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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Infrastructure Sector Unit Europe and Central Asia Region Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (SCL-41450) ON A LOAN IN THE AMOUNT OF US$20.0 MILLION TO THE REPUBLIC OF LATVIA FOR A HIGHWAY PROJECT May 7, 2001 Report No: 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 Rate Effective December 21, 2000) Currency Unit = Lat Lat I = US$ US$ = Lat LATVIA FISCAL YEAR January 1- December 31 ABBREVIATIONS AND ACRONYMS ADT - Average Daily Traffic CIS - Commonwealth of Independent States EBRD - European Bank of Reconstruction and Development EU - European Union FSU - Former Soviet Union HDM - Highway Development and Management Model ICB - Intemational Competitive Bidding IRI - International Roughness Index ERR - Economic Rate of Return LRA - Latvian Road Administration LRD - Latvian Road Department LRSD - Latvian Road Safety Directorate MOT - Ministry of Transport MU - District State Road Management Unit NCB - National Competitive Bidding NPV - Net Present Value PIU - Project Implementation Unit PMS - Pavement Management System RMD - Road Maintenance Division RRA - Regional Road Administration Vice President: Country Director: Sector Director: Sector Manager: Program Team Leader: Johanes F. Linn, ECAVP Michael F. Carter, ECCO9 Ricardo A. Halperin, ECSIN Eva Molnar, ECSIN Cesar A. Queiroz, ECSIN

3 FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF LATVIA CONTENTS Page No. I. Project Data I 2. Principal Perfornance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 1 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome Sustainability Bank and Borrower Perfornance Lessons Learned Partner Comments Additional Information 20 Annex 1. Key Performance Indicators/Log Frame Matrix 21 Annex 2. Project Costs and Financing 22 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 26 Annex 6. Ratings of Bank and Borrower Performance 27 Annex 7. List of Supporting Documents 28 Map IBRD Number 28187R 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 Project ID: P Project Nane: HIGHWAY Team Leader: Cesar Queiroz TL Unit: ECSIN ICR Tvpe: Core ICR Report Date: May 7, Project Data Name: HIGHWAY L/C/TF Nimber: SCL CountrylDepartment: LATVIA Region: Europe and Central Asia Region Sector/subsector: TH - Highways KEY DATES Original Revised/Actual PCD: 10/30/95 Effective: 08/02/97 07/10/97 Appraisal: 12/07/96 MTR: 06/30/97 02/08/99 Approval: 03/27/97 Closing: 12/31/ /31/2000 Borrower/lImplementing Agency: Other Partners: REPUBLIC OF LATVIA/LATVIAN ROAD ADMINISTRATION European Union (EU Phare) STAFF Current At Appraisal Vice President: Johannes F. Linn Johannes F. Linn Cotntry Manager: Michael Carter Basil Kavalsky Sector Manager: Eva Molnar Dominique Lallement Team Leader at ICR: Cesar Queiroz Anders Bonde ICR Primary Author: Robert Nooter 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: HS Sustainability: HL Institutional Development Impact: SU Bank Performance: HS Borrower Pelfornmance: HS QAG (if available) Quality at Entrv: S Project at Risk at Any Time: No ICR S 3. Assessment of Development Objective and Design, and of Quality at Entry 3. 1 Original Objective: The overall objectives of the project were to preserve the Latvian road network and to minimize total road transport costs in Latvia. The specific objectives were to: (a) Expand the level of periodic maintenance where it is economically justified;

6 (b) Improve the efficiency and quality of the road maintenance by introducing improved technology and quality control and by increasing LRA's cost consciousness and economic justification capabilities; (c) (d) (e) cost. Support the development of the private road construction and engineering industries; Improve road safety conditions in Latvia; and Establish the mechanism and level of funding required to achieve the minimum total road transport These objectives were consistent with the Bank's strategy for Latvia in its transition from a centrally planned to a market economy, which included measures to stimulate and support private sector development. This project was important for improving the condition of the country's transport infrastructure, which in turn was an essential part of the environment necessary for private sector development. The project also facilitated the objective of deepening structural reforms by encouraging the transition from force account operations in the road sector to the use of contracting, and the development of an efficient privately owned and operated road construction industry. The objectives were clearly stated, and were realistic in terms of the country's capabilities. The Latvia Road Administration (LRA) had capable engineers, but they were out of touch with the latest technological developments in their industry because of the isolation from the West during the Soviet period. LRA's management wanted to make a transition to methods consistent with a market economy, and the project was able to provide the means to support the transition process. Thus, the project objectives reflected the strategies of both the country and the World Bank. This coincidence of interests reduced project risks because of the deep sense of ownership that the road administration had in the project. 3.2 Revised Objective: The original objectives remained unchanged throughout the life of the project. 3.3 Original Conmponents: The Highway Project included a four year program of activities consisting of the following components, all of which were to be implemented by the LRA. (a) Periodic Highway Maintenance (US$27.0 million) - Repaving and rehabilitation of approximately 230 km of overlays and 750 km of surface dressings for the Main and First Class road network. (b) Bridge Repair and Reconstruction (US$12.3 million) - Repair and reconstruction of bridges in critical condition on the Main and First Class road network

7 (c) Road Safety Improvement (US$6.0 million) - Design and implementation of remedial measures to improve major accident black spots identified during the preparation of the project (US$2.5 million), and improvement of road safety in the Bauska and Iecava Regions (US$3.5 million). (d) Gravel Road Maintenance and Low Cost Bitumenization Techniques (US$0.7 million) - Technical services to introduce cost-efficient maintenance of gravel roads including low cost bitumenization and to perform economic evaluation of these techniques (US$0.2 million), and implementation of pilot projects to complement the technical services (US$0.5 million). (e) Equipment for the Laboratory (US$0.5 million) - Laboratory equipment needed to perform European Union-standard testing for road maintenance and construction. (f) Institutional Strengthening and Training (US$0.7 million) - Services to (i) review the detailed design, quality control and supervision of the project (US$0.3 million for highways and US$0.1 million for bridges); (ii) improve design procedures and prepare a research program to adopt EU standards (US$0.1 million); (iii) strengthen the local road construction industry through the provision of training for private road construction and engineering companies (US$0.1 million); and (iv) improve LRA's and the Latvia Road Safety Directorate's (LRSD) capabilities to identify accident black spots and to design remedial treatments (US$0.1 million). In addition to the above costs, physical contingencies of ten percent and price contingencies calculated on the basis of estimated worldwide inflation for the foreign costs and estimated domestic inflation for the local costs over the project period totaling US$9.7 million were included. Thus the total project cost was estimated to be US$56.9 million net of duties and taxes. The design of the project components was realistic in terms of LRA's ability to implement them, and were consistent with the project objectives. The first and second components were supportive of the first objective of expanding periodic maintenance, as well as providing the means for developing the private road construction industry. The third component was directly relevant to achieving the improvement of road safety conditions. The fourth, fifth and sixth components were the means for achieving the improvements in efficiency and quality of road maintenance, as well as providing for a study of the financing arrangements for road maintenance. Thus, the components were directly linked to the achievement of the project objectives. The project design also reflected the lessons leamed about the road sector from prior projects, both in ECA and throughout the world. This is demonstrated in the emphasis placed on maintenance rather than new investment, in the provision of timely maintenance to avoid excessive future maintenance costs, in the use of economic analysis for the selection of priorities for the use of available financing, and in the use of contracting instead of force account for periodic maintenance operations. 3.4 Revised Components: The components remained the same throughout the life of the project. Adjustments were made in the lengths of road repaired and the number of bridges rehabilitated, depending on the rate of deterioration of the road surfaces during the implementation period and detailed surveys made each year, as indicated below. (a) Periodic Highway Maintenance (US$34.95 million) - The actual works were more intensive than planned during preparation, especially in regard to the need for leveling layers on many of the road surfaces that had been considered for surface dressings only. Specifically, km of roads were treated with a single surface dressing compared to a planned 750 km at appraisal. As the additional leveling is a more - 3-

