Multitranche Financing Facility Georgia: Sustainable Urban Transport Investment Program Tranche 3

Transcription

1 J Periodic Financing Request Report Project Number: November 2013 Multitranche Financing Facility Georgia: Sustainable Urban Transport Investment Program Tranche 3

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3 CURRENCY EQUIVALENTS (as of 29 October 2013) Currency Unit lari (GEL) GEL1.00 = $ $1.00 = GEL ABBREVIATIONS ADB GAP Asian Development Bank gender action plan IEE km initial environmental examination kilometer MDF Municipal Development Fund of Georgia MFF multitranche financing facility MRDI Ministry of Regional Development and Infrastructure PFR periodic financing request NOTES (i) In this report, "$" refers to US dollars. Vice-President-in- Charge Director General Director Team leader Team members B. Lohani, Operations 1 K. Gerhaeusser, Central and West Asia Department (CWRD) A. Chiplunkar, Urban Development and Water Division, CWRD B. Goalou, Urban Development Specialist (Transport), CWRD R. Butler, Senior Social Development Specialist (Safeguards), CWRD S. Campbell, Senior Social Development Specialist (Gender and Development), CWRD I. Chkonia, Senior Project Officer, CWRD J. Javier, Operations Assistant, CWRD D. Margonsztern, Urban Development Specialist (Transport), CWRD T. Papuashvili, Senior Project Assistant, CWRD C. Png, Senior Counsel, Office of the General Counsel C. Soliman, Associate Operations Officer, CWRD T. Tran, Senior Environment Specialist, CWRD

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5 TRANCHE AT A GLANCE CONTENTS Page I. BACKGROUND 1 II. ASSESSMENT OF MFF IMPLEMENTATION 1 A. Sector Policy, Strategy, and Road Map 1 B. Impact, Outcome, and Outputs 3 C. Assessment of Investment Program Implementation 3 III. PROPOSED PERIODIC FINANCING REQUEST 5 A. Impact and Outcome 5 B. Outputs 5 C. Investment and Financing Plans 6 D. Implementation Arrangements 6 E. Project Readiness 7 F. Advance Contracting and Retroactive Financing 7 IV. DUE DILIGENCE 7 A. Technical 7 B. Economic and Financial 8 C. Governance 8 D. Poverty, Social and Gender Dimensions 8 E. Safeguards 9 F. Risks and Mitigating Measures 10 G. Risk Categorization 10 V. ASSURANCES AND CONDITIONS 10 VI. RECOMMENDATION 10 APPENDIXES 1. PFR from the Government 2. Design and Monitoring Framework for Tranche 3 3. Project Administration Manual Detailed Cost Estimates Procurement Plan Gender Action Plan 4. Summary Poverty Reduction and Social Strategy 5. Economic Assessment for Tranche 3 6. Financial Assessment for Tranche 3 7. Contribution to the ADB Results Framework 8. Initial Environmental Examinations 9. Resettlement Plans SUPPLEMENTARY APPENDIX 1. Draft Loan and Project Agreements

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7 TRANCHE AT A GLANCE 1. Project Name: Sustainable Urban Transport Investment Program 2. Project Number: Tranche 3 3. Country: Georgia 4. Department/Division: Central and West Asia Department/ Urban Development and Water Division 5. Sector Classification: Sectors Primary Subsectors Health and social protection Social protection 6. Thematic Classification: 6a. Climate Change Impact 7. Targeting Classification: General Intervention No climate change indicator available. Geographic dimensions of inclusive growth 9. Project Risk Categorization: Complex Public sector management Economic and public affairs management Transport, and information and Urban transport communication technology Themes Primary Subthemes Economic growth Promoting economic efficiency and enabling business environment Environmental sustainability Urban environmental improvement Targeted Intervention Millennium development goals Income poverty at household level 6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender elements (SGE) No gender elements (NGE) 8. Location Impact: Urban High 10. Safeguards Categorization: Environment B Involuntary resettlement A Indigenous peoples C 11. ADB Financing: Amount Sovereign/Nonsovereign Modality Source ($ Million) Sovereign MFF-Tranche Ordinary capital resources 73.0 (Loan) Total Cofinancing: No Cofinancing available. 13. Counterpart Financing: 14. Aid Effectiveness: Source Amount ($ Million) Government 45.2 Total 45.2 Parallel project implementation unit Program-based approach No Yes

