FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EUR 90.0 MILLION (US$122.5 MILLION EQUIVALENT) TO THE REPUBLIC OF BULGARIA FOR A ROAD INFRASTRUCTURE REHABILITATION PROJECT Sustainable Development Department South Central Europe Country Unit Europe and Central Asia Region May 3 1,2007 Report No: BG 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 April 30, 2007) Currency Unit = Bulgarian Lev (BGN) BGN = US$1 US$ = BGN 1 BGN = EUR 1 EURl = US$ FISCAL YEAR January 1 - December 31 AADT APL BNB CAS CBA CFAA CPS CRBL EBRD ECA EIB EIRR EMP EU FFIU FM GDP HDM IBRD ICB ICR IDA IFA Average Annual Daily Traffic Adaptable Program Loan Bulgarian National Bank Country Assistance Strategy Cost Benefit Analysis Country Financial Accountability Assessment Country Partnership Strategy Central Roads and Bridges Laboratory European Bank for Reconstruction and Development Europe and Central Asia (World Bank region) European Investment Bank Economic Internal Rate of Return Environmental Management Plan European Union Foreign Financing Investment Unit (within NRIF) Financial Management Gross Domestic Product Highway Development and Management Model International Bank for Reconstruction and Development International Competitive Bidding ABBREVIATIONS AND ACRONYMS IF1 IN IRR ISPA MRDPW MOF MOT NAO NPV NRIF OP PAD PHARE POM PPP RDOP REA RUC SBD SIL SOE SOPT International Financial Institution International (Road) Roughness Index Internal Rate of Return Instrument for Structural Policies for pre- Accession Ministry of Regional Development and Public Works Ministry of Finance Ministry of Transport National Accounting Office Net Present Value National Road Infrastructure Fund Operational Policy (of the World Bank) Project Appraisal Document Fund for Assistance to Central and Eastern European Countries Project Operational Manual Purchasing Power Parity Regional Development Operational Program Road Executive Agency Road User Cost Standard Bidding Document Specific Investment Loan Statement of Expenditures Sectoral Operational Program for Transport Implementation Completion Report TEN-T Trans-European Network - Transport International Development Association VAT Value Added Tax Institutional Fiduciary Assessment voc Vehicle Operating Cost VSL Variable-Spread Loan Vice President: Country DirectodManager: Sector DirectodManager: Task Team Leaders: Shigeo Katsu, ECAVP Anand K. SethRlorian Fichtl, ECCU5 Peter D. ThomsodMotoo Konishi, ECSSD Heny G. R. Kerali, ECSSD Mohammed Dalil Essakali, ECSSD

3 FOR OFFICIAL USE ONLY BULGARIA ROAD INFRASTRUCTURE REHABILITATION PROJECT CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE Country and sector issues Rationale for Bank involvement Higher level objectives to which the project contributes... 6 B. PROJECT DESCRIPTION Lending instrument Project development objective and key indicators Project components Lessons learned and reflected in the project design Alternatives considered and reasons for rejection C. IMPLEMENTATION Partnership arrangements Institutional and implementation arrangements Monitoring and evaluation of outcomeshesults Sustainability Critical risks and possible controversial aspects Loadcredit conditions and covenants D. APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Social Environment Safeguard policies Policy Exceptions and Readiness 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. i

4 Annex 1: Country and Sector or Program Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Arrangements Annex 9: Economic and Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance Map IBRD

5 BULGARIA ROAD INFRASTRUCTURE REHABILITATION PROJECT PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSSD Date: May 3 1, 2007 Team Leaders: Henry G. R. Kerali Mohammed Dalil Essakali Country Director: Anand K. Seth Sectors: Roads and highways (100%) Sector Director: Peter D. Thomson Themes: Trade facilitation and market access Sector Manager: Motoo Konishi (P); Regional integration (S) Project ID: PO99894 Environmental screening category: B - Partial Assessment Lending Instrument: Specific Investment Loan [XI Loan [ 3 Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (EUR): million [(US$m) Equivalent] Borrower: The Republic of Bulgaria The Ministry of Finance 102 Rakovski Street Sofia Bulgaria 1040 Responsible Agency: The National Road Infrastructure Fund (NRIF) 3 Macedonia Blvd Sofia Bulgaria 1606 Tel: Fax:

6 Estimated disbursements (Bank FY/US%m) Y I 2008 I 2009 I 2010 I 2011 I 4nnual hmulative OO Expected effectiveness date: September 18, 2007 Expected closing date: June 30, 2011 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Ref: PAD A.3 Does the project require any exceptions from Bank policies? Ref: PAD D. 7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [ ]No Does the project include any critical risks rated substantial or high? [ ]Yes [XINO Ref: PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Ref: PAD D. 7 Project development objective Ref: PAD B.2, Technical Annex 3 The development objective of the proposed project would be to assist Bulgaria to reduce road transport costs by improving the condition and quality of its roads network during the first years of EU accession. Project description Ref: PAD B.3, Technical Annex 4 The total Project cost is estimated at EUR 144 million, with EUR 90 million from the proposed World Bank Loan. The Project includes three components: (i) rehabilitation of about 450 kilometers of Class I, 11, and I11 roads; (ii) technical assistance for the NRIF to develop its capacity in planning, programming, and project execution; and (iii) technical assistance and other activities to support Bulgaria s objective to improve road safety. Which safeguard policies are triggered, if any? Ref: PAD D. 6, Technical Annex 10 Environmental Assessment (OP/BP/GP iv

7 Significant, non-standard conditions, if any, for: Re$ PAD C.6 Covenants applicable to project implementation: a. b. C. d. e. The NRIF shall maintain a project financial management system acceptable to the Bank. The project s financial statements, statements of expenditures, financial reports, withdrawal applications and designated accounts will be audited by independent auditors acceptable to the Bank and on terms of reference acceptable to the Bank. The annual audited statements and audit report will be provided to the Bank within six months of the end of each fiscal year. The NRIF shall prepare and furnish to the Bank within forty five days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter. The NRIF shall submit to the Bank quarterly Project Reports, in a format satisfactory to the Bank, not later than 45 days after the end of each quarter outlining the progress made in the implementation of the Project, as well as the problems encountered and how they are being addressed. The Borrower shall ensure that the NRIF: (i) takes all necessary measures to implement the Project in accordance with the Project Operational Manual (POM), and the EMP, and shall not amend, suspend, abrogate, repeal or waive any provisions of the POM and the EMP without prior approval of the Bank; and (ii) suitably includes adequate information on the implementation of the EMP in the Project Reports. Not later than eighteen months after the Effective Date, the Borrower shall carry out jointly with the Bank and the NRIF, a midterm review of the progress made in carrying out the Project. V

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9 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues 1. Bulgaria s economy has steadily grown since 2000, most recently with 5.5 percent in 2005 and 6.2 percent in 2006l, inflation in the period slowed to single digits, unemployment declined to 10.7 percent in 2005 from 18 percent in 2000, and poverty levels have dropped. These positive trends are expected to continue in the near future. However, raising productivity and employment to narrow the income gap and facilitate convergence with the European Union (EU) will remain Bulgaria s main challenge in the next few years. At roughly 30 percent of the average GDP per capita for EU25 in Purchasing Power Parity (PPP) terms, Bulgaria is starting its convergence to the living standards of the more advanced members of the EU from a less favorable position than most other new member states. Bulgaria also faces a demographic dilemma. Its population is declining at almost one percent per year, its labor participation and its employment rates are among the lowest in Europe, and the productivity of its labor force is lo?. Raising productivity will require improvements on several fronts. Because of the potential impact of the transport system on aggregate productivity, and on regional competitiveness, public intervention to improve the efficiency of the transport system is one of many development paths that the Government is pursuing. 2. Bulgaria started preparing the transport sector for future challenges in the years leading to EU accession. It aligned the transport policy and regulations with that of the EU ahead of accession, and this should provide the necessary pre-requisite for Bulgaria s full integration within the EU transport market. Bulgaria also launched several investment programs from the late 1990s to upgrade the transport infrastructure to EU standards and to enhance the transport links with neighboring countries and with the rest of the EU. 3. In addition to the critical importance of road transport links with the rest of the EU, which is Bulgaria s main trade partner, internal road transport is especially important for Bulgaria because of the country s geographic and economic features. Only 30 percent of the country s population lives in large and medium size cities. The rest of the population live mainly in small towns (40 percent) or in rural areas (30 percent), often separated by sparsely populated mountainous areas, and therefore depend very much on road transport for their livelihood. Economic activities are also widely spread over the territory with activities such as tourism and agriculture as potential sources of growth. Unlike many Central and Eastern European countries, Bulgaria developed over the past few decades a good road network of over 37,000 km that reaches all communities, including 19,000 km classified as national (republican) roads3. Geography, past investment and the reform of road transport services undertaken before EU accession are the main factors that have shaped the demand for road transport. Roads now carry about two thirds of the combined road plus rail freight market (measured in ton-km including international traffic), thereby effectively complementing rail transport for short distance, high value, and time sensitive cargo. In the passenger segment, I International Monetary Fund Country Report No. 07/ Bulgaria Public Finance Policy Review. World Bank Report No BG In Bulgaria the national (republican) roads are divided into four classes: motorways, and Class I, 11, and I11 roads. These national roads are managed by the National Road Infrastructure Fund. In addition there are 18,000 km Class IV roads owned and managed by the local governments (see Table 1). 1

10 road transport competes aggressively with rail transport and has gained a share of over 70 percent of the intercity passenger transport. 4. While the road infrastructure has coped reasonably well during the transition period in the past 10 to 15 years, it is now feared that the quality of the road infrastructure as well as its capacity on certain sections are hindering the efficient movement of goods and people and may be depriving Bulgaria from an important source of aggregate productivity gains. Recent surveys have shown that only one-third of the national road network is in good condition (Table l), and road capacity around the large urban centers is not sufficient to satisfy the growing traffic demand. Furthermore, a considerable portion of the core national road network still needs to be upgraded to European technical and safety standards. Bulgaria has committed to completing the upgrade of its main road network to EU standards by 2014, with a number of roads to be upgraded by Table 1: Bulgaria s National Road Network and its Condition (2005) Road Class Length Good Fair Poor (km) (percent) (percent) (percent) Motorways Class I 2, Class I1 4,O Class I11 11, Total (Average) 19, Note: Around 18,000 km of Class IV (local) roads are not included. 5. The main reason for the poor road condition is inadequate financing for road maintenance in the past. The annual financing required for routine maintenance and repair of the national road network has been estimated by the National Road Infrastructure Fund (NRIF) to be about EUR 86 million. If allowance is made for periodic maintenance, which includes pavement rehabilitation, the total annual financing required would amount to at least EUR 200 million. However, total maintenance and rehabilitation expenditures have amounted to only EUR million in recent years, with typically EUR 50 million spent on routine maintenance and repair, and EUR 70 million spent on rehabilitation. In general, the very tight fiscal policy of Bulgaria after the financial crisis in the late 1990s has had a severe impact on roads. Spending on roads reached very low levels in 2002 and 2003 at close to 1 percent of GDP4. Although, more funds are allocated to road rehabilitation now, there is a risk that with EU accession, the emphasis on developing the major EU transport corridors in order to expand infrastructure capacity would result in reduced spending on maintenance in general and on the rehabilitation of roads that are not part of the main European corridors. In order to secure a sustainable source of funding for road infrastructure maintenance, Bulgaria has gradually introduced a vignette system since 2004 to collect charges for using the main road network. This source of funds has generated in 2005 and 2006 about EUR 80 million annually, and it is expected to generate more revenues following EU accession. 6. With the growth in motorization, poor road safety has become an increasing issue in Bulgaria. Since 1970, in Western Europe, there has been a substantial reduction in road traffic injuries, but not so in Bulgaria or in Eastern Europe. A risk measure for traffic Bulgaria Public Finance Policy Review. World Bank Report No BG

11 fatalities, persons killed in traffic per 100,000 inhabitants, shows that Bulgaria, with a figure of 12.1, is below the average in Eastern Europe but is twice higher than the EU average. Studies show that excessive speed has been the leading cause in 40 percent of fatal crashes in Bulgaria, and that 28 percent of those killed were pedestrians; the third highest figure in Europe, after Poland and Lithuania. Fatal crashes, about 1,000 annually, occur equally likely in rural and urban areas; whereas in countries with good road traffic safety records, a higher percentage of fatal crashes occur in rural areas. There are about 7,000 road traffic injuries annually in Bulgaria, making the likelihood of a traffic crash being fatal two to three times higher than in countries with good road traffic safety. Only a small fraction of the fatal crashes occur on the motorways. Black spots, traffic conflicts and weaknesses in traffic management and enforcement, together with human factors and slowness of emergency medical services, are contributors to road traffic crashes. 7. Investments in roads in the recent past largely concentrated on roads that serve international transport on the main European corridors. These investments were undertaken under the Transit Roads program supported by the European Investment Bank (EIB). This program allowed the upgrade to European standards through rehabilitation and partial reconstruction of the motorways and Class I roads on European corridors. From 1995 to 2005 more than 2,300 km of the national roads have been rehabilitated through this program. Some investments were supported by the European Bank for Reconstruction and Development (EBRD), and the EU - PHARE and ISPA programs. The Transit Roads Project 4 will rehabilitate or reconstruct about 430 km more of the Republican Road Network by the end of 2008, and the Transit Roads Project 5 is under preparation. 8. While the importance of modernizing Bulgaria s Class I roads is unquestioned, limits on the Government s capital expenditures have put the rehabilitation of Class I1 and I11 roads on a lower priority. Broad-based economic growth, and equitable sharing of benefits from it, is no lesser a goal of EU integration than serving international traffic. The lower tier networks provide access to land and directly influence the daily social life for 70 percent of the population who live in the rural areas or in small towns. The poor condition of Class I1 and I11 roads, and some Class I roads, whose improvement and modernization is funded under this project, frustrates balanced economic development and widespread sharing of benefits from economic growth. With a total length of over 15,000 km, the lower level road network has a significant effect on regional development particularly on manufacturing, service industries, tourism, and also on the cost of social services and personal contacts. 9. The Government of Bulgaria is of the opinion that the roads sector is important to ensure fast economic convergence with the EU. It also recognizes the weaknesses in the road network and its effect on the competitiveness of Bulgaria s economy. The Government has thus prepared a draft Transport Sector Strategy for , encapsulated in the Sectoral Operational Program for Transport (SOPT), and in the Regional Development Operational Program (RDOP), which describe plans for utilizing EU grants - the Cohesion Fund and the European Regional Development Fund - over the period In these documents, road investment plans include rehabilitation of existing infrastructure and the construction of new road sections of high priority for the EU. The Government has also proposed a motonvay construction program that requires significant resources. These plans are elaborated in a more comprehensive National Strategy for Integrated Infrastructure Development for the period These Government plans would translate into a 3