8 expensive procedure than a single surface treatment, only a total of km of roads were able to be rehabilitated compared to an estimated 980 km at appraisal. However, as the leveling made a greater improvement in the road by reducing the roughness more than would have been the case with only a surface dressing, this resulted in an increase in the economic rate of return (see para. 4.3 and Annex 3). Decisions to alter the original design were taken with the use of careful economic analysis and in keeping with sound road management practice. (b) Bridge Repair and Reconstruction (US$10.71 million) - The exact number of bridges to be repaired was left open at appraisal, and was to be based on detailed field investigations. A total of eight bridges were rehabilitated or reconstructed on the Main and First Class road network, as shown on the attached map. (c) Road Safety Improvement (US$7.41 million) - This component was carried out as originally planned, including design and implementation of remedial measures to improve major accident black spots identified during the preparation of the project, and improvement of road safety in the Bauska and lecava Regions. The improvements in the Bauska Region, fnanced by EU-Phare, are still under implementation and are expected to add an additional US$2.2 million to the total spent for road safety under the project. (d) Gravel Road Maintenance and Low Cost Bitumenization Techniques (US$0.32 million) - This component was also carried out as originally planned, although at a somewhat lower cost. (e) Equipment for the Laboratory (US$0.22 million) - Laboratory equipment was purchased as planned, but at somewhat lower cost since equipment was also received from other donors. (f) Institutional Strengthening and Training (US$0.79 million) - This component was also carried out as originally planned, as described in para. 4.2 (f) below. In summary, the overall total project costs were US$54.40 million at the time of the closing of the IBRD loan, compared to the appraisal estimate of US$56.90 million. The work still to be completed for the road safety improvements in the Bauskas Region, financed by the EU-Phare and the Government's counterpart contribution, will add an additional estimated US$2.2 million to the final overall cost of the project, for a total of US$56.20 million. 3.5 Quialitv at Entty: There was no Quality Assurance Group assessment of this project, but the ICR finds the quality at entry to be satisfactory. The objectives are consistent with the objectives of the Bank's strategy for Latvia and the Government's priorities, the quality of the design is appropriate for a country that was just emerging from the Soviet Union, the preparation took into account the Bank's safeguard policies with special relevance to environmental considerations (wherein an environmental review was carried out during project preparation and safeguards implemented during implementation), and the risks were appropriately assessed and addressed. The economic analysis was done competently for improvements in roads, bridges, and road safety covering 96 percent of total project costs. 4. Achievement of Objective and Outputs 4.1 Outcome/achiev ement of objectiv 'e: All of the project objectives were achieved or exceeded, and overall the project deserves a Highly Satisfactory rating. Specifically: -4 -

9 (a) Expand the Level of Periodic Maintenance Where It Is Economically Justified. The level of financing from Latvian sources for maintenance of the national road network was expanded from US$25.5 million in 1996, the year prior to project startup, to an estimated US$60.0 million in This substantial increase was the result of the creation of a Road Fund for the accumulation of road user charges (see below for a more complete explanation of the Road Fund), a portion of which is allocated to LRA's budget for road maintenance. In the early years of the project, World Bank financing made an important addition to the amount of rehabilitation that could be carried out, thus helping to mitigate the deterioration in the condition of the roads. While the LRA would like to have more funds than the amounts available in recent years, the country's financing for road improvements is at the level of 1.0 percent of Latvia's GDP, which compares favorably with other developed and developing countries around the world. Overall, the level of periodic maintenance has been expanded substantially, and to a generally satisfactory level compared to other countries. (b) Improve the Efficiency and Quality of the Road Maintenance by Introducing Improved Technology and Quality Control and by Increasing LRA 's Cost Consciousness and Economic Justification Capability. Improvements in the technologies and operating methods used by LRA had already been started at LRA's own initiative, with support from an EBRD project that preceded the Highway Project. Also, LRA had contracted for the installation of a system for evaluating the priorities for road maintenance (the Belman system), and was in process of introducing it at the time of preparation of this project. The project added to these changes in several important ways that are described in para. 4.2 below. The most significant improvement in efficiency was the reduction in the unit costs for basic periodic maintenance operations such as overlays and surface dressings. During project preparation, the Bank staff observed that unit costs for work being performed under previous work programs was high compared to other Baltic countries. Contracts were being let under national bidding procedures, without foreign competition. The Bank urged the LRA to utilize ICB procedures instead of national bidding in order to create a more competitive environment. The local contracting industry objected to the change, but the LRA agreed with the Bank and proceeded accordingly. This led to bidding by contractors from neighboring countries and to the formation of joint ventures between local and foreign companies (the Danish company Colas and the Finnish company Lemminkainen both formed joint ventures with local companies), resulting in bids that were about 30 percent lower than estimates that were based on the cost of previous contracted works. -5 -

10 Latvia Unit Costs in Lats for Road Improvements Unit Pothole Patching t 47,21 48,62 42,00 Crack Sealing m 0,67 0,72 0,79 Bitumen Tack Coat m 0,19 0,21 0,11 Asphalt Concrete Leveling Course t 36,08 32,65 26,9 Single Surface Dressing m 1,06 1,10 0,81 Grading and Compacting of Shoulders 2 0,19 0,19 0,12 Cutting of Bushes ha 513,10 528,5 382,32 Asphalt Concrete Wearing Course, 4 cm m 2 5,31 3,39 2,73 2 Asphalt Concrete Wearing Course, 6 cm m 4,93 5,09 3,96 Hot Remix-Plus m 2,91 3,59 2,78 Road Marking m 2 4,80 4,27 4,21 Of particular significance is the reduction in the unit costs for asphalt concrete leveling and wearing courses and for surface dressings, since these make up most of the cost of the periodic road works included in the project. In addition, quality controls were reinforced by insistence on rigid inspection of completed works as a basis for full payment of contracted work. Links were established between LRA and its Nordic counterparts in a manner that will facilitate LRA's access to new technologies over the coming years, as is described more fully in 4.2 (f) below. (c) Support the Development of the Pivate Road Construction and Engineening Industries. Prior to the start of the project, all of the road construction companies had been privatized. Training carried out under the project was helpful in improving the operations of these private road contractors in Latvia, including contract bidding procedures, cost accounting, and private sector management skills. Also, the introduction of International Competitive Bidding for the placing of periodic maintenance contracts intensified the pressure on the local contractors to find ways to lower their costs and improve their quality in order to be able to compete. In the final analysis, this made them better and stronger companies able to carry out high quality work at competitive prices. At the time of project preparation, routine maintenance was being carried out by 26 publicly owned Regional Road Administrations, each responsible for the routine maintenance operations in one administrative unit of the country. These units were combined into four publicly owned companies, each of which operates on a contract basis for its respective area of the country, based on contracts issued by the 2-6 -

