oods, Equipment & Vehicles: Technical Assist. for the tablishment and strengthening of Feasibility, detailed design & gineering studies of the best temative route (road) linking keside northem Tanzania to Narok d widening of access road to Moi emationaf Airport, Mombasa - Feasibility and Design of I RD RD NCB I 0.50 I 0.57 I 0.42 I, I 0.14 I I I I I JBMCB ~ QCBS ~ ~ ~ 2.01 QCBS QCBS Ian and transport sector studies QCBS Capacity building and training of taff in the urouosed NHA, nitoring, evaluation and impact sessment and extemal audit )BS/SSS ,

50 Component - Support to the KAA Resoonsible -r Agency :ontract Type KAA ICB NCB NCB NCB ICB ICB ICB ICB i : 7.9: I I ~ ~ 1 ~ ~ I I I I I ICBl NCB ICB KAA ICB ICB onsultant services: pgrading Kisumu &Wilson Airpo ICBl NCB ICBl NCB QCBS I 1.65 I 1.62 I Training Project Operating Costs (KAA) ubtotals F (KAA) Training

51 ~ Component Remonsible Agency I 0.08 I 5.93 KCAA QCBS H - Support to the MOTC Goods, Equipment and Vehicles: 1-Support to New Maritime Authority for IT 2-Strengthening of MOTC in IT ICB 10.1s I 0.17 ICB I 0.20 I Support in enhancement of maritime training capacities for ICB compliance with IMO STCW95 convention Consultant services: MOTC I-Support for Implementation of maritime laws and Maritime I I I 0.2s 0.22 I I I ompiiance with internationai onventions and the NCTA treaty QcBs QBS reject Operating Costs (MOTC) Subtotals H (MOTC) I I 0.83 I 1 I COMPONENT TOTALS ,

52 Assumptions -42-

53 Annex 6: Implementation Arrangements KENYA: Northern Corridor Transport Improvement Project Scope of Services for the Project Technical Teams (PTTs), Project Coordinating Team (PCT) and the Project Oversight Committee (POC) Project Technical Teams The Project Technical Teams (PTTs) will carry out the day-to-day management of the Northern Corridor Road Improvement project, on the basis of the provisions of the Development Credit Agreement and all subsidiary agreements applicable, and to finance activities as detailed in the Project Appraisal Document. The Project Technical Teams are set in MORPWH, MOTC, KAA and KCAA. As regards the roads component, the PS MORPWH has appointed a Team Leader for the PTT with experience and successful track record in implementation and management of Bank financed projects. The MORPWH-PTT Team Leader will report to PS, MORPWH, while consulting with the Chief Engineer (Roads) on technical matters and keeping him informed in all other matters. The members of the team who will manage the day-to-day activities of the road component will include: Team Leader PavementlMaterials Specialist Economist'Social Development Specialist Engineerinflesign Procurement'Design Environmental Specialist Procurement Financial specialist Construction specialist Eng. C. 0. Orege Eng. J. Maina Ms. R. A. Ombam Eng. S. M. Ngare Eng. S. 0. Okech Mrs. E. Mibei Mr. C. Muia Ms. P.M. NdonyelGichana to be determined Specifically, the MORPWH-PTT will undertake the following pre-contract and project management activities: Pre-award Activities prepare the project implementation plan follow up on all actions agreed with the Bank related to Project preparation invite bids according to World Bank procedures select consultants accordingly to World Bank procedures prepare project contractual documents prepare bidding documents conduct evaluation of bids undertake contract negotiations facilitate issuing of letters of awards liaise with World Bank and as well as other PTTs as part of coordination role -43-

54 Project Management Activities Team Leader Discuss and agree with the consultants, suppliers and contractors detailed project activities Facilitate the mobilization of contractors and consultants Facilitate import clearance Supervise and monitor consultants and contractors Supervise project implementation at all levels Draw up procedures for receiving, verification and payment of invoices on timely basis Ensure timely payments to consultants and contractors Preparation and submission of progress reports Ensure that financial audits are carried out in time Ensure all safeguard policies are adhered to Keep and maintain all project records, reports and information The Team Leader shall provide the overall leadership of its component of the project. Specifically, the Team Leader shall: Manage the day-to-day operations of the component Plan, direct, control and coordinate project Monitor the commitment of the MORPWH to the project Monitor the performance of consultants and contractors in accordance to agreed contractual obligations Implement the project in accordance to the overall plan of operations and activity schedules and report changes thereto Liaise with the Reform Taskforce of the road sector and the World Bank Ensure that adequate coordination exists with all other PTTs and MOF as required Ensure that there is structured and consistent monitoring of progress of implementation, including the regular reports, and audit reports Act as Team Leader, PCT and Secretary to the POC 3: MOTC - PTT As regards the roads component, the PS, MOTC has appointed a Team Leader for the PTT The MOTC-PTT Team Leader will report to PS, MOTC and will manage the day-to-day activities of the MOTC component, The members of the team will include: Team Leader Procurement Specialist Financial Management Specialist Maritime and Port sector specialist Air Accident Specialist Monitoring and evaluation specialist Northern Corridor Specialist Assistant to Team Leader Mr. A. Kitolo, Principal Economist Mr. T.M. Abincha (Chief Procurement Officer) Mr. M. Kimani (Senior Accountant) Mr, P. Thuo (Director of Shipping) Eng. P of Accident Investigations) Mr. S.O.Helu (Senior Economist) Ms, G. Maingi (Senior Assistant Secretary) Mr. D. Ochieng (Economist) Specifically, the MOTC-PTT will undertake the following pre-contract and project management activities: -44-

55 Pre-award Activities Preparation of the project implementation plan Follow up on all actions agreed with the Bank related to project preparation Invitation of bids according to World Bank procedures Selection of consultants according to World Bank procedures Preparation of project contractual documents Preparation of bidding documents Evaluation of bids Contract negotiations Issuing letters of award Project Management Activities Team Leader Discuss and agree with the consultants, suppliers and contractors detailed project activities Facilitate the mobilization of contractors (if applicable) and consultants Facilitate import clearance Supervise and monitor consultants and contractors Supervise project implementation at all levels Draw up procedures for receiving, verification and payment of invoices on timely basis Ensure timely payments to consultants and contractors Preparation and submission of progress reports Ensure that financial audits are carried out in time Ensure all safeguard policies are adhered to Liaise with the World Bank project team, and the National Transport Policy Committee on the implementation of the National Transport Policy Keep and maintain all project records, reports and information Specifically, the Team Leader MOTC, PTT shall: Manage the day-to-day operations of the component Plan, direct, control and coordinate project Monitor the commitment of the MOTC units to the project ' Monitor the performance of consultants and contractors in accordance to agreed contractual obligations Implement the project in accordance to the overall plan of operations and activity schedules and report changes thereto Ensure that adequate coordination exists with all other Ministries as required, as well as with the KCAA and the KAA Ensure that there is structured and consistent monitoring of progress of implementation, including the regular reports, and audit reports As regards the KCAA component (Part G of the Project), the Director General, KCAA has appointed a Team Leader. and members of the PTT who will manage the day-to-day activities of the KCAA -45-

56 component and from time to time co-opt other members to compliment any skills of the team. The Team Leader will report directly to the Director General, KCAA. The PTT members will include: TeamLeader Procurement Specialist Financial Specialist Senior Airworthiness Inspector Superintending Engineer Operations Officer Economist Mr. E. J. W. Mugo Mr. W. Kamanga Mr. G. G. Muchemi Eng. P. M. Wakahia Eng. M.I. Mwangi Mr. P.M. Munyao Mr. C. Kombo Specifically, the PTT will undertake the following pre-contract and project management activities: Pre-award Activities prepare the project implementation plan follow up on all actions agreed with the Bank related to Project preparation invite bids according to World Bank procedures select consultants accordingly to World Bank procedures prepare project contractual documents prepare bidding documents conduct evaluation of bids undertake contract negotiations facilitate issuing of letters of awards liaise with World Bank and Ministry of Transport & Communications, as well as MOTC PlT Team leader as part of coordination role with the Ministry ensure implementation of identified measures for compliance of safety and security standards in Kenya to relevant provisions of ICAO. Project Management Activities Team Leader Discuss and agree with the consultants, suppliers and contractors detailed project activities Facilitate the mobilization of contractors and consultants Facilitate import clearance Supervise and monitor consultants and contractors Supervise project implementation at all levels Draw up procedures for receiving, verification and payment of invoices on timely basis Ensure timely payments to consultants and contractors Preparation and submission of progress reports Ensure that financial audits are carried out in time Ensure all safeguard policies are adhered to Design, and monitor an action plan that ensures progress towards compliance of safety and security standards in Kenya to relevant provisions of ICAO two years after the beginning of the project. Keep and maintain all project records, reports and information The Team Leader shall provide the overall leadership of its component of the project. -46-

