FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No: MZ Public Disclosure Authorized Public Disclosure Authorized PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING (CREDIT) IN THE AMOUNT OF SDR 26.3 MILLION (US$41 MILLION EQUIVALENT) TO THE REPUBLIC OF MOZAMBIQUE FOR PHASE II OF THE ROADS AND BRIDGES MANAGEMENT AND MAINTENANCE PROJECT (RBMMP-II) Public Disclosure Authorized Transport Unit Country Department AFCS2 Africa Region March 14, 2011 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: 31 January 2011 Currency Unit = New Mozambique Metical (MZN) MZN = US$ US$ = SDR 1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ADB AF ARAP ANE APL CA CAS DFID DG DGF DP EA EC ECMEPs EIA EIRR EMP EU FA FM FMS FIFA GAI GAS GIS GoM GDP GPPZ African Development Bank Additional Financing Abbreviated Resettlement Action Plan Administração Nacional de Estradas (National Road Administration) Adaptable Program Lending Chief Accountant Country Assistance Strategy Department for International Development Director General Departamento de Gestão Financeira (Department of Financial Management) Development Partner Environmental Assessment European Commission Provincial State Enterprise for Construction and Maintenance of Roads and Bridges Environmental Impact Assessment Economic Internal Rate of Return Environmental Management Plan European Union- Financing Agreement Financial Management Financial Management System Fédération Internationale de Football Association (International Federation of Football) Gabinete de Auditoria Interna (Internal Audit Deparment) Gabinete de Assessoria e Supervisão (Assessment and Supervision Unit) Georgraphic Information System Government of Mozambique Gross Domestic Product Gabinete do Projecto da Ponte do Zambeze (project management unit for the Zambezi Bridge)

3 HDM Highway Development and Management HIMS Highway Information and Management System HIV/AIDS Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome HNMS Highway Network Management System ICB International Competitive Bidding INAV IDA Instituto Nacional de Viação (Traffic National Institute) International Development Association IFR Interim Financial Reports IMOPETRO Importadora Moçambicana de Petróleos, Mozambique (Petroleum Import Association) IP Implementation Progress IPR Independent Procurement Review IRR Internal Rate of Return IRPS Imposto Sobre o Rendimento das Pessoas Singulares (Income Tax) ISDS Integrated Safeguards Data Sheet ISR Implementation Status Report IVA Imposto sobre o Valor Acrescentado (Value Added Tax) M-I Medium Impact MoF Ministry of Finance MoPH Ministério de Obras Publicas e Habitação (Ministry of Public Works and Housing) MZN New Mozambique Metical N1 National Road Number 1 NCB National Competitive Bidding NPV Net Present Value OP/BP Operational Policy/Bank Procedure ORAF Operational Risk Assessment Framework PAD Project Appraisal Document PAFGS Processing Additional Financing: Guidance to Staff PAPs Project Affected Persons PARPA Plano de Acção para a Redução da Pobreza Absoluta (Action Plan for the Reduction of Absolute Poverty) PCA Presidente do Conselho de Administração (Chairman of the Board of Directors) PDO Project Development Objectives PF Pooled Fund PRISE Programa Integrado do Sector de Estradas (Integrated Road Sector Program ) QCBS Quality and Cost Based Selection RAP Resettlement Action Plan RBMMP Roads and Bridges Management and Maintenance Project RF Fundo de Estradas (Road Fund) RPM Regional Procurement Manager RSDMS Road Safety Data Management System RSS Road Sector Strategy SADC Southern African Development Community

4 SATC SBS SDMRR SIDA SISTAFE SWAp TA UFSA US VOC South African Transport Commission Sector Budget Support Support for the Decentralized Management of Regional Roads Swedish International Development Cooperation Agency Sistema de Administração Financeira do Estado, Public (Public Financial Management System) Sector Wide Approach Technical Assistant Unidade Funcional de Supervisão das Aquisições (Department of Procurement Monitoring) United States Vehicle Operating Cost Vice President: Obiageli Katryn Ezekwesili Acting Country Director: Olivier Godron Sector Director Jamal Saghir Sector Manager: Supee Teravaninthorn Task Team Leader: Pierre Graftieaux

5 REPUBLIC OF MOZAMBIQUE ADDITIONAL FINANCING AND RESTRUCTURING FOR PHASE II OF THE ROADS AND BRIDGES MANAGEMENT AND MAINTENANCE PROJECT CONTENTS Additional Financing Data Sheet... i I. Introduction...1 II. Background and Rationale for Additional Financing in the amount of US$41 million...4 III. Proposed Changes:...12 IV. Appraisal Summary...17 V. Consistency with CAS...17 VI. Revised Economic Analysis...18 VII. Expected Outcomes...18 VIII Benefits and Risks...18 IX. Financial Terms and Conditions for the Additional Financing...19 X. Environmental Safeguard Issues...19 XI. Social Safeguard Issues...19 Annex 1: Results Framework and Monitoring...21 Annex 2: Operational Risk Assessment Framework (ORAF)...24 Annex 3: Detailed Description Of Modified Activities...27 Annex 4: Revised Estimate Of Project Costs...29 Annex 5: Revised Procurement Plan...30 Annex 6: Revised Financial Management...38 Annex 7: Revised Economic Analysis...48 ANNEX 8: Revised Financing of PRISE and IDA Contribution...55 Annex 9: Environmental and Social Safeguards...56