12 significant increase of at least 50 percent in investments in the road infrastructure. The EU accession alone will bring important financial resources to the road sector through the EU grants, estimated at about 0.5 percent of GDP per year or an average EUR million annually over the period The experience of EU-15 countries has shown that one key determinant to the successful use of the European grants was the move away from simple, quick-fix projects to develop broader strategies and programs. Ireland for instance successfully used these grants not only as a source of funding, but also as a catalyst to introduce greater rigor in the analysis of the cost and benefits of projects. In addition, Ireland used these grants to help national institutions develop their capacity to design sector strategies, to plan and implement subsequent programs, and to manage major projects. 10. The Government recognizes that Bulgaria faces a challenge with respect to implementing these plans and effectively using EU grants for the road sector, but at the same time it sees this challenge as an opportunity to modernize road management. The Government s objective is to make road management stable, by clarifying the institutional setup and defining a long term vision for the sector s development and financing; make it efficient, by strengthening the capacity of the road manager to prioritize, develop programs, and implement investments; and make it accountable, by strengthening administrative capacity and ensuring sound financial planning and management as well as proper responsiveness to the beneficiaries. 11. The Government has taken steps to achieve its objective for road management by transforming the Road Executive Agency (REA) in August 2006 into the National Road Infrastructure Fund (NRIF), which is now the manager of Bulgaria s national roads (Motonvays, Class I, 11, and I11 roads). The NRIF is technically a separate legal entity established within the Ministry of Finance. By this transformation, the Government wants to consolidate the management of roads and clarify the role of the executing agency for future EU funded investments. Unlike the former structure where REA was an agency reporting to the Ministry of Regional Development and Public Works (MRDPW), the NRIF is an entity within the Ministry of Finance supervised by a Managing Board consisting of the Minister of Finance, the Minister of Transport and one of his deputies, the Minister of Regional Development and Public Works, and the Executive Director of the NRIF. According to the Roads Act adopted in August 2006, the Minister of Transport has the responsibility for formulating the state policy for the national road infrastructure and for the oversight of its discharge, while the NRIF is responsible for executing the policy through the implementation of the annual national road program consisting of maintenance, rehabilitation, construction, and traffic safety activities. As in the past, the private sector will continue to be the supplier of road design, maintenance and construction services. The Government s rationale for the institutional realignment and change in road management, besides being driven by the EU accession agenda, is that the new institutional arrangement will enable better planning and implementation of the Operational Programs for Transport and for Regional Development as well as optimal absorption of EU funds. The NRIF will finance its road program from several sources: the state budget, the Cohesion and Structural Funds of the EU, sovereign loans, and the fees collected under the Road Law, mainly the vignette system. It is hoped that this new setup will quickly bring in the stability, efficiency and accountability that the Government is seeking in the management of roads. 4

13 12. The NRIF has kept most of the former REA structure, including some 2,900 staff, the 28 regional and district offices that manage and supervise road maintenance as well as the Central Roads and Bridges Laboratory (CRBL), which provides road information and other technical needs. Despite a strong engineering tradition, REA had not attained the management capacity level of road managers in other EU new member states. In particular, modern road management systems have only partially been adopted. Best practices in corporate management and internal procedures and processes have barely been introduced. An assessment by the Bank of the financial management and procurement practices of REA in found that there is room to significantly improve REA S operations by targeting capacity building measures, corporate governance, budgeting, financial transparency, accountability, procurement, and project management. However, the weaknesses in the NRIF do not seem to come from internal resistance to change or reluctance to modernize. For instance, REA had, long before many road managers in Central and Eastern Europe, adopted a commercial approach for contracting out road design, construction, rehabilitation and maintenance. REA had even been using long-term (3 year) area-wide contracts for road maintenance, although based on inputs and unit prices and not on performance. REA also kept, despite the limited resources, a road laboratory in relatively good shape to provide the bare minimum services needed for traffic monitoring or targeted road condition surveys. Moreover, some units within REA had shown best practices in many areas, such as the good financial management practices in the ISPA unit. The Government expects that the technical assistance component of the proposed project will assist in further strengthening the capacity of the NRIF for a quick convergence with EU best practices in road management. 13. As for road safety, the Government has set the target to reduce fatal road crashes by half by 2010 compared to the average in This would require an annual reduction of 7.5 percent compared to the recently observed 2 percent reduction in fatal traffic crashes. The Government has indicated that improving the safety of children and youth in traffic, reductions in traffic conflicts and black spots on the roads, improvements in traffic enforcement, cooperation with medical authorities, and a scientific approach to changing driver behavior are the key measures required to reach the road safety target. 2. Rationale for Bank involvement 14. The proposed project would be the Bank s first road sector project in Bulgaria. In 2004, the Government requested a Bank loan for the roads sector, but this was later dropped. Renewed interest in Bank support for the transport sector follows a Public Finance Policy Review6 prepared by the Bank. This study included a review of how Bulgaria could make efficient use of future EU grant funds in the road sector, and how to finance roads that are not eligible for EU grants with an emphasis on the need to strengthen institutional capacity of the road manager in Bulgaria (see Annex 1). The Government subsequently decided that the Bank could assist Bulgaria on three levels. First, to assist in improving the condition of roads outside the Trans-European Network - Transport (TEN-T) including Class I, I1 and I11 roads. Targeting Class I1 and I11 roads would improve access to markets for the population and enterprises in small towns and rural areas, augment their employment opportunities after EU accession, and reduce traffic conflicts and road crash black spots. Second, the Government 5 6 Institutional Fiduciary Assessment (IFA) of Road Executive Agency. The World Bank Bulgaria Public Finance Policy Review. World Bank Report No BG

14 and the NRIF (the former REA) want to improve the road management capacity in Bulgaria to be able to prepare multiyear road maintenance programs under a constrained budget environment, and for this it will be necessary to modernize the existing road data and management systems. Finally, the Bank would assist with the establishment of the newly created Roads Policy Directorate in the Ministry of Transport, as well as the NRIF, in order to strengthen technical and managerial capacity to efficiently implement ongoing and future road projects, especially those to be co-financed with EU grants, and to approach the road safety issues in a comprehensive manner. 15. The proposed project complements and is consistent with ongoing and planned road projects in Bulgaria. The Government has secured loans since the mid 1990s from the EIB to upgrade major roads on European corridors to EU standards under a series of Transit Roads Projects. Pre-accession funds (ISPA and PHARE) were also used to improve European roads in Bulgaria. EU grant funds for the road sector would increase after EU accession in However, the EU Cohesion Fund provides financing to increase transport infrastructure capacity and, to a limited extent, network rehabilitation along the TEN-T only. The Government is of the view that this should not affect spending needed to clear the large maintenance and rehabilitation backlog on Class I roads, and more particularly on Class I1 and I11 roads. The proposed project would address this particular issue by redressing the balance between financing for maintenance of existing assets and that for new construction, as well as between roads within and outside EU corridors. Finally, the project aims to strengthen the capacity of NRIF as the implementing entity for all IF1 and EU funded projects. This is particularly important for ensuring that the NRIF will be able to complete all EU funded projects within the agreed schedule in order to fully absorb the EU grants made available to Bulgaria. 3. Higher level objectives to which the project contributes 16. The proposed project is fully consistent with the Bank s 2006 Country Partnership Strategy (CPS) for Bulgaria. The CPS puts much emphasis on supporting and strengthening institutional capacity, strengthening the private sector, and promoting equity and economic growth. The Bank will support investments in priority sectors determined by Bulgaria, one of which has been identified as the road sector, and thereby assist the country to achieve its objectives of successful EU integration and efficient absorption of EU grants. The Bank s support will be more relevant if the project implementation also strengthens the institutional capacity of NRIF to manage the national roads well and be capable of using EU funds at the rate they will become available. 17. The proposed project is also consistent with the objectives of the Government s draft Transport Strategy7, whose goals are to achieve economic efficiency, develop a sustainable transport sector, and assist the regional and social development and commitment. The project also would support the objectives of the Sectoral Operational Program for Transport (SOPT) through the proposed institutional capacity building. The envisaged approach and the planned support to increase institutional capacity at NRIF have the secondary objective to improve NRIF s ability to effectively utilize EU cohesion funds. Strategy for the Development of the National Transport System of the Republic of Bulgaria until Ministry of Transport

15 18. The project will also contribute to achieving the objectives of the National Plan for the Development of Bulgaria until 2013 whose priorities include the improvement and development of the basic infrastructure and sustainable and equitable regional development. The project will support the main priorities specified in this national plan: to increase productivity and competitiveness of the Bulgarian economy in order to provide higher standard and better quality of life for the Bulgarian citizens, through the development of Bulgaria s transport infrastructure as an integral part of the Common European transportation network between Europe and the countries in the Near East and Asia. More specifically, the road transport priorities in the national plan include: (i) safety and security of the transportation system, (ii) modernization of the transportation system, (iii) improvement of access by local and regional businesses to the national and Trans-European transport networks, (iv) establishment of prerequisites for balanced development of the regions, and (v) effective use of the public investments and funds from the European Union. The redesign of the project roads to EU standards will improve traffic safety and modernize the system to begin to conform to present-day design practice and improve the year-round conditions on the selected roads. The last two objectives relate to the improvement of economic opportunities, competitiveness and equitable social development in all regions of Bulgaria. These objectives are served by selecting economically justified road segments that have wide geographic distribution. 19. Finally, the project also contributes to the objective of the Ministry of Public Administration and Administrative Reform to increase the administrative capacity at local and regional level for the preparation and implementation of socially useful investment projects for balanced regional development, and the commitment of the Ministry of Regional Development and Public Works to support this objective. B. PROJECT DESCRIPTION 1. Lending instrument 20. The lending instrument proposed for this project is a Specific Investment Loan (SIL). The Borrower is the Republic of Bulgaria, and the representative of the Borrower is the Ministry of Finance. The Project Implementing Entity is the National Road Infrastructure Fund (NRIF). The Borrower has selected a Euro-denominated Variable-Spread Loan (VSL) with a 17-year maturity including a five-year grace period. 2. Project development objective and key indicators 21. The development objective of the proposed project would be to assist Bulgaria to reduce road transport costs by improving the condition and quality of its roads network during the first years of EU accession. The proposed project objectives will be achieved by: a. Improving the condition of selected Class I, I1 and I11 roads totaling about 450 km, and thereby reducing road user costs. b. Enhancing NRIF s capacity to adopt efficient planning policies and effective management of maintenance, rehabilitation and construction programs. c. Assisting Bulgaria in articulating a road safety strategy and in identifying priority activities to improve road safety. 7

16 22. For road users, the project would lead to better road quality and levels of service, leading to lower vehicle operating costs and increased travel time savings. It is expected that the strengthening of the NRIF s planning and management capacity will allow a more efficient use of the resources allocated to the sector, including future EU grant funds, and hence lower economic costs for Bulgaria. The project would also assist in developing plans for improved road safety and hence lower the social costs due to road traffic crashes. 23. Project performance would be assessed through a number of qualitative assessments and quantitative indicators. The specific indicators would be regularly monitored and evaluated by the NRIF. In addition, performance will also be assessed based on progress in project implementation at the end of each year based on the total length of roads receiving periodic maintenance, and on the progress in implementation and use of an enhanced road management system. The proposed indicators to be used to assess project performance are detailed in Annex 3. The list below specifies these project monitoring indicators, including the results expected at the end of the project. Project outcome indicators (i) Improvement, by the end of the project, of the condition of roads to be rehabilitated under the project, measured in IRIS. This will translate, at the network level, into the improvement of: (a) 6 percent of Class I roads (b) 3 percent of Class I1 roads (c) 1 percent of Class I11 roads (ii) Reduction, by the end of the project, in Vehicle Operating Costs by at least 10 percent on roads rehabilitated under the project. Project intermediate outcome indicators Rehabilitation by the end of the project of about: (a) 174 kilometers of Class I roads (b) 138 kilometers of Class I1 roads (c) 138 kilometers of Class I11 roads Timely processing and implementation of contracts and the staff training program. Implementation and effective use by the NRIF of an enhanced Road Management System, by the end of the project. Preparation by the NRIF of a rolling multi-year road maintenance and rehabilitation program, by the end of the project. Preparation by the NRIF of at least three performance-based area-wide maintenance contracts, by the end of the project. Preparation of a road safety improvement strategy with implementation plans, by the end of the project. IRI means International (Road) Roughness Index. 9 The reduction in Vehicle Operating Cost in response to improved IN is obtained from the Highway Development and Management model (HDM-4). Inputs for HDM-4 will be adjusted so as to account for improvement in road condition only. 8

17 . 3. Project components 24. The total Project cost is estimated at EUR 144 million, with EUR 90 million from the proposed Bank Loan, and up to EUR 54 million co-financing by the Government (including taxes). The total Project cost, excluding Value Added Tax, is therefore estimated at EUR 120 million. The project includes three components: 25. Component 1: Rehabilitation of selected roads (estimated cost: EUR million). This component comprises civil works for the rehabilitation of selected Class I, 11, and I11 roads during the period and the provision of consultancy services to assist NRIF during the life of the project with the review of the designs, procurement and contract management. Design and supervision of construction works will be carried out by consulting firms, and they are not included in the project. The NRIF has prepared a priority program of rehabilitation works to be implemented under this component. This priority program is part of a long term investment plan aimed at clearing the historical backlog of road maintenance. The priority program under the project covers about 450 kilometers of road sections distributed throughout the country and selected on the basis of economic and other social benefits. In case changes need to be made to this program during project implementation, the NRIF will submit to the Bank for review and approval the updated priority program. The proposed rehabilitation would improve ride quality leading to lower operating costs for road users, ensure structural soundness of the road for a prolonged period and prevent collapse, leading to lower life-cycle cost for the road asset. The consultancy services under this component will assist the NRIF through the provision of technical advisory services and training regarding the review of designs, procurement, supervision, management and reporting for the implementation of the Project. This will include the preparation of bidding documents, review of bids, and the coordination and oversight of quality control of works and their supervision. In addition to transfer of skills to NRIF staff through training and day-to-day operations, the consultancy services will lead to better control of implementation schedules and will provide quality assurance for executed works. 26. Component 2: Institutional Development (estimated cost: EUR 2.41 million). This component comprises consulting services, studies, the provision of equipment, and training to: (i) strengthen the internal management and operations of the NRIF; (ii) improve road sector planning, programming, budgeting, and program implementation with particular focus on the use of EU Cohesion and Structural Funds; and (iii) improve the efficiency of road maintenance practices. The component will include (a) a technical advisor for the NRIF s management, (b) technical assistance to enhance NRIF s financial management capacity and to conduct the required project financial audits which include operational reviews, (c) technical assistance to develop a road management system and to prepare for piloting Performance-based Maintenance Contracts, (d) the acquisition of road data collection equipment, related software, and computer equipment, and update of traffic and road databases, and (e) a training program for NRIF staff and management on road management, and absorption of EU funds. These are activities needed to gradually bring the NRIF s operations and performance to the level of EU standards. 27. Component 3: Road safety (estimated cost: EUR 1.44 million). This component includes: (i) EUR 0.24 million for technical assistance targeted at specific road safety 9