57 Specifically, the Team Leader shall: 0 Manage the day-to-day operations of the component 0 Plan, direct, control and coordinate project 0 Monitor the commitment of the MOTC units to the project 0 Monitor the performance of consultants and contractors in accordance to agreed contractual obligations 0 Implement the project in accordance to the overall plan of operations and activity schedules and report changes thereto 0 Ensure that adequate coordination exists with all other Ministries as required 0 Ensure that there is structured and consistent monitoring of progress of implementation, including the regular reports, and audit reports As regards the KAA component (Part F of the Project), the Managing Director, KAA has appointed a Team Leader for the PTT, who will report directly to him for project related activities. The KCAA-PTT will manage the day-to-day activities of the KAA component. The members of the team include: 0 TeamLeader Eng. Mukwana, GM, Engineering Services 0 Deputy Team Leader Eng P. Chamwada, Resident Engineer 0 Procurement Specialist Mr. A. Muthambuku 0 Security Specialist Brig. (RTD) Eshikhati 0 Financial Manager Mr. P Chonde 0 Economist Mr. J Methu 0 Architect Mr. M 0. Omwende 0 Electrical Engineer Eng. M. Mumali 0 Electronics Engineer Eng. 0. Waithaka 0 Building services Eng. M. Warutere 0 Civil workshuildings Messrs. J. Ndua and J.M. Kaniu 0 Electromechanical Mr. Murila 0 Electricallelectronics inspectors Messrs. E. Muga and Mwathe Specifically, the KAA-PTT will undertake the following pre-contract and project management activities: Pre-award Activities 0 To prepare the project implementation plan 0 To follow up on all actions agreed with the Bank related to Project preparation 0 To invite bids according to World Bank procedures 0 To select consultants accordingly to World Bank procedures 0 To prepare project contractual documents 0 To prepare bidding documents 0 To conduct evaluation of bids 0 To undertake contract negotiations 0 To facilitate issuing of letters of awards 0 To liaise with World Bank and Ministry of Transport & Communications, as well as MOTC PTT Team leader as part of coordination role with the Ministry Project Management Activities 0 Discuss and agree with the consultants, suppliers and contractors detailed project activities 0 Facilitate the mobilization of contractors and consultants 0 Facilitate import clearance -47-

58 a Supervise and monitor consultants and contractors Supervise project implementation at all levels Draw up procedures for receiving, verification and payment of invoices on timely basis Ensure timely payments to consultants and contractors Preparation and submission of progress reports Ensure that financial audits are carried out in time Ensure all safeguard policies are adhered to Design, and monitor an action plan that ensures progress towards compliance of security standards in Kenyan Airports to relevant provisions of ICAO and the US Transport Security Administration after two years of project. Keep and maintain all project records, reports and information Team Leader The Team Leader shall provide the overall leadership of its component of the project. Specifically, the Team Leader shall: a Manage the day-to-day operations of the component a Plan, direct, control and coordinate project 0 Monitor the performance of consultants and contractors in accordance to agreed contractual obligations 0 Implement the project in accordance to the overall plan of operations and activity schedules and report changes thereto a Ensure that adequate coordination exists with all other Ministries as required a Ensure that there is structured and consistent monitoring of progress of implementation, including the regular reports, and audit reports Project Coordination Team (PCT) The PCT will be responsible of the following: 0 Provide overall project coordination and reporting 0 Ensure timely production of joint overall project implementation progress reports a Report to the POC all projects related matters, any difficultieshottlenecks and policy matters that may hinder smooth project preparation and implementation. 0 The team will meet at least once per month during project preparation and quarterly during project implementation The PCT will comprise of the following members: Team Leader, PTT MORPWH Team Leader, PTT MOTC Team Leader, PTT RAA Team Leader, PTT KCAA Chairman Co Chairman MORPWH will provide the secretariat. Project Oversiaht Committee POC) The POC is responsible for overseeing the overall project preparation and implementation. It will provide the channel through which the PCT will inform the Ministries and Parastatals top management the progress, prevailing bottlenecks, and policy direction required for smooth preparation and implementation -48-

59 of the project. It comprises senior officials from both MORPWH and MOTC as well as of the implementing agencies as follows: Permanent Secretary, MORPWH Permanent Secretary, MOTC Representative of the Permanent Secretary, MOF Managing Director, KAA Director General, KCAA Chief Engineer Roads, MORPWH Team Leader, PTT MORPWH Team Leader, PTT MOTC Team Leader, PTT KAA Team Leader, PTT KCAA Chairman Co-chairman Secretary The POC will be responsible for: 0 Providing support and resolving any constraints that may hamper project implementation and would require interventions from other ministries or arms of the Govemment 0 Providing policy direction on matters relating to the project preparation and implementation. The POC meets at least quarterly. -49-

60 Annex 7: Financial Management and Disbursement Arrangements KENYA: Northern Corridor Transport Improvement Project A. FINANCIAL MANAGEMENT ARRANGEMENTS Country issues The results of the latest Kenya Country Financial Accountability Assessment (CFAA) dated April 2001 indicated that...fiduciary risk in public spending is assessed as high. while a lack of compliance with establishe~ financial and procurement regulations have completely rendered many initiatives aimed at strengthening the control environment ineflective, issues of limited execution, inadequate monitoring, insu~cient capacity and lack of enforcement also need to be resolved. The report further observed that there were high financial management risks due to a weak control and low capacity environment. Govemment accounts were regularly late and incomplete. Inter-agency reporting was slow and sometimes difficult to achieve, where hierarchical lines were blurred or foreign to the day-to-day structures and management of the institution. Accountability chains were weak, and penalties extremely light or nonexistent. A new Government is now in place with a commitment to ensuring compliance with legislation, strengthening regulatory institutions and fighting corruption. With the support of a number of donor-assisted initiatives, including the IDA-funded Public Sector Management Technical Assistance Project (PSMTAP), Government is seeking to rapidly enhance the financial accountability framework in order to: mitigate fiduciary risk in public expenditure management; achieve economy, efficiency and effectiveness in the use of public funds; enhance transparency and accountability; and enhance staff capacity in public financial management A number of project-specific risk mitigation arrangements have been proposed in order to address noted country concerns: a) A POC has been established with membership comprising senior management of respective implementing agencies. The POC is responsible for overall project implementation supervision, monitoring and reporting. b) The independent annual audit of the project will be subcontracted to a private firm of auditors who will report to the Government CAG. This arrangement is intended to ensure effectiveness and efficiency of the audit process. c) A significant portion of project costs relate to procurement of goods and services requiring prior review, approval and direct payment by IDA. The project will be subject to regular IDA supervision missions aimed at closely monitoring performance and the timely resolution of issues. -50-

61 Financial management system The objectives of the project s financial management system are: 0 to ensure that funds are used only for their intended purposes in an efficient and economical manner; 0 to ensure that funds are properly managed and flow smoothly, adequately, regularly and predictably in order to meet the objectives of the project; 0 to enable the preparation of accurate and timely financial reports; 0 to enable project management to monitor the efficient implementation of the project; and 0 to safeguard the project assets and resources. Furthermore, the following are necessary features of a strong financial management system: the PTT should have an adequate number and mix of skilled and experienced stafc the intemal control system should ensure the conduct of an orderly and efficient payment and procurement process, and proper recording and safeguarding of assets and resources; the accounting system should support the project s requests for funding and meet its reporting obligations to the GOK and IDA; the system should be capable of providing financial data to measure performance when linked to the output of the project; and an independent, qualified auditor should be appointed to periodically review the Project s financial statements and internal controls. Institutional and implementation arrangements The Government will use the transaction based disbursement method for this project, and provide quarterly Financial Monitoring Reports (FMR) for reporting purposes. The PTTs will be responsible for the overall financial management of the project, in accordance with sound and standard guidelines acceptable to IDA. The PTT will oversee the management of Special and Operating Accounts, the preparation of FMRs and annual financial statements, Withdrawal Applications and other financial requirements of the POC and IDA.. The PTTs will also report the use and operations of the counterpart funding, including, for MORPWH, that of the Project Account for counterpart funding. The POC will oversee the statutory audit of project s financial statements, ensuring that the process is carried out efficiently and in line with the terms of funding agreement. It will also be responsible for ensuring that matters arising from audits are dealt with expeditiously. The proposed project will be fully integrated into the activities of the MORPWH and MOTC. The accounting and budgeting systems will therefore be fully compatible with the Government systems, MORPWH and MOTC will both have an accountant in the project teams to handle the financial management matters. Flow of Funds Special Accounts - GOK will establish two US dollar special accounts, one each for MORPWH (Special Account A) and MOTC (Special Account B, taking care of the needs for MOTC, KCAA and KAA). MORPWH will be responsible for the management of Special Account A, and MOTC for the management of Special Account B, and each Ministry will be responsible for replenishment and reporting on the use of the funds from the respective accounts. The special accounts would receive the dollar depositsltransfers from the main credit account. Separate special accounts are required due to the distinct nature of project components to be implemented by MORPWH and MOTC respectively. Separate periodic financial reports will be prepared by the PTTs. -51-