11 LRA and with payments made only for actual work performed. Some of the routine maintenance functions, however, including road marking and some of the installations of road signs, barriers, and reflectors, are contracted out in open tendering to private companies. (d) Improve Road Safety Conditions in Latvia. The physical improvements in the areas identified as accident black spots have led to a significant reduction in the number of accidents and fatalities at these locations. The construction of underpasses on major routes, for example, made access to facilities on both sides of the roadway more accessible, especially for children, disabled, and old people who had previously had difficulty in crossing busy thoroughfares. While the data is based on only the past two years (and in some cases even less), the average number of accidents involving personal injury has been reduced at these locations from 12 accidents per year to one, and the number of fatalities from 9 to zero. For the country as a whole, road fatalities declined from 611 in 1995 to 588 in 2000, and the total number of accidents involving personal injury declined from 4,903 in 1995 to 4,482 in During the same period, registered vehicles increased from 368,000 in 1995 to 701,804 at the beginning of Thus, on a per vehicle basis, there was a significant reduction in the rate of fatalities and accidents during the project period, with the fatalities per 10,000 vehicles falling from 16.6 in 1995 to 8.4 in On October 21, 1997, the Road Traffic Law was passed. On the basis of this law, road traffic regulations, regulations for equipping work areas on roads and streets, normative documents for vehicle technical control, vehicle registration regulations, drivers' qualification regulations, regulations for road signs, vehicle marking, emergency vehicle coloring and equipment, road marking and other state standards for Latvia have been developed. On October 25, 1991, a new public institution was established at the Ministry of Transport and Communications called the Road Traffic Safety Directorate (CSDD). CSDD is a non-profit public joint stock company dealing with vehicle registration, administering of qualification examinations for drivers and issuing of driving licenses, securing technical inspection of vehicles, surveillance of roads for safe traffic, and developing and maintaining a vehicle and drivers' register and data base. Reporting on traffic safety conditions has improved, including availability of road safety data, which is now available on the Road Traffic Safety Directorate web site at Latvia has also adopted the 1968 Vienna Convention standards "On Road Traffic" and "On Road Signs and Signals". (e) Establish the Mechanism and Level of Funding Required to Achieve the Minimum Total Road Transport Cost. The Government introduced a Road Fund during the period when the project was under preparation, which began to accumulate funds in April The key features of the Latvian Road Fund which stands out as an example of global best practice are as follows: (i) Revenues come from vehicle license fees (collected by the Road Fund) and a levy added to the price of fuel. Key to its success was the manner in which the levy was introduced. The Ministry of Finance made certain that when the levy was proposed (as well as each time it was increased), it remained budget-neutral, i.e. if the Road Fund levy went up by 2 cents per litre, the general tax on fuel went up by more than 2 cents. General taxes, therefore, increased rather than being diverted to the Road Fund; (ii) The Fund has a broad-based oversight board, which is truly independent. It has only advisory status, but appears to be quite effective. Its 13 members include a chairman (the Minister of Transport and Communications), six representatives of the central government, two representatives of local government and six representatives of civil society. The central government members are ex officio, while the rest are nominated by the organizations that they represent; (iii) The Road fund finances national, municipal and local roads (30 percent goes to the municipalities and local roads). They operate with transparent and very well thought out formulas for dividing the finds between the various municipalities and local entities; (iv) Finally, the Road Fund is rigorously audited

12 There are extensive checks to ensure that the funds have been spent on approved programs and that work has been carried out according to specifications. There have been some problems at the municipal level (some municipalities initially spent the money on school buildings), but work is ongoing to tighten financial controls on spending. As Road Fund revenues increased, other sources of financing for road maintenance (principally Government budget support) were phased out. Road Fund revenues channeled to LRA increased due to the increases in vehicles in Latvia, plus some adjustments in the level of taxation. At present, 50 percent of the excise duty on fuel, as well as vehicle registration fees, must be put into the Road Fund on a regular basis. No financing is provided from the general budget for road maintenance except for a rural road rehabilitation program, and foreign loans that are used for road maintenance are expected to be repaid from Road Fund resources. The Road Fund finances subsidies to the railway system and bus transportation in rural areas, and road maintenance for municipalities, in addition to the operations of LRA. At present, about 67 percent of the Road Fund revenues now are available to LRA for the maintenance and improvement of the national road network. The overall result of the creation of the Road Fund was an increase in revenues available to LRA for road rehabilitation from US$25.5 million in 1995 to an estimated US$60.0 million in 2000 (without including foreign loans). Road Fund resources available for the national road network equaled 1. I percent of Latvia's GDP in 1998, which compares favorably with allocations for road maintenance in developed countries. There was an eight percent decline in income to the Road Fund in 2000 compared to 1999 due to the apparent failure on the part of the Ministry of Finance collection agencies to collect all fuel excise taxes, but the overall level of financing for road maintenance was still at an acceptable level. At the same time, the use of the Belman system for planning road maintenance activities based on economic analysis assures that the available funds are being used to the best advantage. The introduction of the Road Fund in 1994 undoubtedly added to the resources available for road maintenance in Latvia, in contrast to other countries that relied solely on budget allocations for this purpose. The fact that the Road Fund also financed municipal streets and subsidies for other forms of transportation probably helped to secure support for the Road Fund Law at inception, and to keep the Road Fund in place. At the same time, those who oppose the use of Road Funds would argue that the incorporation of certain road user charges into compulsory financing arrangements results in a lack of flexibility for programming the use of public resources at the time the budget is prepared. On the whole, however, in Latvia's case the use of a Road Fund provided resources at what appears to be a reasonable level of financing on a secure and regular basis, and as such can be considered as a desirable development. 4.2 Outputs by components: (a) Periodic Highway Maintenance. The periodic maintenance component was carried out on schedule and at the estimated cost. A total of km of roads were improved at an average cost of US$46,451 per km, including improvements in drainage, road markings and signs, and other related improvements in addition to the basic improvement of the pavements. The project helped to improve the roughness of the entire Main Road Network, 1610 km in length, as indicated by the average roughness of the network as follows: -8 -