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7 REPUBLIC OF MOZAMBIQUE PHASE II OF THE ROADS AND BRIDGES MANAGEMENT AND MAINTENANCE PROJECT ADDITIONAL FINANCING ADDITIONAL FINANCING DATA SHEET Country Director: Olivier Godron (Acting) Director: Jamal Saghir Sector Manager: Supee Teravaninthorn Team Leader: Pierre Graftieaux Project ID: P Expected Effectiveness Date: May 2, 2011 Lending Instrument: Adaptable Program Loan Additional Financing Type: Credit Project ID: P Project Name: Roads and Bridges Management and Maintenance Program - Phase II Lending Instrument: Adaptable Program Loan Basic Information - Additional Financing (AF) Sectors: Roads and highways (100%) Themes: Infrastructure services for private sector development (67%); Rural services and infrastructure (33%) Environmental category: B Partial Assessment Expected Closing Date: December 31, 2012 Joint IFC: N/A Joint Level: N/A Basic Information - Original Project Environmental category: B Partial Assessment Expected Closing Date: December 31, 2012 Joint IFC: N/A Joint Level: N/A AF Project Financing Data [ ] Loan [ X ] Credit [ ] Grant [ ] Guarantee [ ] Other: Proposed terms: AF Financing Plan (US$m) Source Total Project Cost: Cofinancing: Borrower: Total Bank Financing: IBRD IDA New Recommitted Client Information Total Amount (US$m) i

8 Recipient: Republic of Mozambique Responsible Agency: Road Fund (Fundo de Estradas) Contact Person: Elias Paulo Telephone No.: Fax No.: AF Estimated Disbursements (Bank FY/US$m) FY Annual Cumulative Project Development Objective and Description Original project development objective: The objective of the overall RBMMP is to assist the Recipient in: (i) improving the coverage and conditions of roads and bridges in the territory of the Recipient; (ii) strengthening the Recipient s institutional capacity to manage and administer the road sector; (iii) establishing financing mechanisms for road maintenance; (iv) promoting the use of local resources in roads construction and management; and (v) improving road transport safety. The project development objective of the Roads and Bridges Management and Maintenance Program - Phase II is to improve access of the population to all season roads through maintenance, rehabilitation and upgrading of the classified road network. Revised project development objective: There are no changes in the Project Development Objectives (PDOs). Project description: The first component of the project will support the Project Implementing Entity and National Road Administration (ANE), at national and provincial levels, to enable them to effectively carry out the Project through the provision of technical assistance and consulting services. The second component will support maintenance of the road network. The third component will support investments in the national road rehabilitation and upgrade program and engineering services. Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Does the project require any waivers of Bank policies? Have these been endorsed or approved by Bank management? [ X ]Yes [ ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ X ]Yes [ ] No [ ]Yes [ X ] No [ X ]Yes [ ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ ] No ii

9 Financing Agreement Reference FA, Article V, 5.01 Conditions and Legal Covenants: Description of Date Due Condition/Covenant The Recipient has hired a chief Effectiveness condition accountant for the Project with qualifications, experience, and pursuant to terms of reference, satisfactory to the Association, in accordance with the provisions of paragraph C of Section III of Schedule 2 of the FA. Dated Covenant The Recipient shall submit to the Association, evidence in form and substance satisfactory to the Association, showing that the Project Implementing Entity has established and adopted a financial management system, in form, and substance satisfactory to the Association, as confirmed by the Association in writing December 29, 2011 iii