62 Operating Accounts - In addition, four local currency operating accounts would be opened, one each by MORPWH, MOTC, KAA and KCAA. These will form the primary source of IDA finance for project activities and will be managed directly by the respective implementing entities. Project Account: the Government will also open a Project Account for the purposes of depositing counterpart funds to finance expenditures under Parts A through E of the project (MORPWH components). The initial deposit in this Project Account will be Ksh. 90 million and will be a condition of Credit effectiveness. Thereafter the Borrower will deposit at the beginning of each financial quarter adequate amounts to cover the expected expenditures during the respective quarter, The other implementing agencies have either negligible counterpart finding requirements (KCAA, MOTC) or are revenue generating entities (KAA) such that and it was not deemed necessary to include specific accounts for their counterpart finding requirements. Subsidiary Agreements - Furthermore, KAA and KCAA will be required to enter into subsidiary loan agreements with the Ministry of Finance for the funds that will be made available to finance aviation safety, security and airport related activities in accordance -with prevailing government practice. Funds to be channeled to KAA and KCAA will be drawn from the MOTC Special account. KAA and KCAA will be required to present periodic financial monitoring reports to MOTC for consolidation and reporting. The on lending terms and conditions were agreed between Government and KAA. and KCAA, and confirmed during negotiations. Respective bank accounts shall be opened by credit effectiveness date. Initial cash flow forecasts upon which the advance disbursement will be made from the IDA Credit should also be finalized by the same date. Funds flow arrangements for the project shall be as follows: IDA will make an initial advance disbursement from the proceeds of the Credit by depositing into the Borrower-operated Special Accounts. Actual expenditure will be reimbursed through submission of Withdrawal Applications and against Statements of ExpenditureRinancial Monitoring Reports, which will be approved by the PTTs. GOK transfers from the Special Account (for payment of transactions in local currency) will be deposited in the Operating Accounts in accordance with funding arrangements. In the case of MORPWH and MOTC, counterpart funds are allocated through the normal central government budgetary process. For MORPWH, the funds will be deposited in the Project Account. The terms and conditions under which KAA and KCAA shall make counterpart contributions will be defined in the respective subsidiary agreements. Staffing MORPWH, MOTC have respectively assigned Finance Officers to be responsible for project financial management. The officers are designated Financial Specialist members of the PIITS. The Finance Officers report to respective Ministries Permanent Secretaries who are designated Accounting Officers and members of the POC. Respective Finance Officers have personnel with ranks of Accountant I and 11and Assistant Accountants I and I1 reporting to them and assigned various accounting responsibilities as detailed in the project financial operations manual. The finance departments of KAA and KCAA are established along similar lines, ultimately reporting to the Managing Director and Director General, respectively, who are members of the POC. The project s key accounting personnel have attended procurement, financial management and disbursement training sessions conducted at the Country Office in Nairobi in November 2003, -52-

63 Description of Financial Management Arrangements Internal Controls and Financial Management Manual The project s internal controls are based on the established GOK accounting and internal control systems and documented in the project financial operations manual. The manual has been subject to review by the Bank Financial Management Specialist. The procedures used by the project to maintain its records include the requirement for cross references to supporting documentation in the SOE supporting schedules in order to facilitate the inspection of these schedules and improve the maintenance of the project s records. The manual describes the accounting system: the major transaction cycles of the project; funds flow processes; the accounting records, supporting documents, computer files and specific accounts in the financial statements involved in the processing of transactions; the list of accounting codes used to group transactions (chart of accounts); the accounting processes from the initiation of a transaction to its inclusion in the financial statements; authorization procedures for transactions; the financial reporting process used to prepare the financial statements, including significant accounting estimates and disclosures; financial and accounting policies for the Project; budgeting procedures; financial forecasting procedures; procurement and contract administration monitoring procedures; procedures undertaken for the replenishment of the Special Account; and auditing arrangements. Planning and Budgeting Budgeting for the project has been undertaken centrally by the PCT in consultation with the POC and with extensive detailed input by respective implementing agencies. IDA reporting guidelines provide for periodic activity, cash flow and procurement projection, analysis and review on an ongoing basis. Responsible personnel have already been advised and trained. Books of accounts and list of accounting codes The project s accounting records will be maintained in the existing GOK computerized system. A list of accounts codes (Chart of Accounts) for the project will be designed and integrated into the Government Budget. This will match the classification of expenditures and sources and application of funds set out in the Credit Agreement. The Chart of accounts will be developed in a way that allows project costs to be directly related to specific work activities and outputs of the project. This process is required to be in place by Credit Effectiveness. Audit arrangements Internal Audit The project is subject to statutory internal audit regulations through which MOF seconded personnel provide the internal audit function. The Internal Auditor reviews all transactions before expenditures are incurred, However, the performance of this fuflction is only limited to the pre-audit inspection of the project s transactions, and no internal audit reviews are undertaken to ensure, for instance, that internal control guidelines are complied with, The function is therefore assessed as weak, with no planned reliance by IDA. The fiduciary risk presented by the absence of an effective internal audit function is mitigated by the existence of a POC with specific fiduciary responsibilities and IDA requirement for periodic project monitoring and reporting, -53-

64 External Audit The Office of the Controller & Auditor General (CAG) is primarily responsible for the auditing of all government projects. There is an option for the audit to be subcontracted to a firm of private auditors, with the final report being issued by the CAG, based on the tests carried out by the subcontracted firm. It has been agreed that the project audit will be subcontracted to a private firm of auditors approved by the CAG for reasons that: e e IDA has continued to experience delays in receipt of audited financial statements, largely owing to lack of technical capacity in the office of the CAG; and The project entails multiple implementing agencies, requiring multiple audit locations. The existing setup and audit process of the office of the CAG is considered unsuitable for such an arrangement. The firm of auditors subcontracted to carry out the audit would meet IDA S requirements in terms of independence, qualifications and experience. Consolidated Annual Audited Financial Statements, taking into consideration the new Audit Policy Guidelines of the World Bank would be submitted to IDA within six months after end of each financial year. It is recommended that arrangements for the extemal audit of the financial statements of the project should be communicated to IDA through agreed terms of reference. Reporting and Monitoring Financial Monitoring Reports Formats of the various periodic financial monitoring reports to be generated from the financial management system will be developed. There will be clear linkages between the information in these reports and the Chart of Accounts. The financial reports will be designed to provide quality and timely information to project management, implementing agencies, and various stakeholders on project performance. The following contents of quarterly FMRs will be produced by the PTT: - Financial Reports: 0 0 Sources and Uses of Funds by Funding Source Uses of Funds by Project Activity/Component m Physical Progress (Output Monitoring) Report Procurement Report The formats will be defined and agreed by negotiations and the project must be capable of producing FMRs by effectiveness. Financial Statements The financial statements should be prepared in accordance with International Public Sector Accounting Standards (which inter alia includes the application of the cash basis of recognition of transactions). The IDA Credit Agreement will require the submission of audited financial statements to the Bank within six months after the year-end. -54-

65 These Consolidated Project Financial Statements will comprise: 1, A Statement of Sources and Uses of Funds I Cash Receipts and Payments for each funded phase, which recognizes all cash receipts, cash payments and cash balances controlled by the entity; and separately identifies payments by third parties on behalf of the entity. 2. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement of Cash Receipts and Payments being cross referenced to any related information in the notes for each funded phase. Examples of this information include a summary of fixed assets by category of assets, and a summary of SOE Withdrawal Schedule, listing individual withdrawal applications; and 3. A Management Assertion that Bank funds have been expended in accordance with the intended purposes as specified in the relevant World Bank legal agreement for each funded phase. Indicative formats of these statements will be developed in accordance with IDA requirements by Credit Effectiveness. Financial Management Action Plan The action plan below indicates the actions to be taken for the project to provide satisfactory FMRs, and the dates by when they are due to be completed. 1 2 Action Date due by Responsible Opening books of account and completion of the Credit Effectiveness Chart of Accounts for the project. Demonstrate ability to prepare FMRs June 30,2004 PTT m 3 I 4 I Opening Operating and Project Accounts. Credit Effectiveness PTT Appointment of external auditors acceptable to IDA and IDA S agreement with the auditors TOR 6 months after credit effectiveness POC and IDA I I I I I Supervision plan A supervision mission will be conducted at least every six months. The mission s objectives will include that of ensuring that strong financial management systems are maintained for the project throughout its life. A review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. The Project Status Report (PSR) will include a financial management rating for the component. The Country Office Financial Management Specialist will arrive at this after an appropriate review. -55-

66 B. DISBURSEMENT ARRANGEMENTS Disbursements from IDA would be made on the basis of incurred eligible expenditures (transaction based disbursements). IDA would then make advance disbursement from the proceeds of the Credit by depositing into a Borrower-operated Special Account to expedite Project implementation. The advance to a Special Account would be used by the Borrower to finance IDA S share of Project expenditures under the proposed Credit. Another acceptable method of withdrawing funds from the Credit is the direct payment method, involving direct payments from the Credit Account to a third party for works, goods and services upon the Borrower s request. Payments may also be made to a commercial bank for expenditures against IDA special commitments covering a commercial bank s Letter of Credit. IDA S Disbursement Letter stipulates a minimum application value for direct payment and special commitment procedures. Upon credit effectiveness, PTT would be required to submit a withdrawal application for an initial deposit to the Special Accounts, drawn from the IDA Credit, in amounts stated in the Development Credit Agreement. Replenishment of funds from IDA to the Special Account will be made upon evidence of satisfactory utilization of the advance, reflected in SOEs andlor on full documentation for payments above SOE thresholds. Replenishment applications would be required to be submitted regularly on a monthly basis. The Borrower will be obligated to refund any ineligible expenditure made from the Special Account. If the Special Account remains inactive for more than six months, the Borrower may be requested to refund to IDA amounts advanced to the Special Account. IDA will have the right, as to be reflected in the Development Credit Agreement, to suspend disbursement of the Funds if reporting requirements are not complied with. C. FINANCIAL CAPACITY OF THE BORROWER AND ITS AGENCIES TO IMPLEMENT THE PROJECT Background Although GOK will be ultimately responsible to meet the debt servicing requirements of the IDA funded portion of the project, the actual implementation will be the responsibility of four different GOK ministriedauthorities - MORPWH, KAA, K CMEASA and MOTC. What follows is a financial analysis of the four GOK implementing agencies. (a)morpwh Development expenditure for the road sector has fallen considerably during the last four years. However, thanks to dedicated revenue stream being collected by KRB, expenditure on routinelperiodic maintenance of the road network has actually increased. Starting from the current FY, development expenditure on the road sector is planned to start increasing. See following table for detail. -56-