18 improvements, such as the development of road safety plans, public awareness campaigns, development of legal aspects of road safety, introduction of new approaches to enforcement, development of new approaches for timely medical emergency services, etc.; and (ii) EUR 1.20 million to finance priority activities aimed at improving road safety such as removing traffic crash black spots, areas with traffic conflict situations, and for additional technical assistance. The objective of this component is to assist in improving road safety in Bulgaria through a coordinated and integrated package of cost-effective, multi-sectoral road safety interventions designed on the basis of international best practice. Priority activities under this component will be identified through a separate technical assistance to be carried out in late 2007 using a grant from the Global Road Safety Fund. This grant-financed technical assistance will assess the capacity for implementing road safety policies, to prepare a strategy for improving road safety, and to reach consensus with the Government on a multi-sectoral strategy for improving road safety. 4. Lessons learned and reflected in the project design 28. The current project is the first road sector project in Bulgaria supported by the World Bank and, consequently, there may be unknowns that can only be uncovered during project implementation. The World Bank has, however, extensive experience with road projects in many regions, including in many of the Central and Eastern European countries and in the EU New Member States. The proposed project uses the lessons of World Bank projects in the region which were very successful in addressing the issue of the historical backlog in road maintenance that accumulated in the 1990s. As in other successful World Bank projects in EU New Member States, the proposed project is designed to help absorb EU Cohesion and Structural Funds for the road sector through a targeted technical assistance component. 29. In these types of projects, there is a need for early attention to and good supervision of the institutional development activities. Very often, the technical assistance component faces delays and is started late and, consequently, is not completed or has little impact by project closing. To be effective, the technical assistance needs to be started early on during project implementation, and the Bank needs to be flexible, timely and responsive to the Borrower s needs because unforeseen events are likely to emerge during project implementation. 30. There is a need to understand the local capacity. Intensive supervision, study tours and training may be necessary early in the project to support the technical assistance; this is especially true for institutional reforms issues, which are difficult to implement both technically and politically Road program development using engineering-economic criteria are new in most EU New Member States and very difficult to assimilate into day-to-day management of the road administration. Knowledge transfer is always difficult and crucially depends on the personal qualities of the consultant and less on his or her technical skills. 32. In middle income countries and in EU New Member States, the development impact is higher when the project uses to the extent possible the Borrower s existing procedures and regulations when they are acceptable to the Bank. 33. Previous World Bank transport projects in Bulgaria - one for the railways another for trade and transport facilitation - have successfully been implemented, and the results were 10

19 satisfactory. The entities involved in these projects showed adequate technical and institutional capability. The preparation time for all civil works can, however, be long in Bulgaria, caused by a very long process of coordination among the relevant stakeholders. For this reason, component designs should be significantly advanced during project preparation, using applicable instruments to start and complete a project in a timely manner. 5. Alternatives considered and reasons for rejection 34. The proposed operation has been tailored to respond to the Government s specific request for Bank support in the transport sector. In this process many alternatives and approaches were considered and screened. It was decided that the project will focus on activities that are not included within the scope of EU grant funds, except the assistance to the NRIF to develop capacity to use them. Loans from other IFIs (particularly EIB), ISPA and the Cohesion funds address most other immediate needs for the roads on the European corridors. Although the rehabilitation of the road network had a high priority, it had not received adequate funds; especially Class I1 and I11 roads were perennially under-funded. Modernization of the management tools to better focus the available funds for roads; the allocation of funds between maintenance, rehabilitation and investment; and the formulation of multi-year road programs also needed support. This project addresses the above issues from three angles: (i) it provides funding for rehabilitation of important roads and improvement of road safety; (ii) it aims at improving processes and technical documents so that the planned stable funding mechanism for roads can be utilized with advantage; and (iii) it provides technical assistance for capacity development, modern road data and management systems, funds for equipment, and technical assistance and training. 35. A programmatic approach (SWAP) with maximum use of Bulgaria s systems for safeguards, financial management and procurement was initially considered. With this approach, the Borrower would prepare a multi-annual program that could be financed partially from the loan and ultimately with other pooled sources of funds. However, this approach was later dropped during project preparation for three reasons. First, this is the first World Bank road project in Bulgaria, and time is needed for the Borrower to get familiar with Bank requirements and procedures, and for the Bank to assess and understand Bulgarian systems. Second, an Institutional Fiduciary Assessment (IFA) was conducted by the Bank and concluded that the use of country systems for fiduciary matters would require intensive work to harmonize procedures that were not consistent with project preparation schedule lo. Third, the Bank conducted an assessment of equivalence and acceptability of Bulgarian environmental and social safeguards procedures and concluded that there are significant differences in several aspects that would not allow the full use of country systems with regard to safeguards. It was decided therefore that this proposed project should be a conventional project, and that there would possibly be, as discussed in the Country Partnership Strategy, a follow-up Project that would adopt the programmatic approach. The implementation of the proposed project would serve to better understand and overcome the three points explained above. 36. An Adaptable Program Loan (APL) was also considered, but rejected, although it would have had the advantage of easy linkage with policy reforms and could have provided a 10 Institutional Fiduciary Assessment (IFA) of Road Executive Agency. The World Bank

20 strong reform incentive for the Government. However, the Government did not want to commit to an extended loan at the outset. Consequently, this proposed project has been designed as a SIL operation, and it could be followed by a second SIL in the future, depending on the Government s fiscal policy. C. IMPLEMENTATION 1. Partnership arrangements 37. The Ministry of Finance in Bulgaria has overall responsibility for coordination of funds from all Inernational Financial Institutions (IFIs), the EU (ISPA, PHARE, and Cohesion fund programs), bilateral agencies, and any private sector partners. The technical assistance component proposed in this project will serve the entire road sector and will benefit projects regardless of their source of funding including those financed by the EU and other IFIs such as EBRD and EIB. The Bank s project team will keep in regular contact with all of these entities to coordinate and cooperate both in lending and technical assistance. 2. Institutional and implementation arrangements 38. The NRIF will be the implementing entity of the proposed project. The Management Board of the NRIF will have overall responsibility for project oversight. The Foreign Financing Investment Unit (FFIU) within the NRIF will manage the implementation of all project components. The Finance Department within the NRIF will be responsible for project financial management arrangements. There will be no specific Management Unit for this project. The FFIU is also implementing the Transit Roads Program financed by the EIB and has experience in managing projects with external financing. The NRIF will have the overall responsibility for project implementation including planning, procurement, disbursement of funds, monitoring the use of funds, auditing arrangements, monitoring and evaluation, supervising the implementation of the Environmental Management Plan (EMP), and reporting on the progress of implementation and use of project funds. 39. The NRIF has well established departments that perform specialized functions such as planning, design, road safety, maintenance management, financial management, audit, and a separate technical unit for data resources, road management systems and testing (Le. the Central Roads and Bridges Laboratory - CRBL). These departments and units have previous experience with IFI-financed projects, and therefore the present administrative arrangements and operational procedures within the organization will be maintained while complying with financial management, procurement and safeguard requirements of the Bank. 40. The NRIF prepared and adopted, before negotiations, the Project Operational Manual, which is satisfactory to the Bank, describing procedures for implementation of the Project and including, inter alia: (i) procedures governing administrative, procurement, accounting, financial management, and monitoring and evaluation arrangements; (ii) targets to be achieved under the Project; and (iii) a sample format for Project Reports. The FFIU is headed by a manager, supported by two engineers and one economist. Two additional staff, with relevant qualification and experience in project management and procurement and with the required language skills, were assigned to the FFIU before negotiations, to work on the 12

21 proposed Project. In addition, a technical assistant was assigned to the FFIU to assist with communications, filing, and translations when needed. The consulting firm planned to be hired under the project will assist the NRIF in project implementation including analysis and justification of works, review of the designs, preparation of bidding documents, bid evaluation, coordination and oversight of quality control of works and their supervision, and training of NRIF staff on project management and procurement. In terms of financial management, the NRIF had, before negotiations, (i) assigned two financial management staff in the Finance Department to work on the project; and (ii) prepared, as part of the Project Operational Manual, the Project Financial Management Manual, which is acceptable to the Bank. 3. Monitoring and evaluation of outcomeshesults 41. Project monitoring during project implementation will be carried out by the NRIF. This would entail close supervision of the works and technical assistance, auditing financial statements, and monitoring project performance indicators for the duration of the project as per the agreed indicators in Annex 3. Indicators will be important to ensure the effectiveness of the project as well as to ensure a timely completion of the project and flag any time delays. In view of the selected indicators, data collection should not be a major problem and therefore no capacity issue is foreseen. For the road indicators, results will come from the road data register that will be improved under the project. The project will finance enhancements to the road database; better instruments for data acquisition, management and usage; and capacity building activities for the NRIF management and staff. Project Reports will be prepared by the NRIF on a quarterly basis and submitted to the Bank for review. The Project Reports will focus on results rather than providing process related information. 4. Sustainability 42. The Borrower has implemented IFI-funded projects and the results have been sustained. Under this project, sustainability is expected to stem from the good economic returns on investments and more importantly from the efforts under the project to ensure sound maintenance practices. Indeed, an important aspect to avert risks to sustainability is the successful implementation of the project s technical assistance. The project will seek to improve the chance of sustainability by: (i) developing and assisting the NRIF to prepare and carry out of the 5-year road program for maintenance and rehabilitation; technical assistance is provided for the improvement of road data and management systems, and their use in road program preparation; (ii) assisting NRIF to utilize available funds from all sources timely; (iii) supporting the NRIF reorganization of its functions to improve efficiency in implementation; and (iv) supporting a Technical Adviser as a consultant to the top management of the NRIF. 5. Critical risks and possible controversial aspects 43. In the road sector, the proposed project is a moderate risk operation. The NRIF has successfully implemented IF1 funded projects in the past, and the challenge is rather to adjust to the new increase in activities and to the new environment after Bulgaria joined the EU. The main risk is institutional because the NRIF is a new organization. Although it is a direct 13

22 successor to REA, the NRIF has a new oversight arrangement and reports to three ministries instead of one; it has different road financing sources; and there are likely to be new operating procedures and other changes. There are no controversial issues foreseen to arise during the implementation of the project. The proposed project is focused on road maintenance and rehabilitation whose environmental and social impacts are overwhelmingly positive. 44. Institutional change. There is a moderate risk that the ongoing organizational changes in the road sector in Bulgaria may take longer than what is expected in this project and even longer than what the Government is aiming at. This could slow the realization of not only the expectations of this proposed project but also those of the Government. The NRIF may take time to adjust to its new environment and to implement the needed internal institutional reorganization. During project preparation, the Government was very committed to a timely implementation of the new law and its secondary regulations. This momentum is expected to continue and it will mitigate this potential risk. Moreover, the technical assistance component under this project responds to a specific request from the Government to accompany this ongoing institutional change. World Bank supervision and close monitoring of this component as well as the interaction with the Government and the NRIF will also mitigate this risk. 45. Funding for road maintenance and rehabilitation. There is a moderate risk that insufficient funding for road maintenance will continue to be an issue in the coming years. Road rehabilitation may also suffer from the shortage of funding. The Government expects that additional funding for the road sector in general from EU Cohesion and Structural Funds may free some money for road maintenance. The Government also expects that there will be higher revenues from the road vignette. While the proposed project does secure funding for rehabilitation of selected roads, the technical component aims at making spending on roads more efficient. Hence, the technical component will assist the NRIF in making better use of existing funds by modernizing the road condition information system and introducing new tools to select and prioritize road maintenance and rehabilitation programs and to prepare medium term programs for maintenance and rehabilitation. This should mitigate the risk of insufficient funding for road maintenance and rehabilitation. 46. Implementation of road works under the project. There is also a moderate risk that the project may suffer from delays in procuring road works. Some past road investment projects in Bulgaria such as those financed with EU pre-accession funds have suffered from significant delays. The NRIF has accumulated experience in project preparation, procurement and contract management, and the lessons learned by the NRIF should help mitigate this risk. In addition, the designs for road works under the proposed project started during project preparation so that a reasonable amount of works can start in the first year of project implementation. The NRIF will also use the services of a consulting firm to assist with overall procurement and contract management. The selection of such a consulting firm was initiated during project preparation and is expected to be completed in time for the preparation of the first bidding documents. 47. Efficient maintenance planning and implementation. There is a moderate risk that it may take time for the NRIF to prepare and implement medium-term rolling plans for maintenance using the equipment, tools and methodologies procured or developed under the proposed project. There is also a risk that testing new methods for maintenance 14

23 implementation such as area-wide performance-based maintenance contracting may be delayed or abandoned. This is a typical risk for this type of project. However, there is already a good practice in place in the NRIF with regards to road management systems. The CRBL has sufficient experience with road management systems. The proposed project will assist in enhancing the CRBL s capacity as well as that of the NRIF in general in road management and in the use of planning tools. The proposed project will also assist in making sure these activities are streamlined in the NRIF and sufficient operating budget is allocated for this purpose. As for road maintenance practices, the NRIF also has good experience with areawide contracting, although the current contracting is based on unit prices and on inputs rather than on performance or outputs. Project supervision and technical assistance will ensure new methods are piloted, lessons are drawn, and good practices are streamlined in the NRIF. Risk To Proiect DeveloDment Obiective Slow implementation of the institutional change in NRIF Risk Rating M I Mitigation Measure Insufficient funds for road maintenance and rehabilitation of roads M Slow implementation of road works M inform of future needs. Early preparation of design. Slow introduction and use of new planning tools for maintenance and delay in piloting new methods for road maintenance contracting Overall Risk Rating Risk Rating: H = High; S = Substantial; h M M interaction with the NRIF. Make use of the road management and data systems, and adopt a learning by experience approach. Promote full use of the new approaches to road maintenance. 15

24 6. Loadcredit conditions and covenants 48. Project covenants: a. The NRIF shall maintain a project financial management system acceptable to the Bank. The project s financial statements, statements of expenditures, financial reports, withdrawal applications and designated accounts will be audited by independent auditors acceptable to the Bank and on terms of reference acceptable to the Bank. The annual audited statements and audit report will be provided to the Bank within six months of the end of each fiscal year. b. The NRIF shall prepare and furnish to the Bank within forty five days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter. c. The NRIF shall submit to the Bank quarterly Project Reports, in a format satisfactory to the Bank, not later than 45 days after the end of each quarter outlining the progress made in the implementation of the Project, as well as the problems encountered and how they are being addressed. d. The Borrower shall ensure that the NRIF: (i) takes all necessary measures to implement the Project in accordance with the Project Operational Manual (POM), and the EMP, and shall not amend, suspend, abrogate, repeal or waive any provisions of the POM and the EMP without prior approval of the Bank; and (ii) suitably includes adequate information on the implementation of the EMP in the Project Reports. e. Not later than eighteen months after the Effective Date, the Borrower shall carry out jointly with the Bank and the NRIF, a midterm review of the progress made in carrying out the Project. D. APPRAISAL SUMMARY 1. Economic and financial analyses 49. A cost-benefit analysis (CBA) was conducted for the rehabilitation works of all road sections to be included in the project. This project covers some 450 kilometers of national roads. The results of this CBA show positive Net Present Values (NPV) at a discount rate of 12 percent for all road sections under the project, with a total NPV of EUR 24 million. The evaluation was done using the Highway Development and Management Model (HDM-4), which simulates life cycle conditions and costs and provides economic decision criteria for road construction and maintenance activities. The same HDM-4 analysis shows that the proposed rehabilitation works will result in a decrease in Vehicle Operating Costs (VOC) on the road sections to be rehabilitated by 10 percent on average. Details of the economic analysis are included in Annex Technical 50. The design standards used for road works to be financed under this project are based on Bulgarian standards, which are compliant with existing European and international standards. The NRIF has good capacity in road engineering and operations. The NRIF has experience with the IFIs and EU, as they have successfully implemented several IF1 or EU- 16