10 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to: (a) provide an Additional Financing (AF) in an amount of US$41 million to the Mozambique Roads and Bridges Management and Maintenance Project Phase II (RBMMP-II), Credit 4308-MZ, which includes US$25 million to bridge the financing gap, and US$16 million to scale up the project s impact and effectiveness, (b) restructure the project to drop all references to a pooled fund (PF) which has proved unworkable; and (c) extend the credit closing date by one and a half years from June 30, 2011 to December 31, The original credit amount is US$100 million equivalent. 2. There will be no changes in the Project Development Objectives (PDO), institutional roles and implementation arrangements. The project scope is modified in two ways: first, one of the three large civil works projects on the N1 road was removed from the project due to the funding gap (although it was financed by the Government of Mozambique (GoM) and has been completed). Second, the project was originally designed as a SWAp (sector wide approach) with 35 percent of the total IDA funding under the project allocated to a PF (see paragraph 7) with large number of activities and with IDA financing about 10 percent of the total. Because it was not possible to implement the pooled fund as planned, the restructuring of the project proposes a reallocation of the remaining IDA funding originally intended for the PF to finance 100 percent of a subset of the activities included in the SWAp. Consequently, the project now includes fewer activities although all of the remaining original activities are being implemented under GoM and other donor funding. Otherwise, the civil works remain as originally planned with the addition of road safety investments, and the technical assistance and consultants services component is enriched with some additional activities, including the preparation of engineering designs, road safety and the implementation of a highway management system. The provision of the additional finance is critical to achieving the original project objectives of RBMMP-II. 3. Compliance with Bank s Policies and Procedures on Additional Financing: According to the Bank s guidelines, ongoing Adaptable Program Loans (APLs) do not normally qualify for AF. However, successful APLs may qualify for AF under specific exceptions ( Processing Additional Financing: Guidance to Staff PAFGS, July 12, 2010 Clause 7). In this case, although the project has faced some implementation challenges, it is successfully moving toward achieving its PDOs and the purpose of the restructuring is to address the challenges confronted. The exceptions under which the AF is justified as described in the PAFGS are: a. address a cost overrun or financing gap encountered during implementation of a phase : the major part of the AF is being applied to the cost overruns on the two civil works projects, Xai-Xai Chissibuca and Jardim Benfica, as described below in the next paragraph; c. scale up project activities that are performing better than expected and cannot be postponed to the subsequent APL phase : the two civil works projects, which are performing well, have scale-up components that cannot be delayed as described in the next paragraph; and d. complement project activities that are performing better than expected and cannot be postponed to the subsequent APL phase : project preparation required for 1

11 APL 3 cannot be postponed and several additional consultancies are necessary for the successful implementation of this phase of the APL and for the preparation of the following phase (see paragraph 35). 4. Furthermore, this proposed additional financing also complies with the provisions of OP paragraphs 1 and 2, and paragraph 5 of BP In addition, anti-corruption guidelines state that guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants", dated October 15, 2006 and updated January 2011, shall apply to the project. 6. The proposed AF would support the completion of original project activities and would enable the project to meet its initial development objectives through bridging the financing gap associated partly with the cost overrun 1, and through funding additional activities designed to enhance the efficiency of the investment. The proposed allocation of the US$41 million, combined with savings of US$16.4 million as the result of the GoM s decision to not use IDA funds to finance the civil works on Lot 3 (Massinga-Nhachengue, initially to be funded under APL2) is as follows: (a) US$32.85 million for the priority section of National Highway (N1) from Xai-Xai to Chissibuca, of which US$27.85 million would be to cover the gap between the contract price and the cost estimates at the time of appraisal, and US$5 million would be to finance the additional thickness of the asphalt layer from 30 mm to 40 mm in order to meet South African Transport Commission (SATC) specifications; (b) US$16.55 million for the Jardim-Benfica section on National Highway 1, of which US$11.95 million would be to cover the gap between the contract price and the cost estimates at the time of appraisal, US$3 million would be to enhance the project impact through the inclusion of pedestrian bridges and street lighting to improve road safety along this section; and US$1.6 million to cover additional supervision costs; (c) US$4.05 million for the preparation of engineering design and bidding documents for civil works that would be financed under a proposed follow-on RBMMP-III; and (d) US$3.95 million to provide technical assistance, studies and support for road safety, highway management systems, climate resilience in road and bridge design and development of a strategy to integrate rail service and feeder roads along the Beira Railway corridor. Procurement of construction works coincided with the financial crisis of 2008 and a steep rise in oil prices, causing unprecedented increases in construction costs in the region. 7. In view of the cost increases, the GoM reduced the works to be financed by the Bank to two lots, and increased their counterpart contributions, especially under Category 1. However, the cost increase was unfortunately so significant that these measures proved insufficient to bridge the gap and the need to resort to an AF from the Bank, even though on a reduced scale, remains. 8. The largest part of the scaling up component is an integral part of the civil works. These additions under the AF are justified as they could not be delayed. The increased pavement thickness for Xai-Xai Chissibuca is strictly in response to the updated projected loadings and 1 Bid prices for works increased substantially and unexpectedly right after the time that the Project was being prepared, mainly because of a steep increase in input prices, especially oil. This phenomenon is being repeated elsewhere in Southern Africa and throughout Africa. 2

