Completion Report. Project Number: Loan Number: 2433 September Azerbaijan: Road Network Development Program (Project 2)

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1 Completion Report Project Number: Loan Number: 2433 September 2013 Azerbaijan: Road Network Development Program (Project 2)

2 CURRENCY EQUIVALENTS Currency Unit Azerbaijan manat (AZN) At Appraisal At Project Completion (31 May 2008) (24 April 2013) AZN1.00 = $1.21 $1.27 $1.00 = AZN AZN ABBREVIATIONS ADB Asian Development Bank ARS Azer Road Service EIRR economic internal rate of return EMP environmental management plan FFA framework financing agreement IEE initial environmental examination km kilometer MFF multitranche financing facility MOF Ministry of Finance MOT Ministry of Transport NPV net present value PCR project completion review PIU project implementation unit RNDP Road Network Development Program VOC vehicle operating cost NOTES (i) (ii) The fiscal year (FY) of the government ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 31 December In this report, "$" refers to US dollars.

3 Vice-President X. Zhao, Operations 1 Director General K. Gerhaeusser, Central and West Asia Department (CWRD) Director X. Yang, Transport and Communications Division, CWRD Team leaders Team members F. Huseynbeyov, Senior Project Officer, CWRD B. Reddy Bathula, Senior Transport Specialist, CWRD N. Bustamante, Senior Operations Assistant, CWRD Y. Hagverdiyeva, Senior Operations Assistant, CWRD M. Mamayson, Associate Project Analyst, CWRD N. Valiyev, Economics Officer, CWRD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 CONTENTS Page BASIC DATA I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 3 D. Disbursements 3 E. Project Schedule 4 F. Implementation Arrangements 4 G. Conditions and Covenants 5 H. Consultant Recruitment and Procurement 5 I. Performance of Consultants and Contractor 6 J. Performance of the Borrower and the Executing Agency 6 K. Performance of the Asian Development Bank 7 III. EVALUATION OF PERFORMANCE 7 A. Relevance 7 B. Effectiveness in Achieving Outcome 8 C. Efficiency in Achieving Outcome and Outputs 8 D. Preliminary Assessment of Sustainability 9 E. Impact 10 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 12 C. Recommendations 13 APPENDIXES 1. Project Framework Project Cost and Financing Plan Disbursement of Loan Proceeds Appraisal and Actual Implementation Schedules Chronology of Major Events Organizational Structure of Project Implementation Status of Compliance with Major Covenants Summary of Contract Packages Economic Reevaluation Contribution to the ADB Results Framework Project Overall Assessment 34 i

5 BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number Azerbaijan 2433-AZE Road Network Development Program (Project 2) Republic of Azerbaijan Ministry of Transport $55.40 million 1414 B. Loan Data 1. Appraisal Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 6. Closing Date In Loan Agreement Actual Number of Extensions 7. Terms of Loan Interest Rate Commitment charges Maturity (number of years) Grace Period (number of years) 9 June June August August August 2008 (Management approval) 15 December days after the date of loan agreement 3 March April December 2012 Financial closure on 24 April Based on London interbank offered rate 0.15% per annum 24 years 4 years 8. Terms of Relending (if any) Interest Rate Maturity (number of years) Grace Period (number of years) Second-Step Borrower None

6 ii 9. Disbursements a. Dates Initial Disbursement 24 July 2009 Effective Date 3 March 2009 Final Disbursement 24 April 2013 Original Closing Date 30 April 2012 Time Interval 45 months Time Interval 38 months b. Amount ($) Category Original Allocation Last Revised Allocation Amount Increased/ (Canceled) Amount Disbursed Undisbursed Balance a 1. Works 45,100,000 52,400,000 7,300,000 52,147, , Unallocated 10,300, ,000 (9,800,000) 0 500, Consulting Services 2,500,000 2,500,000 2,399, ,384 Total 55,400,000 55,400, ,546, ,240 () = negative. a Cancelled at financial closing of loan on 24 April Source: Asian Development Bank. C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate* Actual Foreign Exchange Cost Local Currency Cost Total * At appraisal, the project cost was not separated by foreign exchange and local currency. 2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed ADB Financed Other External Financing Total IDC Costs Borrower Financed ADB Financed Other External Financing Total ADB = Asian Development Bank, IDC = interest during construction.