67 Financial Year Development Expenditure (KSh millions) Development GOK Partners Total Maintenance Expenditure (KSh millions) ,576.6 NIA NIA , , ,38 1.O , , , , , , , , , ,922 6,696 8,042 8,78 1 9,700 During the next five years, GOK plans to substantially increase development expenditure for road development from about KSh13.05 billion (US$170 million) in FY04105 to about KSh35.44 billion (US460 million) in FY If the planned increases do occur, the total planned investments for the road sector would be about KShl21.21 billion (US$1.574 billion). The MORPWH is responsible to meet in full the funding requirements of the road related components of the project at an estimated cost of about US$221.9 million (KSh billion), Based on the assumption that the total allocations for road development during the next five years do total KSh billion (US1 S74 billion), the US221.8 million (KSh billion) required for the road component of the project, would represent only about 14 percent of the total projected sector investments. Even assuming that the allocations for road development over the next five years total only KSh6O billion (US$780 million), the funding requirements for the road component of the project would amount to about 28% of the total. This means that although the road component of the project is quite large, MORPWH: should be able to meet its funding requirements. Even if actual allocations for road development turn out to be half of what is currently projected, MORPWH should still be able to meet the funding needs of the road component of the project without crowding out other critical investments in the road sector. (b) &-L4 The KAA was formed in 1991 through the KAA Act. As an authority, KAA operates autonomously, has to publish annual accounts and has its own sources of revenue. The primary source of revenue for KAA is Landing and Parking fees for aircraft. These made up about 64 percent of its total revenue in FY Since KAA is an established authority, it will be directly responsible to meet the counter-part funding obligations of its component funded under the project and to re-pay the GOK the on-lent portion of the IDA Credit. The KAA operates nine major airports nationwide and KIA generates about 80 percent of its revenue. More importantly, KIA and to a much lesser extent Wilson airport, are the only two airports consistently generating operating surpluses for KAA. All other airports, including Kisumu and Moi International airports, are consistently loss making for IUA, This means that the profitable operations at KIA and Wilson Airport are, to a large extent, cross-subsidizing the loss making operations of the other seven &ports operated by KAA. -57-

68 The KAA s revenues have grown over the last five years by about 39 percent from KSh1,803, 7 million (US$23.4 million) to KSh2,504 million (US$32.5 million), while expenses have grown by only about five percent. As a matter of fact, from FYOOlO1 to FY02103, expenses have actually decreased by a total of about 5.8 percent. This is the result of an aggressive cost cuttinglcontainment strategy implemented by KAA. The increase in revenue and decrease in expenses, has resulted in FY02103 in the first operating profit for KAA in more than five years. For the current FY, despite a very difficult operating environment, KAA is expecting its turnover to increase by over lo%, which should produce another operating profit and substantially reduce its net loss. See following table for details. KAA: Income Statement (Profit and Loss Account) in KSh million Item FY98199 Tumover 1,803.7 FY99100 FYOOlOl FYOll02 FY ,127 2,26 1 2,37 1 2,504 Total expenses 2, , , ,499.8 Operating profit/loss With virtually no short term debt and a debtfequity ratio for FY02103 of only 0.14, KAA is currently in an under-leveraged position. The only debt that KAA currently has on its books is a Euro denominated secured loan. The loan was taken to fund the recently completed K IA rehabilitation project. As of June 30,2004, the balance of the loan will be about Euro 27 million (US$34 millioflsh billion), and it is expected to be fully repaid by FY The debt service requirements for the Euro denominated loan are projected to peak during the current FY at about US$5.7 million (KSh438.9 million) and should gradually decline to about US$4.2 million in FY GOK is planning to on-lend the about US$35 million (KSh2.695 billion) share of the IDA Credit to KAA at an interest rate of 7% per annum, with grace period of eight years and a maturity of 15 years. KAA will be responsible to come up with about US$7.1 million (KSh547 million) in counter-part &nds required for its component of the project. The additional US$35 million (KSh2.695 billion) in long term debt, will cause only a slight deterioration in its debtfequity ratio and will cause its debt servicing requirements to increase until at least FYll112. It is projected that the total debt servicing requirement for KAA will peak in FY06107 at about US$8-9 million. Considering its projected steady growth in revenue, strong balance sheet and low debt levels, KAA should be in a relatively good position to service the increased debt load caused by implementing the project. In addition, the cash flow projections prepared by KAA show that, even with the additional debt from the project, it will have a cash surplus starting from FY04105 to at least FY Finally, if the GOK does decide to allow KAA to retain at least part of the Passenger Service Charge, currently worth about KSh2.5 billion (US32.4 million), it would substantially strengthen the financial position of KAA. Not only would KAA become highly profitable, but it would also be able to bring forward part of its long term 2020 capital investment program. (c) KCAAlEASA The KCAA was formed in 2003, and has taken over the functions of the Directorate of Civil Aviation (DCA). This means that FY03104 will be the first year that KCAA operates as an independent authority. This has caused some teething problems in terms of the transfer of budgetary resources from GOK to KCAA and in setting up proper financial management procedures and systems. Since EASA is part of KCAA, its accounts will be shown in a consolidated form as part of the KCAA accounts. -58-

69 The main source of revenue for KCAA comes from the Air Navigation Charges, which make up about 95 percent of total revenue. During the last four years, Air Navigation Charges have increased by about 36 percent, and are expected to increase by a further four percent this year. In FY03104, KCAA plans to collect about KShl.440 billion (US$18,7 million) in revenues. The following table shows the revenues collected during the last five years. DCAKCAAIEASA: Sources of Revenue (In KSh million) Source of Revenue Air Navigation Charges Aviation Fees Other Total FY99100 FYOOlOl FY01102 FY02103 *FY , , , , , ,176 1, , ,440.8 The GOK has decided, that the estimated US $10 million (Ksh 770 million) in IDA funds required for the K CMASA managed project components will be on-lent on the same terms and conditions as for the KAA. This means that K CMEASA will accrue a relatively small debt servicing liabily from implementing the components under the project. The planned budgeted expenditures for KCAA are about KSh930 million (US$12.1 million) and about KShl billion (US$13 million) for FY03104 and 04/05 respectively. Assuming that KCAA will retain in full the revenues that it generates from its activities, it should be in a position to fully fund all of its activities, including its long term debt and capital investment program. (d)motc The project component that MOTC is responsible to implement under the project is estimated to cost about US$2.48 million (KSh 191 million). For FY03104 the development expenditure of MOTC is estimated at about KSh4OO million, For the next two FYs, the development expenditures of MOTC should remain fairly constant. This will mean that it should not have major problems in meeting the rather small counterpart funding requirements of the project component that its supposed to implement and fund. -59-

70 Annex 8: Procurement KENYA: Northern Corridor Transport Improvement Project General 1. Scope of IDA financed procurement under the project 1.1. Total project cost is estimated at US$ million. IDA will contribute about US$207 million towards the financing of works, goods, and consultant services, and training as detailed in Table A. 1.2 The last Kenya Country Procurement Assessment Review (CPAR) was conducted in Following the findings and recommendations of the CPAR, the Government of Kenya (GOK) applied for the Bank's support to implement the recommendations of the CPAR, and subsequently received from the Bank an IDF grant, which was approved in Using the proceeds of the grant, GOK started a procurement reform program. One of the main outcomes of the reform program was the establishment and publication in the government gazette in March 2001, of National Public Procurement Regulations, which govern all public procuring entities, and production of standard bidding documents for works and goods. The Public Procurement Regulations allow the Bank procedures to take precedence over any contrary provisions in the national regulations. Therefore there is no contradiction between the Government Procurement Regulations and the Bank Guidelines. 2. Use of Bank Guidelines 2.1. Procurement of works and goods will be carried out in accordance with the Guidelines: Procurement under IBRD Loans and IDA Credits (January 1995 edition- revised January and August 1996, September 1997, and January 1999). Bank's Standard Bidding Document ( SBD) and standard bid evaluation forms will be used for works and goods procured under ICB. SBD recently prepared by KAA will be used for works and goods procured under NCB Selection of consultants will be carried out in accordance with the Guidelines: Selection and ~mploy~ent of Consultants by World Bunk Borrowers (January 1997 edition - revised September 1997, January 1999, and Muy 2002). Bank standard Request for Proposals (WP) and evaluation forms will be used where applicable. 3. Advertising 3.1. A General Procurement Notice (GPN) has been published in the UN Development Business and in a daily national newspaper of wide circulation, The GPN will be updated annually for any outstanding ICB and large consultancy services. Specific Procurement Notices (SPN) for goods and works to be procured under ICB and NCB and for consultant services will be advertised in at least one national newspaper of wide circulation and internationally for ICB contracts The related bidding and pre-qualification documents, as applicable, would not be released before eight weeks after the GPN has been published. Sufficient time would be allowed to obtain the bidding documents, 4. Procurement Plan 4,l. GOK will prepare a procurement plan for works, goods and services covering the entire project period. A specific procurement plan for the frst year of implementation has been agreed with MORPWH, MOTC, KCAA and KAA. MORPWH, MOTC, KCAA and KAA will submit for review by -60-