12 economic benefits. The lighting and pedestrian bridges cannot be postponed to RBMMP-III, when the costs of implementation would be significantly higher as the ongoing contract would be closed by then, not mentioning the fact that the sooner these bridges are built and the street lighting is operational, the fewer fatal accidents will happen along this urban road. With regard to the funds allocated for RBMMP-III of the project preparation, they are necessary to adequately prepare the next operation. Failure to have incorporated these funds initially could have been overcome had the project proceeded without the cost overruns, since in such case the Road Fund (RF) could have made due by allocating to these studies some of the unallocated funds. 9. Apart from the above cost increase, there was a need to restructure the project, to amend the financing agreement in order to drop the reference to the PF which has proved unworkable, and to reflect the cancelation of the earlier misprocured activities. With respect to the pooled fund component, IDA stopped contributing to the PF for Part A (Overhead Costs) and Part B (Road Maintenance) because of changes from the originally agreed sectoral approach. The fund flow mechanism to the PF had been changed in 2008 after other DPs decided not to join when they were informed that IDA rules would apply to all procurement under the PF. This forced the RF to establish two PFs one with contributions from IDA and the Road Fund (to which IDA procurement rules applied) and another one with contributions from EC, DFID and RF under which procurement followed Mozambican procurement law. As a result of this situation, no further disbursements were made to the pooled fund and no Category 1 expenditures were financed with the IDA credit after June 30, As a result of an Independent Procurement Review carried out in June 2009, out of a sample of 31 contracts, 10 contracts in the total amount of US$1,436,000 were proposed for a declaration of mis-procurement. Although it was not possible to determine what IDA share actually was used in the payment of the subject contracts, the Association decided to use a figure of 30 percent of the total payment made from the RF-IDA PF account for these contracts in determining the amount to be declared as mis-procurement. 11. The restructuring thus comprises: (a) reallocation of the remaining un-disbursed amount, initially under the PF, i.e. US$18.04 million, not to be allocated to specific activities under Parts A and B of the project, still under Category 1; and (b) the estimated amount identified as misprocurement in the amount of US$430,800 from Category 1 Goods, Works and Consulting Services which was funded from the PF has been cancelled from the project (reimbursement was made by the GoM on December 2, 2010). It was agreed that the reallocated Category 1 funds would be used for activities specified in the project description, included in the project procurement plan and which were procured following World Bank procurement guidelines. Eligible expenditures after July 1, 2009 are to be financed 100 percent by IDA, and funds advanced by the Road Fund for payment on these contracts would be reimbursed once the Additional Financing becomes effective. For consequences of the cancellation, the amount of the original credit is now reduced to US$99,569, RBMMP-II is being implemented in a sectoral way to support GoM s integrated road sector program, in Portuguese called Programa Integrado do Sector de Estradas (PRISE), the three-year cost of which was estimated at US$1.043 million in The PRISE established the 3

13 PF for meeting overhead and maintenance costs. Subsequently, this component was split into two funds: PF and a Sector Budget Support (SBS) fund, after other development partners (DPs) did not join the PF. There were 19 DPs including the International Development Agency (IDA), who were initially contributing to PRISE either through PF, SBS, directly to earmarked projects and activities, or a combination of the above. The original IDA-financed RBMMP-II was contributing US$35 million to the PF, and US$65 million to the infrastructure investment component earmarked for the rehabilitation of priority sections of N1. The proposed AF is critical for the completion of these works, which are an integral part of the North-South national corridor in Mozambique. 13. The GoM and the key implementing agencies, Road Fund and National Roads Administration (ANE), are fully committed and are complying with all legal covenants specified in the Financing Agreement (FA). The overall project performance in terms of achieving the PDO indicators has been satisfactory throughout project implementation. Implementation progress (IP) has also become satisfactory after significant progress in procuring the civil works contracts. The project does not have any unresolved fiduciary, environmental, social or other safeguard issues. On account of the extended procurement process for the civil works contracts and some of the scaling up activities, the project closing date will need to be extended by one and a half years from June 30, 2011 to December 31, II. Background and Rationale for Additional Financing in the amount of US$41 million Background 14. Country Context. Mozambique has been a strong economic and social performer. Since the devastating civil war ended in 1992, the country has enjoyed a remarkable economic recovery, achieving an average annual economic growth rate of six to eight percent between 1996 and As a result, the poverty index fell by 15 percentage points between 1997 and 2003, bringing almost three million people (of a total population of 20 million) above the poverty line and out of extreme poverty. However, a recent 2008 household survey indicates that its development strategy requires some reorientation to make it more inclusive. After a sizable 15 percentage point drop between 1997 and 2003, the new poverty report indicates a broadly stagnant poverty headcount, at around 54 percent. Inequality remains relatively low by regional standards and progress has been made toward the key Millennium Development Goals of infant mortality and primary school enrollment. Further investments and reforms are required to improve business environment, make the legal and judicial sectors more effective, and strengthen public financial management and the overall governance framework. In addition, further decentralization and enhanced delivery of key services, especially in rural areas is required. Access to transport infrastructure and services plays a significant role in promoting the rural economy, providing social services, and improving market environments. 15. Economic growth was strong in 2010 at 8.5 percent in real terms, higher than the six percent growth achieved in Trade deficit has increased lately to reach about 11 percent of gross domestic product (GDP) in 2010 (estimates by the Economist Intelligence Unit 2010). The impact of the global financial crisis on the Mozambican economy is limited but real. The government formed an inter-agency financial crisis task force at the ministerial level in 2009 and 4