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9 I. BACKGROUND 1. A framework financing agreement (FFA) for the multitranche financing facility (the facility or MFF) MFF 0043 Georgia: Sustainable Urban Transport Investment Program (the Investment Program) was signed between the Government of Georgia and the Asian Development Bank (ADB) on 21 June Subsequently, on 19 July 2010, ADB's Board of Directors approved the facility for financing the Investment Program in an amount not exceeding $300 million. The Investment Program s executing agency is the Municipal Development Fund of Georgia (MDF). 1 It aims to improve the urban transport systems in urban areas in Tbilisi and other cities in Georgia. 2. Project 3 will improve the urban transport system and infrastructure in urban areas and comprises two subprojects: (i) section 2 (km ) of the international standard Tbilisi- Rustavi Urban Road Link; and (ii) phase 2 of Anaklia Coastal Improvement; both of which are in line with components of the Investment Program. 2 The government, through the Ministry of Finance, has submitted on 5 September 2013 the periodic financing request (PFR) for Tranche 3, requesting a loan of $73 million from ADB's ordinary capital resources. These investments will improve the urban environment, strengthen economic and tourism development, and regional integration. II. ASSESSMENT OF MFF IMPLEMENTATION A. Sector Policy, Strategy, and Road Map 3. The government envisions the cities as engine of economic growth and job creation. The government emphasizes city cluster development and the delivery of quality infrastructure and urban services. These are considered essential to increase quality of life, attract investment, and increase productivity and competitiveness. The strategic vision is shared by all municipalities. In this regard, the government has been working out an urban and regional renewal strategy and has been supporting the business plan to attract private investments. 4. In line with the sector roadmap prepared for the MFF, these operational plans are now detailed in all regions and cities with the support of the international community. Urban transport, with the other urban services, constitutes the core of this strategy. The policy reform framework outlined in 2010 is still valid and is being implemented and rolled out. It promotes competition, private sector involvement, efficiency, fairness, transparency, environmental sustainability, value for money with regard to capital investment, maintenance, and sound service provision. With regard to urban infrastructure, the sector roadmap priorities approved on 21 June 2010 are to: (i) complete and upgrade the road network; (ii) develop public transport and non-motorized transport to reduce pollution, noise, and traffic crashes; and (iii) improve living conditions. These strategic objectives are fully consistent with the Interim Operational Strategy of Georgia, 3 in line with the country partnership strategy currently under preparation (scheduled to be approved in 2014), and with ADB s sustainable transport objectives. 4 1 Established in 1997 for a World Bank project, MDF channels development partners funding for municipal projects and has implemented more than 930 projects. International financial institutions include: United States Agency for International Development, World Bank, Asian Development Bank, Kreditanstalt für Wiederaufbau, European Bank for Reconstruction and Development, or European Investment Bank, among others. 2 Both subprojects have complied with selection criteria and approval procedures set in schedule 4 of the Financing Framework Agreement. Tbilisi-Rustavi Urban Road Link (section 1, km 0-4, and section 3, km ) and Anaklia Coastal Improvement (phase 1) projects are financed under Tranches 1 and 2 of the Investment Program. 3 ADB Georgia: Interim Operational Strategy, Manila. 4 ADB Sustainable Transport Initiative Operational Plan. Manila.

10 2 5. As part of the MFF, the government is requesting ADB for a third tranche to help it address the urban transport problem within the framework of the urban renewal strategy. The policy reform framework has been actively implemented in Tbilisi under Tranche The long-term urban transport investment plan ( ) prepared in 2010 draws from the government priorities and is estimated at approximately $1.4 billion, comprising physical and nonphysical investments to address medium-term ( ) and long-term ( ) needs. 7. For 3 years, the Ministry of Regional Development and Infrastructure (MRDI), MDF, and Tbilisi Municipality have been implementing a large number of projects which were listed in the investment plan of the sector roadmap. Achievements include: (i) (ii) (iii) Urban infrastructure rehabilitation, modernization and expansion. The government and the municipal governments have invested and mobilized a lot of funding to improve the urban infrastructure particularly in Tbilisi, Batumi, Anaklia, Mestia, and other cities in the Kakheti region. ADB, World Bank, and Kreditanstalt für Wiederaufbau have been the main financiers for the urban sector. In Tbilisi, the city municipal government constructed a new road link to bypass Vake district and a new 2x2 lane tunnel to link Vake and Vacha-Pavela districts relieving two road bottlenecks. Several other projects promoting nonmotorized transport have been implemented: (i) pedestrian footbridge over the Mtkvari Bridge; (ii) creation of the landscaped park on the left bank near the Metekhi cliff; (iii) upgrade of a ropeway system to connect the old city and the upper part of Tbilisi; and (iv) renovation, facelift, and beautification of all major commercial avenues in Tbilisi and Batumi. Bus shelter replacement and introduction of real time passenger information system enhances the attractiveness of public transport in Tbilisi. Improved institutional framework and increased private sector involvement. As planned in the policy reform framework, Tbilisi City successfully outsourced the management of the city parking to an Israeli company. The city entered into an agreement with the Ministry of Interior and the Traffic Police to set up an integrated traffic control and management center coordinating traffic signals. These investments listed as eligible expenses under the MFF were eventually directly funded by the municipality and ADB essentially provided policy advice. Similarly, Tbilisi also restructured the bus network and reformed the microbus network with introduction of new and high-capacity vehicles and innovative financial incentives for the drivers. Improved governance and management capacity. Capacity of MDF and Tbilisi Municipality to prepare and appraise project feasibility, engineering design, environmental and social safeguards, has significantly improved through ADB training and on-the-job activities. Since 2005, the MDF s objective is to identify, assess, prepare, finance, and implement projects with and on behalf of local selfgovernments. In 2010, MDF moved under the authority of MRDI and strengthened its organization with monitoring and safeguards divisions to comply with the development partners recommendation. 8. A key development partner in the urban transport sector is the World Bank, which approved a $60 million loan in April 2012 to sustain urban, economic, and tourism development in the Kakheti Region with rehabilitation of touristic and community infrastructure particularly in