7 iii 3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual A. Base Cost 1. Civil Works for Road Improvement 2. Consulting Services 3. Taxes and Duties B. Contingencies C. Financing Charges during Construction Total Project Schedule Item Appraisal Estimate Actual Civil Works Contract Procurement Q Q Q Q Implementation Q Q Q Q Construction Supervision Consultant a Implementation Q Q a The construction supervision consultant engaged under the East West Highway Improvement Project (Loan AZE) also supervised construction on this project. However, after the closure of the earlier project, the consultants inputs required supervising construction for this project from 10 May 2010 were covered under the loan. 5. Project Performance Report Ratings Ratings Implementation Period Development Objectives Implementation Progress From 15 December 2008 to 31 December 2010 Satisfactory Satisfactory From 1 January 2011 to 31 March 2011 On track a From 1 April 2011 to 30 June 2011 Potential problem From 1 July 2011 to 31 December 2012 On track a From 1 January 2011 the project performance rating system was replaced with a new project management information system (eops). D. Data on Asian Development Bank Missions No. of Person- Days Name of Mission Date No. of Persons Fact-finding May a, c Appraisal 9 12 June a, c Review November a, c Review April a, c Review July a, c Review October b, c Review January a, c Review March a, c Review 7 29 April 4 May a, c, d Review July b, c, d Review October a, c Midterm review June b, c Review November c Review March c Review June c Review November c Specialization of Members a Project completion review 8 19 July b, c, e a a = financial analysis specialist, b = transport specialist, c = project officer, d = social development, e = consultant.

8 I. PROJECT DESCRIPTION 1. Azerbaijan s road network includes, in addition to secondary and local roads, two major highways: (i) the east west highway linking Baku, the country s capital, to the Georgian border, and (ii) the north south highway running from the Russian Federation border to the Iranian border via Baku. The east west highway, which is about 500 kilometers (km) long, is one of Azerbaijan s main transport links to the western region and for external trade. The network was developed primarily under the former Soviet Union, when traffic volume was much higher. Vehicle axle overloading and the lack of resources for maintenance have left three-quarters of the entire road network in Azerbaijan in poor condition. Most of the east west highway, connecting with the Georgian border, has been improved with external assistance. The World Bank assisted improving the Ganja Qazakh section (94 km), and the European Bank of Reconstruction and Development (EBRD) funded work on the Hajigabul Kyurdamir section (85 km). The government requested the Asian Development Bank (ADB) to provide financing for the two sections of the east west highway: the Gazakh Georgian border section (39 km) and the Ganja bypass road (39 km) forming part of Yevlakh Ganja section. Accordingly, ADB approved two loans for the East West Highway Improvement Project in December 2005 a loan of $49.0 million from ADB s ordinary capital resources (OCR) and another loan in various currencies equivalent to SDR2,075,000 ($3.0 million) from its Special Funds resources. 1 However, during implementation, the project experienced unprecedented increases in prices for fuel, utilities, and major road construction materials, which significantly increased the cost of constructing the Gazakh Georgian border section of the road. 2 This rendered the available funding insufficient to finance the Ganja bypass road. The government and ADB agreed to change the scope of the East West Highway Improvement Project and exclude the Ganja bypass road (39 km). 2. The government developed in July 2006 the Road Network Development Program (RNDP) for To support the RNDP, the government and ADB entered into a framework financing agreement on 8 August 2007 for a multitranche financing facility (MFF) in an aggregate principal amount not exceeding $500 million equivalent. 4 ADB approved the MFF on 28 September The government requested ADB to finance the improvement of the Ganja bypass road under the MFF, it having been excluded from the East West Highway Improvement Project (para. 1). Constructing this road was a high priority of the government and was included in the RNDP for It bypasses Ganja, Azerbaijan s second-largest city, and forms part of the country s primary east west highway linking the capital, Baku, to the Georgian border. As part of the Asian highway network and one of Azerbaijan s main routes for external trade, the east west highway carries traffic between the Caspian and Black seas and has potential to become an important route for transit transport between Asia and Europe. ADB approved a loan of $55.4 million in August 2008 under project 2 of the MFF from its ordinary capital resources. 5 This was in line with the ADB s country strategy and program 1 ADB Report and Recommendation of the President to the Board of Directors on Proposed Loans to Azerbaijan for the East West Highway Improvement Project. Manila. (Loans 2205-AZE and 2206-AZE, approved on 8 December 2005). 2 The costs of fuel and utilities are regulated by the government s tariff council and were raised a number of times from January 2007, triggering multiple increase in costs of construction materials (the tariff council s resolutions may be found at 3 Republic of Azerbaijan Public Investment Program in the Road Subsector, Baku. 4 ADB Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to the Republic of Azerbaijan for the Road Network Development Program. Manila. 5 ADB Road Network Development Program Tranche 2. Manila (Loan 2433-AZE, $55.4 million).