71 March 3 1 of each year specific annual procurement plans for the 12 months to come that will include contract packaging, estimated costs, types of contract, procurement methods and procurement schedules. 5. Procurement Methods Specific procurement arrangements and estimated costs are summarized in Tables A and Al, and are briefly described below. The standard provisions for Domestic preference will apply for ICB-procured goods and works Works: [estimated to cost a total of US$ million including contingencies of which US$150.9 million will be IDA contribution^. Works related to upgrading of about 3 73 km of existing roads will be procured following ICB procedures. Other components such as enhancement of roadside amenities, private sector participation in road management, road safety improvements and support to KAA will be procured following ICB and NCB procedures, based on value of contracts. The ICB threshold for works shall be US$2.0 million. Contracts estimated to cost less than US$2.0 million per contract may be procured through the NCB procedures, Smaller works contracts valued at less than US$50,000 per contract may awarded on the basis of comparison quotations received from at least three contractors. 5.2 Goods: [estimated to cost a total of US$20.85 million including contingencies of which US$20.43 million will be IDA contribution^. Goods related to purchase of equipment for support to MORPWH, KAA, KCAA, and MOTC will be procured following ICB procedures for contracts valued at greater than $150,000. For contracts valued at less than $150,000 per contract, NCB may be used, depending on the nature and value of goods to be purchased. Goods valued at less than $50,000 per contract may be purchased on the basis of evaluation of three quotations. However, goods, which can only be procured through a limited number of suppliers, irrespective of the amount of the contract, may be procured using LIB procedures. 5.3 Consultunt Services: [estimated to cost US$38.02 million including contingencies and training of which US$35.72 million will be IDA contribution^. All consulting services financed by IDA credit costing more than US$200,000 equivalent for firms will be awarded according to the QCBS procedure. Consulting service contracts estimated to cost less than US$200,000 equivalent to be awarded to consulting firms may be awarded according to the Consultants Qualifications selection method. Consultants for financial audits and other repetitive services estimated to cost less than US$ 50,000 equivalent per contract will be selected through Least Cost Selection (LCS) method. Individual consultants will be selected in accordance with provisions of paragraphs 5.1 to 5.3 of the Guidelines. In exceptional cases (such as for project monitoring and evaluation, HIVlAIDS mitigation, training, as well as the road concession contract) Single-Source selection for appointing a consultant, an NGO, a university or a research and training institution, may be used in accordance with provisions of paragraphs 3.8 to 3.11 of the Guidelines. Shortlists for contracts costing less than US$200,000 equivalent may consist of national firms only in accordance with provision of paragraph 2.7 of the Guidelines provided that at least three qualified finns are available at competitive costs. However, if foreign firms have expressed interest, they will not be excluded from consideration. 5.4 Training: each of the implementing agencies will prepare and submit to the Bank for its review an annual training program, as part of the project annual work plan. The program will identify, inter alia: (a) the training envisaged, (b) the personnel to be trained, (c) the selection methods of institutions or individual conducting such training, (d) the institutions conducting the training, if already selected, (e) the duration of the proposed training, and (f) the cost estimate of the training. Report by the trainee upon completion of training would be mandatory. -61-

72 6. Prior Review Thresholds (Table B) 6.1. Table B gives the thresholds for Bank prior reviews: Works: Each contract for civil works estimated to cost US$l.O million equivalent or more and the first two contracts of value less than US$ 1.O million equivalent will be subject to prior review in accordance with the procedures of paragraphs 2 and 3 of Appendix I of the Guidelines, The ICB threshold for works shall be US$ 1.O million. Goods: All contracts for goods estimated to cost in excess of US$250,000 each would be subject to prior review by IDA, C o ~ s ~ Services: ~ ~ u ~ All ~ s terms of reference and single source Consultant contracts will, regardless of the contract amount, be subject to prior review. Contracts estimated to cost US$lOO,OOO equivalent or more for firms will be subject to prior review in accordance with procedures set forth in paragraphs 2 and 3 of Appendix I of the Consultants Guidelines. With respect to each contract for employment of individual consultants costing $50,000 or more, the qualification, experience, terms of reference, and terms of employment of the consultants will be subject to prior review. Training and exceptional extensions of non-prior review contracts raising their values to levels equivalent or above the prior review thresholds will also be subject to prior reviews. All consultancy services that are not subject to prior review will be subject to post review in accordance with procedures set forth in paragraph 4 of Appendix lof the Consultants Guidelines. 7. Exemption of taxes and duties: As per the letter provided by the Ministry of Finance dated March 5,2004, the Implementing Agencies will be exempted from paying VAT and duties. It is understood for all locally available or manufactured or assembled goods, including those previously imported, the bid prices shall include all duties, sales, and other taxes, and for works contracts, the bidders shall be required to quote unit prices or lump sum prices that include all duties, taxes and other levies. -62-

73 Table A: Project Costs by Procurement Arrangements (US$ million equivalent) 5. Front-end fee *Figures in parentheses are the amounts to be financed by the Credit. All costs include contingencies, but exclude direct taxes such as VAT and import duties to be borne by the Borrower **Includes goods to be procured through international and national shopping and LIB; and consulting services. NBF = Not Bank-financed (includes NDF) Table Al: Consultant Selection Arrangements (US$ million equivalent) Totals (29.82) (0.41) () () () (2.31) () (32.54) Note: QCBS = Quality and Cost Based Selection QBS = Quality Based Selection SFB = Selection under Fixed Budget LCS = Least Cost Selection CQ = Selection Based on Consultant's Qualifications Other = Selection of Individual consultants (per Section V of Consultants Guidelines) NBF = Not Bank-fmanced Figures in parenthesis are the amounts to be financed by the IDA Credit. For major consultancies and training services, the estimated costs and method of selection are as follows: -63-

74 Table A2: Consultant Selection Arrangement Com Estimated Selection Pa Component cost Method Nn. US% m Delivery Type A. B. C. D. E. F. G. H, Rehabilitation of Northern Corridor works 1. Roadside Amenities and Socioeconomic Enhancement 2. HIVIAIDS Mitigation measures 1, Preparation of concession bidding documents 2. Private Sector Participation advisor for Nairobi South Bypass 3. Design & Supervision of LTPBC Road Safety Improvement - Design Supervision and safety education 1, Technical assistance for the establishment & strengthening of NHA 2. Support to KRB (Road User Charges study, inventory of unclassified roads, etc) 3. Design Eng. Study for Kibwezi-Isiolo Corridor 4. Feasibility, detailed engineering design and eng. studies for alternate routes 5. Feasibility & design of Mombasa Bypass Year Transport Development Plan and transport sector studies 7. Capacity Building & training of staff in the proposed NHA, MOWWH, MOF, ERD and KRB 8. Consulting services for project monitoring, evaluation & impact assessment, and external audit 1. Update Feasibility & Design for upgrading Kisumu & Wilson Airport facilities including JKIA runway 2. Training 1, Technical Assistance to KCAA 2. Implementation of GNSSlGPS enroute and approach procedures 3. Training of staff & Trainers at EASA and KCAA 1. Support for implementation of maritime laws and Maritime Authority 2. Support to MOTC including compliance with international transport and facilitation conventions and the NCTA treaty 3. Training of MOTC and sector staff * QCBS QCBS sss sss QCBS QCBS QCBS QCBS QCBS QCBS QCBS QCBS QCBS SS SIQB S QCBS QCBS QCBS QCBS QCBS Const. Supervision Const. Supervision ConsServicesJNGO Consultant Services Consultant Services Consultant Services Consultant Services Consultant Services Consultant Services Consultant Services Consultant Services Consultant Services Consultant Services Consultant Servicesltraining Consultant Services Consultant Services Training Consultant Services Consultant Services Training Consultant Services Consultant Services Consultant ServiceJTraining Total Cost for Consuitant Services and Training * Under NDF financing -64-

75 I Expenditure Category 1. Works ICB - NCB 2. Goods Table 3: Thresholds for Procurement Methods and Prior Review Contract Value Threshold (US% thousands) Procurement Method Contracts Subject to Prior Review (US$ millions) Above US2.0 million ICB All contracts ($193 m approx) US$2.0 m and below NCB All contracts >$lm and first two contracts < $lm ($5.7 m approx) >US$150,000 ICBJLIB All contracts >$250K ($18.0 m approx) <US$150,000 NCB First two contracts ($0.65 m) I 3. Services - Finns 4.Services -Individuals >us$loo,ooo QCBS All contracts ($32 m approx) >US$50,000 Comparison of 3 CVs TORS and Qualifications only Total value of contracts subject to prior review: $249 million approximately Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every six months (includes special procurement supervision for post-reviewlaudits) The total cost of works, goods and consultants services to be procured under the project is US$ million (including contingencies) or 99% of the project cost ($276.52). The balance of US$ 1.83 million is for incremental operating costs. The nature, complexity and costs of the contracts to be implemented by the four implementing agencies (IA) significantly vary from one to the other, Procurement for KCAA and MOTC will entirely be for goods and consultant services, while MORPWH and KAA will procure civil works in addition. MORPWH and KAA will be responsible for the majority of procurement under the project, namely 100% of all works, 75 % of goods and 83% of consultant services. Each IA has established a PTT to spearhead the implementation of their respective project components. The PTTs comprise technical, finance, and procurement staff. The procurement capacity of the PTTs was assessed with due consideration of the size and categories of the procurement to be undertaken by the IAs. The MORPWH-PTT technical and procurement staff, which is responsible for 78% of the total procurement under the project, is trained and has acquired practical experience in Bank procurement procedures under the on-going Nairobi-Mombasa Road Rehabilitation Project. The procurement risk is therefore rated low, KAA, which will undertake 17% of the total procurement under the project, has already started the procurement process of some of the contracts to be financed retroactively under this project with guidance from the Country Office procurement Specialist. KAA-PTT staff members are incrementally gaining experience in following Bank procurement rules, and with additional training, are expected to become fully conversant with the procedures. The procurement risk under KAA is rated average. The staff of the other two IAs (KCAA and MOTC) have not been trained or exposed to Bank procedures. Hence the procurement risk is high though they are jointly responsible for only 6% of the total procurement under the project. On the basis of the PTTs qualification and experience in procurement, particularly for the main IAs (i.e. MORPWH and KAA), the overall procurement risk assessment is rated average. To further strengthen the procurement capacity of the Us, it is recommended that the technical and procurement staff in the PPTs undergo formal training organized by the regional training institutions such as ESAMI and GIMPA to be financed under the project. -65-