11 Telavi and Kvareli. The purpose is to concentrate investments in few cities but in a comprehensive and integrated way. The European Investment Bank approved a $170 million loan for a new 70-kilometer (km) section of the East-West highway E60 corridor near Kutaisi. The French Development Agency is looking at improving connections of the inter-city public transport services. Additionally, the United States Agency for International Development is also contributing to develop local management capacity, stimulate private investment, and help structure the tourism industry. B. Impact, Outcome, and Outputs 9. The expected impact of the Investment Program is improved urban environment, local economy, and living conditions within urban areas. This will expand economic growth, job opportunities, and environmental sustainability. The expected outcome is improved efficiency, reliability, and affordability of urban transport infrastructure and services. The outputs of the Investment Program include: (i) road and bridge construction and urban habitat and waterfront improvement; (ii) public transport network and infrastructure rehabilitation and extension; and (iii) multimodal facilities including parking and traffic management. C. Assessment of Investment Program Implementation 1. Component A: Urban Transport Infrastructure 10. Project 1 focuses on the extension, rehabilitation, and improvement of urban transport infrastructure in Anaklia, Mestia, and Tbilisi. 5 It comprises (i) the upgrading of 20 km of the Mestia urban area road network to allow year-round accessibility to this United Nations Educational, Scientific and Cultural Organization (UNESCO) heritage site, (ii) the completion of a 1.5-km Tbilisi metro extension to the university district serving 150,000 inhabitants, and (iii) a 2.0-km coastal improvement project in Anaklia to limit erosion and open up the city for tourism development. Under Project 1, MDF commissioned in December 2011 the $20 million Mestia Road Improvement subproject in Svaneti region at a cost below engineer's estimate, yielding approximately $1 million of loan savings. The civil works of $9.4 million equivalent Anaklia Coastal Improvement (phase 1) started in July The detailed engineering design of Tbilisi Metro extension is being finalized and civil works contract (estimated $45 million) is expected to be awarded in Q The works for the Anaklia Coastal Improvement Project should be completed in 2014 and the metro extension is expected to be completed in During the first 30 months of implementation, the project experienced changes in terms of subprojects and implementation schedule. Two subprojects, Kutaisi non-motorized transport and Gorgasali tunnel construction and urban redevelopment, have been removed from the scope of Tranche 1. 6 Anaklia Coastal Improvement subproject (phase 1), initially planned in Tranche 2, has been front-loaded as detailed design and bidding documents were already finalized. Consequently, Tranche 1 outputs and contract awards and disbursement have been updated after approval in May 2013 of the change in project and extension of loan closing date. Based on the revised projections of Tranche 1, as of 15 November 2013, $36.55 million (45.1%) worth of contracts have been awarded. Disbursement amounts to $26.16 million (29.3%). One civil works contract has been awarded on 12 June 2013 for an amount of $9.4 million. 3 5 Tranche 1 (Loan 2655) is a loan of $85 million equivalent from ADB's Special Funds resources which was signed on 5 August 2010, and declared effective on 29 September Kutaisi non-motorized transport project was removed to avoid any overlap with the implementation of the Kutaisi water supply and sanitation network improvement also financed by ADB (Loan 2749). Gorgasali project prepared in 2008 lost its rationale with the road and urban projects recently implemented on the other river bank (completion of road tunnel, and recreational park with a pedestrian footbridge and a renovated ropeway linking the old Citadel).

12 4 Tranche 1 is rated on track. The project has achieved a physical progress of 35% against an elapsed period of 37%. 12. Project 2 focuses on the extension, rehabilitation, and improvement of urban transport infrastructure in Tbilisi and Rustavi. 7 It comprises the Tbilisi-Rustavi Urban Road Link (sections 1 and 3) subproject. ADB gave no objection to contract awards in September In October 2012, the land acquisition and resettlement plan (LARP) implementation compliance report was endorsed by ADB. Following a parliamentary election held in Georgia on 1 October 2012, a new government was elected and the supervisory board of MDF was also changed. The project has been reviewed by the new government, and the subproject was slightly adjusted in order to further mitigate social impacts during the construction. ADB s Procurement Committee approved the rebidding of the subproject in May 2013 and contract award is expected in Q As for Tranche 2, two imprest accounts were opened in September 2012 and two withdrawal applications corresponding to 10% of the loan values ($6.4 million and $1.6 million equivalent) were processed subsequently. No contract has been awarded yet. The new government and the supervisory board undertook an evaluation of all subprojects of the Investment Program and requested changes in the project. A major change in scope of Project 2 and reallocation of loan proceeds were approved by ADB on 17 May ADB financing originally envisaged for the then cancelled items were respectively $13.3 million for physical investment and $1.8 million for consulting services, and the portion of the tranche amount has been cancelled accordingly. There are no other outstanding issues and the implementation will pick up pace in early 2014 when the contractors are in place. Project 2 is currently on track. 2. Component B: Institutional Effectiveness 13. The policy reform framework comprised institutional strengthening which includes the reorganization and reforms at the Tbilisi Municipality, other municipalities, and urban transport service providers. Under Project 1, workshops and seminars were organized to raise public awareness on urban transport, and attract possible private investors and other cofinanciers. In particular, the sector roadmap prepared for the Investment Program enabled Tbilisi to benefit subsequently from a grant from the Government of France. This grant financed three key activities originally scoped under Project 1 institutional component which have been successfully completed: (i) a transport household survey; (ii) the establishment of an urban planning transport unit at the Tbilisi Municipality; and (iii) a feasibility study for a light rail system. Under Project 2, a laboratory for bridges, roads, and tunnels will be established in the Technical University of Georgia. 3. Component C: Program Management Facility 14. This included detailed engineering design, construction supervision, and preparation of projects to be financed under subsequent tranches, thereby ensuring project readiness before approval. This component will run through the period of Project 1 and overlap with subsequent projects. As of today, MDF recruited six engineering, procurement, and construction management (EPCM) consultants for Tranche 1 and Tranche 2 subprojects. Detailed design and bidding documents have been prepared for Anaklia Coastal Improvement (phases 1 and 2) and Tbilisi-Rustavi Urban Road Link (sections 1 and 3). Detailed design and bidding documents for the metro extension and Tbilisi-Rustavi Urban Road Link (section 2) are being finalized, and should be completed in Q Appointment of these consultants has strengthened the 7 Tranche 2 (Loans 2879 and 2880) comprises a loan from ADB s ordinary capital resources amounting to $48.9 million (Loan 2879) and a loan from ADB s Special Funds resources amounting to $16 million equivalent (Loan 2880). Tranche 2 was approved on 24 July Both loan agreements were signed on 24 July 2012, and declared effective on 20 August 2012.