9 2 update. 6 By strengthening Azerbaijan s transport links to Georgia, the project aimed at encouraging regional cooperation. 3. At appraisal, the project had one component: improving the 39 km two-lane paved Ganja bypass road. The Ministry of Transport (MOT) was the executing agency, and the Azer Road Service (ARS) was the implementing agency. The project was scheduled to be completed by April It was foreseen as benefiting people living along the project sections of the east west highway, road users, construction companies, traders, and other people who derived income from expanded traffic, trade, and investment in the project area. The expected major direct benefits were (i) lower road transport and maintenance costs, (ii) faster and more reliable road transport services, (iii) better access for local communities to markets and social services, (iv) job and income opportunities created during project implementation (i.e., using local labor and construction materials) and after project completion (i.e., roadside businesses), (v) the efficient movement of freight and passengers across Azerbaijan s border with Georgia at Red Bridge, and (vi) strengthened institutional capacity in the road subsector. The economic internal rate of return for the project at appraisal was 12.7%. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. Transport plays an important role in Azerbaijan s economy, supplying 6% of gross domestic product. Roads are the dominant mode of freight and passenger transport. The country occupies an important geographical position for transit routes with roads and railway lines connecting the Black and Caspian seas. Transport sector development in Azerbaijan therefore contributes to regional cooperation by facilitating international trade. The sector is also crucial to the domestic economy, as it links the rural population to urban and international markets. The development of transport infrastructure is one of the government s key tasks to sustain growth in the gross domestic product and promote trade with neighboring countries. The poor condition of the national road network poses a challenge. Some 56% of the main road network is in poor condition and urgently needs repair. The east west corridor (Baku Ganja Georgia border through Alyat and a more direct route through Shamakhi) and the north south corridor (Russian Federation border Baku Alyat Iran border) are crucial to addressing the transport bottlenecks to national development and poverty reduction. 5. The project was found to be highly relevant, at both appraisal and completion, to the government s objectives and policies for developing the transport sector, as set out in the RNDP (footnote 3) and ADB s country strategy and program update (footnote 6). The project will promote domestic and regional trade and traffic, thus contributing to the objectives of the government s development strategies. At completion, 37.5 km 7 of two-lane paved Ganja bypass road along the east west highway had been rebuilt, significantly improving connectivity in the project area, as well as traffic between Azerbaijan and Georgia. The project generated socioeconomic benefits for the local people in and around the project area in terms of increased opportunities for business and employment. Consulting services assisted the successful implementation of the project and the development of the road subsector. Environmental mitigation measures in the initial environmental examination were fully implemented during the project. The impact and outcomes were as anticipated, and the end results showed that the 6 ADB Country Strategy and Program Update (2006): Azerbaijan. Manila. 7 At appraisal, the length of the road project was thought to be about 39 km. However, the actual length of the road is 37.5 km as constructed. This discrepancy was due to a mistake during appraisal.

10 3 project outcome had contributed to meeting the government s development objectives. At completion, the project thus remained highly relevant, since it contributed to achieving the strategies and policies above. The project framework showing the results is in Appendix 1. B. Project Outputs 6. At appraisal, the project envisaged one output: improving the two-lane paved Ganja bypass road. During implementation, at the request of the government, ADB approved a change in project scope to include consulting services for project construction supervision. 8 The project was designed adequately and implemented as envisaged. 7. At completion, 37.5 km of two-lane paved Ganja bypass road was constructed connecting Baku to the Georgian border. Road construction was supervised by an association of international and national consultants that also helped develop the government s capacity for project implementation and reporting. 8. Subsequent to the start of the project, the government decided to widen the road to four lanes by constructing another two-lane road alongside the project road, in line with the widening program of the east west highway to cater to the growing traffic. The additional two-lane work has been financed by the Government of the Republic of Korea and is scheduled for completion by December C. Project Costs 9. At appraisal, the cost of the project, including contingencies, was estimated at $73.9 million. The actual project cost at completion was $72.9 million. The project provided $10.3 million for physical and price contingencies, which was reallocated for civil works to cover the additional costs and consulting services for construction supervision (footnote 8). Appendix 2 compares the details of the project costs at appraisal and at completion. 10. Under the financing plan envisaged at appraisal, the project was to be financed by an ADB loan of $55.4 million (75% of the project cost) and a government contribution of $18.5 million (25%). At completion, ADB had financed $54.5 million, and the government had contributed $18.4 million (for the same ratio). The undisbursed loan was cancelled at financial closing on 24 April The detailed comparison of the financing plan at appraisal and at completion is in Appendix 2. D. Disbursements 11. The loan was signed on 15 December 2008 and became effective on 3 March The first disbursement was made on 24 July 2009, and 98% of the loan funds were utilized by the loan closing date. Appendix 3 shows the projected annual disbursement of loan proceeds compared with actual disbursement. Loan proceeds were disbursed in accordance with ADB s Loan Disbursement Handbook (2007, as amended from time to time). The project experienced coordination issues between the contractor and the subcontractors. The subcontractors alleged that they did not receive timely payments from the contractor. As such, the poor cash flow of the 8 The construction supervision consultants engaged for the East West Highway Improvement Project also supervised construction for this project. However, after the closure of the earlier project, the government requested covering the consultants inputs required supervising construction for this project from 10 May 2010 under this project. Accordingly, the change in scope was approved on 1 June 2010 and the loan funds were reallocated to cover the cost of construction supervision from 10 May 2010 until project completion.