25 financed projects during the past decade. There should therefore be no major technical issues for this project, other than to ensure that quality control is adequately administered both at the design and implementation stages. 3. Fiduciary 5 1. Financial Management. The financial management functions of the project will be handled by the NRIF Finance Department, and the Finance Department will be responsible for the flow of funds, accounting, reporting, and auditing. The financial management arrangements of the proposed project are acceptable to the Bank. The overall financial management risk for the project is moderate to substantial before the mitigation measures are implemented, and with adequate mitigation measures in place, the financial management residual risk is rated moderate. 52. The World Bank report on Bulgaria Country Financial Accountability Assessment (CFAA, September 2003) concluded that the level of fiduciary risk attached to the primary elements of Bulgaria s public financial management systems is low. The elements of public financial management systems assessed include the legal framework, the institutional capacity and the practices for the core financial control processes such as budgeting, treasury and cash management, accounting, financial reporting, internal control, internal audit, external audit and parliamentary oversight. In terms of governance, a recent Business Environment and Enterprise Performance Survey as well as the 2006 Bank s report Anticorruption in Transition 3 - Who is Succeeding... And Why? concluded that the corruption in Bulgaria has decreased in recent years, although corruption levels are still high compared to EU15 countries. At the project level, corruption risks are related mainly to the misuse of funds. 53. Therefore, in order to mitigate the risks inherent in Bulgaria s public financial management systems, additional project level safeguards have been established, including: (i) the requirement for an independent external project financial audit including operational review; (ii) regular joint procurement and financial management reviews; (iii) regular technical reviews by the Bank; and (iv) overall supervision, including procurement and financial management, will be undertaken periodically by Bank staff. Project operational reviews will assess the efficiency and performance of project implementation. In this respect, the Project follows the traditional ring-fenced approach seen in many Bank projects. 54. Disbursement. The NRIF will open the Designated Account for the project in the Bulgarian National Bank. Disbursement of loan proceeds will, at least initially, be based on statement of expenditures (SOEs), with the possibility that at a later stage of project implementation, disbursements could be based on interim un-audited financial reports (IFRs). Retroactive financing is not envisaged under this project. 55. Procurement. The organization of procurement work for the proposed project will be carried out by the Foreign Financing Investment Unit (FFIU) of the NRIF, which is also implementing the Transit Roads Program under EIB financing. The project includes procurement of works, goods and consulting services. The NRIF prepared a procurement plan which was agreed upon during negotiations and attached to the minutes of negotiations. During the implementation of the Project, the procurement plan will be updated by the NRIF, in agreement with the Bank, at least annually or as required to reflect the actual project 17

26 implementation needs and improvement in procurement capacity. The terms of reference for the update of the procurement plan are included in the Project Operational Manual. Further details related to procurement arrangements are outlined in Annex Social 56. The proposed project is not a poverty-focused operation. However, it supports the Government s road sector policy of broad and evenly distributed benefits and promotion of economic growth, and improved road safety. Improved transport facilities provide access to schools, health and job markets, especially in rural Bulgaria. Road works also generate substantial employment during project implementation. While this impact may be temporary, the proposed project will help facilitate stable and sustained funding for the roads, which fosters the development of private sector industries and provides for sustained employment in the sector. 57. Preparation of the project did not involve a participatory approach per se. However, the proposed project is part of the Government Infrastructure Strategy adopted in July 2006 which involved a long process of public consultation and participation. Public information was also made extensively available for the Infrastructure Strategy, which includes the proposed project. The NRIF has also established procedures to inform the public of its investment plans in general and on specific projects and sub-projects, including through a dedicated internet web site. 5. Environment 58. In accordance with the World Bank s safeguard policies and procedures, including OP/BP/GP 4.01 Environmental Assessment, the project has been classified as Category B for environmental assessment purposes. Rehabilitation works of existing road infrastructure generally do not generate significant impacts on the environment as the works are usually conducted within the existing road boundaries. The project will not have any land acquisition and the scope of civil works will be limited to rehabilitation of roads within the existing right-of-way. Under Bulgarian environmental regulations and EU directives, such types of works are not subject to mandatory environmental impact assessment. 59. Most rehabilitation and maintenance projects in the road sector have positive environmental impacts, particularly with the retention of existing alignments. The proposed rehabilitation works will include upgrade of the road base, reconstruction of the road surface and improvement of drainage and culverts along the same alignment as the existing roads. Positive socio-economic impacts will include reduced vehicle operating costs, reduced travel time; improved access to local services, markets, health and education facilities; improved tourism income generation due to easier and faster access; short-term jobs created during the construction period; and improved flood control through the drainage facilities to be installed or rehabilitated as part of road rehabilitation. 60. There will also be adverse impacts of project relating to the hydrology, drainage, additional dust and noise emissions, and increased pollution loads (e.g., suspension solids in run-off water) in the project area mainly during the construction period. However, the design of the project offers an opportunity to introduce mitigation actions, especially with regard to drainage- and erosion-associated negative environmental impacts but also with regard to the 18

27 way road maintenance and construction activities are undertaken in this project and in the future in the operations of NRIF. Identified environmental impacts will relate principally to civil works during the road rehabilitation activities, and could be managed through supervision of environmental aspects and use of adequate technical construction standards. 61. Short-term (direct) negative impacts include those resulting from: (i) the production and application of bituminous products; (ii) the quarrying of stone and gravel; (iii) noise, dust, and the re-direction of traffic during the execution of works; (iv) the removal of construction related waste materials; and (v) alteration of drainage and potential soil erosion. Long-term (indirect) negative impacts will be confined to those arising from increased traffic and travel speeds along the rehabilitated roads. 62. An Environmental Management Plan (EMP) was prepared by the NRIF for the proposed project activities and disclosed in Sofia at the NRIF Headquarters for public information. The EMP includes measures to address all potential environmental impacts (e.g. the approach to ensure during works adequate passage for animals, drainage or other issues that are relevant to the specific areas) and monitoring activities to be implemented during the construction stage. The EMP will be implemented by the selected contractors and monitored by the Supervision Engineer and the NRIF. 6. Safeguard policies Safeguard Policies Triggered b Yes No Environmental Assessment (OP/BP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.1 1) [XI [I Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) 111 [XI Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI 7. Policy Exceptions and Readiness 63. The project meets the regional criteria for readiness for implementation. By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas 19

28 Annex 1: Country and Sector or Program Background BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT Country and Sector Background 1. Bulgaria s economy has steadily grown since 2000 (most recently with 5.5 percent in 2005 and 6.2 percent in 2006 ), inflation in the period slowed to single digits, unemployment declined to 10.7 percent in 2005 from 18 percent in 2000, and poverty levels have dropped. These positive trends are expected to continue in the near future. However, raising productivity and employment to narrow the income gap and facilitate convergence with the EU will remain Bulgaria s main challenge in the next few years. At roughly 30 percent of the average GDP per capita for EU25 in PPP terms, Bulgaria is starting its convergence to the living standards of the more advanced members of the EU from a less favorable position than most other new member states. Bulgaria also faces a demographic dilemma. Its population is declining at almost one percent per year, its labor participation and its employment rates are among the lowest in Europe, and the productivity of its labor force is low12. Raising productivity will require improvements on several fronts. Because of the potential impact of the transport system on aggregate productivity, and on regional competitiveness, public intervention to improve the efficiency of the transport system is one of many paths the Government is pursuing. 2. Bulgaria started preparing the transport sector for future challenges in the years leading to EU accession. It aligned the transport policy and regulations with that of the EU ahead of accession, and this should provide the necessary pre-requisites for Bulgaria s full integration within the EU transport market. Bulgaria also launched several investment programs from the late 1990s to upgrade the transport infrastructure to EU standards and to enhance the transport links with neighboring countries and with the rest of the EU. 3. In addition to the critical importance of road transport links with the rest of the EU, which is Bulgaria s main trade partner, internal road transport is also important for Bulgaria because of the country s geographic and economic features. Only 30 percent of the country s population lives in large and medium size cities. The rest of the population lives mainly in small towns (40 percent) or in rural areas (30 percent), often separated by sparsely populated mountainous areas, and therefore depend on road transport for their livelihood. Economic activities are also widely spread over the territory with activities such as tourism and agriculture as potential sources of growth. 4. In general, access is not an issue in Bulgaria as the road network is well developed and reaches all comrnunitie~ ~. The road network extends over 19,000 kilometers of national International Monetary Fund Country Report No. 07/ Bulgaria - Public Finance Policy Review. World Bank report No BG, The density of the state road network ( km/sq. km) in Bulgaria is higher than the average for the EU (0.09 km/sq. Km). Considering the fact that 40% of Bulgaria s territory is mountainous and for that reason less populated, as a whole, the road network density is sufficient. At the moment NRIF estimates that only 12 settlements are not connected with the road system (61.2 km). 20

29 (Republican) roads managed by the NRIF14, in addition to 18,000 kilometers of local roads managed by local jurisdictions. More than 98 percent of the national road network is paved. There are around 3,310 bridges that span 5 meters or more, and about 31 major tunnels with an average length of about 340 m. The core network consists of 7,000 km of national roads. Of these around 3,000 km are classified as European (E). International traffic is carried primarily by motorways and Class I roads. All Class I roads in Bulgaria begin or end at an international border crossing. Class I1 roads connect major population centers. 5. The growing trend towards polarization in favor of the large urban centers and a few well situated medium-size cities, in proximity to the main communication axes and attractive to foreign investments, underlines the importance of the motorways and Class I roads. The bad condition of the lower class road network limits the connections between cities and villages. The access to the western parts of Sofia, Pernik and Kjustendil Districts in the South-West region is also difficult. One of the main objectives stated in the mission of the Bulgarian Ministry of Transport is to support balanced regional ~tevelopment ~ and the modernization of Class I1 and I11 road networks to improve road access to the main transport corridors and for the lagging-behind areas. 6. Only a few roads experience capacity constraints at present. This is confirmed by the average speeds currently reported on the network-about 70 km/h for cars on Class I roads and 110 kmh on motorways. Trucks achieve overall speeds of kmh on Class I roads and kmh on motorways. However, road traffic flow is constrained through the major urban centers because of the absence of bypasses. For international truck traffic, delays at borders crossings and through large urban centers are far more significant than delays along the roads. 7. Bulgaria s increasing links with the EU will have an impact on the directions of trade flows and create new opportunities for road transport. Bulgaria s trade flows were previously dominated by the Eastern Corridor because of its links with the Eastern Block, and these flows were served by maritime transport in the Black Sea and by rail. Today, the EU is the main trade partner, which is expected to fwrther intensify following Bulgaria s EU accession. The EU membership combined with Bulgaria s geographic position makes transport infrastructure potentially attractive for transit transport to and from other countries. Bulgaria s transport infrastructure, particularly roads, were however not planned to satisfy such demand. 8. Geography, the growth of Bulgarian economy, past investment, and the reform of road transport services before EU accession, are the main factors that shape the demand for road transport. Foreign trade has been expanding at a rapid rate and is now growing at close to 15 percent per year in dollar terms. As a result, freight transport measured in terms of tons-km increased between 2000 and 2003 by an average 5.5 percent per year for national transport, and by 10.4 percent for international transport. Most of this increase was carried by road transport, which grew by 14.4 percent per year. The market share for road transport has therefore increased to 55 percent of national transport. Measured in ton-km, roads now l4 In Bulgaria the national (republican) roads are divided into four classes: motorways, and Class I, 11, and 111 roads. These national roads are managed by the National Road Infrastructure Fund. In addition there are 18,000 km Class IV roads owned and managed by the local governments (see Table A1,1). 15 Report: Strategy for Development of the National Transport System of the Republic of Bulgaria Until 2015, the Ministry of Transport and Communications, April

30 carry about two thirds of the combined road plus rail freight market, road transport being especially attractive for high value, time sensitive, or short distance cargo. In the passenger market, road transport has gained a share of over 70 percent of the intercity passenger transport, which is still below the EU15 average where 85 percent of passenger travel demand is served by road transport. 9. In countries with levels of vehicle ownership similar to that of Bulgaria (about 270 cars per 1,000 people), the rate of growth of road traffic can be much higher than GDP (the elasticity of demand with respect to GDP is greater than one-sometimes as high as about 2.0 for car traffic16). Recent trends in Bulgaria would suggest an elasticity of about 1.0 because traffic and GDP have grown at a similar pace. Nevertheless, in the future, international experience would suggest a higher elasticity, particularly as disposable income increases. 10. The deregulation of road freight together with the transformation of the Bulgarian economy has had an impact on the modal split in the country. The economy is becoming less dependent on heavy industries and agriculture. Movements of heavy and low value cargo, and of bulk raw materials that were mostly carried by rail and water transport, are being reduced and substituted by the transport of compact high value goods, carried mainly by road transport. The effect of this trend is important because it has many impacts on the modal split in a competitive market where rail and water transport mainly carry long-haul heavy cheap freight or multi-modal container traffic. As an illustration, international freight transported by road almost doubled between 2000 and 2004 (see Figure Al. 1). Figure Al.1: Goods carried 14,000 12,000 10,000 8,000 6,000 4,000 2, Rail Ton.km Road Ton.km +Rail modal share +Road modalshare T 100% - 90% - 80% - 70% - 60% - 50% * 40% - 30% - 20% - 10% - 0% N a ti0 na I I lnlerna ti0 nal I Total I (right axis: million tons-km, left axis: modal share in YO) Source: European Conference of Ministers of Transport (ECMT) 11. While the road infrastructure has coped reasonably well during the transition period in the past 10 to 15 years, it is now feared that the quality of the road infrastructure as well as its capacity on certain sections are hindering the efficient movement of goods and people and may be depriving Bulgaria from an important source of aggregate productivity gains. Recent l6 Based on evidence from European countries in the 1950 s and 1960 s when car ownership was fairly low. 22

31 surveys show that only one-third of the national road network is in good condition (table Al.l), and road capacity around the large urban centers is not sufficient to satisfy the growing traffic demand. Furthermore, a considerable portion of the core national road network still needs to be upgraded to European technical and safety standards. Bulgaria has committed to completing the upgrade of its main road network to EU standards by 2014, with a number of roads to be upgraded by Table Al.1: Road Network and condition Road Class Length Good Fair Poor (km) ("/.I ("/.I ("/.I Motonvays Class I 2, Class I1 4, Class , Total (Average) 19, Note: Around 18,000 krn of Class IV local roads are not included. 12. The main reason for the poor road condition is inadequate financing for road maintenance. The annual financing required for routine maintenance and repair of the national road network, excluding Class I11 roads, has been estimated by the former REA to be about EUR 61 million and over EUR 86 million, if Class I11 roads are included. If allowance was made for periodic maintenance (including the need for pavement rehabilitation), the total annual financing required would amount to EUR 200 million. However, total maintenance and rehabilitation expenditures have amounted to only EUR million in recent years, with typically EUR 50 million spent on routine maintenance and repair, and EUR 70 million spent on rehabilitation. 13. With the growth in motorization, road safety has, become an increasing issue in Bulgaria. Since 1970, in Western Europe, there has been a substantial reduction in traffic injuries and fatalities, but not so in Bulgaria or in Eastern Europe. A risk measure for traffic fatalities, persons killed in traffic per 100,000 inhabitants, shows that Bulgaria, with a figure of 12.1, is below the average in Eastern Europe but is twice higher than the EU average. Studies show that excessive speed has been the leading cause in 40 percent of fatal crashes in Bulgaria, and that 28 percent of those killed were pedestrians; the third highest figure in Europe, after Poland and Lithuania. Fatal crashes, about 1,000 annually, occur equally likely in rural and urban areas; when, in countries with good road traffic safety, a higher percentage of fatal crashes occur in rural areas. There are about 7,000 road traffic related injuries in Bulgaria annually, making the likelihood of a road crash being fatal two to three times higher than in countries with good road traffic safety. Only a small fraction of the fatal crashes occur on the motorways. Black spots, traffic conflicts and weaknesses in traffic management and enforcement, together with human factors and slowness of emergency medical services, are contributors to traffic crashes. 14. The very tight fiscal policy of Bulgaria after the financial crisis in the late 1990s had a severe impact on roads. Spending on roads reached very low levels in 2002 and 2003 at close to 1 percent of GDP17. The total spending on roads in Bulgaria over the period was on average about 1.21 percent of GDP, of which maintenance represented 0.39 percent, " Bulgaria - Public Finance Policy Review. World Bank report No BG,