13 capacity of MDF and Tbilisi City to prepare and appraise project design and environmental and social safeguards. Individual international consultants have been recruited by MDF to provide specific technical expertise particularly on metro, road, coastal improvement, and safeguards. 4. Compliance 15. It has been confirmed that all undertakings in the framework financing agreement and the covenants in the loan and project agreements that were due at the time of processing the third tranche of the facility have been complied with, and no specific measures are needed. 5 III. PROPOSED PERIODIC FINANCING REQUEST A. Impact and Outcome 16. Project 3 of the Investment Program is expected to improve urban environment, local economy, and better living conditions within urban areas. The expected outcome of Project 3 is improved efficiency, reliability, and affordability of urban transport infrastructure and services in relevant cities. B. Outputs 1. Component 1: Infrastructure Improvement 17. The first component will support the construction of two strategic urban infrastructures: (i) a 6.8-km four-lane urban link between the cities of Tbilisi and Rustavi, including a 2-km urban boulevard, creation of recreational areas, and improved pedestrian facilities, and (ii) the construction of a 1.2-km coastal protection structure in Anaklia. These subprojects will benefit 1.45 million inhabitants of Tbilisi, Rustavi, and Anaklia, including 145,000 persons directly covered in subproject areas. These two subprojects are second phases of subprojects already financed under the Investment Program. 8 As the urban road link is part of the Transport Corridor Europe Caucasia Asia (TRACECA), this will also improve connectivity with neighboring countries and help Georgia reduce congestion and improve road safety in line with ADB s Sustainable Transport Initiative (STI) Operational Plan Component 2: Institutional Effectiveness 18. Project 3 will also strengthen the institutional and monitoring management capacity of MDF, Tbilisi Municipality, and other municipalities. This will be undertaken through funding from Project 1 and Project 2, and will benefit from a parallel capacity development technical assistance financed through a Spanish Grant, already approved and expanded to cover urban transport at the government s request. 10 This includes modeling tools and geographic information system to be implemented in nine secondary cities including Mtskheta, Rustavi, Anaklia, Mestia, and Gori. 3. Component 3: Project Implementation Support 19. Detailed engineering and construction supervision firms were recruited under Project 1 to oversee the construction of Tbilisi-Rustavi urban road link and Anaklia coastal improvement. 8 Including Project 3, the total lengths of urban link (Tbilisi-Rustavi) and of coastal protection (Anaklia) infrastructures constructed under the Investment Program will be 17.4 km and 3.2 km, respectively. 9 ADB Sustainable Transport Initiative Operational Plan. Manila. 10 ADB Technical Assistance to Georgia for Developing a Geospatial Urban Water Supply and Sanitation Utility Management System. Manila. The technical assistance was increased from $800,000 to $1,400,000 in 2012 to cover urban transport.

14 6 Individual consultants have been recruited under Project 1 to strengthen MDF s technical expertise and management capacity, and safeguards unit needed for Tranche 3 subprojects. C. Investment and Financing Plans 20. Project 3 is estimated at $ million, inclusive of taxes and duties, land acquisition and resettlement costs, and interest and other charges on the loan during construction. The PFR is requesting a loan of $73.00 million from ADB's ordinary capital resources. The ADB loan will finance civil works, consulting services, and interest and other charges on the loan during construction. Government financing will cover taxes, duties, land acquisition and resettlement costs, and provision for recurrent costs for maintenance. The detailed cost estimates and financing plan are provided in Table 1. Table 1: Tranche Investment Plan ($ million) Item Amount a A. Base Cost b 1. Component 1 Infrastructure Improvement Component 2 Institutional Effectiveness c Component 3 Project Implementation Support 1.10 Subtotal (A) B. Contingencies d C. Financing Charges During Implementation e 2.38 Total (A+B+C) a b c d e Includes taxes and duties of $17.67 million to be financed from government resources. In mid-2013 prices. Funded from Tranche 1 and Tranche 2, and from a parallel capacity development technical assistance financed through a Spanish Grant, as described in para. 20. Physical contingencies computed at 10% for civil works and 10% consulting services. Price contingencies computed at 2% on foreign exchange costs and 4% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. Includes interest and commitment charges. Interest during construction for ADB loan(s) has been computed at the 5-year forward London interbank offered rate (LIBOR) plus a spread of 0.4% and applicable maturity premium of 20 basis points. Commitment charges for an ADB loan are 0.15% per year to be charged on the undisbursed loan amount. Sources: Asian Development Bank and Municipal Development Fund of Georgia estimates. 21. The government has requested a loan of $73 million from ADB s ordinary capital resources to help finance Project 3. The loan will have a 30-year term, including a grace period of 7 years, an annual interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year (the interest and other charges during construction to be capitalized in the loan), and such other terms and conditions to be set forth in the draft loan and project agreements. The government has requested that repayment will follow straight line method. Based on this, the average loan maturity is years and the maturity premium payable to ADB is 0.20% per annum. The financing plan is in Table 2. Table 2: Financing Plan Source Amount ($ million) Share of Total (%) Asian Development Bank Government TOTAL Sources: Asian Development Bank and Municipal Development Fund of Georgia estimates. D. Implementation Arrangements 22. The executing agency will be the MDF. The supervisory board of MDF (chaired by the Prime Minister) includes representatives from the Ministry of Finance (MOF), MRDI, and