11 4 subcontractors affected work progress during project implementation. To improve the cash flow of subcontractors toward improving implementation progress, ADB allowed direct disbursements to subcontractors as to the contractor and consultants. There was no imprest account under the loan. Project accounts were maintained according to the government system and subjected to a financial audit. 9 According to the annual audit reports submitted to ADB, no deficiencies or risks in financial management occurred. Overall, the project complied with ADB s disbursement procedures. E. Project Schedule 12. At appraisal, the financial closing date of the loan was 30 April 2012 and civil works were envisaged completed by October At the request of the government, ADB approved advance contracting of civil works to expedite project implementation. The civil works contract was signed on 26 December 2008, and the works commenced on 16 March The plan was for the construction supervision consultancy under loan 2205-AZE to be implemented over 24 months, plus a 24-month liability period for defects. However, the project experienced startup delays because (i) coordination issues arose among the local authorities, contractor, and subcontractors; and (ii) the contractor was slow to mobilize. Through the joint efforts of ADB and the implementing agency, civil works activities were able to catch up. During implementation, the project also faced unfavorable winter weather. From August 2011 to February 2012, heavy rains and other inclement weather seriously hampered physical progress. Therefore, at the request of the government, ADB approved extending the loan closing date to 31 December The civil works were substantially completed by 31 December Some minor and miscellaneous items remained to be executed and were included in the punch list. Subsequently, the punch list items were completed using government funding. A comparison of the actual implementation schedule with the schedule envisaged at appraisal is in Appendix 4, and a chronology of the main events is in Appendix 5. F. Implementation Arrangements 13. MOT was the executing agency and ARS the implementing agency. ARS had already implemented ADB-funded projects and developed adequate capacity to manage project implementation. The chairman of ARS was responsible for supervising the project. A steering committee had representation from the Cabinet of Minister s Office, Ministry of Economic Development, Ministry of Finance, MOT, and ARS. The steering committee, chaired by a deputy minister of transport, ensured interagency coordination, reviewed implementation progress, and provided approvals and guidance as necessary. The project implementation unit (PIU) established in ARS efficiently handled project implementation. The PIU was headed by a project director and supported by qualified staff and an externally contracted team of qualified technical, safeguards, financial, and support staff. The PIU managed project activities, including planning, progress monitoring, and reporting. Separate financial accounts for the project were established, financial accounts were audited by an auditor (footnote 9), and the annual audit reports were submitted to ADB as required by the loan agreement. The audit reports provided quantitative and qualitative assessment of the financial management adopted for the project, which was found satisfactory. The organizational structure for the project is in Appendix 6. 9 The external auditors engaged by the ARS were Grant Thornton Public Accountants, Baku, Azerbaijan, for FY2011 FY2012 and Audit-Lider, Baku, Azerbaijan, for FY2009 FY2010.

12 5 G. Conditions and Covenants 14. The project complied with all the major covenants required by the loan agreement. 10 The government established an adequate organizational structure for project implementation, designated the executing and implementing agencies, and set up the PIU with sufficient staff. Project implementation was well managed, covering among other things procurement, using the services of consultants, monitoring progress, controlling construction quality, preparing monthly and quarterly progress reports, and implementing financial audits. The quality of the completed project roads met the standards specified in project documentation. The government provided the required counterpart funds of $18.4 million. The contractor and the subcontractors followed labor laws and ADB s requirement for hiring laborers, and it encouraged women to participate in the project. HIV awareness programs were organized by the contractor. During implementation, ARS and the contractor acted to prevent any adverse environmental impact from design or construction in accordance with environmental management plan (EMP), which was a part of the civil works contract. ARS monitored EMP implementation, and any issues were reported to the contractor for compliance. The project was implemented in compliance with ADB s Anticorruption Policy (1998, as amended to date). No corrupt, fraudulent, collusive, or coercive practices were alleged during implementation. Separate accounts and records for the project were maintained and subjected to annual audit by an independent auditor engaged with the agreement of ADB. There was no imprest account under the loan. According to the audit reports submitted to ADB annually, as required by the loan agreement, no deficiencies or risks in financial management occurred. The funds were used for the purposes for which ADB provided them. Internal controls, funds management, and financial accounting procedures for the project were generally satisfactory. The quality of the completed road met with the standards specified in project documentation. The status of compliance with major loan covenants is in Appendix 7, which shows that 23 of 24 covenants were fully complied with. The one covenant that was only partly complied with relates to performance monitoring and evaluation for which ARS had not fully collected the data at the project completion. This status does not significantly affect project performance. H. Consultant Recruitment and Procurement 15. The duties of construction supervision consultants engaged under loan 2205-AZE for the East West Highway Improvement Project included supervising construction on this project. As such, no separate construction supervision consultant was engaged. However, after the closure of loan 2205-AZE, the government asked for the required inputs for supervising construction from 10 May 2010 to be covered under the loan. Accordingly, through a minor change in project scope, the loan financed about 42 person-months of international consultancy and 448 person-months of national consultancy to supervise the construction of the Ganja bypass road. 16. Civil works procurement conformed to ADB s Procurement Guidelines (2007, as amended from time to time). The civil works contract was procured using international competitive bidding by prequalified bidders. Relevant provisions of ADB s Anticorruption Policy were included in the bidding documents. The contract was awarded on 26 December 2008 for a 24-month contract period plus a 24-month liability period for defects. Civil works started in March 2009 and were substantially completed on 31 December 2012, delayed by about 10 ADB and the Government of Azerbaijan Loan Agreement between Republic of Azerbaijan and the Asian Development Bank. Baku (Loan 2433-AZE, dated 15 December 2008).