76 ~ ~ Table C: Allocation of Credit Proceeds Civil Works for moun. in US $ Financing percentage 75% 75% MORPWH KAA KCAA MOTC Consultant Services for MORPWH KM KCAA MOTC Training for MORPWH Unallocated KCAA I 0.73 MOTC 0.74 MORPWH % Foreign and 90% loa ' 100% foreign and 94% loca 100% MOTC 0.23 Total Credit Proceeds Front-end fee Total

77 Table D. Project Procurement Plan COMPONENT A- Rehabilitation of Northern Corridor1 Indicative y!:; Award/ Selection Prior Prequalifyl Submit Signing of Completion Review Short List BidlProposal Contract of Package of Contracts (YeslNo) (mo/yr) (mo/yr) (mo/yr) (mo/yr) Roadside Amenities and HIWADS C - Private Sector Participation in Road D - Road Safetv Irnorovement. I I I I I I I -67-

78 ~ ~ Dec Component 2- Support to KRB (Road User Charges study, inventory of unclassified roads, and review of truck traffic in Nairobi) 3- Design engineering study of Kibwezi- Kitui- Mwingi-Maua-lsiolo corridor 4- Feasibility, detailed design & engineering studies of the best alternative route (road) linking lakeside northern Tanzania to Narok and widening of access road to Moi lntemational Airport, Mombasa. 5- Feasibility & Design of Mombasa Bypass 6-10 Year Transport Development Plan and transport sector studies 7- Capacity building and training of staff in the proposed NHA, MORPWH, MOF, ERD and KRB 8- Consultant services for: a) project monitoring, evaluation and impact assessment (0.67 m); & b) external audit (0.20 m) F -Support to the KAA Works: I-Rehabilitation of old Embakasi airport infrastructure 2-perimeter.._. Fencing for Major Airports WLS 3-External electrical works for old Embakasi terminal 4-Renovation of old terminal building at Em bakasi 5Construction works for re-organization of passenger terminal JKIA 6-Reconstruction of Terminal Building at Kisumu Airport 7-Rehabilitation & extension of runway and construction of access road and parking area at Kisumu Airport 8-Renovation and upgrading of security at Wilson Airport I Goods. Eauioment and Vehicles: I screening baggage, access Indicative cost ($MI 2.01 o.77 o, , , Selection rrlethodlno, If Contract! Prior Review (YeslNo) 'requalifyl Short List (mobr) Submit BidlProposal (mo/yr) control and other equipment at IC6 (2) Yes Oct 2004 Jan airports 2-Flight Information and public display Contract QCBS (3) Yes Aug 2004 Oct 2004 Jan2005 I June2009 QCBS (1) Yes Oct 2004 Jan 2004 June Aug 2007 QCBS (1) Yes ' Aug 2004 Nov 2004 QCBS (1) Yes QCBS (1) Yes Dec 2004 I Jan 2007 Training Yes >> June2009 QBS (1) sss (1) IC6 (1) NCB (4) Yes I June2004 Yes July Oct2004 I MIA Yes Dec 2004 I KSM I 0.70 Yes NCB (1) Yes Yes No NCB (1) Yes 1 July2004 ICB (1) Yes Oct 2004 Jan 2005 ICB (1) Yes 1 Jan2005 IC8 (1) Yes Jan 2005 April 2005 IC6 (1) Yes Jan Apr2005 Sept 2004 Mar ICB (1) Yes 3-Fire Tenders (5) 3.85 ICB (11 Yes Mar2005 ~ 4-Security perimeter lighting and detection system for JKIA, MIA, Wilson 0.83 IC6 (1) Yes Feb 2005 April 2005 April 2006 & Kisumu I 0.83 IC8 (1) Yes Feb 2005 IC6 (1) Yes ICB (1) Yes 5-Security and communications 0.99 ICB (2) Yes equipment and vehicles (4 airports) 6-Support to 4 Emergency Operation 1 4 I.UJ cc ICB (2) Yes Oct 2004 Jan 2005 Consultant services: I -68- I

79 1. Component Selection Prior Prequalify/ Submit Completior? : n: I MethodlNo. Review Short List BidlProposal 'zn:zf of Package $M of Contracts (YeslNo) (molyr) (moly) mol (mom I-Update Feasibility and design for upgrading Kisumu &Wilson Airport facilities including JKIA runway 2-Training G -Support to the KCAA QCBS (1) Training Yes Yes May 2004 >> July 2004 >> Sep 2004 >> Mar 2005 June2009 Goods, Equipment and Vehicles: I 1- Support to KCAA for IT ICB(1) Yes Nov2004 March2005 June2005 Sept Support to EASA (Airworthiness, ATS & engineering equipment) and accident CB(4)'NCB investigation Laboratory (2),LIB(3) Yes Nov 2004 March 2005 June 2005 Sept 2005 Consultant services: I-Technical assistance to KCAA for safety inspection, training and 4.29 QCBS (1) Yes April 2004 Aug 2004 Jan 2005 Sept 2007 implementation of reforms 2-Implementation of the GNSSlGPS enroute and approach procedures 0.66 QCBS (1) Yes Oct 2004 Jan 2005 May 2005 June Training of staff and Trainers at EASA and KCAA o.81 Training Yes >> >> >> Sept2007 H -Support to the MOTC Goods, Equipment and Vehicles ir to New Authority for 0.17 ICB (1) Yes Feb 2005 June 2005 Aug 2005 Feb 2006 I, I I I I I I I 2-Strenathenina of MOTC in IT I 0.22 I icb(1) 1 Yes 1 June Oct Dec June Support in enhancement of Maritime training capacities for compliance with 0.44 ICB Yes June 2004 Oct 2004 Dec 2004 June 2005 IMO STCW95 convention Consultant Services I-Support for Implementation of maritime laws and Maritime Authority 2-Support to MOTC including compliance o.28 QCBS No Aug 2004 Dee 2004 Mar 2005 Sept 2005 with international transport and QCBS' No facilitation conventions and the NCTA 0.33 QBS treaty, and implementation of the Nat. Trans, Policy Aug 2004 Dec 2004 Mar 2005 Sept Training of MOTC and sector staff 0.83 Training Yes June 2004 Oct 2004 Dec 2004 June 2007 Subtotals (A, B,C,D,E,F,G,H) Miscellaneous I-Project Operating Costs (MORPWH) 1.IO 2-Proiect ODeratina Cost (MOTC) ~roiect ODeratina Costs (KAA) I I I I I I hoiect Ooeratina Costs (KCAA) I 0.10 I I I I I I I Sub totals Miscellaneous I TOTAL COST *Costs include contingencies **Plan based on Project effective date of July 1,

80 Annex 9: Economic and Financial Analysis KENYA: Northern Corridor Transport Improvement Project PVofCosts PVofBenefits NPV 1 IRR 1 Program I (Million US$) (Million US$) (Million US$) I (%) Rehabilitation of the Northem Corridor / 27% Summary of Benefits and Costs: The project s main benefits are the savings to be made by road users in vehicle operating costs, passenger time costs and accident costs. An economic analysis was done for the rehabilitation of the Northem Corridor component, which represents 70 percent of the total project costs. The Net Present Value (NPV) of the rehabilitation of the Northem Corridor is US$125 million and the overall Intemal Rate of Return (IRR) is 27 percent, with IRR varying from 20 to 37 percent for the different road projects. Main Assumptions: Vehicle Fleet Characteristics and Economic Unit Costs Light Medium Heavy Car Truck Truck Truck Matatu Bus Vehicle Characteristics Service life (years) Hours driven per year Km driven per year Number of passengers Gross vehicle weight (tons) ESA loading factor Economic Unit Costs New vehicle price (US$) New tye price (US$) Fuel cost (US$/lt) Lubricants cost (US$/It) Maintenance labor (US$ihr) Crew cost (US$/crew-hr) Passenger working time (US$/pa-hr) Passenger non-working time (US$/pa-hr) Cargo Time (US$lhr) Annual interest rate(%) The value of working time of car passengers was estimated considering an average economic annual income of Kshs 250,000 per annum and 2,000 working hours per year (250 days at 8 hours), and the value of worlung time of public transport users was estimated to be twice the minimum wage, The value of non-working time was considered 25 percent of working time and the percent of work journeys to be 35 for cars and 25 for public transport. The value of cargo time has been estimated on the basis of an average cargo value of US$400 per tone and a cost of working capital of 15%. The following tables present typical road user costs at different roughness levels, in US$ per vehicle-km, and typical road user costs composition for a road roughness equal to 2.0 IRI. -70-