32 Current Expenditures Total Routine Maintenance and Repair Interest payment (EIB, EBRD) Others Capital Expenditures Total Rehabilitation New construction Repayment ofprincipal (EIB, EBRD) Others Total road expenditure GDP at current price Total road expenditure % of GDP Actual Planned * ,200 13,700 15,200 16,600 17,700 19,500 22,300 23, Project Background 16. Investments in roads in the recent past concentrated largely on roads that serve international transport on the main European corridors. These investments were undertaken under the Transit Roads program supported by EIB. This program has allowed the upgrade of the motorways and mainly Class I roads on European corridors to European standards through rehabilitation and partial reconstruction. From 1995 to 2005 more than 2,300 km of the national roads have been rehabilitated through this program. Some investments were supported by EBRD, PHARE and ISPA programs. Currently, Transit Roads Project 4 will rehabilitate or reconstruct about 430 km more of the Republican Road Network by the end of Transit Roads Project 5 is under preparation. 18 International Road Federation (IRF), World Road Statistics, Geneva. 24

33 17. While the importance of modernizing Bulgaria s Class I roads is unquestioned, limits on the Government s capital expenditures have put rehabilitation of the Class I1 and 111 roads on lower priority. Broad-based economic growth, and equitable sharing of benefits from it, is no lesser a goal of EU integration and balanced regional development than serving international traffic. The lower tier networks provide access to land and directly influence the daily social life for 70 percent of the population who live in the rural areas or small towns. The poor condition of the Class I1 and 111 roads, and some Class I roads, whose improvement and modernization is funded under this project, frustrate balanced economic development and widespread sharing of benefits from economic growth. With the total length of over 15,000 km, the lower level network has a significant effect on the regional development in manufacturing, service industries, tourism, and to the cost of social services and personal contacts. 18. In addition to financing road rehabilitation, in the Government s opinion, NRIF s capacity to program, prioritize, and implement investments would need to be strengthened. The standard of project preparation is relatively weak, and economic analysis of projects is often lacking. Particular attention needs to be paid to strengthening administrative capacity and ensuring sound preparation and financial planning of infrastructure projects. To this end the project will support the development and introduction of modern road management systems and associated training for NRIF staff to adopt management methods and standards commonly found in other EU countries. 19. The Government of Bulgaria is of the opinion that the roads sector is important to ensure fast economic convergence with the EU. It also recognizes the weaknesses in the road network and its effect on the competitiveness of Bulgaria s economy. The Government has thus prepared a draft Transport Sector Strategy for , encapsulated in the Sectoral Operational Program for Transport (SOPT), and in the Regional Development Operational Programs (RDOP), which describe plans for utilizing EU grants - the Cohesion Fund and the European Regional Development Fund - over the period In these documents, road investment plans include rehabilitation of existing infrastructure and the construction of new road sections of high priority for the EU. The Government has also proposed a motonvay construction program that requires significant resources. These plans are elaborated in a more comprehensive National Strategy for Integrated Infrastructure Development for the period These Government plans will translate into a significant increase in investments in the road infrastructure. The EU accession alone will bring important financial resources to the road sector through the EU grants, estimated at about 0.5 percent of GDP per year or an average EUR million annually over the period The experience of EU- 15 countries has shown that one key determinant to the successful use of the European grants was the move away from simple, quick-fix projects to develop broader strategies and programs. Ireland for instance successfully utilized these grants not only as a source of funding, but also as a catalyst to introduce greater rigor in the analysis of the cost and benefits of projects, and as a driver to help national institutions to develop their capacity to put together sector strategies and to plan and implement subsequent programs and manage major projects. 20. The Government recognizes that Bulgaria faces a challenge with respect to effectively using EU grants and implementing these plans for the road sector, but at the same time it sees this challenge as an opportunity to modernize road management. The 25

34 Government s objective is to make road management stable, by clarifying the institutional setup and defining a long term vision for the sector s development and financing; make it efficient, by strengthening the capacity of the road manager to prioritize, develop programs, and implement investments; and make it accountable, by strengthening administrative capacity and ensuring sound financial planning and management as well as proper responsiveness to beneficiaries. 21. The Government is moving gradually to achieve its objective for road management. It has transformed the Road Executive Agency (REA) in August 2006 into the National Road Infrastructure Fund (NRIF), which is now the new manager of Bulgaria s national roads (Motorways, Class I, 11, and I11 roads). The NRIF is a separate legal entity that is administratively within the Ministry of Finance. By this transformation, the Government wants to consolidate transport policy and clarify the role of the executing agency for future EU funded investments. Unlike the former structure where REA was an agency reporting to the Ministry of Regional Development and Public Works (MRDPW), NRIF is a fund under the Ministry of Finance supervised by a Managing Board consisting of the Minister of Finance, the Minister of Transport and one of his deputies, the Minister of Regional Development and Public Works, and the Executive Director of the NRIF. According to the Roads Act adopted in August 2006, the Minister of Transport has the responsibility for the formulation of the state policy for the national road infrastructure and for the oversight of its discharge, while the NRIF is responsible for executing the policy through the implementation of the annual road (Motorways, Class I, 11, and I11 roads) program consisting of maintenance, rehabilitation, construction, and traffic safety activities. As in the past, the private sector will continue to be the supplier of road design, maintenance and construction services. In the process of this transformation, a new Roads Policy Directorate was created in the Ministry of Transport. The mandate and operating procedures of the directorate have not yet been published. 22. The Government s rationale for the institutional realignment and change in road management, besides being driven by the EU accession agenda, is that the institutional arrangement will enable better planning and implementation of the Transport and Regional Development Operational Programs as well as optimal absorption of EU funds. It remains to be seen whether this new setup will quickly bring in the required stability, efficiency and accountability the Government is seeking in the road manager. 23. The NRIF will finance its road program from the several sources: the state budget, the Cohesion and Structural Funds of the EU, sovereign loans, and the fees collected under the Road Law, mainly the vignette system. The NRIF is located in the Ministry of Finance. How the interface between the road program and policy, formulated in the Ministry of Transport, financing of the road program located in the Ministry of Finance, and the details of the multiyear road program and its implementation will work out in practice is unclear, and will evolve. The technical assistance component of the proposed project will assist the process of the NRIF establishment. 24. The NRIF, as the successor of REA, will continue to be responsible for the management and maintenance of road infrastructure, the implementation of the road projects and the road infrastructure policy. It has kept most of REA s structure, including some 2,900 staff, the 28 regional and district offices which manage and supervise road maintenance, as 26

35 well as the Central Roads and Bridges Laboratory which serves road information and other technical needs. 25. Currently, the NRIF uses the private sector for road maintenance and construction services. Local contractors have the capacity to provide routine maintenance and most periodic maintenance services. The district offices of NRIF supervise and design the contracts funded by the budget. Except the IFI-funded projects, most contracts are small and of short duration and driven by the available budget. The project would work with the NRIF and the road sector entities to pilot a new kind of road maintenance contracting system, which has been found efficient and useful in many EU countries. 26. As for road safety, the Government has set the target to reduce fatal road traffic crashes by half by 2010 compared to the average in This would require an annual reduction of 7.5 percent compared to the recently observed 2 percent reduction in fatal traffic crashes. The Government has indicated that improving the safety of children in traffic, reductions in traffic conflicts and black spots on the roads, improvements in traffic enforcement, cooperation with medical authorities, and a scientific approach to changing driver behavior are the key measures to reach its target. 27

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39 Annex 3: Results Framework and Monitoring BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT Results Framework PD To assist Bulgaria to reduce road transport costs by improving the condition and quality of its roads network during the first years of EU accession. and maintenance. improvement of: (a) 6 percent of Class I roads. (b) 3 percent of Class I1 roads. (c) 1 percent of Class 111 roads. Intermediate Ou Improvement of the condition of Class I, Class I1 and Class 111 roads under the project. Timely processing and implementation of contracts and the staff training program Begin implementation of pavement management system and associated database for the entire NRIF managed network. Rolling multi-year road maintenance and rehabilitation program Capacity of the road manager (NRIF) to manage road maintenance A strategy and plans to improve road safety 450 km of Class I, Class I1 and Class 111 roads rehabilitated by the end of the project Number of contracts processed and managed by Management Consultant. Training received by staff. Updating road data for 100 percent of Class I and Class I1 roads and 60 percent of Class 111 roads Preparation of multi-year road program Preparation of three performancebased area-wide maintenance contracts Development and implementation of a sound strategy and plans to improve road safety in Bulgaria Project supervision and to ensure that NRIF follows the procurement plan. Project supervision and to assess the performance of Management Consultant Scheduling annual road data collection, and program road maintenance activity. Improve NRIF s planning I capabilities I Enhance efficiency of road maintenance operations and practices Monitor progress on improvement in road safety in Bulgaria Arrangements for results monitoring 1. Current road data, excepting the traffic data, are very sparse in Bulgaria as shown in table A3.1, The plan is to build up a regular road data collection and updating activity at NRIF on top 19 IRI means International (Road) Roughness Index. The relationship between road condition and IRI is discussed and presented at the end of this annex. 20 The reduction in Vehicle Operating Cost in response to improved IRI is obtained from the Highway Development and Management model (HDM-4). Inputs for HDM-4 will be adjusted so as to account for improvement in road condition only. 31

40 of the existing activity, which has suffered from inadequate funding, outdated data collection instruments, and non-integrated and possibly old-fashioned databases. Road Class Motorways Class I Roads Class I1 Roads Class 111 Roads Length (km) IRI (%) SDP (%) Traffic (%) , , , A road data system (register) is indispensable for road management, and for all shades of maintenance (e.g. routine, periodic, rehabilitation) and new construction. Its importance and scope are much wider than monitoring and evaluation in this particular project. The system extends over, and pervasively affects, the entire road management function of NRIF from planning, programming to construction, and is necessary for cost monitoring, traffic safety planning and monitoring, and evaluation of alternative actions. 4. Monitoring and evaluation in this project i s affected not only by the absence of coverage in the baseline data, but also the definitions used to describe the condition of the road network whose improvement is the primary objective of this project. The tables below show the currently used definitions for road condition and a proposed definition that NRIF could consider. Should the new (and it is believed more appropriate) road condition definitions, and the improved data, alter the baseline percentages, the new baseline will be used but the relative improvement will remain as indicated in the results monitoring table. Table A3.2: Road Roughness (IRI) Classes used to describe current road condition in Bulgaria I I I I I I I IR1 Class (dkm) Good Fair Poor Roughness 1 Motorways I Class I Roads 1 Class I1 Roads <1.5 <2.5 <3.5 < >2.5 >3.5 >4.5 >5 I Traffic ]Average daily IRI - International Roughness Index (m/km) 21 SDI = Surface Distress Index. 32

41 I- T 2 z $ e - $ a E e Y e, a '7 6 L $ * 8 C 0 E:.- c) s 8 $ a E e CI 0 w *7 a Is Is I s 00 m g 0 0 d 0 s 3 00 m 0 PI 0 0 d 0 2 I _t_ ~ m m 0 0 a 0 s I I m m

42 Annex 4: Detailed Project Description BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT 1. The development objective of the proposed project is to assist Bulgaria to reduce road transport costs by improving the condition and quality of its roads network during the first years of EU accession. The proposed project objectives will be achieved.by: (a) improving the condition of selected Class I, I1 and I11 roads and thereby reducing road user costs; (b) enhancing NRIF s capacity to adopt efficient planning policies and effective management of maintenance, rehabilitation and construction programs; and (c) assisting Bulgaria in articulating a road safety strategy and in identifying priority activities to improve road safety. The project has three components with a total estimated cost of EUR million including about EUR 24.0 million of value added tax (VAT). The proposed Loan from the World Bank is EUR 90.0 million, with co-financing of up to EUR 54 million from the Government. The first component, with an estimated cost of million, consists of the rehabilitation of about 450 kilometers of the Bulgarian national road network and consulting services to assist in the preparation and implementation of the construction works. The second component, with an estimated cost of EUR million, supports institutional development of the road sector institutions including the NRIF through a technical assistance program. The third component supports Bulgaria s objective to improve road safety and has an estimated cost of EUR 1.44 million. Component 1: Rehabilitation of selected roads (estimated cost: EUR million) 2. This component comprises civil works for the rehabilitation of selected Class I, 11, and I11 roads during the period and the provision of consultancy services to assist NRIF during the life of the project with the review of the designs, procurement and contract management. Design and supervision of construction works will be carried out by consulting firms and they are not included in the project. Rehabilitation works (estimated cost: EUR million) 3. The NRIF has prepared a priority program of rehabilitation works to be implemented under this subcomponent. This priority program is part of a long term investment plan aimed at clearing the historical backlog of road maintenance. The priority program under the project covers about 450 kilometers of road sections distributed throughout the country and selected on the basis of economic and other social benefits. In case changes need to be made to this program during project implementation, the NRIF will submit to the Bank for review and approval the updated priority program. 4. The proposed rehabilitation would improve ride quality leading to lower operating costs for road users, ensure structural soundness of the road for a prolonged period and prevent collapse, leading to lower life-cycle cost for the road asset. The works will typically comprise pavement strengthening with asphalt concrete wearing and leveling courses, shoulder stabilization, culvert and ditch rehabilitation, repair of existing or installation of new guard rails, bridge rehabilitation, minor structures repair, road marking and signing including traffic calming and safety measures within localities. 34

43 5. The priority program discussed and agreed upon during project appraisal covers about 450 kilometers and was grouped into nine regional.lots, as presented in table A4.1. Table A4.1: Priority program proposed to be rehabilitated under the project Lot 1 Northwestern Lot 3 Northeastern Glavenitza - Zaforovo (km ) Lot 3 Total I Mar. 08 -Nov Lot 4 Southwestern I I I I I I region Sofia - Pirdop (km km ) Lot 4 Total Jul Jun Pirdop - Karlovo - Kalofer (km km ) Plovdiv - Biala Cherkva - Kosovo (km km Total