13 6 21 months beyond the contractual completion date (para. 12). The summary of contract packages is in Appendix 8. I. Performance of Consultants and Contractor 17. Overall, the performance of the consultants was satisfactory. The consultants for construction supervision carried out all activities required under their terms of reference. During implementation, the consultants discharged their duties as the engineer under the terms of the Fédération Internationale des Ingénieurs-Conseils (FIDIC) contract, working in close cooperation with the PIU. As such, the consultants were empowered to make certain decisions on technical and contractual issues on behalf of ARS. They helped the PIU prepare monthly and quarterly progress reports, established and implemented the project performance management system, and provided on-the-job training and seminars for contractors and PIU staff. The loan financed 490 person-months of consulting services for project construction supervision, broken down as 42 person-months of international consultancy and 448 person-months of national consultancy. 18. The performance of the contractor is rated less than satisfactory. The project experienced start-up delays mainly because (i) contractor mobilization was inadequate and (ii) coordination between the contractor and subcontractors was poor. The subcontractors alleged that they did not receive timely payments from the contractor. To resolve these issues, ADB had to intervene and work out a mechanism to improve the cash flow of the subcontractors toward improving project progress. ADB allowed direct disbursements to subcontractors for the portion of works carried out by them. The subcontractors contributed effectively to completing the civil works, and without them it would have been difficult for the contractor to complete the project. During implementation, the contractor had difficulty coping with inclement weather, which caused the completion of works to be significantly delayed. The works were finally completed after about 21 months of delays. The quality of the civil works was, however, satisfactory and well regarded by the supervision consultants and ARS. J. Performance of the Borrower and the Executing Agency 19. The overall performance of the borrower and the executing agency is rated satisfactory. The borrower was the Government of Azerbaijan, the executing agency was MOT, and the implementing agency was ARS. As assessed at appraisal, an organizational framework was established for efficient and timely project management. The government provided the required counterpart funds and all necessary support without any delay. Under the guidance of the steering committee, ARS closely coordinated and regularly monitored construction progress and the quality of physical works. The PIU, established by ARS with assistance from the consultants, monitored project implementation onsite and prepared all required progress reports. The capacity of ARS officials to manage project implementation improved significantly. MOT and MOF facilitated effectively and supported ADB s review missions during implementation and at completion. Project accounts and financial statements were audited by external auditors acceptable to ADB (footnote 9), and the audit reports were submitted to ADB as required under the loan agreement. ARS established the project performance management system. However, the draft project completion report received from the borrower lacked information on performance indicator results, which was subsequently collected during the project completion review (PCR) mission. The executing agency has been advised to undertake periodic project performance review in accordance with the project performance management system to evaluate the scope, implementation arrangements, progress, and achievements of

14 7 objectives of the project and the facility. The executing agency continues to improve its capacity, and the improvements will likely be apparent during succeeding ADB projects. K. Performance of the Asian Development Bank 20. The performance of ADB is rated satisfactory. Project administration was undertaken by ADB s headquarters until January 2011, when it was transferred to ADB s resident mission in Azerbaijan. During implementation, ADB was closely involved in identifying and resolving issues through the regular fielding of project review missions. ADB intervened to maintain the coordination required between the contractor and subcontractors and allowed direct disbursements to subcontractors for the portion of works carried out by them to improve the their cash flow and the progress of the project (para. 18). ADB headquarters provided continuous guidance on project implementation and identifying and resolving implementation issues toward the successful completion of the project. ADB conducted 13 loan review missions, a midterm review mission in June 2011, and a project completion review mission in July Its approval of documents during processing and implementation was timely, and the payment of claims was prompt. At the government s request, ADB extended the loan closing date from 30 April 2012 to 31 December In general, the government appreciated ADB s timely advice on technical and contract administration matters. III. EVALUATION OF PERFORMANCE A. Relevance 21. The project is rated highly relevant, at both appraisal and completion, to the government s objectives and policies, as well as ADB s country strategy. The State Program on Poverty Reduction and Economic Development, and the State Program on Socioeconomic Development of Regions, constitute the government s strategic framework for development. The infrastructure pillar of the first listed program includes reconstructing a significant portion of the country s roads in accordance with international standards. The country s development programs aim to improve major road infrastructure to facilitate economic growth and poverty reduction. By improving the east west highway, the project provided local people in and around the project area with better access to markets, job opportunities, and social services, thereby facilitating socioeconomic development. By strengthening Azerbaijan s transport links to neighboring countries, the project promoted regional cooperation. 22. The project was included in ADB s assistance program for 2006, which was fully consistent with ADB s country strategy and program (footnote 6) and focused on pro-poor sustainable growth, social development, and good governance. This meant (i) supporting broadbased, inclusive economic development by improving infrastructure, financial systems, and the skills base; (ii) reducing vulnerability by improving access for the poor to forest and land resources, human capital, and public services; and (iii) improving governance to enhance the effectiveness of public investment and supporting decentralization to strengthen local government. In harmony with these strategies, the project (i) improved access to markets and social services facilities for education and health while directly making job opportunities available to the poor; (ii) developed the skills of local contractors in road rehabilitation and 11 Republic of Azerbaijan State Program on Poverty Reduction and Economic Development, Baku. 12 Republic of Azerbaijan State Program on Socioeconomic Development of Regions, Baku.