13 Year Roughness (IRI, m/km) (b) Bridge Repair and Reconstruction. A total of eight bridges were repaired or reconstructed (see map attached). (c) Road Safety Improvement. Under the project, improvements in accident black spots identified through data collection introduced under the project were designed with the help of highly qualified intemational consultants, and construction is now completed. Also, local design personnel were trained in accident black spot design techniques so that they could carry out similar designs after the experts had departed. A total of nine accident black spots were improved. Also, Latvia carried out a broad based road safety program involving many Government agencies. It established a Traffic Safety Council under the Cabinet of Ministers, composed of members from the Ministry of Transport and Communications, the Ministry of Interior, the Municipality of Riga, and the Community of Municipalities. The Council reviews and approves traffic safety programs, and sets tasks for the Ministry of Transport and Communications in the road safety area. It has also prepared a Traffic Safety Program for the years with a target of reducing the number of fatalities from 627 (1998) to a level of 300 by the end of the period. As part of this program, the Government has established a target for annual road safety expenditures of at least Lat 3.0 million, which is about 10 percent of the annual road budget. The combined impact of these activities and the improvements in accident black spots resulted in significant improvements in road safety conditions, as described in para. 4.1 (d) above. (d) Gravel Road Maintenance and Low Cost Bitumenization Techniques. International consultants were engaged to design test sections for trying alternative techniques for the bitumenization of gravel roads. The test sections were installed in 1998, and are now in process of evaluation. While it is too early to assess which of the techniques offers the best choices for Latvia, the work that has been carried out has been satisfactory. (e) Equipment for the Laboratory. Laboratory equipment was procured for the purpose of upgrading the capacity for conducting tests on asphalt concrete and other road construction materials. The equipment was installed and put into operation in a satisfactory manner. The total amount of equipment financed by the project was somewhat less than originally planned since LRA received support for this purpose from other financing agencies. (f) Institutional Strengthening and Training. International consultants, financed through technical assistance programs from Sweden, Finland and Denmark, were engaged in conjunction with local consultants to introduce modem design and quality control practices, using the project's periodic works program as a practical example. Task teams were organized to review and update Latvia's design standards consistent with EU standards; this work is still ongoing, but is making good progress. Training was provided in Latvia to the local road construction industry in competitive bidding procedures and how to carry out contracts, augmented by workshops in Estonia and France. LRA introduced international competitive bidding, as described above, resulting in a local industry that is able to compete with foreign -9-

14 firms. A pavement improvement technique called "mill and fill", whereby a milling machine is used to remove high spots on the pavement surface and asphalt concrete is applied to fill the remaining low spots, was introduced and tried on a test basis. The final results of quality and cost are still being evaluated, but at a minimum Latvia now has access to this technique for future use in appropriate applications. While LRA was already installing a Belman system for determining road maintenance priorities, it has also begun to use the World Bank computer program HDM-4. LRA's linkages to other road administrations in all of the Nordic countries were strengthened. Many Latvian road engineers visited the Nordic road administrations, and Latvia was invited to participate in the Nordic Road Council meetings. Swedish bilateral finding was obtained for establishing vehicle testing stations and other applications that were additional to the project itself. Finland and the US Federal Highway Authority helped to build up Latvian technical competence through the T-2 center that was established in Latvia. Also, cooperation between the road administrations of the three Baltic countries was encouraged. A recent example of this was the Regional Transport Seminar held on November 16-17, 2000, which was hosted by the Latvian Ministry of Transport and Communications in Riga, to which the other two Baltic countries were invited. The purpose of the conference, which was well attended by all three countries, was to assess the progress made in each country in restructuring their transport sectors, and to compare the progress made in each subsector. In summary, through its exposure through these contacts, Latvia has leamed how to access interesting new technologies and policy options, and they are now able to find what they need themselves. In summary, all of the planned improvements in quality and institutional strengthening, as well as some additional improvements, were carried out as planned and in a highly satisfactory manner. 4.3 ivet Present IValue/Economic rate of return: Net Present Values (NPVs) and economic rates of return (ERRs) were calculated at project completion based on actual costs and updated traffic counts, with the following results: Project Component V at Appraisal NPV at Completion ERR at Appraisal ERR at C om p letion Periodic Highway US$87.5 million US$148.6 million 34.9 % 56.8 % Maintenance Bridge Repairs and US$525.0 million US$550.7 million 227 % 289 % Reconstruction l The cost of capital used for both calculations of NPV was 12 percent. Economic rates of return and NPVs were not calculated for the Road Safety component due to the relatively short time period for accumulating data on accidents since the improvements were made. However, based on the preliminary data described in para. 4.1 above, the results should easily exceed the ERR of 65.0 percent and NPV of US$10.2 million estimated at appraisal. 4.4 Financial rate of/return: Not applicable. 4.5 Institutional development inipact: The institutional development impact was considerable, as described in 4.2 (f) above. LRA had already started the process of adopting modem road maintenance techniques before the project began, but this process was further stimulated and accelerated by the activities that were carried out as part of the

15 Highway Project. 5. Major Factors Affecting Implementation and Outcome 5. 1 Factors outside the control of govenmment or implementing agency: There were no significant factors outside of the control of the Govermment that affected the progress of the project. The only factor that had some negative impact, outside of the control of the implementing agency (LRA), was the recent decline in the collection of road user charges described in para. 4.1 (e). 5.2 Factors generally siubject to government control: The Government fulfilled all of its obligations under the project, including making counterpart funding available through the operation of the Road Fund. Loan signing and effectiveness were achieved on or ahead of schedule, and the project was completed within the original time frame. 5.3 Factors generally subject to inmplementing agency control: There were no factors under LRA's control that affected the project adversely. 5.4 Costs and financing: There was one major change in the financing arrangements for the project. During preparation, there were firm indications that the Kuwait Fund would provide US$15.0 million in co-financing for the project. However, the Government preferred to minimize its foreign borrowing, and decided to finance the US$15.0 million from its own resources, which was facilitated by the World Bank Structural Adjustment Loan that was available at that time. Consequently, the Government, at its own initiative, provided both the agreed counterpart financing of US$15.4 million and the co-financing amount. US$20.4 million of this amount came from the Structural Adjustment Loan, US$3.7 million from the Road Fund, and US$6.4 million from the Government budget for a total of US$30.5 million. This revised financing plan did not alter the project, which remained the same as originally planned in scope and size. Co-financing included in the project preparation was estimated at US$5.8 million in grant financing from EU-Phare for the renovation of two of the bridges included in the project, and for major road safety improvements in the Bauska and lecava Regions. The EU component was delayed somewhat due to the necessity of adapting the bidding documents and procedures to EU rules. However, the work on the two bridges and the improvements in the Iecava Region has been completed, and the work in the Bauska Region is now under way. Financing from the EU-Phare grant disbursed as of December 31, 2000 was US$3.58 million and is included in the project summary. The cost of the remaining work in Bauska is expected to add an additional US$2.2 million to the cost of the project when completed (US$1.5 million from EU-Phare and US$0.7 million counterpart financing from the Government), for a total EU-Phare contribution to the project of US$5.08 million. Co-financing from Sweden (US$0.3 million), Finland (US$0.3 million) and France (US$0.1 million) for technical support for improved gravel road maintenance techniques, quality control, design standards, and training in road safety and for private contractors was made available as planned. 6. Sustainability 6.1 Rationale. for sustainability rating: Sustainability of the project objectives is highly likely due to the Government's awareness of the importance of road maintenance and road transport for national development. This is evident in its commitment to the use of a dedicated Road Fund and its willingness to finance the Fund at an adequate level. Also, the environment within the Government is conducive to good management practices, with no apparent political