44 Consultancv services for implementation (estimated cost EUR 2.40 million) 6. Under this subcomponent, a consulting firm (Management Consultant) will be hired to assist the NRIF through the provision of technical advisory services and training regarding the review of designs, procurement, supervision, management and reporting for the implementation of the Project. This will include the preparation of bidding documents, review of bids, and the coordination and oversight of quality control of works and their supervision. In addition to transfer of skills to NRIF staff through training and day-to-day operations, the consultancy services under this component will lead to better control of implementation schedule and will provide quality assurance for executed works. The consultancy services will also review the training requirements within NRIF at both operational and managerial levels and conduct a training program to be implemented during the assignment. The training to be achieved through hands-on experience, will cover design review, preparation of bidding documents, bid evaluation, project supervision and reporting, and will be applicable to all projects and not only for the World Bank project. In addition to transfer of skills to NRIF staff, the consultancy services should lead to better control of implementation schedules and should provide quality assurance of executed works. The services of this consultancy will cover the project implementation period, including the defect liability period. Component 2: Institutional Development (estimated cost EUR 2.41 million) 7. This component comprises consulting services, studies, the provision of equipment, and training to (i) strengthen the internal management and operations of the NIUF; (ii) improve road sector planning, programming, budgeting, and program implementation with particular focus on the use of EU Cohesion and Structural Funds; and (iii) improve the efficiency of road maintenance practices. These are activities needed to gradually bring the NRIF s performance to the level of EU standards. This component covers the following activities: (1) A technical assistance to strengthen the internal management and operations of the NRIF, and to improve road sector planning, programming, budgeting, and program implementation (estimated cost EUR million). This subcomponent is envisaged to be provided by Technical Advisers (two experts, or a firm) and consists of the following three tasks: (i) For the Management Board of the NRIF and for the Directorate of Road Infrastructure Policy in the MOT, the Technical Adviser would assist to: (a) define and propose the road sector budget structure, (b) develop the Management Board s decision-making cycle, (c) identify the information base for the decisions, including a method for budget allocations for different road categories by functional class and geographic region, and (d) identify procedures for financial oversight. (ii) For the NRIF and for the Directorate of Road Infrastructure Policy in the MOT, the Technical Adviser would train management and staff to: (a) develop road sector strategic directions for the next ten years, (b) specify analytical methods for planning and programming, (c) help develop 5-year rolling road 36

45 investment and rehabilitation programs consistent with the budget, and (d) design the interface procedures with NRIF s Management Board and NRIF s management for the road program. (iii) For the NRIF operations management, the Technical Adviser would advise on (a) reorganization and staffing, (b) operating procedures, (c) planning and programming, (d) processing of required studies, (e) financing forecasts and financial management, (f) relations with road users, and (8) other issues that the Board may desire. (2) A technical assistance to enhance NRIF s financial management capacity and to conduct the required project audits which include project operational reviews (estimated cost EUR million). NRIF plans to establish a procurement directorate and to complete the reorganization of the finance department in This subcomponent comprises consulting services to assist the NRIF in this process and will include: (i) developing and documenting a set of formal procedures to be followed in terms of financial management and procurement by NRIF, based on the current regulation and practices in terms of both ex-ante and ex-post controls. These controls relate to technical specifications of the work performed and quality of work, financial controls, and administrative controls; (ii) advise on a long term Information Technology strategy with regards to an integrated Management Information System by introducing a modern accounting system that can be linked with the contract monitoring system and which would allow different types of automatic reporting and reduce the current manual work; and (iii) train the internal finance and audit staff. This subcomponent also includes conducting the financial audits including the operational review required for the proposed Project. (3) A technical assistance to develop a road management system and to prepare for piloting Performance-based Maintenance Contracts (estimated cost EUR million). This subcomponent will assist the NRIF Maintenance Division and the Central Roads and Bridges Laboratory (CRBL) in developing and using a road management system and associated road management information system. The subcomponent also includes preparing a pilot multi-year routine and periodic maintenance plan. This assistance would also review or develop maintenance standards, by functional road class and traffic volume. After completion of the pilot routine and periodic maintenance plan, three multi-year area-wide performance-based maintenance contracts would be developed and procured on a pilot basis. The pilot contracts would be complemented with three traditional contracts in similar areas for control and for studying the effectiveness of the performance-based contracts. The actual implementation of these maintenance contracts is not part of the proposed project, but follows, or overlaps by one year, the completion of the ongoing three-year contracts which stated in 2006 and will be completed in The NRIF proposes this strategy to allow comparison of new maintenance methods with the existing ones and to avoid substantial changes to the current contracts. The consultancy would also propose and develop a method for prioritization and selection of road sections between periodic maintenance and rehabilitation. 37

46 (4) Acquisition of road data collection equipment, related software, and computer equipment, and update of traffic and road databases (estimated cost EUR million). This subcomponent will benefit the CRBL and would include the following: CRBL s existing laser equipment, which provides IRI measurements directly, will be upgraded and furnished with GPS and additional lasers to measure both longitudinal (IRI) and transverse (rutting) profile measurements. Additional low-cost IRI measurement equipment may be included for specific sites. The acquisition of a deflectograph vehicle. The acquisition and installation of permanent and mobile traffic counting stations. The acquisition of a mobile laboratory for testing road structure and equipment for evaluating the condition of bridge elements. The acquisition of the road database software and the collection of the road data for at least 60 percent of NRIF network, all road classes, during the life of the project. The remaining 40 percent will be completed within the two to three years following the project completion. The acquisition of the Highway Development and Management (HDM4) software licenses for the pavement management system (PMS). The software will be configured for NRIF pavement design method. The acquisition of other software for transport planning and evaluation of pavement and bridge structures. (viii) The improvement of the computer system and network at CRBL and at NRIF s Headquarter and regional offices. (ix) All softwarehardware and equipment acquisition includes technical assistance and on-the-job training in their use in road asset management. (5) A training program to NRIF staff and management (estimated cost EUR 0.060). This subcomponent will cover a training program on road management and on absorption of EU funds. Component 3: Road safety (estimated cost: EUR 1.44 million) 8. This component includes EUR million for technical assistance targeted at specific road safety improvements, such as the development of road safety plans, public awareness campaigns, development of legal aspects of road safety, introduction of new approaches to enforcement, development of new approaches for timely medical emergency services, etc.; and EUR 1.20 million to finance priority activities aimed at improving road safety such as removing road traffic crash black spots and traffic conflict situations, and for additional technical assistance. The objective of this component is to assist in improving road safety in Bulgaria through a coordinated and integrated package of cost-effective, multi-sectoral road safety interventions designed on the basis of international best practice. Priority activities under this component will be identified through a separate technical assistance to be carried out in late 2007 using a grant from the Global Road Safety Fund. This grant-financed technical assistance will assess the capacity for implementing road safety policies, to prepare a strategy for improving road safety, and to reach consensus with the government on a multi-sectoral strategy for improving road safety. 38

47 Annex 5: Project Costs BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT Project Cost By Component and/or Activity Rehabilitation of selected roads Institutional development Road safety Total EUR million Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs' Interest during construction 0.0 Front-end Fee 0.0 Total Financing Required 90,OO Costs include physical contingencies and price contingencies. All costs include applicable taxes and duties. 'Identifiable taxes and duties are EUR 24.0 million, and the total project cost, net of taxes, is EUR million. Therefore, the share of World Bank loan in total project cost net of taxes is 75 percent. 39

48 Annex 6: Implementation Arrangements BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT General arrangements 1. The Loan Agreement will be between the Republic of Bulgaria and the Bank. The project will be implemented by the National Road Infrastructure Fund (NRIF), which is supervised by a Management Board comprising three ministers: the Minister of Finance, the Minister of Transport, and the Minister of Regional Development and Public Works (MRDPW); a Deputy Minister of Transport; and an Executive Director. The NRIF will receive the Loan funds as a transfer from the Ministry of Finance22. The NRIF, as the former Road Executive Agency, has experience in implementing IFI-funded projects and will be responsible for all aspects of the project implementation. Administration of the Dedicated Account and project accounting will be done by the NRIF who will also prepare the project accounts and report to the Bank. Project Management 2. The NRIF will be the implementing entity of the proposed project. The Management Board of the NRIF will have overall responsibility for project oversight. The Foreign Financing Investment Unit (FFIU) within the NRIF will manage the implementation of all project components. The Finance Department within the NRIF will be responsible for project financial management arrangements. There will be no specific Management Unit for this project. The FFIU is also implementing the Transit Roads Program financed by the EIB and has experience in managing projects with external financing. The NRIF will have the overall responsibility for project implementation including planning, procurement, disbursement of funds, monitoring the use of funds, auditing arrangements, monitoring and evaluation, supervising the implementation of the Environmental Management Plan (EMP), and reporting on the progress of implementation and use of project funds. 3. The NRIF has well established departments that perform specialized functions such as planning, design, road safety, maintenance management, financial management, audits, and a separate development unit for data resources, road management systems and testing (i.e. the CRBL). These departments and units have previous experience with IFI-financed projects, and therefore the present administrative arrangements and operational procedures within the organization will be maintained while complying with financial, procurement and safeguard requirements of the Bank. 4. The NRIF prepared and adopted, before negotiations, the Project Operational Manual, which is satisfactory to the Bank, describing procedures for implementation of the Project and including, inter alia: (i) procedures governing administrative, procurement, accounting, financial management, and monitoring and evaluation arrangements; (ii) targets to be achieved under the 22 Notwithstanding the fact that NRIF is a separate legal entity, it is a second level spending unit under the Ministry of Finance. Pursuant to Article 7(2) of the Organic Budget Law, NRIF s budget is part of the budget of the Ministry of Finance adopted by the Parliament (the National Assembly) each year. Its operations are included in the overall budget of the Ministry of Finance. The NRIF activities are part of the MOF program budget for NRIF operates as a budget structure and hence is filly integrated in the budget mechanism as a second tier budget spending unit. 40

49 Project; and (iii) a sample format of Project Reports. The FFIU is headed by a manager, supported by two engineers and one economist. Two additional staff with relevant qualification and experience in project management and procurement and with the required language skills wer assigned to the FFIU, before negotiations, to work on the proposed project. In addition, a technical assistant was assigned to the FFIU to assist with communications, filing, and translations when needed. The consulting firm planned to be hired under the project will assist the NRIF in project implementation including analysis and justification of works, review of the designs, preparation of bidding documents, bid evaluation, coordination and oversight of quality control of works and their supervision, and training of NRIF staff on project management and procurement. In terms of financial management, the NRIF, before negotiations, (i) assigned two financial management staff in the Finance Department to work on the project; and (ii) prepared, as part of the Project Operational Manual, the Project Financial Management Manual, which is acceptable to the Bank. World Bank Supervision 5. The World Bank will devote about 20 staff weeks per year and a total of about 90 staff weeks through FY08 to FY12 to support the Government in implementing the project and supervise progress. Implementation support and supervision - with a minimum of two missions per annum, as well as direct involvement of Sofia World Bank Country Office specialized staff, will in particular focus on performance of NRIF in managing contracts, procurement and financial matters, as well as completing the agreed implementation plans. 6. Project monitoring during the course of project implementation and after the project has been completed would be carried out by the NRIF staff. This would entail monitoring project performance indicators for the duration of the project. Project Reports would be prepared by the NRIF on a quarterly basis and submitted to the Bank for review. The Project Reports will focus on results rather than providing process related information. 7. The NRIF will carry out jointly with the Bank, a midterm review of the progress made in carrying out the Project not later than eighteen months after the Loan Effective Date. The Midterm Review will cover, amongst other things: (i) progress made in meeting the Project s objectives; and (ii) overall Project performance against Project performance indicators. 41

50 Annex 7: Financial Management and Disbursement Arrangements BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT A. Financial Management 1. Country Issues 1. The World Bank report on Bulgaria Country Financial Accountability Assessment (CFAA, September 2003) concludes that the level of fiduciary risk attached to the primary elements of Bulgaria s public financial management systems is low. The elements of public financial management systems assessed include legal framework, institutional capacity and practices for the core financial control processes such as budgeting, treasury and cash management, accounting, financial reporting, internal control, internal audit, external audit and parliamentary oversight. 2. Bulgaria has a well developed system and structure of financial management that relies heavily on information technology (such as in the area of cash management) and has independent external audits and parliamentary oversight committees. Sound legislation exists to prepare, implement and monitor the State budget, and the Government has taken various steps to improve the budgeting process. Cash allocation is highly centralized and monitored closely through an automated System for Electronic Budget Payments (SEBRA) and Single Treasury Account maintained in the Bulgarian National Bank (BNB). The automated SEBRA system has a reasonably good internal control. 3. The internal audit function has been fully decentralized to the budget users, which set up independent internal audit departments. The decentralization process was completed in April The State Financial Inspectorate (the former Public Internal Financial Control Agency) still exists, but only with the standard setting role and administrative control at the request of the Government. 4. External audits are performed by the National Audit Office (NAO), which submits its reports to the National Assembly. The NAO has adequate operational independence, resources and staff. 2. Risk Analysis 5. The overall financial management risk for the project is moderate to substantial before mitigation measures are implemented, and with the agreed adequate mitigation measures in place, the financial management residual risk is rated moderate. The table below summarizes the financial management assessment and risk ratings of this project. 42

51 INHERENT RISKS Country level Well developed Public Financial Management structures (additional information are included in country issues in the previous section) but with high perceived level of corruption Entitv level of civil service rules Project level Project is large in size, and in risky Risk S S Risk Mitigating Measures NRIF is to maintain independent financial management system, use of private auditors and use of BNB for Designated Account. Appropriate corruption risk mitigation measures are included (see below) Any changes to the structure and staffing in the implementing entity will require prior agreement with the Bank NRIF s Foreign Investment Financing Unit will hire two additional procurement staff and will use a consultant for procurement. Implementation activities will be monitored during Bank regular supervision missions. Joint Financial Management and procurement reviews will be conducted regularly, together with technical reviews by project team. Project will have both financial audit and operational review, performed by independent auditor. iesidual Risk M M M M Accounting. NRIF uses several software systems which are not Management manual exists. Funds flow Financial Reporting. Lack of integrated system and consolidated report will be prepared manually. Auditing OVERALL CONTROL RISK M S M M Budget based on procurement plan agreed with the Bank and subject to Parliament approval together with the State budget. Process to be reviewed during regular FM supervision. Regular reconciliations to be performed by the project team. NRIF prepared and adopted, prior to negotiations, the Financial Management Manual covering accounting and internal controls for the Droiect Process part of regular FM supervision. Manual reports will have to be reconciled with the accounting data. Annual audit performed by independent auditors acceptable to the Bank and review of audit reports by the Bank s Financial Management Specialist. M M M M M M M OVERALL FM RISK RATING S st L - Low M 43

52 3. Strengths 6. The significant strengths that provide a basis of reliance on the project financial management system is the existence of experienced accounting staff in the NRIF. 4. Weaknesses and Action Plan Implementing Entity 8. The project implementing entity is the NRIF. Within the NRIF, the Foreign Financing Investment Unit will conduct day-to-day operations needed for project implementation. 9. The risk associated with the implementing entity is substantial before mitigations measures are implemented, due to the possible intervention by the structure and staff of the organization. It was agreed that any changes to the structure and staff assigned to work on the project will require prior agreement with the Bank. Moreover, the composition of the implementing entity s staff working on the project was agreed during appraisal. 6. Budgeting and Planning 10. Based on the amended Road Act, the Road Executive Agency (REA) under the Ministry of Regional Development and Public Works was transformed in August 2006 into the National Roads Infrastructure Fund (NRIF), and it will continue to function as a secondary budget user but under Ministry of Finance. The NRIF falls under the provisions and regulations of the State Budget Act Investment projects co-financed by foreign sources and corresponding co-financing requirements receive a priority during budget planning exercises. The proposed Project will be also treated as a priority item in the budget preparation and execution. The project budget will be integrated in the NRIF budget both in terms of loan amounts and counterpart contribution and will be subject to regular rectifications as prescribed by the law. 12. As noted earlier, the financial management arrangements of the project are adequate. The risk associated with planning and budgeting is assessed as moderate. 7. Accounting Information Systems 13. The NRIF uses several software systems which are not integrated. This means that data recorded in several systems needs to be reconciled on a regular basis in order to ensure consistency of data throughout the entire management system. Consolidation is done manually and leaves significant room for a human error and requires excessive use of staff time to perform such an exercise. 14. For accounting purposes the NRIF is using AJUR-L software which was introduced in 1997 following the recommendations of the former Public Internal Financial Control Agency (PIFCA). The software has an MS-DOS interface and is quite outdated. The access is password protected and each user has specific rights assigned. According to the NRIF, there is no plan to purchase new accounting software in the near future. 15. The Interim un-audited financial reports will be prepared using the detailed trial balance extracted from AJUR-L software. 44