15 8 maintenance; and (iii) provided institutional development assistance and technical training to road subsector staff and improved their capacity to administer, supervise, and monitor civil works contracts. B. Effectiveness in Achieving Outcome 23. The project is rated effective in achieving its purposes and outcomes. Azerbaijan s insufficient road infrastructure increased transport costs and the frequency of accidents and was therefore a major impediment to economic growth. With the implementation of the project, traffic to and from the Georgian border will significantly benefit from savings in travel time and improved road safety. Despite delays in implementing the project, all project components were completed as envisaged at appraisal. The objectives and outcomes of the project were fully achieved. Upon completion, 37.5 km of two-lane paved Ganja bypass road was constructed. The road bypasses Ganja city and forms part of the country s primary east west highway linking the capital, Baku, with the Georgian border. A significant part of traffic flows all the way from Baku to Georgia and vice versa, including, for example, about 50,000 new passenger cars transported annually through Georgia to Baku. Supplemented by considerable addition of oil revenues into the economy during the project implementation and improvements to the national social safety net program, the poverty incidence in the six project rayons (districts) fell from 37% in 2003 to 6% in Similarly, industrial production in the six rayons increased from about AZN62 million in 2003 to about AZN176 million in 2012, and grain production increased from 149,400 tons in 2003 to about 215,480 tons in The PCR mission noted a sharp increase in traffic volume. The annual average daily traffic during 2013 was 4,485 vehicles, triple the 1,500 recorded in The travel time to pass Ganja shortened considerably from 40 minutes to 20 minutes. The international roughness index value for the project road was improved from more than 6.0 in 2007 to 2.5 in These factors reduced transport costs by about 25 30% in 2013 through reduced freight charges and fares for buses and taxis. The project also contributed socioeconomic benefits (paras ). Several local public transport services have begun operating on the project road, serving local residents, particularly the poor. The number of fatal accidents on the project road is reported to have fallen by more than 10% in 2012 from C. Efficiency in Achieving Outcome and Outputs 24. The project is rated efficient in view of the considerable traffic growth and improved results reported in the economic reevaluation. The road upgraded under the project is an important section of the east west highway in Azerbaijan. The improvement of the road is facilitating socioeconomic development in the project area, and the traffic using the project road has increased quickly. The vehicle operating cost (VOC) on the project highway has fallen by an average of 40%. Taking into consideration the actual traffic and the trends for traffic growth, as well as socioeconomic development in the project area, the traffic forecast at appraisal was revised upward suitably in the economic reevaluation. 25. The PCR mission reevaluated the economic value of the project using a methodology similar to that adopted at appraisal. In the economic reevaluation, the economic benefits were calculated by comparing the scenarios with and without the project. The economic benefits included VOC savings and passenger travel time cost savings. There are several other nonquantified benefits that have not been considered in the economic assessment. The economic internal rate of return was recalculated at 13.24% with an economic net present value of $10.62 million. The recalculated rate is higher than the appraisal estimate of 12.7% and higher than the