15 Ministry of Economic Development (MoED). Other ministries and municipalities are invited to attend as appropriate. The board is providing guidance, reviewing the Investment Program, and performance. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM). Table 3: Implementation Arrangements Aspects Arrangements Implementation period February 2014 June 2018 Estimated completion date 30 June 2018 Management (i) Oversight body MDF Supervisory Board/Ministry of Regional Development and Infrastructure (ii) Executing agency MDF (iii) Implementation unit Technical Division of Investment and Loan Department in the MDF comprising of 12 full-time staff and four consultants Procurement a International competitive bidding (ICB) 2 civil works contracts $73.3 million Consulting services a Financial audit 1 lump sum contract (QCBS) safeguards monitoring Individuals $1.1 million Advance contracting Not applicable. Disbursement The loan proceeds will be disbursed in accordance with the Asian Development Bank's (ADB s) Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. MDF = Municipal Development Fund of Georgia, QCBS = quality- and cost-based selection. a All amounts are inclusive of taxes and duties. Sources: Asian Development Bank and MDF estimates. E. Project Readiness 23. The subprojects in this loan have been prepared under Project 1 by the executing agency. Detailed engineering designs, drawings, and bidding documents for Tbilisi-Rustavi Urban Road Link (section 2) and Anaklia Coastal Improvement (phase 2) are being finalized. 24. Tbilisi-Rustavi Urban Road Link (section 2) subproject entails land acquisition and resettlement impacts and Project 3 has an overall categorization as A. The draft LARP has been prepared, endorsed by the government and ADB, and disclosed on 30 August Initial environmental examinations (IEEs) have been conducted for the two subprojects which are categorized as B. The two IEEs have been endorsed by the government and ADB, and disclosed on 27 August and 4 September The indigenous peoples' impact classification for all subprojects is C. F. Advance Contracting and Retroactive Financing 25. The government s PFR does not request either advance contracting or retroactive financing. 7 A. Technical IV. DUE DILIGENCE 26. The government identified the two subprojects as critical for the proper functioning of the road network in the metropolitan area of Tbilisi and in Anaklia. The design proposed for the two subprojects are standard and does not require any sophisticated technology. The 6.8-km Tbilisi- Rustavi Urban Road Link (section 2) is designed according to the Georgian standards and is compliant with the standards developed for the TRACECA network. In addition, a 2-km urban boulevard and associated recreational areas have been introduced and designed in line with international best practices for design of urban roads and road safety. An independent road

16 8 consultant has been recruited to carry out a review of the design, bill of quantities and bidding documents, and to provide recommendations to optimize design and cost during construction. The second phase of the Anaklia Coastal Improvement subproject adopts similar technology and technical specifications as the ones used for the first phase. B. Economic and Financial 27. For Tbilisi-Rustavi Urban Road Link, major economic benefits are savings in travel time and vehicle operating costs. Non-quantified benefits such as reduction in traffic crashes and economic development have also been confirmed. The economic viability of the road project is higher than the opportunity cost of capital estimated at 12%, with an economic internal rate of return (EIRR) of 12.4% and a net present value (NPV) of $3.4 million. For Anaklia Coastal Improvement, major economic benefits are increased tourism and prevention of land loss. The subproject is economically viable is good with an EIRR of 18.8% and a NPV of $126 million. Both subprojects remain economically viable with adverse changes in key variables. The government will be responsible to repay the loan. As both subprojects do not generate revenue, the financial sustainability assessment consisted of ensuring that the government provides adequate resources for the maintenance of the project. The government has assured that it will provide maintenance for the first 20 years after construction from its budget. 11 C. Governance 28. Both the financial management systems and the procurement capacity at MDF are considered sound and reliable which are also confirmed by the other development partners working with MDF. The financial management and procurement management assessments of MDF have been updated. Procurement trainings on international and national competitive bidding were carried out in 2011 including a presentation of the ADB s Anticorruption Policy. The specific policy requirements and supplementary measures on governance are described in the PAM. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and MDF. The specific policy requirements and supplementary measures are described in the PAM. D. Poverty, Social and Gender Dimensions 29. Project 3 will benefit 1.45 million urban residents essentially located in the metropolitan area of Tbilisi and in Anaklia. It will stimulate economic development and improve urban environment of participating municipalities. The potential beneficiaries are local residents, commuters, and road and public transport users. Businesses will benefit from improved mobility of people and connectivity. The poor and socially excluded will benefit from (i) better access to the city and other activity centers, (ii) employment opportunities from road construction and maintenance, and (iii) development of business activities after project completion. Employment targets for local unskilled workers, women, and vulnerable groups and core labor standards have been included in the poverty reduction and social strategy and gender action plan (GAP) and they will be monitored. 30. Health hazards from car pollution and traffic crashes will be reduced. Reductions in congestion, noise, and gas emissions will benefit health and quality of life. Shorter travel times and better transport services will improve lives especially women, the elderly, and children as they will have better access to social services such as schools, universities, and hospitals. 11 Schedule 6 of the Framework Financing Agreement stipulates that government allocates adequate funds to sustainably maintain the infrastructure throughout its service life.