14 started to talk about possibilities of aid and foreign direct investment shortfall, decline in economic activity and low fiscal revenues. The likelihood of renewed social unrest echoing the September 2010 riots in Maputo, particularly in poor urban areas, will remain substantial, all the more so if food prices increase more than currently expected. The main funding source in the road sector, the fuel levy, however, will not likely be severely affected by the crisis, and hence sector funding remains relatively secure. 16. Sector Issues. Mozambique's classified road network-the national and regional roadsconsists of 29,349 kilometers of roads, of which 5,814 kilometers (or 20 percent) are paved. Road density per land area is low at 46 meters per square kilometer (204 for sub-saharan Africa as a whole) due to the large size of Mozambique, but quite average, relative to the population, at 423 meters per 1,000 of the population. The percentage of the rural population that has reliable, all-year access (as measured by the percent of the rural population within two kilometers of an all-season classified road) is currently 31.3 percent. One of the main objectives of RBMMP-II is to increase the number of rural residents with reliable access to social and economic facilities. 17. Sector Policy and Strategy. In 2001 the GoM developed a Road Sector Strategy (RSS) and ten-year plan in collaboration with IDA and other DPs. To support GoM in implementing the Road Sector Strategy , a 10-year Adaptable Program Loan (APL), the RBMMP, was designed in three phases. Phase I of the RBMMP (RBMMP-I) successfully achieved its objectives and closed on June 30, During 2006, in close collaboration with road sector DPs, the GoM revised the Road Sector Strategy and developed PRISE, a road sector program based on the Revised RSS and the Road Sector Policy. RBMMP-II was designed concurrently with and as an integral part of PRISE. The approval of RBMMP-III is contingent upon the successful completion of triggers, which include the requirement that road works under RBMMP-II are substantially completed. 18. Road sector expenditures between 2001 and 2006 were about US$700 million or on average US$140 million per annum. It has been recognized that past road sector investments were insufficient to support the country's poverty reduction goals. PRISE therefore, planned to substantially increase expenditures for both maintenance and investment. Total planned sector expenditure under PRISE was projected at US$1,043 million, or about US$347 million per annum (about 4.4 percent of gross domestic product). During calendar years 2007, 2008, and 2009 actual sector expenditure reached only 70, 60 and 61 percent respectively of the plan mainly due to delays in implementation of externally financed investments, including the IDA financed RBMMP-II. Budgeted amounts for year 2010, 2011 and 2012 are respectively US$333, 268 and 402 million. Since RBMMP-II is being extended to 2012, it will now cover six years of PRISE activity, over which time the projected cumulative budget will be approximately US$1.7 billion. 19. During the preparation of PRISE, there was strong commitment by DPs and GoM to harmonize approaches in line with the Paris Declaration. While harmonization has been achieved in respect of the adoption of a joint performance assessment framework, a joint financial, technical and procurement audit, and the conduct of joint bi-annual review meetings, joint financing arrangements were not achieved as originally intended. It was originally intended to finance a large portion of PRISE through sector budget support as described and detailed in the 5

15 PRISE Implementation Plan (February 2007). However, at the request of IDA, and as described in the original Project Appraisal Document (PAD), the financing of administration and overheads, and road maintenance (components A and B of RBMMP-II) was changed to a PF to which the RF, the European Commission (EC), the Department for International Development (DFID), the Swedish International Development Cooperation Agency (SIDA) 2 and IDA would contribute. However, when it became clear to these DPs 3 that IDA requires fiduciary oversight of the PF expenditures, through prior review of the procurement of contracts above certain thresholds and variations 4 to the Mozambique procurement procedures, EC and DFID decided that they would not join the PF, but would provide the untied portion of their funding (about 30 percent in the case of the EC and 100 percent in the case of DFID) through untied SBS. During the mid-term review of the project, it was recognized that this revised financing arrangement is not in line with the description in the original PAD and the provision of the Project Agreements, and that therefore a restructuring would be required. 20. Original Project Data. RBMMP-II was approved on May 23, 2007 for an amount of US$100 million, declared effective on October 5, 2007, and was originally scheduled for closing on June 30, 2011, but this proposal for Additional Financing seeks to extend the closing date to December 31, RBMMP-II supports PRISE, Mozambique s current road sector program. PRISE has three components: (A) Overheads; (B) Maintenance; and (C) Investments. RBMMP- II contributes to components (A) and (B) through a US$35 million allocation to the PF, and to component (C) with US$65 million for infrastructure investments and related consultant s services for civil works aimed at rehabilitating and upgrading 160 kilometers of the N1 in three sections in Maputo, Gaza and Inhambane Provinces. 21. Objectives. The objective of the overall RBMMP is to assist the Recipient in: (i) improving the coverage and conditions of roads and bridges in the territory of the Recipient; (ii) strengthening the Recipient s institutional capacity to manage and administer the road sector; (iii) establishing financing mechanisms for road maintenance; (iv) promoting the use of local resources in roads construction and management; and (v) improving road transport safety. The project development objective (PDO) of RBMMP-II is to improve access of the population to all-season roads through maintenance, rehabilitation and upgrading of the classified road network. The achievement of the PDO is measured through: (a) percentage of classified roads in good and fair condition; and (b) the percentage of the rural population within two kilometers of an all-season classified road. 22. The rating of the progress towards achievement of the PDO is satisfactory as shown in the last three ISRs of January 2011, June 2010, and April The rating of the Overall Implementation Progress (IP) as per ISR of December 2009 was Satisfactory, however it was downgraded to Moderately Satisfactory in the ISRs of April 2010 and June 2010 because the disbursement was slow on account of delay in the procurement and signing of civil works 2 The anticipated SIDA contribution to the PF was later clarified to be more appropriately included as part of its SDMRR program (Support for the Decentralized Management of Regional Roads) which includes substantial amounts of flexible funding but which is not commingled with PF or SBS funding from other DPs. 3 At a special meeting between the RPM and DP in Maputo in August As per the original PAD, Annex 8, page 61, paragraph 4, the Mozambican procurement system may be used provided: (i) domestic preference is applied only to ICB and not NCB; (ii) domestic preference for locally manufactured goods shall apply only for ICB; and (iii) in case of ICB bidding documents shall also be in English. 6