16 9 ADB-recommended discount rate of 12%. The project is therefore still considered economically viable with robust returns. The details of the economic reevaluation are in Appendix 9. D. Preliminary Assessment of Sustainability 26. The project is considered likely sustainable. The road is an important section of the east west transport corridor and part of AH5, the east west route of the Asian highway network. 13 The sustainability of the road improvement is almost assured, as the government has initiated several measures to maintain the road, enforce road safety and axle load regulations, and facilitate cross-border formalities. However, to ensure the degree of sustainability envisioned, the government should (i) encourage the development of local logistic services and implement proper policies and interventions that will accelerate socioeconomic development, widen the reach of the project benefits, and eventually transform this transport corridor into an economic corridor; and (ii) continue institutional reforms to deepen corporatization and privatization in the road subsector, enhance road development planning, and improve sector performance in operating and maintaining roads and in project management. Specifically, the following government initiatives would further enhance project sustainability. 27. Road maintenance. Adequate routine and periodic maintenance is essential to the sustainability of the assets. Maintenance is carried out by MOT and ARS through its teams and units located in various rayons. These maintenance units have adequate capacity to maintain the project roads. The continuity of such efforts will ensure that the project road remains in acceptable condition and thus able to accommodate the growth in traffic. MOT has been allocating the funds and resources annually required for road maintenance. The budget for road maintenance has gone from $55 million in 2006 to $246 million in 2013 for the road network under MOT and ARS. The government thus commits itself to allotting its own budget and resources for routine and periodic maintenance along the project roads. Further, the government is considering awarding performance-based maintenance contracts in the future, which would enhance the sustainability of the bypass. 28. Road network development. The timely implementation of the Road Network Development Program (RNDP) will develop an efficient, safe, sustainable, and internationally and domestically integrated transport network to support the country s economic and social development. 14 This will complement the project road and cause the traffic on this road to further increase. 29. Cross border facilitation. Azerbaijan s location in the southern Caucasus makes its road network crucial to regional transport and trade. The east west and north south highways form part of the Asian highway network connecting Iran and the Russian Federation, as well as Georgia and Turkey to Central Asia. 15 As Azerbaijan is a signatory to a number of international transport agreements and conventions, it is important for it to ensure that cross-border and transit road transport remains efficient. It must maintain roads in good condition, provide adequate cross-border facilities, and harmonize cross-border procedures with its neighbors The RNDP was initially developed for implementation during at an estimated cost of $5.3 billion and covering 9,500 km of roads. However, implementation was slowed by delays in land acquisition and resettlement, lack of project readiness, delays in procuring works and consulting services, and lack of institutional capacity. Later, in 2012, the RNDP was updated with an estimated cost of $8.46 billion to be implemented up to The concept of the Asian highway network was developed with assistance of the United Nations Economic and Social Commission for Asia and the Pacific. Twenty-seven Asian countries including Azerbaijan have signed the Intergovernmental Agreement on the Asian Highway Network.

17 Road safety. The main causes of traffic accidents are the poor condition of the road network, weak enforcement of safety regulations, intoxicated drivers, and inadequate driver education. The government needs to enhance road safety with comprehensive road safety awareness campaigns and the provision of safety infrastructure such as median barriers, pedestrian overpasses or underpasses, additional service roads, and traffic lights and signs in urban areas. It is developing road safety regulations to implement appropriate safety enforcement measures, which will also reduce accidents on the project road and thereby enhance project sustainability. 31. Axle load. Weak enforcement of axle load regulations allows overloading to rapidly deteriorate the pavement. Axle load control is needed to prevent the deterioration of the road network. The government has taken initiatives to control overloading in its endeavor to safeguard the road assets. It has established vehicle weighing stations to enforce axle loads and is implementing appropriate enforcement procedures and regulations. E. Impact 1. Environmental Safeguards 32. The project was environment category B at appraisal. As per the initial environmental examination conducted at appraisal according to ADB s Environmental Policy (2002) and Environmental Assessment Guidelines (2003), environmental impacts from construction were temporary. The temporary use of land adjacent to the project road, removal of roadside vegetation, temporary land-take for the site of the contractor s yard, and the extraction and transport of construction material from borrow sites were considered to have temporary impacts on the environment during project implementation. No protected or environmentally sensitive areas such as designated wetlands, forests, nature conservation areas, or places of archaeological importance were within or near the project area. Mitigation measures for temporary impacts were implemented to minimize impacts and ensure maximum safety during construction, as set out in the environmental management plan (EMP). The government ensured that all activities are performed in compliance with the principles and objectives of ecologically sustainable development. Consultants prepared biannual environmental reports that recorded all the environmental issues but indicated no significant negative environmental impact during implementation. 2. Social Safeguards 33. The project did not require the acquisition of private land except for two parcels of state and municipal lands adding up to 0.07 hectares, which were unused and did not involve any resettlement, as road improvement activities were largely confined to the existing right-of-way. At appraisal, ARS prepared a due diligence report for land acquisition and resettlement that confirmed that no business and residential structure would be removed from the road reserve. The project was therefore category C for involuntary resettlement in accordance with ADB s Involuntary Resettlement Policy (1995). During implementation and at completion, no land acquisition or resettlement issues were noted. The project had no impact on indigenous peoples and, accordingly, was category C for indigenous people under ADB s Policy on Indigenous Peoples (1998).