81 Typical Unit Road User Costs (US$/vehicle-km) Roughness Light Medium Heavy (IRI) Car Truck Truck Truck Matatu Bus , RUC Tires Parts and Labor Depreciation and Interest Crew Time Overhead Light Medium Heavy Car Truck Truck Truck Matatu Bus , , Passenger and Cargo Time I Total I The following table presents typical road maintenance unit costs, Maintenance Unit Costs Operation / Financial Cost Reconstruction (US$/&) I Patching (US$/&) Edge Repair (US$/mZ) Overlay (US$nCm) Resealing ( USSh) Crack Sealing (US$/&) Drainage Maintenance (US$h) Rehabilitation of the Northern Road Corridor For the economic analysis, the corridor sections to be rehabilitated under the project were subdivided into homogeneous sections, in terrns of traffic and road condition, which are given in the following table along with the base financial investment costs. The economic analysis considered thirteen percent of the base costs for contingencies and one percent to take account of possible environmental mitigation costs. -71-

82 Road Economic Base Rehabilitation Length Evaluation Length Road cost Project (km) Sections (km) Work (US$M] I-Maji ya Chumvi - Miritini 35.0 Maji ya Chumvi - Miritini 35.0 Rehabilitacibn Sultan Hamud - Machakos Tumoff 55.3 Sultan Hamud - km Rehabilitation 15.9 km Machakos Tumoff 29.6 Rehabilitation Machakos Tumoff -Nairobi 33.5 Machakos Tumoff - Namanga Jct Widening 18.7 Namanga Jct. -Nairobi 11.5 Widening Lanet - Timboroa 99.4 Pipeline Jct. - Lanet - Nakuru 9.6 Widening 6.8 Nakuru - End Dual Carr. 2.7 Rehabilitation 1.1 End Dual Carr. - Njoro Jct. 3.2 Widening 2.3 Njoro Jct. - Mol0 River 24.2 Rehabilitation Mau Summit - Kisumu Molo River - Mau Summit 21.5 Rehabilitation 6.9 lmau Summit - Timboroa 38.21Rehabilitation Mau Summit- Kericho 55.11Rehabilitation 16.8 Kericho - Awasi 42.4 Rehabilitation I Awasi - Ahero 18,3/Rehabilitation I yf Ahero - Kisumu 21.6 Rehabilitation Airport North Road 7.7 A109 - Old Embakasi Airport 4.4 Widening 5.7 Embakasi Roundabout - Donholm 3.3 Widening 4.3 Total ~ 306 The table below presents the estimated main current road characteristics. Number Current Road Sections Characteristics Length1 Width I Surface Sections (km) (m) Type Maji ya Chumvi - Miritini ST Sultan Hamud - km AC km Machakos Tumoff AC Machakos Tumoff - Namanga Jct AC Namanga Jct. -Nairobi AC Pipeline Jct. - Lanet - Nakuru AC Nakuru - End Dual Carr AC End Dual Carr. - Njoro Jct AC Njoro Jct. - Mol0 River AC Molo River - Mau Summit AC IMau Summit - Timboroa AC 5 IMau Summit - Kericho I AC Kericho - Awasi Awasi - Ahero Ahero - Kisumu AC 6 A109 - Old Embakasi Airport AC Embakasi Roundabout - Donholm AC Roughness I Cracking I The table below presents the 2003 daily traffic estimates and the corresponding traffic composition. -72-

83 Project Economic Traffic Road Evaluation Length Estimate Number Sections (km) (AADT) 1 Maji ya Chumvi - Miritini Sultan Hamud - km Light Medium Heavy Car Truck Truck Truck Matatu Bus (%) (%) (%) (%) (%) (%) 14.6% 16.9% 5.9% 29.0% 27.7% 5.9% 18.4% 11.4% 21.2% 31.3% 14.7% 3.1% km Machakos Tumoff % 11.4% 21.2% 31.3% 14.7% 3.1% Machakos Turnoff - Namanga Jct % 16.8% 15.1% 21.0% 15.5% 8.0% Namanga Jct. - Nairobi % 21.9% 10.3% 13.5% 18.7% 5.3% Pipeline Jct. - Lanet - Nakuru % 7.7% 4.4% 8.3% 24.9% 5.4% Nakum - End Dual Carr % 4.6% 4.8% 5.8% 30.2% 3.8% End Dual Can. - Njoro Jct % 6.6% 7.0% 11.0% 22.5% 7.0% Njoro Jct. - Molo River % 6.5% 5.5% 10.7% 22.7% 7.5% Molo River - Mau Summit % 7.7% 5.8% 17.6% 21.8% 14.7% Mau Summit - Timboroa % 9.1% 6.4% Mau Summit - Kericho % 19.9% 11.2% Kericho - Awasi % 21.4% 15.8% 9.6% 15.5% 9.3% Awasi - Ahero % 19.8% 11.6% 10.6% 20.8% 7.5% IAhero - Kisumu % 17.9% 10.4% 7.1% 28.8% 6.2% 6 /A109 - Old Embakasi Airport % 9.5% 3.0% 3.0% 30.5% 0.9% IEmbakasi Roundabout - Donholm I 55.5% 7.3% 4.0% 3.9% 28.0% 1.3%] The rehabilitation of the Northem Corridor benefits were evaluated using HDM-4 in terms of savings in vehicle operating costs and time cost, considering a traffic growth rate of 2 percent for cars and 3 percent for all commercial vehicles based on historical traffic data along with economic trends. For a conservative analysis, no generated traffic was included on 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 of the evaluation period. For roads to be widened to four lanes, accident benefits were computed considering an estimate of the actual accidents rate on two lane Northern corridor roads (1 80 accidents per 100 million vehicle-km) and an assumed reduction in accidents of 40 percent once a road is widen to four lanes. Insurance companies for various types of injuries in Kenya based the unit accidents cost, given on the following table, conservatively on the average payouts. Accident Unit Costs I Accident I Percent I Costs (US$) I of Accidents Fatal 20% Damaged Only I 2,200 I 50% All Accidents 1 5,860 I 100% Accident Rates (100 million vehicle-km) Two Lane Road Actual 180 Four Lane Road Estimate 108 The table below presents the main economic evaluation results for the proposed road works. -73-

84 Road Rehabilitation Project I-Maji ya Chumvi - Miritini 2-Sultan Hamud - Machakos Tumoff 3-Machakos Tumoff -Nairobi 4-Lanet - Timboroa 5-Mau Summit - Kisumu 6-Airport North Road Total Economic NPV IRR Evaluation NPV IRR (Million US$) (%) Sections (Million US$) (%) 13 37% Maji ya Chumvi - Miritini 13 37% 13 23% Sultan Hamud - km % km Machakos Tumoff 10 33% 31 28% Machakos Tumoff - Namanga Jct % INamanga Jct. -Nairobi 19 29% 40 33% /Pipeline Jct. - Lanet - Nakuru 9 31% Nakuru - End Dual Cam. 2 44% End Dual Cam. - Njoro Jct. 1 22% Njoro Jct. - Molo River 9 40% Molo River - Mau Summit 9 43% Mau Summit - Timboroa 8 26% 22 20% Mau Summit - Kericho 8 19% Kericho - Awasi 9 23% Awasi - Ahero 3 21% Ahero - Kisumu 2 18% 7 25% A109 - Old Embakasi Airport 3 23% Embakasi Roundabout - Donholm 4 28% % % All project roads yield an IRR greater than 12% and the NPV of the overall program is US$ 125 million with an overall IRR of 27%. The following table presents the distribution of the project benefits, which indicates that 83 percent of the project benefits are due to a reduction of vehicle operating costs, while passenger time and accident savings represent 17 percent of the project benefits, Increase in road agency costs Decrease in vehicle operating costs Decrease in passenger time costs Decrease in accident costs Net society benefits (NPV) PV Percent (Million US$) (%) % 34 14% 6 3% 125 Sensitivity analysis I Switching values of critical items: The table below presents the results of the sensitivity analysis eliminating accident benefits, eliminating passenger time savings, increasing costs and decreasing benefits. The results show that all sub-projects yield an IRR greater than 12%, even under the sensitivity scenario of increasing the construction costs by 20% and reducing the benefits by 20%. -74-

85 The results of the switching values analysis, presenting the multipliers on costs or benefits that yield an NPV equal to zero, indicate that, for the overall project, costs have to multiply by 1.94 or benefits by OS2 to yield an overall NPV equal to zero, which shows that the economic justification of the project is robust. -75-