16 interference with operations or corrupt practices. Furthermore, there is a high level of commitment at the technical level to improving operations and introducing best practices. All of this bodes well for a continued high level of performance. In the recent past, there has been some reduction in the level of collections of fuel excise taxes even though there has been an increase in the number of registered vehicles and an obvious increase in traffic on the roads. LRA has called this to the attention of the tax collection agencies that have responsibility for collections. Until this situation is improved, financing available to LRA for road maintenance will be adversely affected, but not to such a degree that serious road deterioration would result unless the situation worsens significantly. Latvia is undergoing a comprehensive civil service reform that will affect all parts of the Government. In LRA's case, this will mean that its organizational structure will change from that of a non-profit state-owned joint stock company to an agency of the Government, reporting to the Ministry of Transport. However, the functions for which LRA will be responsible remain the same as previously, and therefore this change should not have any adverse effect on its operations or the sustainability of the project objectives. 6.2 Transitioni arrangement to regular operations: Through the assistance of project consultants and training, LRA has developed design standards based on Westem models that are used for both international and local contracting for periodic maintenance. It has also introduced competitive bidding procedures for periodic maintenance on a regular basis, and the training carried out under the project has developed the contractors' ability to function on this basis. Contractors have purchased new equipment to be able to comply with the requirements of Westem standards. Thus the operational procedures introduced during project implementation have now been incorporated into LRA's regular operations. In the area of road safety, the Traffic Safety Council has been established, and a new division has been established in LRA that is responsible for traffic safety functions. Also, financial sustainability is secured by the existence of the Road Fund, supervised by a Road Fund Board, which consists of representatives from Government, road users and civil society. The establishment of these organizations and operational procedures should provide reasonable assurance that the improvements in the road network made because of the project will be maintained in the future. 7. Bank and Borrower Performance Bank 7.1 Lending: Project preparation was carried out expeditiously and in a highly professional manner, and consequently the Bank's performance is rated as Highly Satisfactory. The project identification phase took into consideration the Government's and the Bank's assistance strategies, which recognized the importance of an adequate road network as essential for reaching the country's development goals. The project design benefited from lessons learned about the transport sector from other World Bank projects, resulting in placing emphasis on maintenance instead of new construction, the need to introduce new technologies and operational methods in order to modernize road maintenance operations, and the importance of an adequate and regular source of financing for road maintenance. The project counterpart was a single agency (LRA), which simplified the implementation process. Preparation was carried out with only four Bank staff, which was adequate to prepare all of the essential elements of the project while keeping the preparation cost to a minimum. The Bank staff correctly assessed that the Government counterparts were dedicated and competent, with a - 12-

17 sincere commitment to carrying out the project and sustaining it after completion, and that the Government was prepared to support the project with adequate financing. 7.2 Supervision: The supervision of the project was also Highly Satisfactory. Supervision missions were carried out on a regular basis with competent professional staff. Reporting was timely and reflected the progress being made. The compliance with legal covenants and the reporting of the Project Monitoring Indicators was done regularly. The numbers of Bank staff devoted to supervision was minimal, but fully adequate to keep track of project developments and progress. There were no deviations from Bank policies, and no revisions to the project design were necessary. 7.3 Overall Bank performa77ce: For the reasons outlined above, the Bank's performance is rated as Highly Satisfactory. Borrower 7.4 Preparation: The borrower was fully involved and cooperative in the preparation process. Both the Ministry of Transport (MOT) and the LRA had a keen interest in moving the preparation along as rapidly as possible, and provided all necessary information and support. The borrower had prior experience with intemational agencies through the implementation of an EBRD loan for road improvements, which greatly expedited the process of understanding procurement and contracting procedures to be followed in the Highway Project. The Government was already aware of the need to modemize its road maintenance operations, and many changes were already under way, so that the Highway Project could build on this base and take another step forward. Thus the Govermnent's role in the preparation process is also rated as Highly Satisfactory. 7.5 Government implementation performance: The Government met its commitments under the project without fail, including the timely and adequate provision of counterpart funding. All legal commitments were complied with, and there were no deviations from the Bank's safeguard policies. The MOT pursued the establishment of a Road Fund on its own initiative, as it recognized that this was essential for assuring a regular flow of funds for road maintenance. 7.6 Implementing Agency: LRA, the implementing agency, also deserves a Highly Satisfactory rating for its role as the principle implementing agency. Implementation was facilitated by the fact that an effective Project Implementing Unit (PIU) had been established for the preceding EBRD project, and could be used for the implementation of the Highway Project without the usual delay needed for the establishment of a new organization. Also, the LRA performed its tasks expeditiously and with competence, and was eager to adopt new technologies that proved effective. 7.7 Overall Borrower pe;fornmance: The borrower's overall performance is rated as Highly Satisfactory for the reasons outlined above. 8. Lessons Learned There were a number lessons that emerged from this project that have relevance to other projects in this sector: (a) Competent Counterparts Significantly Improve the Chances for a Successful Project. This, and its opposite (poor counterparts often lead to poor projects), is a lesson that is leamed repeatedly in World Bank operations, but can not be repeated too often. In this case, every step of the project, from preparation - 13-

18 to completion and then to sustainability, was facilitated by the extremely competent and dedicated staff at LRA and MOT. On the contrary, the best project design would have had limited impact if this were not the case. (b) A Maximum Degree of Competition is Necessary to Achieve Efficiency of Contracted Works. The preceding EBRD project was well designed and implemented, and there was a competent local construction industry capable of doing good quality work. However, the absence of international contractors reduced the level of competition, with the result that contracted operations were more costly than those in neighboring countries. The introduction of Intemational Competitive Bidding intensified the competition, with reductions in unit costs of 30 percent or more over the life of the project. The lesson to be leamed is that procurement procedures should take into account the maximizing of competition. In road operations, this can best be achieved when both local and foreign firms compete through the use of ICB, but with bidding packages sufficiently subdivided so that local fimns with limited financial capacity can also participate. (c) Simplicity Pays Off. Experience has indicated that simpler projects tend to be more successful, and the present project confirms this observation. The project had a single counterpart agency, the Latvian Road Administration, under the authority of the Ministry of Transport and Communications, which was responsible for implementation of all project components. This simplified both project preparation and supervision, and allowed the Bank staff to concentrate its efforts in a manner not possible with more complicated projects. (d) Continuity of Staff is Important. There was no change in the local counterpart staff over the life of the project. On the Bank side, there was one change of Team Leader, but with good transition and continuity as both Team Leaders remained in the same department (ECSIN). This allowed the participants in the project activities to have a continuous dialogue, and to develop trust and understanding of each other's viewpoints by working together over an extended period of time. (e) "Second Generation" Type Road Funds Work In Latvia, a "second generation" Road Fund demonstrated that this type of fund could win the recognition and support of the public at large while putting road managememt on a sound commercial footing. As such, it can also play an important role in meeting European integration requirements. Essential conditions for success were its transparency, an oversight board that is broad-based, independent and includes nongovemment members, beneficiaries of the fund that include local and municipal govenmments, and road user charges that are designed not to reduce general revenues. (f) Involvement of Highly Developed Countries in Bank-financed Projects Speeds International Integration. When highly developed countries (in this case, Sweden, Finland, France and the EU) are key foreign stakeholders in economic growth of a country, the availability of grants for technical assistance to support important refonn programs helps to re-integrate the economy into the intemational community and results in unusual speed in changing the traditional patterns of doing business