16 contracts. During the September 2010 mission, good progress was seen in the procurement and as of February 2, 2011, the project has disbursed 65.7 percent (against 41.6 percent five months earlier in June 2010) of the credit amount and the IP rating in the January 2011 ISR has been upgraded to satisfactory on account of the following reasons: (a) substantial progress has been achieved in the implementation of large civil works contracts since the June 2010 mission; (b) based on the clarification received from the RF, the issue of mis-procurement has been resolved and the GoM has now refunded to the Bank an amount of US$430,800. As indicated in the ISRs of January 2011 and June 2010, disbursements have picked up since the two big civil works contracts were signed and it is expected that all project activities will be completed within the proposed project extension of one and a half years. In all four last ISRs, the rating for the performance of Financial Management (FM) has been moderately satisfactory due to weaknesses identified by the auditors in their audit reports and management letters for 2008 and An action plan to address these issues was agreed upon during the September 2010 mission and is being implemented by the client. The status of the progress achieved in implementation of the agreed action plan is shown in Annex 6 Revised Financial Management. In the four last Implementation Status Reports, the rating for project management, counterpart funding and monitoring and evaluation was Satisfactory. Despite the fact that at the beginning of the Project there were some procurement problems that led to a finding of mis-procurement, the implementing entity responded very well and addressed the problems. The rating for procurement is now satisfactory as per the last ISR (January 2011). 23. Performance indicators. With regard to the two key results and their performance indicators, as specified in the project appraisal document, the progress is as follows: Condition of the classified road network in good and fair condition: Baseline value as of January 1, 2007 was 64 percent; achievement as of end 2009 was 71 percent, and final target is 77 percent. Rural population within two kilometers of an all-season classified road: 5 the revised estimated baseline value as of January 1, 2007 was 25 percent; the achievement as of end 2008 (last available measurement) is 31.3 percent; and the target for 2012 is 32.3 percent. 24. Fiduciary and Safeguard Issues: The project has followed the most updated procurement guidelines and all financial audits are current. The project has complied with all legal covenants. The project does not have any unresolved fiduciary, environmental, social and other safeguard problems. However, the construction of footbridges for Lot 1 requires an abbreviated Resettlement Action Plan (RAP), which was disclosed on February 4, 2011 at the InfoShop and in country on ANE s website (ane.gov.mz). The existing Environmental Management Plan (EMP) for the Jardim-Benfica section on National Highway 1 can be used to implement environmental management measures for the new construction works (the pedestrian bridges), 5 The original baseline for this indicator was estimated at 11 percent for However, as the indicator was computed for 2007 and 2008 using more reliable data and a better methodology, it became clear that the baseline was in error. The indicator is now computed only for the classified road network (which is the target of the project) and using the current population distribution data available, the baseline should have been closer to 25 percent and the maximum value attainable is estimated at 34 percent. 7