17 Awareness training on HIV/AIDS and sexually transmitted diseases will be included in all civil works bidding documents and will be monitored during implementation. 31. Tranche 3 is categorized as some gender elements (SGE). In line with the GAP prepared under Tranches 1 and 2, gender-specific actions have been listed in a new GAP. Gender inclusive measures include gender targets for recruitment, capacity development activities, and consultation participation. More statistics will be disaggregated by sex. E. Safeguards 32. Environment. Tranche 3 is categorized as B 12 for environment. Due diligence for environment has been carried out for subprojects. The environmental impacts for the Tbilisi- Rustavi Urban Road Link (section 2) will be largely associated with the construction phase of the project as well as the increase in traffic volume during the operation phase. Special health and safety measures will need to be taken in sections that pass through residential areas. Design optimization has also been performed and addresses in particular: (i) minimization of volume of earthwork for land filling and foundation preparation, (ii) management of borrow pits and quarries, (iii) construction of retaining walls and modeling of associated changes of water flows, as the road partly goes along the Mtkvari river, and (iv) vibration and noise reduction for the residential building and houses located on the edge of the road s Right-of-Way. The IEE prepared for Anaklia Coastal Improvement (phase 2) was prepared in line with the IEE of the phase 1 of the subproject (financed under Project 1), as the context, environmental impacts and mitigation measures are similar, with particular focus on water and sand quality. 33. Involuntary resettlement. The tranche is categorized as A for resettlement, due to the anticipated impacts associated with Tbilisi-Rustavi Urban Road Link subproject (section 2). The Anaklia Coastal Improvement (phase 2) subproject will not have resettlement impacts as documented in the due diligence report. During project preparation, substantial design improvements were made so as to reduce the likely impact of the road section on affected households and businesses. Where the road runs adjacent to existing apartment buildings, the proposed motorway was replaced by an urban boulevard including landscaped verges on either side which will provide a well-integrated relationship with the adjoining residential area. Lower speed limits in this area will also reduce potential noise, vibration, and other potential impacts on the adjoining and nearby properties. Based on this adjusted concept design, the project would impact a total of 312 land plots, 692 structures (82 residential structures, 90 industrial and commercial structures, and 520 minor structures). A total of 282 households and 33 businesses will be affected by land acquisition and resettlement. A draft LARP has been prepared in accordance with the requirements of the land acquisition and resettlement framework approved in 2010 and the ADB Safeguard Policy Statement (2009), and it addresses all anticipated impacts including those of employees of the businesses, informal land users/dwellings, formal (registered) users and public lands. Consultation meetings have been organized in July Design optimization to minimize impacts is continuing and the draft LARP will be updated during implementation based on the final design. MDF implemented in 2012 the LARP of Tbilisi- Rustavi Urban Road Link subproject (sections 1 and 3). In 2013, MDF recruited an individual social safeguards consultant (financed from Project 1), who supports MDF safeguards unit during the preparation and implementation of the LARP and builds capacity Initial environmental examinations have been prepared in accordance with the requirements of the environmental assessment review framework.

18 Indigenous peoples. The indigenous peoples' impact classification for all subprojects is C. The Investment Program does not include communities that may be defined as indigenous peoples under ADB's Safeguard Policy Statement (2009). F. Risks and Mitigating Measures 35. The project has limited risks. ADB's previous experience in the sector shows a sound record of implementation in Georgia and MDF has reasonable capacity in terms of administering externally financed projects. 13 With the consultants supporting MDF, works will be well controlled and monitored. An international road expert has been recruited by MDF to conduct thorough review of the design and to provide technical expertise during construction. Major risks and mitigating measures are summarized in Table 4. Risks Limited interest of contractors due to small size and capacity constraints. Possible cost overruns due to inflation and the fluctuations in construction costs. Insufficient fund is allocated to cover the maintenance and operation costs of the infrastructure. Government realigns its strategic priorities. ICB = international competitive bidding. Source: Asian Development Bank. G. Risk Categorization Table 4: Risks and Mitigation Measures 36. Project 3 is complex because of its category A for resettlement. Mitigating Measures The improved economic climate in Georgia and the use of ICB make the projects attractive for bidders. The Investment Program plan includes physical and price contingencies to cover these extra costs. Counterpart funding includes provisions to cover the maintenance cost for the first 20 years. Subprojects are second phases of subprojects already financed from the Investment Program. V. ASSURANCES AND CONDITIONS 37. The government and MDF have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the project administration manual and loan documents. 38. The government and MDF have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement and project agreement. VI. RECOMMENDATION 39. On the basis of the approval of ADB's Board of Directors for the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $300,000,000 equivalent to Georgia for the Sustainable Urban Transport Investment Program, it is recommended that the President approve the proposed tranche consisting of a loan of $73 million from ADB s ordinary capital resources as described in paragraph 23 of this report and the draft loan agreement and project agreement for the proposed tranche substantially in the forms attached to this report. 13 MDF implemented Municipal Service Development Projects I and II (ADB Loans 2441 and 2534). The projects were completed ahead of schedule and rated successful in the project completion reports (2012 and 2013).