18 11 3. Socioeconomic Impacts 34. The project s overall impact is positive. The newly constructed bypass road has displayed positive socioeconomic impacts, providing a boost to regional trade and better access to markets, economic centers, and social services. The project provides opportunities for further economic, industrial, and commercial development, increasing opportunities for business and employment. Key socioeconomic impacts are summarized below. 35. Economic development. The improvement of the east west highway is significantly promoting economic growth in Azerbaijan and facilitating cooperation with other countries in the region. The project stimulated rural growth by improving access to remote areas and allowing the efficient exchange of goods and services. The PCR mission interacted with local business establishments, the local community, and other stakeholders. All of them had a positive business outlook. Local businesses registered growth of about 25 30% during Local communities expressed their satisfaction with the increased opportunities, indicating good prospects for improved livelihoods. With the reduction in travel time thanks to the bypass, most of villagers are able to travel to town centers more frequently, up from 5 times a year to 17. The PCR mission observed that many new wayside amenities like restaurants and shops had sprung up along the project road. Many households expressed their desire to work for those businesses, indicating good prospects for improved livelihoods. All of these developments will help raise Azerbaijan s gross domestic product. 36. Poverty reduction. The PCR mission noted that poverty in the project area was reduced through (i) improved access to business opportunities for local communities, local companies, and freight forwarders; (ii) improved access to employment and income for the local people in and around the project area in roadside businesses and road improvement works; (iii) improved access to markets and social services; and (iii) lower prices of transport services, food, and other daily necessities made possible by lower transport costs. During implementation, the project provided employment to about 400 people, including 21 women, through the contractor, subcontractor, and consultants. This included technical, administrative, and skilled workers, as well as semiskilled workers and manual laborers. 37. Opportunities for women. The contracts for civil works and consulting services included provisions to encourage the employment of skilled and unskilled women laborers. During implementation, the project was able to employ 21 women. This is considered a modest achievement considering the nature of road construction and the cultural restrictions on women working. In addition, the improved east west highway means a sizable number of women are working in various small and medium-sized commercial businesses, including roadside businesses selling farm products, restaurants, and lodging houses, which are generally managed by women. Women now have improved access to social services and facilities, especially hospitals and schools. 38. Health and safety. During project implementation, the contractor conducted awareness programs on HIV for project management staff, contractors, subcontractors, and residents. Manuals and booklets were distributed to workers and residents in the project area to encourage condom use, promote a healthy lifestyle, and increase awareness of HIV. Long-haul truck drivers are a primary vector for the geographical spread of HIV. The government undertook measures to prevent trafficking in illegal substances, wildlife, endangered species, and people at the border in accordance with national laws and regulations.

19 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 39. Overall, the project is rated successful. Project formulation and design were technically sound and highly relevant to government and ADB development strategies. The main outputs were delivered as planned, and the project is promoting trade with neighboring countries and facilitating regional cooperation. Improved road connectivity is contributing to socioeconomic development and poverty reduction, particularly for the local people in and around the project area. Improvements to road conditions, increased traffic on the project road, and the project s social impact have proven that the project outcomes and outputs anticipated at appraisal were substantially achieved and that the project s long-term impact is likely to be achieved within the project s operation cycle. The government s road network development plan and its efforts to improve cross border facilitation, road safety and axle load control, and socioeconomic development in the project area will add to the project s sustainability. Lessons from project development and implementation should be incorporated in future projects, including those financed by ADB. B. Lessons 40. The project helped the government to identify gaps in various project implementation activities. The main lessons, which may be incorporated into ongoing and future projects, are as follows: (i) (ii) (iii) Cost estimates. More robust due diligence is needed during project design and formulation to enable the closest possible cost estimates and to set aside enough resources to cover contingencies. This can save considerable time. The scope of the ADB-financed East West Highway Improvement Project, approved in 2005 (para. 1), included two sections of the east west highway: Gazakh Georgian border section and Ganja bypass road, forming part of Yevlakh Ganja section. However, during implementation, the project experienced unprecedentedly sharp increases in prices for fuel, utilities, and major road construction materials, which significant increased the cost of construction. Consequently, the scope of the East-West Highway Improvement Project was revised to exclude the Ganja bypass road. This delayed improving the Ganja bypass road, which was a muchneeded alternative to the existing highway. At cost estimation, prices of materials should be examined carefully and in relation to neighboring markets and the unit costs of similar items in previously awarded contracts. Contingencies should also consider the exceptional cost increases during implementation. Realistic estimation of project and contract duration. Inclement weather seriously hampered physical progress in project implementation, especially from August 2011 to February The contractor had difficulty coping with it, which significantly delayed the completion of works. A more realistic timeframe for implementing a road project should be formulated allowing for unpredictable local weather conditions and other contingencies so that resources can be deployed effectively and efficiently. Broader consultations during project design. The project constructed a twolane road. Subsequent to the start of the project, the government decided to widen the road to four lanes by constructing another two-lane road alongside the project road. The widening works are scheduled for completion by December