86 A. Environmental Assessment Environmental Safeguards Annex 10: Safeguard Policy Issues KENYA: Northern Corridor Transport Improvement Project According to the environmental safeguards classification, the project is a category B. Environmental Impact Assessment studies have been conducted for 5 of the 6 road sections included in the project. The findings of the environmental assessment (EA) of the various road works subprojects suggest that overall impact is positive on the socio-economic environment of the area. Positive impacts largely comprise reduction in people s transport costs, travel time savings, increased employment opportunities - not only during the construction period but also in the long-term due to increased economic activities, better access to medical clinics and hospitals especially for a variety of activities engaged mainly by women and children, and better access to schools and social amenities. However, there are negative impacts that have been identified in the EA reports with recommendations for appropriate measures to mitigate their effects. The negative impacts, which are likely to occur mainly during the construction phase, include: soil erosion and disturbance of water flows, water pollution, traffic disruption, noise, vibration, gaseous and dust pollution, disturbance of flora and fauna, permanent andlor temporary land acquisition and landscape disturbance. There are no large scale, significant and irreversible impacts. During construction, a number of borrow pits and stone quarries will be opened up. Government has published a Preliminary Materials Report, 2000, which identifies suitable locations of such quarries and borrow pits. The potential sites have been generally observed to be free of homesteads, buildings, and other environmentally sensitive structures. Since most of the negative impacts identified in the EA reports relate to the construction phase of the project, mitigation and support measures will best be achieved through the incorporation of suitable clauses in the contract documents, which will be done before tendering of the works contract starts, Such clauses include, among others, provisions for appropriate measures for storage, handling, transportation and disposal of all waste material; provision of adequate sanitary facilities; rehabilitation and surface restoration of borrow pits; basic training in construction health and mitigation measures against spread of HIVIAIDS; and sustainable seeding and tree growing to restore vegetation to its original condition, The project also provides for specific measures under the roadside amenities, road safety and the HIVIAIDS components to minimize negative environmental and social impacts and enhance social welfare and positive impacts. Social Safeguards The MORPWH has mobilized Consultant services to assist the Government in preparation of the Resettlement Policy Framework and the Resettlement Action Plans for all road sections under the project. Work has commenced and the Government has furnished the World Bank with a Resettlement -Policy Framework, which has been reviewed and cleared by the Bank and disclosed, to the public in the country and in the Bank s InfoShop (January 14,2004). According to the preliminary surveys carried out, it has been observed that there will be limited displacement of businesses and housing, specifically in Nakuru Town, Salama Market, Chepseon Market and Makutano, which are all in Machakos and Nakuru districts. Components for which some land acquisition is required and therefore will affect people living in these areas are: 1. General road improvement, which will affect: 0 People who have businesses located along road reserves; and 0 people settled on areas, which will be affected during the construction phase. -76-

87 2, Widening of certain road sections, which will effect: 0 Settlement along the corridor; 0 Businesses located in areas earmarked for widening to four lanes; and 0 Agricultural activities that support livelihoods that will be displaced by road development activities. The resettlement plans, which have been prepared on the basis of the RPF, are centered on a development strategy package aimed at improving or at least restoring the economic base of the affected persons. In order to obtain cooperation, participation and feedback from these communities, a systematic information dissemination strategy to educate and inform them of their rights has been adopted where they have been consulted during planning and preparation of the resettlement plans. This has been done through formal and informal leaders as well as representatives of the local communities. Local authorities are a part of this consultative process so that they can provide the necessary clarification of matters that arise. To this effect, workshops and consultative focused group discussions have been held in cooperation with Local Authorities and District Development Offices. These workshops will also ensure coordination of the tasks to be undertaken as well as planning for all the stakeholders involved at the start of each subproject. Follow-up workshop will be held to solve pending issues and suggest corrective measures to be fed back into the project as the implementation goes on. The Consultant, CBOs and Government agencies (including representatives from County/Town Councils) will visit the sub-projects; report the progress of resettlement and rehabilitation of project-affected persons (PAPS) in progress reports. Methods of valuing assets The consultant will adopt legally acceptable valuation procedures adopted by the Government and acceptable to the Bank for purposes of fairness and consistency. These methods will consider replacement costs and types and levels of compensation under the Kenyan law. Valuation of lost assets will be made at their replacement cost. A Team including Consultants, Ministry for Lands Officials, County/Town Council representatives, elders, and villagers will visit the affected areas, Each asset will be enumerated and inscribed on a questionnaire register. Values of each asset will be pre-printed, shown to the affected person, and set against the type and number of such losses that the individual will be shown, and the total of all losses as well, The inventory and evaluation will be signed and a copy given on the spot to the affected person. The form will say, and the affected person will be notified, that the inventory will not be official until a second signed copy, verified by project supervisory staff, is returned to the affected person. At this time, a copy of the grievance procedure will also be given to the affected person, Methods of Compensation for loss of property The Kenyan law recognizes compensation for loss of property, including houses, crops and trees, due to implementation of development projects. It also recommends a fair compensation for the loss of property paid at market value. Property loss falls under four categories namely: Property owners Business tenants Residential tenant Encroachers (using land) Squatters The Kenya community law states that all land belongs to the Govemment and in case of expropriation the land is to be compensated at market price. Private professional agencies such as Private and independent real estate agencies, banks or mortgage firms are engaged in determining market values for land, or to -77-

88 evaluate the adequacy of administratively set compensation. The local governments through purchase will acquire the land required. The Collector of Compensation or valuation expert in consultation with field Valuation Officers at the Ministry of Lands will establish the value of the land. Affected people, who will lose their titles, will be provided new land with titles. Those without titles will also be provided land in accordance with the legal status of the land previously cultivated or exploited. Economically marginalized PAPs with reduced access to land will be given particular attention by providing them with more land in order to enhance the sources of livelihood. Replacement cost for other assets: For public infrastructure: In-kind replacement under the force account within an agreed time, or full compensation to the agency replacing the service is required, e.g. public phone booths. For cultural property and community-owned facilities: In-kind replacement or compensation at replacement cost for land and structures (e.g. religious churches, mosques, private or community-operated schools, village meeting houses, local libraries). For cash crops: Arrangements should be made to allow for harvest or market value should be paid for lost cash crops. The annual market value of crops for the previous 3 years is deemed appropriate as crop compensation. Other assets: Tube wells, graves, fishponds, poultry houses, fences and other tangible assets should be replaced in kind (or with functional equivalents) relocated or be compensated at replacement cost. The consultants together with the MORPWH MOF and local government agencies will conduct the execution of the expropriatiodcompensation operations. PAPs will be consulted about compensation arrangements. Cash compensation amount and size of land offered for compensation will be presented to each eligible PAP for consideration and endorsement before cash payment for land can be affected. The following will be undertaken: - A Census of the affected people - Asset inventory survey to determine whether the asset lost is temporary or permanent and assignment of its economic value. The affected persons will be categorized in one of the following groups: a) Those who have formal legal rights to land (including customary and traditional rights recognized under the laws of Kenya), b) Those who do not have formal legal rights to land at the time the census begins but have claims to such land or assets provided that such claims are recognized under the laws of Kenya and become recognized through an identified process, c) Those who have no recognizable legal right or claim to the land they will be occupying, The process will involve review of tenure documents owned by occupants, interviews with households and groups in the affected area, Local authorities and ministry of land concerned with land ownership and management. The persons in a) and b) will be provided compensation for the land they lose and other assistance ensuring they are informed about options, consulted on choices and provided with prompt and effective compensation. Persons covered under c) are provided resettlement compensation in lieu of land and other assistance as necessary. Gender Issues in the Resettlement Program Attention will be paid to the needs of both men and women. Given that women are usually excluded in decision-making, special efforts will be put in ensuring that women groups and women leaders are part of the consultative processes. Issues such as, access to health facilities, access to markets, schools, rivers and forests for fuel and other needs will be given special attention when they arise. -78-

89 Equally important will be economic activities at the roadside that include vegetables, fish, and charcoal that are mostly managed by women and children, which will be handled with extra sensitivity. Needs for sanitary facilities such as toilets and waste disposal will be addressed with due consultation and participation of both men and women taking account of their special needs and responsibilities. Institutional framework Decision making regarding policy and other strategic areas regarding the subcomponents will be made by a consultative body made up of: Ministry of finance, Ministry of Lands and Settlement(physica1 planning department), Ministry of Regional Development, MORPWH, Ministry of Agriculture and Ministry of local Governments. The local authorities involved in this project are: Kilifi, Kwale, Nakuru, Kericho, Kisumu, Narok and Machakos. Local NGOs will also be involved in all matters that they can provide input on in this project. A local NGO will be engaged to implement and monitor the HN/AIDS component of the project, and it is expected that the same NGO will also assist in planning, management and monitoring of the implementation of the social mitigation program. B. Proposition For The Establishment of an Environmental and Social Management Unit (ESMU) in MORPWH Current Staffing Levels of the Roads Department The current staffing level of the entire Roads Department, MORPWH is sufficient to coordinate and oversee the smooth implementation of the Project including coordination of the relevant Consultancy and Contracted Civil works Services. There is however need to built more capacity in personnel and equipment to enhance performance of the newly formed Special Program Environmental and Social Unit of its Planning Branch. The Chief Engineer (Roads) who is responsible for roads construction and maintenance has under him a Chief Superintending Engineer (Planning) under whose docket the Environmental Management in relation to road construction and maintenance falls. A senior Environmentalist has been seconded from National Environment Management Authority (NEMA) to the MORPWH, Department of Roads, to offer technical guidance to the Implementing Engineers, This expert is working closely with a Roads Engineer to enhance the operations of the Special Program and Environment unit, as it is currently known to be. However, this denomination of the unit does not fully capture the mandate of a unit that needs to address environmental and social impact aspects involved in the road sector activities -hence, we propose that the unit be named as the Environmental and Social Management Unit (ESMU). Establishment of an ESMU The Special Program and Environment Unit has been established and operational for the last four years. This Unit needs to be transformed into a permanent establishment in order to mainstream environmental and social concerns in the design, implementation, and maintenance of road infrastructure. The Unit also needs to engage in capacity building across the various departments in the Ministry, as well as bring about awareness in the general public. The proposed ESMU should be placed high enough in the administrative hierarchy in order to maintain horizontal relationship with the various departments, as well as be involved in decision-making process involving the departments of the MORPWH. Such placement is also strategic because it facilitates liaison with relevant partners, such as NEMA, Ministry of Lands and Settlement, NGOs, and others, who could play a vital role and serve as backstopping in addressing complex environmental and social mitigation measures, capacity building and strengthening of key stakeholders and other interest groups of the road project. -79-