19 9. Partner Comments (a) Borrowerlimplementing agency: Comments of the Latvia Road Administration Historical Background After gaining independence Latvia started a transition period towards the market economy. The road sector budget decreased drastically in year 1992 and only emergency road repairs could be carried out resulting in a growing backlog of periodic road maintenance. An important step towards improving of road financing was the establishment of the Road Fund in The road construction industry was partly privatized. Latvia had no experience in public procurement and the relevant legislation had to be developed. The standards for geometric and pavement design were still based on the former Soviet Union design manual. Axle loads often exceeded the designed capacity of roads. The first Road Project in Latvia was being implemented from 1994 to The Project was financed by EBRD and JEXIM and included road periodic maintenance (120 km of overlays), the equipment for efficient winter maintenance and procurement of testing equipment according to Western standards. The institutional strengthening component included Asphalt Technology Study, Road User Charges Study, and Road Management Reorganization Sturdy. The EU-PHARE program was expected to finance part of the improvements of the Via Baltica road. Project Objectives The overall objective of the Latvia Highway Project was to minimize total road transport costs in Latvia. The following specific objectives were outlined to complimenthe overall objective: (a) Expand The Level of Periodic Maintenance Where It Is Economically Justfied It was agreed in the Loan agreement, that each year the Borrower shall submit to the Bank an economically justified work program. Repaving Work LRA uses the Danish Belman pavement management system. The sections are prioritized comparing the effect and cost of the selected solutions. After the implementation of the Project economic intemal rates of return and net present values were recalculated with the help of HDM3 model taking into account actual contract prices and vehicle operating costs. In most cases the actual benefit was higher than planned. IRRs in all cases exceeded 20% thus confirming the high cost effectiveness of the Project. In general, the current financing level is insufficient to cover periodic maintenance needs for all the state road network. In order to avoid concentration of all works only on the busy roads around Riga, and leaving some regions without any periodic maintenance, minimum financing quotas have been set for each region. LRA prepares an annual work program taking into account regional needs in addition to the cost benefit analysis. Bridge Maintenance The priority list of bridges was prepared by a consultant from SweRoad. The sequence of repairs was based on the actual technical condition of the bridges. Eight bridges were repaired under the Project. Other bridges from the list were repaired or will be repaired using local funds. The planned rates of return for bridges were

20 calculated as extremely high and remained such after recalculation at the end of the Project. In order to minimize road users' costs in all the cases temporary bridges or one free line for traffic was provided during reconstruction. Only on Gauja Bridge the heavy traffic was diverted to an altemative route. Traffic Safety At the beginning of the project LRA did not have a methodology for black spot analysis. Traffic safety experts from SweRoad prepared a manual for evaluation of various measures for the elimination of black spots. Black spot improvement works were started in The actual effect from black spot improvements can not be properly valuated yet because the period after reconstruction is too short. However, the fact that during the period after reconstruction heavy accidents have not been registered in the treated black spots make us believe that measures taken have been effective. (b) Improve the Efficiency and Quality of the Road Maintenance by Introducing Improved Technology and Quality Control and by Increasing LRA 's Cost Consciousness and Economic Justification Capabilities Design standards and specifications of the former Soviet Union were still in force in Latvia, but LRA had started the process of adapting design, specifications, construction technology and testing of road standards used in the European Union. In order to improve the efficiency and quality of the road maintenance the Project includes several studies oriented to introducing of Western design standards and improving of contract management and supervision. The Technical assistance was given by DHW Consultants to LRA and Technical Conmmittee for Standardization to review and adapt suitable EU standards regarding road geometric design, pavement structural design and related specifications and testing methods. Close cooperation was established between Latvian and European institutions of standardization. For the period until European norms will be developed Swedish asphalt norms "Road 94" were accepted for use in Latvia. Since 2001, LRA has developed new standard specifications for state roads. The new asphalt specifications are completely based on Western standards. LRA, in cooperation with local design companies and the State asphalt laboratory, developed repaving works specifications for the Highway project. The bidding documents were prepared according to the World Bank Guidelines by PIU. The works were contracted out to private enterprises on a contract basis through competitive bidding. The contracts described new requirements to the quality to be met and the penalties faced. The innovations in the contracts required improvements in contract management and supervision. The consultants from Finnish National Road Administration were assigned for contract management and supervision study. The consultant observed local contract management practice and made recommendations for organization and reporting obligations for contract management as well as substantial assistance was given to practical site supervision. The supervision of works was performed by supervisors on a contract basis or for smaller sections by LRA's regular staff. New model templates, such as site diary, quantity measurement form, payment certificates, etc., were introduced in practice not only for World Bank project, but for all periodic maintenance and reconstruction including EU and locally financed contracts. Improvements in contract management and supervision made possible more accurate evaluation of quality. The quality requirements and improved supervision made contractors concentrate more on quality and consider investments in new technologies. Latvia has 60,000 km of gravel roads of which 12,000 are state roads. For gravel roads LRA does not have a pavement management system. The Project included two components towards improving LRA's ability of

21 economic justification of gravel road maintenance projects. With the technical assistance from SweRoad, Scandinavian gravel road maintenance technologies for preventing of dusting were tested. In order to compare performance of local materials a pilot section was treated with three types of stone materials. We got information about approximate costs of the tested technologies. LRA provided the follow-up and maintenance of the pilot sections in order to evaluate the complete cost and durability of the tested technologies. The pilot project for introducing of the economic evaluation model HDM4 was started in one region with 300 km of gravel roads. There is software in the LRA and a trained project team capable to continue implementation of the HDM4 model in the entire country. Currently due to lack of financing for gravel roads, the Government has not ordered further implementation of the project. (c) Support the Development of the Private Road Construction and Engineering Industries The Latvia Highway Project introduced intemational bidding in the road construction market of Latvia. French consultant Ponts Formation Edition conducted a series of seminars in order to improve capability of local contractors to compete and to perform the contracts according to intemational contracting practice. Five seminars for directors and technical managers were held in Latvia, also one workshop in Estonia and Lithuania as well as a study tour to France. The main topics of seminars were financial management, quality management and the latest construction technology. The Highway Project also increased the periodic maintenance market in Latvia. This increase improved the economic situation of the local construction industry. The contractors invested in new technologies thus improving the quality of works. (d) Improve Road Safety Conditions in Latvia Latvian statistics on road accidents are among the worst in Europe. The Latvia Highway Project included several measures to improve the traffic safety situation on the state roads. SweRoad consultants assisted to prepare Road Safety Program of the Project. In order to develop local expertise in accident black spot analysis Swedish traffic safety experts were working in close cooperation with the newly established traffic organization division in LRA. Eight accident black spots were improved in the World Bank Project and Phare financed traffic organization improvements in lecava and Bauska towns on Via-Baltica. (e) Establish the Mechanism and Level of Funding Required to Achieve the Minimum Total Road Transport Cost Since 1994, Latvia has established a state road fund. The revenues of the State Road Fund consists of the annual vehicles tax and 50% of the excise duty on fuel. Although the State Road Fund can not cover the actual needs of the entire road network, it was continuously growing and the legal base of the Fund has been developed. An important contribution to the State Road Fund was given by the amendments to the law "On Excise Duty" adopted by the Parliament on May 16, They clearly determined the state policy towards the increase of excise duty in order to draw nearer the tax rates to those minimum rates determined by the European Union. Unfortunately, currently, the Road Fund does not ensure the level of funding required to achieve the minimum total road transport cost. In year 1999 and 2000 the collection from fuel excise tax was below the expectations and currently the Road fund ensures only 1/3 of optimal financing needs. At the same time, the Road Fund has become an example of how to involve all stakeholders in planing process of road transport funding. Road Fund Advisory Board includes representatives of state, municipalities, road builders and road users. Regular information about Road Fund budget and planned road maintenance activities has increased public awareness that road infrastructure is a service to be paid for. Road users start taking care of where their money goes and how it comes back to the road