19 PFR FROM THE GOVERNMENT Appendix 1 11

20 12 Appendix 1 Project Description The Project proposed for financing under this Periodic Financing Request will comprise the following parts: (a) Urban Transport Infrastructure Improvement, including the following Subprojects: Tbilisi-Rustavi Urban Road Link (section 2) and Anaklia Coastal Improvement (phase 2). (b) Project Management Facility and consulting services for audit, safeguards monitoring and capacity development in executing agency. Details and Design and Monitoring Framework for this tranche is in Annex 1 Cost Estimates and Financing Plan Loan Amount and Terms Period of Loan/Guarantee Utilization Advance contracting Retroactive Financing The total cost of the Project is estimated at $ million, inclusive of taxes, duties, and interest and other charges on the loan during construction. The detailed cost estimates and financing plan are provided in Annex 2. ($million) ADB Government Total Component 1: Urban Infrastructure Component 2: Project Management Facility Base Cost Contingencies Financial charges Total Source: Government of Georgia and Asian Development Bank estimates. This third tranche of the MFF is proposed as a loan of $73.00 million from ADB s ordinary capital resources (OCR) to help finance the project. The loan will have a 30-year term, including a grace period of 7 years, an annual interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan and project agreements. The period is expected to be completed by 30 June No disbursements from the loan account Loan closing date will be requested or made later than 31 December 2018 or such other date as may from time to time be agreed between ADB and the Borrower. Not applicable. Not applicable.

21 Appendix 1 13 Implementation Arrangements Procurement and Consulting Services Readiness of the Project for Implementation The Executing Agency will be the Municipal Development Fund of Georgia (MDF). The MDF supervisory board chaired by the Prime Minister includes inter alia Ministry of Finance (MOF); Ministry for Regional Development and Infrastructure (MRDI); and Ministry of Economic Development (MoED). Representative of other relevant ministries and of municipalities can be invited to attend as appropriate. The board will be providing overall guidance, reviewing Investment Program performance, and deciding on all major issues of the Investment Program management. MDF will act as the Program Management Unit (PMU). They will particularly handle day-to-day implementation of the Investment Program and be responsible for (i) supervising and monitoring the progress of Project implementation; (ii) undertaking all procurement tasks; (iii) managing the loan disbursement; (iv) providing any counterpart assistance as required; and (v) providing immediate oversight for environmental and social safeguards. All works to be financed under the Facility will be procured in accordance with ADB s Procurement Guidelines (2010, as amended from time to time) [sic]. All consulting services to be financed under the Facility will be procured in accordance with ADB s Guidelines on the Use of Consultants (2010, as amended from time to time) [sic]. The Procurement Plan is attached as Annex 3. The subprojects of this Project have been prepared under PFR1 by the EA. The following actions have been taken/completed: Component 1: Urban Infrastructure Tbilisi-Rustavi Urban Road Link (section 2): Detailed engineering designs, drawings, specifications and bills of quantities are being prepared; and Bidding documents will be finalized accordingly. Anaklia Coastal Improvement (phase 2): Detailed engineering designs, drawings, specifications and bills of quantities have been endorsed by MDF Supervisory Board; and Bidding documents are ready to be sent for ADB review. A summary of engineering designs and financial and economic viability for the two subprojects is in Annex 4. Safeguards Gender and Social Dimensions Covenant Compliance The Initial Environmental Examination (IEE) for the Tbilisi-Rustavi Urban Road Link (section 2) and the IEE for Anaklia Coastal Improvement (phase 2) are in Annex 5. The due diligence on Land Acquisition and Resettlement reports for the Tbilisi-Rustavi Urban Road Link (section 2) and Anaklia Coastal Improvement (phase 2) are in Annex 6. The updated Summary Poverty Reduction and Social Strategy is in Annex 7 and the Gender Action Plan is in Annex 8. Compliance with Tranche 1 and Tranche 2 loan covenants are in Annex 9.

22 14 Appendix 2 DESIGN AND MONITORING FRAMEWORK FOR TRANCHE 3 Design Summary Performance Targets and Indicators with Baselines Data Sources and Reporting Mechanisms Assumptions and Risks Impact By 2021 Assumptions Improved urban environment, local economy, and better living conditions within urban areas - Attractiveness and preservation of cultural heritage with 5% increase in tourist nights compared to baseline (129,000) in 2008 Multiple indicators from municipality, municipal companies and NGO reports Statistical surveys (MRDI) Government continues its focus on infrastructure in the implementation of its national strategy - Increased safety by reducing urban road accidents and casualties by 1% compared to baseline (8,000) in permanent jobs in civil engineering construction created (including operation and maintenance) compared to baseline (21,772) in 2009 National Statistic Office of Georgia Surveys by Tbilisi Municipality or other entities as appropriate Political and economic stability Risk Government realigns its strategic priorities Outcome By 2018 Assumption Efficient, reliable, and affordable urban transport infrastructures and services in relevant cities - Total time spent annually by road vehicles users on the road between Tbilisi and Rustavi decreased by 850,000 hours, compared to baseline (6,800,000) in 2011 Municipal and national statistics. MDF reports and MRDI database. Prompt decisionmaking by GoG and releasing counterpart funds Risk - The program will benefit at least 1.45 million people in Tbilisi, Rustavi and Anaklia Insufficient fund is allocated to cover the maintenance and operation costs of the infrastructure Output By 2016 Assumption Urban transport infrastructures extended, rehabilitated, and improved by MDF and relevant municipalities - A 6.8 km long Tbilisi Rustavi urban road link completed (section 2), including creation of recreational areas and improved pedestrian facilities addressing specific needs of women - A 1.2 km stretch of coastal zone rehabilitated and protected in Anaklia Participating city website and other municipal communication and media materials MDF annual reports Sustained support from newly-elected national and municipal government for urban transport investments Risks Limited interest of contractors due to small size and capacity constraints Possible cost overruns due to inflation and the fluctuations in construction costs