17 and these measures will be reflected in the Progress Reports submitted by the Consultant. The project will continue following-up other cross-cutting activities such as Human Immunodeficiency Virus / Acquired Immunodeficiency Syndrome (HIV/AIDS) awareness and prevention for all stakeholders, including workers employed on the road project sites, village residents on project road routes, and the staff of the implementing agencies. 25. Progress in Achieving Triggers. Good progress has been made in meeting the triggers set out for the proposed RBMMP-III which was initially planned to be a credit of US$135 million. The already achieved triggers are: (a) timely provision of agreed level of funds to the RF and GoM budget allocation; (b) satisfactory implementation of agreed HIV/AIDS prevention measures for all stakeholders including workers employed on the road project sites, village residents along project roads, and the staff of the implementing agencies; (c) regular financial, technical and procurement audits; and (d) satisfactory arrangements for environmental and social management at ANE. The triggers still to be achieved are the following: (a) agreed RBMMP-II road works substantially completed (this is expected to be achieved by June 2011); (b) preparatory activities for RBMMP-III have been satisfactorily completed (this includes the preparation of design and bidding documents for which financing is proposed to be provided under this AF credit); (c) an appropriate road safety policy and strategy is adopted (preparations for this are on-going and this trigger is expected to be met during 2011); and (d) satisfactory financial management of RF and ANE, which is currently moderately satisfactory but an action plan, described below, has been agreed upon during the September 2010 mission to address fiduciary issues. Implementation status of this action plan is described in Annex Financial Management Arrangements: A financial management review of the arrangements of the project implementing unit of the RBMMP-II was carried out to verify whether the financial management arrangements to implement the AF of the project are adequate. Several deficiencies were identified in financial management, including the failure to appoint a suitably qualified Chief Accountant and the slow implementation of a new financial management software system. The above noted comprehensive Financial Management Action Plan being implemented addresses these and other shortcomings. The conclusion of the financial management review is thus positive, subject to: (a) timely appointment of a Chief Accountant satisfactory to the Bank, (b) full implementation of the Financial Management Software Package at headquarters and in the provinces by the end of 2011, and (c) continued satisfactory implementation of the agreed financial management action plan. 27. As a result of the restructuring, all payments made after July 1, 2009, for activities under Parts A and B included in the Procurement Plan for funding by IDA (Annex 5) will be financed 100 percent by the credit and paid directly from the Category 1 dedicated account A (formerly the Pooled Fund Account). 6 There are no other major changes expected in the overall financial management arrangements. The implementing unit is current with submission of un-audited interim financial reports for the original credit, as well as with audited financial statements. The overall financial management performance of the original project has been Moderately 6 For those ongoing activities under Parts A and B that are eligible for IDA financing the GoM will be reimbursed for payments incurred after July 1, The Interim Financial Reports for Category 1 for the period July 2009 up through the most recent quarter will be submitted immediately following effectiveness of the Restructuring and Additional Financing and serve as the basis for such reimbursement. 8

18 Satisfactory, due to some shortcomings such as the vacancy of Chief Accountant, completion of the fixed assets schedule, delays in implementation of the new accounting system, and the outcome of the last two audit reports. There is, however, a robust action plan in place which shows appropriate follow-up actions to address these issues. 28. The recording of accounting transactions will take place through the newly-acquired and customized integrated financial management information system, SunSystems, which is connected to both RF and ANE headquarters and all provincial delegations. The overall financial management responsibility stays with the Road Fund s Departamento de Gestão Financeira (DGF). The integrated accounting system is expected to mitigate several issues noted in prior audits. With the exception of the Chief Accountant s post noted above, the DGF is adequately staffed with experienced and qualified personnel to handle the complexity of the project, as well as an Internal Audit Department. The RF already has an approved financial management procedures manual, which is currently being revised to reflect current conditions and which will also enhance the RF s internal control procedures. 29. Fund flow arrangements will follow the arrangements used in the original financing, whereby the Bank transfers the funds to the same Designated Accounts used for the original financing, one for Category 1 activities and the other for Category 2 and 3 activities, which are held at the Banco de Moçambique. The funds are managed by the RF which makes payments directly to suppliers of works, goods and services. As in the original project, it is expected that the larger contracts will be making use of the Direct Payment disbursement method. Disbursements will also be report-based, and interim un-audited financial reports will be submitted on a quarterly basis within 45 days of the end of the quarter. 30. Audit reports will be submitted to the Bank on a yearly basis, along with the respective management letters within six months of the end of the year. A single audit opinion will be issued for the financial statements of the Road Fund and its implementing entities, and the audits will be conducted based on International Standards on Auditing, by a firm acceptable to the association. 31. Institutional and Capacity Issues. As a condition of effectiveness of RBMMP-II, ANE had to complete its restructuring in a satisfactory manner. By effectiveness, on October 5, 2007, all key staff of ANE had been competitively selected and put in place. As well, a new Board of ANE had been constituted and was already operational when the project became effective. The project implementing agency is the RF which takes the overall fiduciary responsibility for project implementation, while ANE focuses on execution of the roads program. The above institutional arrangement has led to a marked increase in capacity and to satisfactory implementation of the PRISE program, as is demonstrated by the performance indicators of PRISE and acknowledged by the development partners during the past semi-annual joint review meetings, including the most recent one in September ANE has proven internal capacity in the preparation of RAPs, as demonstrated in the implementation of the existing RAP for the Jardim-Benfica road. The project has also provided satisfactory progress reports on environmental management, prepared by an environmental specialist retained by the consultants working on the Jardim-Benfica Road. 9