22 Project Expenditures Borrower's Performance Preparation Components Total Project Funding from (USS million) Costs World Bank 1. Works (a) Highway Maintenance 34,95 14,42 (b) Bridge Rehabilitation 10,71 3,05 (c) Road Safety Improvements 7,41 2,00 (d) Gravel Road Works 0,32 0,24 2. Equipment and Materials 0,22 0,20 3. Consulting and Training 0,79 0,09 Total Cost 54,40 20,00 The borrower established a project team with the necessary competence and capacity for project preparation. At the time of preparation of the project. The EBRD project was already coming to the end of implementation. The Borrower had good experience in road projects financed by IFI. MoT and LRA had clear views on actual transport infrastructure needs. The proposals of project components were economically justified and corresponded to the actual situation. The borrower provided the necessary information for project preparation on time. The relevant feasibility studies were prepared and stake-holding institutions involved in project preparatory stage. Implementation It was agreed to keep PIU from the previous project. PIU had good experience of EBRD procurement and financing procedures. There were no difficulties to learn World Bank procedures and ensure adequate implementation. The loan covenants were followed and proper reporting ensured. A wide range of local experts were involved in implementation of the project. Close cooperation between the consultants and local experts made it easier to adapt project innovations and ensured sustainability. Innovations in contract management and supervision have become a usual practice in all LRA's works contracts. The Government ensured counterpart financing during the whole project cycle. All payments of interest were made timely and in full amnount. Annual audit of project expenditures confirmed that funds had been spent according to the provisions of the Loan agreement. The most difficult cases during project implementation were: (a) Termination of two asphalt works contracts that had not been completed until the end of the season; (b) Two contracts were awarded without having Banks no objection and were financed from another source; (c) Contractors clairn on the decision of evaluation cormmittee. In all cases, the Bank agreed that the borrower has respected the Bank's procedures. Bank's Performance Project was prepared in the best way satisfying the borrowers needs. Often, IFIs are interested in the projects with big scale contracts, in this case the economic benefit was the priority. The Bank's experts bring to the project a lot of experience from similar projects in neighboring countries. The World Bank experience of

23 various projects around the world is the most valuable benefit for the borrower. It is worth mentioning that during all of the project cycle we enjoyed working with very competent and communicable Bank staff. Normally, in similar projects, a problem appears that standard requirements of the IFI may not well fit in the situation of the beneficiary country. In such situations, good communications, clear position and flexibility has great value. In our project, the Bank's project team always respected borrower's arguments and had clear, well justified position. The Bank's lending operations were performed in accordance with the loan agreement. Exchange of information fully satisfied the borrower's needs. Lessons Learned The project team is one of the key issues for successful implementation of the project. Only competent consultant in combination with adequate local counterpart staff can ensure a sustainable benefit. If one of the components does not perform well we always get lower final output. More attention to the counterpart team for various project components shall be drawn in stage of project preparation. It is almost impossible during relatively short project cycle to identify and correct shortcomings. Good communications between the Bank and the borrower facilitate solving of problems in the earliest stage. During the implementation of the project, problems appear when parties shall come to a mutually acceptable compromise in a short time. The Bank's project team facilitated good communications and demonstrated clarity of position. In road projects, timing is important because of the seasonal character of the works. We caused quality problems and extremely hard contract management issues, which could be avoided if bidding would have started earlier. Already in project preparation stage shall be set threshold dates for key actions, when schedule shall be reconsidered. (b) Cofinianciers: EU-Phare, the only co-financier for the project, made the following comments: March 26, 2001 Under the Phare Programme, the European Commission has co-financed four subprojects from the "Highway" project: o the reconstruction of Memele Bridge - the reconstruction of Gauja Bridge * lecava road improvements * Bauska road improvements. The technical design of these projects has generally been carried out by local companies with the assistance of international consultants. The necessity to adapt the documents of the Tender Dossiers to the European Commission's rules has caused some delays but the subprojects were nevertheless completed in time with the exception of the Bauska one. In the case of Bauska's subproject, the works' beginning has been postponed due among others to the European Commission's request that more than one bid be received in the framework of the tendering procedure. This subproject is still ongoing. The Ministry of Transport has undeniably profited from the cooperation with the European Commission when launching intemational tenders and the collaboration with foreign consultants for the preparation of the sub projects has also benefited to LRA and the local designers.there is no doubt about the sustainability of these effects. Still, the important staff turn-over existing within the Latvian Civil Service in general may pose a threat in the long run. In the future, the European Commission's support to Latvian

24 road sector will mainly be channeled through ISPA Progamme. The amounts of ISPA projects are expected to be much higher than those of Phare projects. Nevertheless, the ISPA financing instrument retains a lot of common features with Phare Progamme. In a way, the four co-financed sub projects were a good preparation for ISPA. Best regards, Luc Faber Task Manager (c) Other partners (NGOs/private sector): 10. Additional Information EU Accession. European integration is clearly a priority for the highway sector of Latvia as well as for the rest of the economy. Major achievements have already been made in this direction, particularly with regard to the introduction of modem design standards in conformity with European practice. Progress has also been made in the field of legislation for the transport sector, which now approximates European legislation. The adoption of the EC standards, particularly increased axle-load standards for roadways, poses a major financial challenge as it requires the strengthening of the whole road network. In this regard and also to accelerate the inter-connections with the European regions, as well as to assure a smooth flow of road transit, considerable funding - ISPA grants combined with IFI lending - is going into the development of the key Pan-European corridors. At the same time, there is an urgent need to improve the conditions of rural roads, which would enable small to medium sized settlements to have physical and economic integration with the faster growing urban areas. On the other hand, urban infrastructure (urban roads) cannot benefit from increased European financial support, and the burden for these stays with the municipalities, which have not been adequatly empowered to deal with the growing demand. Improved traffic safety is also on the accession agenda. The early results (e.g. the establishment of the Road Traffic Safety Directorate) are very promising indeed. As on average the cost of road accidents to the society is around 2 percent of GDP, efforts should not be relaxed to improve traffic safety. Further joint actions of the transport, health and education sectors are also called for. The good results of the previous Baltic cooperation could be a basis for a closer regional approach to road safety