53 Accounting Policies and Procedures 16. Accounting is done on a cash basis in accordance with the Accounting Law with the modifications applicable to the budget funded organizations. 17. The project accounting books and records will be maintained on a cash basis and project financial statements will be presented in the loan currency (EUR) and national currency (BGN). 18. The NRIF will have to institute a set of appropriate accounting procedures and internal controls including authorization and segregation of duties. Accounting policies and procedures of the project are reflected in the Project Financial Management Manual. 19. Additional accounting policies that will be applied to the project (besides standard accounting policies used for Budget agencies) will include the following major assumptions: - Cash accounting as the basis for recording transactions. - Reporting should be done in Euro (reporting currency). - Consolidated IFRs should be prepared for all components, including all Loan funds. - All counterpart funds should be reflected in the financial reports. 20. The risk associated with accounting is considered substantial before mitigations measures Internal Controls and Internal Audit The internal control framework in the NRIF has the following aspects: 1) Ex-ante control, exercised by the financial controller (called also Finance Surveyor in NRIF documents in English). 2) Ex-post control, exercised by the internal audit department. 3) In addition, there is an internal control department following on performance of regional branches. Internal control framework 22. Although there are some written policies in the NRIF relating to internal financial control, procedures and flow of documents, there is no centralized document. The risk of not having clear written procedures available for all NRIF staff increases the possibility of errors and duplication of work in case of errors identification and correction. Also, there is a risk that the rules can be subject to different interpretations or being applied only partially. 23. The control over expenditures approval is mainly based on the controller s checklist signed by all responsible staff, including technical sections and department managers, Chief Accountant and the Finance Surveyor (Controller) before it goes for the final approval and signature of the Executive Director or his authorized representative. 24. There are daily bank reconciliations and frequent reconciliations between data in different information systems, as well as ex-ante checks against the budget allocations before each payment. If payments exceed the budget allocation for a particular contract or project, the budgeting department sends a notification to the management who then takes the final decision on whether to delay the project or re-allocate the funds from other projects. 45

54 1. Financial controller 25. Based on the requirements of the Public Internal Financial Control Act the first level spending units under the Central Government budget and municipal budgets, the European Union funded program spending funds and the heads of auditable entities have the obligation to appoint financial controllers whose main role is to exercise an ex-ante control. The ex-ante control is a control focused on the legality of all documents and activities related to financial operations. It is performed through checks before making a decision to assume a liability and incur an expense. The financial controller of the NRIF reports directly to the Executive director and puts the last signature on the accounting checklist before the Executive Director s signature. 2. Internal audit department 26. The internal audit department was created in the NRIF in October 2005, at the same time as in other budget spending units as a result of the decentralization of the former PIFCA. At the time of project appraisal, the department had two auditors only (ten approved), and the NRIF was planning to conduct the recruitment process to hire the additional staff. The internal audit department is fully embedded in the NRIF. The head of the department reports directly to the Executive Director. 27. As the internal audit department is still in its incipient stage, the Bank will not rely on its work. However, if during the project life, the internal audit department develops the capacity, the Bank might place reliance on its work. 3. Internal control department 28. The NRIF organizational structure also includes an internal control department which has no relationship with the finance department. The only interaction this department has with the internal audit department is sharing the reports and results of the work done. The main role of the internal control department is to inspect the activities performed by the regional branches. 29. The NRIF documented in the Project Financial Management Manual the internal control mechanisms to be followed in the application and use of funds and the implementation of the project. The Financial Management Manual deals with financial management and administrative procedures. The Financial Management Manual also deals with accounting and record-keeping, flow of funds, and reporting procedures. 30. The Financial Management Manual reflects the structure of the implementing entity (NRIF), administrative arrangements, internal control procedures, including procedures for authorization of expenditures, maintenance of records, safeguard of assets (including cash), segregation of duties to avoid conflict of interest, regular reconciliation of bank account statements, bank signing mandate (to include at least two signatories), regular reporting to ensure close monitoring of project activities, as well as the flow of funds to support project activities (See flow of funds diagram below) Key internal controls for the project include the following: - restricted access to accounting software with clear responsibility and approval of adjusting journal entries and correcting errors; 46

55 approval of payments by head of finance department and executive director; regular back-up arrangements of the accounting data; IFRs reconciled with Client Connection and trial balance from the AJUR-L software; regular bank reconciliations and reconciliations with the accounting data in the NRIF; an independent technical supervisor hired by NRIF will verify that goods and works for the road sections are done to acceptable standard and completed in approved quantities (Le. number of km built). The local branches technical engineers will check that the materials received for the roads have the design quality and that they are consistent with invoices. 32. The risk associated with internal controls and internal audit is considered as substantial before mitigation measures. 9. Reporting and Monitoring 33. Accounting transactions are done using the accounting software AJUR-L. The detailed trial balance is printed from the system. Financial statements are prepared in MS Excel spreadsheets and submitted to the MOF. 34. Besides the budget funds, the EIB loan funds are also recorded in the accounting system that shows both the EIB funds and co-financing contribution. The NRIF will use the same procedure for the proposed Project. 35, Project management-oriented Interim Un-audited Financial Reports (IFRs) - previously known as Financial Monitoring Reports (FMRs) - will be used for project monitoring and supervision and the indicative formats of these are included in the Financial Management Manual. The NRIF will produce a full set of IFRs every calendar quarter throughout the life of the project and will submit them to the Bank no later than 45 days after the end of the calendar quarter. Formats of these IFRs/FMRs were agreed with the NRIF and are attached to the Minutes of the Negotiations. 36. As the IFRs will be prepared manually, from printed detailed trial balance, requiring additional reconciliations, the risk associated with reporting is considered substantial before mitigation measures. NRIF will have quarterly reconciliations of the AJUR-L trial balance with the IFRs, regular bank reconciliations and monthly reconciliations with Client Connection. The Statement of Expenditure will be reconciled with the accounting system with every withdrawal application. 10. External Audit 37. As NRIF is a second level budget spender, an audit of the entity will not be required. REA has been audited as part of MRDPW by the Bulgarian Court of Accounts but not in full scope and not for the entire year. The main issues in the 2004 audit report relate to deficiencies related to: mistakes in booking some expenditure on incorrect budget lines, accounting policy of tangible fixed assets and non current assets not in compliance with the MRDPW Unified Accounting Policy. The main issues in the 2005 audit report relate to: deficiencies in terms of complying with PIFCA requirements in terms of policies and procedures related to: staff salaries, public procurement procedures, handover and acceptance of official information, mistakes made in the accrual basis accounting (not compulsory). 47

56 38. As there is no legal requirement for the Court of Accounts to perform annual audits of NRIF, the Bank will explore during the project implementation the possibility for the Government to require annual audits for NRIF. 39. The audit of the project will be conducted by independent private auditors acceptable to the Bank, on terms of reference acceptable to the Bank, and procured by the implementing entity. The annual audit will have integrated both the financial audit and an operational review (performance audit), focusing on the efficiency and effectiveness of the usage of project funds. The annual audited project financial statements will be submitted to the Bank within six months of the end of each fiscal year and also at the closing of the project. The cost of the audit will be financed from the proceeds of the loan. 40. The following chart identifies the audit reports that will be required to be submitted by the project implementation entity together with the due date for submission. Audit Report - Project financial statements (PFS), including SOEs and SpeciaUdesignated account. The PFSs include sources and uses of funds by category, by components and by financing source; SOE statements, Statement of designated account, notes to financial statements, and reconciliation statement. - Operational review on the efficient and effective use of loan. Due Date Within six months of the end of each fiscal year and also at the closing of the project 41. The risk associated with external audit is considered moderate. 11. Funds Flow and Disbursement Arrangements 42. Project funds will flow from: (i) the IBRD, via a single Designated Account established in Bulgarian National Bank; and (ii) the counterpart contribution, via the single treasury account. 43. The NRIF will prepare the application for withdrawals to be submitted to the Bank and prepare the payment orders for the suppliers, including counterpart contribution. 44. The Designated Account will be opened in the Bulgarian National Bank, which is used for all projects with foreign financing. 45. Disbursements from the Loan Account will follow the traditional method, either through direct payments or replenishment of the Designated Account. Withdrawal applications for the replenishments of the Designated Account will be sent to the Bank directly by the project implementing entity every quarter, or when about a third of the initial deposit in the Designated Account has been utilized, whichever comes first. During the life of the project, if the NRIF develops cash flow forecast capabilities, they can move to IFRs based disbursements. 46. Upon receipt of each application for withdrawal of an amount of the Loan, the World Bank shall, on behalf of the Borrower, withdraw from the Loan and deposit into the Designated Account an amount equal to the lesser of: (a) the amount so requested; and (b) the amount which the Bank has determined, based on the IFRs, is required to be deposited in order to finance Eligible Expenditures during the six-month period following the date of such reports. 47. The risk associated with funds flow and disbursement is considered as moderate. Detailed funds flow structure is in the diagram below. 48

57 12. Supervision Plan 48. As part of its project supervision missions, the Bank will conduct risk-based financial management supervisions, at appropriate intervals. During project implementation, the Bank will supervise the project s financial management arrangements in the following ways: (a) review the project s quarterly financial management reports as well as the project s annual audited financial statements including operational review and auditor s management letter and remedial actions recommended in the auditor s Management Letters; and (b) during the Bank s on-site supervision missions, review the following key areas (i) project accounting and internal control systems; (ii) budgeting and financial planning arrangements; (iii) disbursement management and financial flows, including counterpart funds, as applicable; and (iv) any incidences of corrupt practices involving project resources; and (c) joint financial management and procurement contract post reviews will be conducted once per year. As required, a Bank-accredited Financial Management Specialist will assist in the supervision process. 49

58 Proposed Flow of Funds and Documents for IBRD Loan I l l I l l i Monthly I I I aggregate requast I for funds - limits of: I expenditures I I I I I I I I I I I I 3. Issuing of the I invoice after paymentisdone. 1 a. Initial and WORLD BANK ' replenishment Withdrawal I LOAN ACCOUNT applications (advances and I' documentation of the use,i of the funds) /I I', I b. Disbursement of advances 7. Monthly It budgetary reports on utilization of ' I funds /I /I I 1 I I / I I, NRIF Second level spending unit 7 7 I I I i I 2. Certificates for the I by '1' ' I work done - approved i ; I 1. Signing ofthe Contractor - Flow of funds ' I I, I 1 1, I / I 1 I, I / I I/ /I /I I' /I /I /I I/ /I' 8. Quarterly I I Interim Un- I 1 1 audited Financial I / I / Reports IFRs I, I 4. Payments order as I I I SEBRA I 6. Counterpart contribution Flow of documents I r Bulgarian National Bank - DESIGNATED ACCOUNT in BNB In EUR I ll Contractor BANK ACCOUNT 5. Payments in a currency of the contract 50

59 A. General Annex 8: Procurement Arrangements BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT 1. Procurement of contracts for works, goods and technical assistance (non-consulting services) for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Advertisement. A General Procurement Notice (GPN) was published on October 31, 2006, in the United Nations Development Business online (UNDB) and was also published in Issue No. 689 of 2006 of the printed version of the UNDB. Specific Procurement Notices (SPN) will be published in UNDB, dgmarket, and NRIF's website as the corresponding bid documents become available. The Borrower will respect debarment decisions by the Bank and will exclude debarred firms and individuals from the participation in the competition for Bank-financed contracts. Current listing of such firms and individuals is found at: Contract awards will be published in UNDB online and dgmarket as well as on the NRIF's website with the minimum information required by the Procurement and Consultants Guidelines. 3. Procurement of Works. Works to be procured under this project would include rehabilitation of about 450 kilometers of Class I, 11, and I11 roads. Civil works estimated at EUR 4,500,000 and above each will be procured through International Competitive Bidding (ICB), and civil works estimated to cost less than EUR 4,500,000 may be procured on the basis of National Competitive Bidding (NCB). The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB). Bidding Documents agreed with the Bank prepared on the basis of Europe and Central Asia (ECA) Regional Sample Document for Works already translated into Bulgarian for the needs of other ongoing Bank-financed projects will be used for National Competitive Bidding procedures. NCB-level contracts are expected under the Road Safety Component of the Project. Following the performance of the first works contracts for road rehabilitation, a decision will be taken for the use of prequalification for contracts exceeding EUR 15 million. The Loan Agreement will also provide for procurement of simple works under Shopping procedure estimated to cost less than EUR 80,000 should the need of such procurement arise at a later stage of implementation of the Project. Technical specifications for works contracts will include requirements meant to eliminate adverse environmental and social impacts as per the Environmental Management Plan described in Annex 10. The Supervision Engineer (consultant financed from NRIF's funds) will monitor environmental aspects during the implementation of works contracts. 51

60 4. Procurement of Goods. Goods to be procured under this project would include road data collection equipment, related software, and computers. Goods and equipment estimated to cost EUR 800,000 and more and the road data collection equipment which cannot be procured from national suppliers would be procured through ICB. Procurement will be done using the Bank s Standard Bidding Documents (SBD) for Goods for all ICB. Contracts estimated to cost less than EUR 800,000 each and considered unlikely to attract foreign competition may be procured through National Competitive Bidding using National Bidding Documents agreed with the Bank, such as the ECA Regional Sample Document for Goods. Small contracts for supplies of readily available off-the shelf goods (including hardware and software) estimated to cost less than EUR 80,000 each may be procured under Shopping on the basis of three written price quotations obtained from qualified suppliers. Small-value contracts for software licenses may be procured under Direct Contracting. In the procurement of IT hardware and software by shopping, when soliciting bids, the quotations from firms operating in Bulgaria registered to the Bank s Web site below should be solicited in addition to the other available firms. ( org/wbsite/external/projects/procu~ment/o,,contentmd K: menuPK: pagePK: piPK: theSitePK: 84266,OO.html) 5. Procurement of non-consulting services: Services which are bid and contracted on the basis of the measurable physical output such as geodetical surveys and soil investigation may be procured using the NCB bidding documents for works suitably amended for a specific purpose. For small value assignments below EUR 80,000 the comparison of three quotations can be used. 6. Selection of Consultants: Consultant services required under this project would include consultancy services to assist with project and contract management under Component 1 Rehabilitation of Selected Roads (referred to as Management Consultant); technical assistance to strengthen the internal management and operations of the NRIF, and to improve road sector planning, programming, budgeting, and program implementation; technical assistance to enhance NRIF s financial management capacity and to conduct the required project audits and project operational reviews; technical assistance to develop a road management system and to prepare for piloting Performance-based Maintenance Contracts under Component 2 Institutional Development; and technical assistance for development of road safety plans, public awareness campaigns, development of legal aspects of road safety, introduction of new approaches to enforcement, development of new approaches for timely medical emergency services under Component 3 Road Safety. Quality and Cost Based Selections (QCBS) will be used for three of the contracts. Advanced contracting is envisaged for the Consultant for project and contract management (Management Consultant). The Selection Based on Consultants Qualifications (CQS) will be used for contracts estimated to cost less than EUR 160,000 equivalent. Audit services for the project will be procured using Least Cost Selection. Short lists of consultants for services estimated to cost less than EUR 160,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Individual consultants would be selected in accordance with Part V of the Consultants Guidelines. Training for the NRIF staff would be conducted in accordance with a biannual training program that the Borrower would submit to the Bank for its agreement before implementation. 52