19 32. The lowest evaluated bids received on July 28, 2008 for the three civil works contracts planned to be financed under RBMMP-II amounted to US$121.2 million and were 133 percent above the appraisal estimate of US$52.0 million. In its bid evaluation report, ANE provided a detailed analysis for the reasons of the price escalation by looking at the escalation of various cost factors such as labor, fuel, construction material, plant and equipment from the time of the appraisal (March 2007) to the time of the bid (June/July 2008). Most civil works projects that went into tender around had experienced bid prices that were percent higher than engineer s estimate. Based on this analysis, which the Bank team reviewed and agreed with, a large proportion of the price increase, about 60 percent can be explained by the massive increase of input costs (particularly fuel, which was, at the time of bid submission, at its peak at US$147 per barrel). The balance of the increase was due to the (world) construction market conditions which at the time of the bid made it more attractive for contractors to work in the then booming South African (especially on those massive construction projects in South Africa related to the organization of the FIFA World Cup in 2010) and Asian markets 7. The other reasons behind the increase of the final contract values are scaling up of the component design that included: (a) pedestrian bridges and street lighting, to improve road safety along the highly trafficked road sections in the built-up areas; and (b) the increase in the thickness of asphalt concrete pavement from 30 mm to 40 mm in order to accommodate increased traffic volumes and to be consistent with the SATC road design standards. This will increase the design life of the rehabilitated road sections from 15 to 20 years. 33. After careful review of the above, IDA gave its no objection to award the contract for Lot 2 (Xai-Xai Chissibuca) for an amount of 1,269,447,739 Meticais (equivalent at the time to approximately US$53.1 million in November 26, 2008, and this contract is currently 95 percent complete. Based on recommendations of IDA, Lot 1 (Jardim Benfica) was issued for rebidding to the pre-qualified bidders after including a cost adjustment clause, and the lowest evaluated bid, received on February 25, 2009, was 541,788,314 Meticais (equivalent at the time to approximately US$21.6 million (18 percent below the bid of July 2008, due to the decreased risk and falling input prices). With prior no objection from the Bank, ANE signed the contract in November 2009 after completion of resettlement actions (see paragraph 61). For Lot 3 (Massinga Nhachengue) GoM is financing the civil works through other sources and IDA funding is no longer needed, except for the supervision contract. The contract for the execution of these works (Lot 3) was signed on March 18, 2009 and the resulting savings have been reallocated to meet the cost increase under Lot 1 and 2. The additional funding needs for Lots 1 and 2, including the cost overrun, increase in scope, and additional costs for supervision are US$33 million (as shown in Table 2, penultimate column, US$31.5 million for works, and US$1.5 million for supervision). 34. Improvement of these three sections of N1 was originally planned under RBMMP-I but was later relegated to RBMMP-II due to insufficient funding. RBMMP-II financed the 7 This happened not only to many Bank project in the sub-region, but also to projects of other development partners too. The EU, ADB and other donors had exactly the same experience. For example, on Mocuba Milange, the PRISE estimated value for an upgrading project was US$36 million. The estimate by the design engineer was about 45 million (US$60 million) and the contract price is about 69 million (about US$95 million). Consequently, the EU is financing a study to analyze the magnitude and sources of construction cost increases in the sector and to make recommendations for ways to mitigate these increases. 10

20 rehabilitation and upgrading of 670 kilometers of the N1 in Maputo, Gaza, Inhambane and Sofala Provinces but left out the above three sections, which are an integral part of the key backbone North-South road of Mozambique. Not rehabilitating them, or rehabilitating them only partly, would mean that the PDO of RBMMP-II would not be achieved. 35. The amount allocated under Category 3 of the credit (consultant s services) was insufficient to finance the revised costs of the supervision of the contracts on N1 and to fund the preparation of designs and bidding documents for works that would be financed under the follow-on RBMMP-III project. It is therefore proposed to allocate an additional amount of US$5.55 million to this category to cover the anticipated funding gap, US$1.5 million for supervision and US$4.05 million for project preparation. 36. The mid-term review and subsequent missions also identified several key areas that could significantly contribute to the project s impact and effectiveness and it was decided to provide an additional US$3.95 million to scale up the project in the following areas: Strengthening the Highway Information and Management System (HIMS): to install an integrated system for the management of the classified road network, including bridges. This is an area where the road sector is performing well, having collected data on the entire network. The system will be fed with these data, facilitate systematic maintenance and investment planning. Failure to take advantage now of this opportunity would be very costly in many respects. The proposed services will include full configuration and implementation of the system within six months, full-time onsite support for one year, twice-annual on-site support for four years, and continuous on-the-job training for one year followed by refresher training for four years. The estimated cost is US$2.0 million of which the RBMMP-II share through project closing date will be approximately US$1.79 million. Development of a Road Safety Data Management System (RSDMS): to design, configure and implement an integrated Road Safety Data Management System, and or to roll this system out to the provinces, to collect and analyze traffic accidents, black spots, traffic infractions, emergency services, and other information critical to improving road safety. Under Swedish funding a specialized consultant has been procured for one year (January December 2011) to establish the specifications of the desired system and to supervise its procurement, installation and initial operation. Road safety is another area where the road sector is on the right path. The GoM used its own resources to finalize the drivers' license program and vehicle inspection centers, and also for traffic markings to improve safety. The Ministry of Transport and Communications through Instituto Nacional de Viação (Traffic National Institute) INAV is preparing the road safety policy under SIDA funding. The Additional Financing will only finance a portion of this program as a bridging activity until RBMMP-III. To delay this step would be to miss the opportunity to quickly expand the system beyond Maputo. Estimated cost: US$3 million of which the RBMMP-II share through project closing date will be approximately US$0.50 million. 11