25 Annex 1. Key Performance Indicators/Log Frame Matrix Outcome I Impact Indicators: tndlcatoriftwx Proned in last PSR AcluaLeast Esffimte 1. Percentage of funds allocated for main 90 % 85 % and regional roads new construction or periodic maintenance utilizing cost-benefit analysis. 2. Ratio of IRI Desired/IRI Achieved for road sections included in the project. 3. Index of fatalities for 10,000 km. 80 % 51 % 1995= Reduction in number of fatalities per year 9 9 on treated accident black spots. 5. Reduction in number of accidents with injured per year on treated accident black spots. *The use of cost-benefit analysis for allocating road maintenance funds is reduced somewhat by the Government's desire to increase the financing for regional and rural roads that have relatively low traffic volumes and therefore do not compare favorably with the roads with higher traffic volumes in the absence of a revised ranking system that takes social indicators into account. Output Indicators: Indkatortlatrx Projected In last PSR Acti/lLatest Esdmate 1. Rati of budget allocation for periodic maintenance/optimal budget for peniodic maintenance. 2. Cost per square meter of a 4 cm overlay US$6.5/sq m US$5.40/sq m 3. Percentage of contracts meeting quality 90 % 90 % specifications. 4. Percentage of periodic maintenance and 100 % 100 % new construction performed by private contractors. 5. Percentage of contracts included the 60 % 95 % project awarded to Latvian companies or joint-ventures. End of project -21 -

26 Annex 2. Project Costs and Financing Project Cost by Comrponent (in US$ million equivalent) Appraisal Actualatest Percentage of Prjc Cost Rt0 y tcmpqy40nt0 XS :$f 0 t3soi* r t US$ million ; 1. Periodic Highway Maintenance Bridge Repairs and Reconstruction Road Safety Improvement Gravel Road Maintenance and Low Cost Bitumenization Techniques 5. Equipment for Laboratory Institutional Strengthening and Training Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs Total Financing Required roject Costs by Procurement Arrangements (A praisal Estimate) (US$ million equivalent) _ PencItU Ct9OfY ica N.l?Xf;tt N. S.FM.0:: Total Cos 1. Works (15.00) (4.00) (0.00) (0.00) (19.00) 2. Goods (0.00) (0.00) (0.80) (0.00) (0.80) 3. Services (0.00) (0.00) (0.20) (0.00) (0.20) 4. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) Total (15.00) (4.00) (1.00) (0.00) (20.00) Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) Ependiur Catego Y 2 N.B.F. Total Cost NCB ~Other 1. Works (17.21) (2.50) (0.00) (0.00) (19.71) 2. Goods (0.00) (0.00) (0.20) (0.00) (0.20)

27 3. Services (0.00) (0.00) (0.09) (0.00) (0.09) 4. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) Total (17.21) (2.50) (0.29) (0.00) (20.00) Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Component (Appraisal Contingencies have been added to Appraisal Estimates) (in US$ million equivalent) Percentage of Appraisal Compont (Appaisl Appraisal Estimate ActualLatest Estimate Contingencies have been added to Appraisal Estimates) Bank CO. Baink Govt. CoF.,Bnk Govt. CoF. Highway Maintenance Bridge Maintenance Road Safety Improvements Gravel Road Works Equipment & Materials Consultancies & Training

28 Annex 3: Economic Costs and Benefits Periodic Highway Maintenance At appraisal, NPV based on a cost of capital of 12 percent was estimated to be US$85.5 million and the economic rate of return (ERR) was estimated to be 34.9 percent. The calculations were based on the use of the Highway Design and Maintenance Model (HDM-3), with data from road surveys for roughness and visual inspection for surface conditions of the pavement, traffic counts for each road section, the cost of vehicle maintenance and operation in Latvia, depreciation of vehicles, and alternative maintenance strategies. The NPV and economic rate of return were calculated at project completion, also using the HDM-3 computer model. The calculations were based on the actual cost of construction, actual roughness of the pavements after rehabilitation, and updated traffic counts and vehicle operating costs. On this basis, the NPV was calculated at US$148.6 million and the ERR was 56.8 percent. The improvement in the results compared to the appraisal estimate is attributed to the reduction in construction unit costs, greater than anticipated traffic levels, and the substantial increase in the cost of fuel (which increases the vehicle operating costs and hence the benefits from improved roads). Bridge Repairs At project completion, the ERR and NPV for the bridge component were calculated using the same methodology as at appraisal, which compared the savings that could be achieved by avoiding the diversion of traffic when the bridge was no longer usable to the cost of the repairs. Actual cost of the repairs or reconstruction and updated traffic counts were used for this calculation at completion. A cost of capital of 12 percent was used for calculating the NPV at both appraisal and completion. The average ERR at completion was 289 percent compared to an estimated 227 percent, and the total NPV was US$550.7 million compared to an estimated NPV of US$525.0 million at appraisal. Road Safety Improvements Economic rates of return and NPVs were not calculated for the Road Safety component due to the relatively short time period for accumulating data on accidents since the improvements were made. However, based on the preliminary data described in para. 4.1 (d) above, the results should easily exceed the estimated ERR of 65.0 percent and NPV of US$10.2 million

29 Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation December Engineers, I Economist June Engineers, I Economist Appraisal/Negotiation December Engineers, I Economist Supervision May Engineers, I Economist S S September Engineers S S February Engineer S S June Engineer S S September Engineer S S February Engineers S S June Sector Leader, I Engineer, I S S Procurement Specialist November Engineers S S March Section Leader, I Engineer S S August Engineer, I Procurement S S Specialist ICR November Engineer S S (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 63.1/ /120.3 Appraisal/Negotiation 7.7/ /12.6 Supervision 47.4/ /153.0 ICR 0.2/ /6.0 Total 118.4/ /

30 Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating OI Macro policies ORH OSUOM O N * NA Oi Sector Policies OH * SUOM O N O NA El Physical * H OSUOM ON O NA O Financial O H *SUOM O N O NA O Institutional Development O H 0 SU 0 M 0 N 0 NA El Environmental O H OSUOM O N O NA Social O Poverty Reduction 0 H OSUOM ON * NA O Gender O H OSUOM O N * NA Z Other (Please specify) 0 H 0 SU 0 M 0 N 0 NA Impact on road safety E Private sector development 0 H O SU O M 0 N 0 NA E Public sector management 0 H 0 SU O M 0 N 0 NA E Other (Please specify) 0 H 0 SU 0 M 0 N 0 NA

31 Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating O Lending OHS OS OU OHU Ol Supervision *HS OS OU OHU Ol Overall *H HS Os O U O HU 6.2 Borrower performance Rating El Preparation OHS OS O U O HU F Government implementation performance O HS O S 0 U 0 HU El Implementation agency performance OHS Os OU OHU Ol Overall OHS OS O U O HU

32 Annex 7. List of Supporting Documents ICR Mission Aide Memoire, November 15-21, "Improvement of Gravel Road Maintenance and Introduction of Low-Cost Bitumenization Techniques", SweRoad, December "National ISPA Strategy: Transport Sector", Ministry of Transport of the Republic of Latvia, October

33

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