61 7. The procurement procedures to be used for each procurement method, as well as initial prior review thresholds for works, goods and services contracts to be procured, are presented in the Procurement Plan and its preamble, which may be updated with the concurrence of the Bank. B. Assessment of the agency s capacity to implement procurement 8. The NRIF will be the implementing entity of the Project. The Foreign Financing Investment Unit (FFIU) within the NRIF will manage the implementation of all project components and will have the overall responsibility for procurement activities. The FFIU is headed by a manager, supported by two engineers and one economist. Two additional staff with relevant qualification and experience in project management and procurement and with the required language skills were assigned to the FFIU, before negotiations, to work on the proposed project. In addition, a technical assistant was assigned to the FFIU to assist with communications, filing, and translations when needed. The consulting firm planned to be hired under the project (Management Consultant) will assist the NRIF in project implementation including analysis and justification of works, review of the designs, preparation of bidding documents, bid evaluation, coordination and oversight of quality control of works and their supervision, and training of NRIF staff on project management and procurement. It is expected that the contract with this consultant will be signed in July The Institutional Fiduciary Assessment (IFA) performed by a World Bank fiduciary team in June 2006 included an assessment of the capacity of the NRIF to implement procurement actions for the Project. The overall conclusion of IFA is that procurement function and responsibilities are organized according to the source of funding, and several units administer procurement throughout the NRIF using different procedures and model documents. NRIF procurement staff primarily have engineering background. NRIF has significant experience in conducting open tenders with participation of foreign bidders and uses the advertisement and bidding documents in English in such cases. The area of main concern according to the IFA is contract implementation and administration. The practice of having cost estimates prepared by the design firm as part of the Bill of Quantities no longer is practiced in Bulgaria. Thus, NRIF does not have in-house expertise to estimate the costs of planned construction or rehabilitation works. It is advisable to either develop in-house expertise to estimate the costs of planned works (even though this is no longer mandatory by law) or include it in the terms of references of outsourced firms preparing the design and bill of quantities. The IFA is available in Project files. 10. During project appraisal, the key issues and risks concerning procurement for implementation of the project have been identified and include the lack of experience in implementing World Bank financed projects, and the need for additional staff to support procurement and contract administration and implementation under the proposed project. The corrective measures which have been agreed are Project Launch Workshop; and the appointment of additional staff, before negotiations, to support and coordinate the implementation of the World Bank financed investments including procurement of technical assistance and equipment for the needs of the NRIF. The Management Consultant to be hired under the project to assist with project and contract management will provide training in design review, bidding documents and bid evaluation, supervision and reporting. Training on project management and procurement would also be considered in the training programs envisaged under the Project The overall project risk for procurement is medium. 53

62 C. Procurement Plan 12. The Borrower developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This Procurement Plan was agreed between the Borrower and the Bank during negotiations and is attached to the Minutes of Negotiations. The Procurement Plan is available at the NRIF headquarters in Sofia. It will also be available in the project s database and in the Bank s external website as well as on NRIF s website. The Procurement Plan will be updated in agreement with the Bank at least annually on the basis of the Terms of Reference included in the Project Operational Manual. D. Frequency of Procurement Supervision by the Bank 13. In addition to the prior review supervision, the post review of procurement actions will be done at least annually. Regular procurement supervision and assistance to NRIF will be done by the World Bank procurement staff in the Sofia Country Office. E. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting: Measurement equipment 0.5 ICB September 2007 Mobile Highway Laboratory for 0.4 ICB September 2007 I Material Testing (b) All ICB contracts and all Direct Contracting will be subject to prior review by the Bank. Each first works NCB, goods NCB, and Shopping contracts will also be subject to prior review. 54

63 2. Consulting Services (a) List of consulting assignments with short-list of international firms. 1 Ref. No I L Consultancy Services to assist with project and contract management Development of Road Management System Road Safety Technical Assistance I 3 cost (Em million) Selection Method QCBS QCBS QCBS 5 Review by Bank (Prior / Post) Prior Prior 6 Expected Proposals Submission Date January 2007 September 2007 (b) Consultancy services estimated to cost above EUR 160,000 per contract and Single Source Selection of consultants (firms) will be subject to prior review by the Bank. Contracts above EUR 40,000 with Individual Consultants and Sole-Source with Individuals will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than EUR 160,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 55

64 Annex 9: Economic and Financial Analysis BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT Summary 1. A cost-benefit analysis (CBA) was conducted for the rehabilitation works of all road sections to be included in the project. The evaluation was done using Highway Development and Management Model (HDM-4), which simulates life cycle conditions and costs and provides economic decision criteria for road construction and maintenance activities. HDM-4 estimates the net benefits of each project in terms of reduction in vehicle operating costs, passenger travel time, and road maintenance expenditures. 2. The proposed rehabilitation would improve ride quality leading to lower operating costs for road users, guarantee structural soundness of the road for a prolonged period and prevent collapse, leading to lower life-cycle cost for the road asset. 3. The project scenario consists of: - The execution of routine maintenance on a yearly basis, starting in 2007, for all road section; and - The execution of rehabilitation works chosen depending on road condition and level of traffic, starting in Without the project, the do-minimum scenario is considered. This scenario is the deferred rehabilitation alternative which corresponds to executing the routine maintenance on a yearly basis starting in 2007, but delaying the execution of rehabilitation works envisaged in the project scenario by five years, i.e. in 2013 instead of The do-minimum scenario is essentially similar to the project scenario. The main difference lies in the fact that the rehabilitation can only start in 2013 or later. The rational is that in the absence of the proposed project, adequate funds will not be available for the NRIF until later in the future to carry rehabilitation activities beyond the minimum yearly routine maintenance requirements. 5. This project covers some 450 kilometers of national roads. The results of this CBA show positive Net Present Values (NPV) at a discount rate of 12 percent for all road sections under the project, with a total NPV of EUR 24 million in 2005 Euros. The same HDM-4 analysis shows that the proposed rehabilitation works will result in a decrease in Vehicle Operating Costs (VOC) on the road sections to be rehabilitated by 10 percent on average, and in a decrease in Road User Costs (RUC) by 8.2 percent. 1. Assumptions and inputs Road sections, traffic composition, and structural and pavement condition 6. The priority program under the project covers some 450 kilometers of class I, 11, and 111 national roads in different regions of Bulgaria. The traffic ranges from 500 Average Annual Daily Traffic (AADT) for low traffic roads to about 8,500 AADT for high traffic ones, with a (length) weighted average of 1,979 AADT (Table A9.2). The traffic composition varies across the regions and for different road classes. The average AADT and traffic composition is based on 2005 data collected by the Central Roads and Bridges Laboratory (CRBL) in Bulgaria. An annual 4 percent increase in traffic has been assumed for all vehicle types in this analysis. The condition and structure data for sections in the priority program under the project are also based on data collected by the CRBL. 56

65 Maintenance activities 7. For the purpose of the cost-benefit analysis, the maintenance activities recommended for the road sections in the project scenario are: The execution of routine maintenance on a yearly basis, starting in Depending on road condition and level of traffic, rehabilitation with construction of a 60 mm or 40 mm Asphalt Concrete (AC) overlay; or reconstruction for roads in bad condition. Maintenance and rehabilitation unit costs 8. The maintenance and rehabilitation unit costs are based on recent contracts in Bulgaria. Average work unit costs were calculated for the different types of maintenance and rehabilitation treatment works adopted in this study and are summarized in Table A9.1, 2. Cost benefit analysis results 9. Table A9.3 shows the result of the cost benefit analysis. The NPV at 12 percent from the project scenario relative to the do-minimum scenario is EUR 24 million. The economic internal rate of return (EIRR) varies between 13.1 percent and percent. All individual sections result in a positive NPV and an EIRR higher than 12 percent under the project scenario, suggesting that the proposed rehabilitation scenario will yield benefits to all the project s sections and that the selection of these sections for rehabilitation was appropriate. 10. The same HDM-4 analysis used for the cost benefit analysis provides an estimate of the change in vehicle operating costs and road user costs due to the implementation of the project. The analysis was performed with the traffic, maintenance activities, and cost assumptions discussed above. The results show that the implementation of the project scenario will result in a decrease in Vehicle Operating Costs (VOC) per vehicle-kilometer by the end of the project period. In addition, VOC is reduced for all the sections identified in this project confirming the proper selection of these sections for rehabilitation. The reduction in VOC varies depending on the road section. The implementation of the Project leads to a reduction of about 10 percent in the average VOC. The VOC per vehicle-kilometer (averaged for all the sections and for all vehicle types) in 2005 EUR before and after the Project is EUR and EUR respectively. Road User Cost (RUC), which includes VOC and travel time, is also reduced on average by some 8.2 percent. The average RUC on these road sections and for various vehicle types is estimated at EUR and EUR before and after the project respectively. 57

66 ~ Lot ~ Section ~ length Table A9.2: Project sections and Traffic composition I Road 1 Site and sections Total Average I AADT I Lot 1 Northwestern region Lot 1 Total Lot 2North- western and Central north I Vratsa - Oriahovo (km O+OOO - km 2+895) , Vratsa - Oriahovo (km O+OOO - km 2+895) , Guliantsi - Milkovitsa (km km ) ,261 1 Burgas - Marinka - Zvezdetz - Malko Tarnovo - border 58

67 ~~ Table A9.3: Project scenario to do-minimum scenario summary of economic indicators NPV of benefits EIRR Section (million 2005 EUR) (%I _ ?h Total

68 Annex 10: Safeguard Policy Issues BULGARIA: ROAD INFRASTRUCTURE REHABILITATION PROJECT Environmental Aspects 1. The proposed project will support Bulgaria in rehabilitating its road network and in modernizing the existing road data and management systems. The project will also strengthen the institutional capacity of NRIF to manage the national roads and to efficiently use future EU Cohesion funds. Infrastructure investments proposed under the project include rehabilitation works of existing Class I, 11, and I11 roads and are not expected to have any major negative environmental impact. They may however involve minor environmental effects during the construction stage. Works under the project will not require land acquisition. In accordance with the World Bank s safeguard policies and procedures, including OP/BP/GP 4.01 Environmental Assessment, the project has been classified as a Category B for environmental assessment purposes. The project does not trigger World Bank Safeguard Policies related to Involuntary Resettlement, Natural Habitats, Pest Management, Indigenous People, Forests, Cultural Property, Safety of Dams, Projects in Disputed Areas or projects on International Waterways. 2. In order to address the potential adverse impacts related to investments proposed under the project, the Borrower, through NRIF, has prepared an Environmental Management Plan (EMP). The EMP describes the principle, objective and approach to be followed to minimize and mitigate the adverse environmental and social impacts of the various activities of the project. Rehabilitation works of existing road infrastructure generally do not generate significant impacts on the environment as the works are usually conducted within the existing road boundaries and could be managed through proper supervision of environmental aspects and use of adequate technical construction standards. Under Bulgarian regulation and EU directives, such types of works are not subject to mandatory environmental impact assessment. The EMP has been disclosed in NRIF s Headquarters in Sofia in Bulgarian language on December 5, 2006 and at the Bank s Infoshop in Washington D.C. on December 20,2006. Environmental Management Plan (EMP) 3. The sustainability of the environmental aspects of the proposed investments will be achieved through implementation of environmental management plans (EMPs) related to each proposed road rehabilitation section that include a set of specific environmental mitigation and monitoring requirements to be taken by the contractor during implementation. This set of requirements meant to eliminate adverse environmental and social impacts will be included in the Technical Specifications of works contracts. 4. The EMP describes necessary steps to mitigate negative impacts including measures during pre-construction and construction to: a) mitigate risks of erosion and sedimentation around watercourses; b) restrict water and soil contamination on work sites and around work camps (including littering and waste disposal); c) restrict generation of dust during construction; d) reduce risk of fire, cutting of trees for firewood, and trapping by construction workers; e) implement road safety awareness programs for construction workers, f) minimize risk of traffic crashes and ensure occupational safety of workers on construction sites, and g) prevent disruption of traffic during the rehabilitation works. Implementation of standard impact 60

69 prevention or mitigation measures through adopting normal engineering practices will ensure that: (i) adequate temporary and permanent drainage is constructed; (ii) the faces of embankments and waste materials piles become stabilized and planted to prevent erosion; (iii) borrow pits are stabilized or finished to become wide drainage ditches; (iv) tree planting and landscaping enhance the roads. In terms of supplementary measures it should be noted that detailed design will require that crossing points of wildlife and cattle if applicable will be signed as deemed appropriate to reduce traffic crash risk, while facilities such as shops, parking garages will also have necessary signals to slow traffic and mitigate risks. Also, in case of finding any rare/endangered animal species during the construction activities, the EMP prompts the contractor to inform the wildlife authorities. 5. The NRIF will implement the project, and will maintain files including copies of all contracts and environmental permits. The NRIF has an already established environmental unit. The NRIF will designate a liaison officer for environmental protection and mitigation for the project and compliance with EMP requirements. 6. The Contractor s team will have a specialist in charge of environmental aspects during the construction phase that will follow the requirements of the current Bulgarian Territorial Structure Act and the related regulations as well as those activities stipulated in the EMP and incorporated in the contract. 7. The Supervision Engineer on the site will assist NRIF in monitoring the environmental aspects of the project during implementation. The Supervision Engineer will make sure the contractors understand their responsibilities in meeting the mitigation plans included in the contract. The Supervision Engineer will play a major role in monitoring. He will be responsible for: (i) providing to the NRIF a monthly monitoring report of the implementation of the EMP till the completion of the work; and (ii) taking timely measures in case of non-compliance of suggested EMP measures including indication of any variances from the EMP, any chance finds, and specific mitigation actions that have been taken or need to be taken. In the case of chance finds the contractor must immediately stop work in the contested location (until resolution has been obtained) and notify the project manager who would immediately notify the NRIF. The NRIF would further notify the appropriate Government or local authority within 24 hours. The appropriate Government body notified would undertake necessary actions to record the findings and determine mitigation requirements within seven working days. 8. Monitoring will focus on measuring compliance with pollution standards and requirement of related permits (wastewater discharges, construction-waste related disposal, air quality, noise level, required construction and water permits, etc.) while mitigation measures will include actions to prevent environmental hazards such as health and safety for the construction workers and the public; noise disturbance; restrictions to access; dust - leading to adverse air quality; adequate noise levels, soil and/or water pollution from equipment, excavation of materials and disposal of surplus soil/earth and other materials, degradation of historical and cultural sites, etc. Special attention will be paid during construction works to chance finds of objects of archaeological or cultural value. 9. Environmental supervision and monitoring will be integrated into the project reporting system. Relevant Government authorities will be involved in auditing project performance and will receive copies of monitoring reports. There are no significant environmental risks or projected negative social impacts which will not be accounted for through implementation of the 61