23 Appendix 2 15 Indicative Activities with Key Milestones Construction, improvement and rehabilitation of urban transport infrastructure 1.1 Bidding documents for Tbilisi Rustavi urban road link (section 2) completed for inviting for bids by month 3 (MDF, PM). 1.2 Bidding documents for Anaklia coastal improvement (phase 2) completed for inviting for bids by Q by month 3 (MDF, PM). 1.3 LARP for Tbilisi Rustavi urban road link (section 2) implemented by month 9 (MDF, PM). 1.4 Tbilisi Rustavi urban road link (section 2) constructed by month 36 (MDF, PM, contractor). 1.5 Anaklia coastal improvement (phase 2) constructed by month 24 (MDF, PM, contractor). Inputs ADB: $73.00 million (OCR) Government: $45.21 million ADB = Asian Development Bank, GoG = Government of Georgia, km = kilometer, MDF = Municipal Development Fund of Georgia, MRDI = Ministry of Regional Development and Infrastructure, NGO = nongovernment organization, OCR = ordinary capital resources, PM = participating municipalities. Anand Chiplunkar Director, CWUW Klaus Gerhaeusser Director General, CWRD

24 16 Appendix 3 PROJECT ADMINISTRATION MANUAL (Available as a separate volume)

25 Appendix 4 17 SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY Country: Georgia Project Title: Lending/Financing Multitranche Financing Department/ Modality: Facility Division: Sustainable Urban Transport Investment Program Tranche 3 Central and West Asia Department/ Urban Development and Water Division I. POVERTY AND SOCIAL ANALYSIS AND STRATEGY Targeting Classification: General intervention A. Link to the National Poverty Reduction Strategy and Country Partnership Strategy The Sustainable Urban Transport Investment Program Project 3 is consistent with the interim operational strategy of Georgia a and the draft country partnership strategy anticipated to be approved in It will improve service delivery in municipal infrastructure within the evolving decentralization process and reduce road transportation constraints on economic activity. The proposed Project will promote efficient and effective urban transport infrastructure, and will finance improvements to urban transport infrastructure and services. The investment program will: (i) Create jobs and employment opportunities. It is anticipated that between 400 and 500 full-time jobs will be created during the construction period. Of the construction jobs, the targets are for 65% to be unskilled. The loan assurances specifically address employment of vulnerable groups and women. (ii) Improve living standards. Living conditions will be improved by urban renewal of green areas, promotion of non-motorized transport facilities such as footbridges and the redesign of existing facilities to improve accessibility. This will significantly reduce time burdens, particularly for women (iii) Protect the environment. The environment management plan outlines clear actions for environmental protection during construction, and these are accounted for in the loan assurances. An awareness campaign will promote a shift to clean transport modes. It will target small businesses, communities, and schools. (iv) Provide skills training. The investment program will include skills training (including for construction, marketing, communication, and public service contracts). This will be done through the program management facility, and the resettlement and gender action plans (GAPs). (v) Support gender inclusion. Loan assurances will ensure the participation of women throughout the Investment program. Gender benefits are addressed in GAP. B. Results from the Poverty and Social Analysis during PPTA or Due Diligence 1. Key poverty and social issues. Georgia ranks 72 nd out of 186 countries in the Human Development Index of the United Nations Development Program (UNDP, 2012). Its rank compares favorably to Azerbaijan (82 nd ) and Armenia (87 th ). However, more than one third of Georgia s population is below the national poverty line (poverty is lower in urban areas). Poverty incidence is comparable with that in other countries in the South Caucasus. The incidence of poverty is 39.4% and the depth of poverty is 13.5%. The process of poverty reduction is rooted in a broad range of socioeconomic activities to which urban transport services provide intermediate inputs. The Investment Program will have an indirect impact on poverty reduction. The provision of urban transport services, including the construction, operation, and maintenance of transport infrastructure, will generate demand for labor (often unskilled labor) and provide income-earning opportunities for the poor. The investment program will stimulate economic development particularly in touristic areas (Anaklia), creating indirect employment opportunities as well. 2. Beneficiaries. Project 3 will benefit over 1.45 million urban residents, improving living conditions and the economic and urban environment in Tbilisi, Rustavi and Anaklia. The potential beneficiaries are local residents, students, commuters, and road and public transport users. The poor and socially excluded will benefit through (i) better living conditions, (ii) construction and maintenance of road project, and (iii) development of business activities around the subprojects upon project completion. Small local businesses will be the primary beneficiaries of the Anaklia Coastal Improvement subproject, while poor fishermen will indirectly benefit from the subproject through protection of the shoreline. Poor and mostly unemployed population of Rustavi will be the primary beneficiaries of the Tbilisi-Rustavi Urban Road Link through enhanced access to economic opportunities and shorter commuting time. 3. Design features. In the case of Tbilisi-Rustavi Urban Road Link, the design has attempted to reduce impacts on land acquisition and resettlement. The road section 2, financed under Project 3, has notably integrated specific design features for the 2 kilometer section along the Mktvari River which passes very close to a poor neighborhood in Phonichala village. Throughout this section, the highway will be transformed into an urban boulevard with recreational areas, enhancing living conditions of poor households. Moreover, the multitranche financing facility s (MFF s) assurances call for employment of local labor, especially from vulnerable groups and women. The gender action plan outlines strategies for mitigating adverse impacts and promoting benefits such as employment and skills training. 4. Other social and poverty issues. The strategic vision of the MFF is to promote a sustainable, integrated, socially affordable, and cost-efficient urban transport system. By 2030, urban transport will play a major role in improving access to businesses and communities, sustaining economic and tourism development, and enabling citizens to tap economic and social opportunities. The major issues and opportunities addressed during the poverty analysis were