Region Sector. Updated Project Information Document (PID) Report No: AB542

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1 Project Name Region Sector Theme Project Borrower(s) Implementing Agency(ies) Environment Category B (Partial Assessment) Date Prepared April 29, 2004 Auth Appr/Negs Date February 3, 2004 Bank Approval Date May 25, 2004 Updated Project Information Document () Report No: AB542 SERBIA AND MONTENEGRO - TRANSPORT REHABILITATION PROJECT Europe and Central Asia Region Roads and highways (70%); Central government administration (25%); General transportation sector (5%) Administrative and civil service reform (P); Infrastructure services for private sector development (P); Other public sector governance (S); Regional integration (S) P SERBIA AND MONTENEGRO Serbian Ministry of Capital Investments Address: Nemanjina 22-26, Belgrade Contact Person: Mr. Miodrag Jocic, Deputy Minister of Capital Investments Tel: Fax: jocic@bitsyu.net Serbian Road Directorate Address: Kralja Alexandra 282, Belgrade Contact Person: Mr. Djordje Djordjevic, Head of Main and Regional Roads Department and Project Coordinator Tel: Fax: tockic@beotel.yu 1. Country and Sector Background The upheaval of the last twelve years, with the different conflicts and their legacies, in the form of economic sanctions and political and economic upheaval, have made a significant contribution to the deterioration of the physical, social and institutional infrastructure within the country. The transport sector, and the physical and institutional infrastructure therein, has been particularly affected, and is currently inadequate to contribute to the recovery of the national economy or facilitate the reintegration of the country into the regional economy. The following are regarded as the most pressing issues in the sector at present: Poor condition of assets: The limited and intermittent funding to the sector since the late 1980s, together with a misplaced emphasis on the provision of new construction projects with political rather than economic significance, has contributed to a significant deterioration in the asset base, in terms of both the infrastructure and the sector equipment, over that period. As a result, transport assets in Serbia are in a poorer condition than any of the neighboring countries, with the possible exceptions of Albania and Bosnia and Herzegovina. SRD's responsiblilities currently extend over a network of about 14,000 km of arterial and regional roads, out of a total network of approximately 40,000 kilometers. Of the former, SRD estimates that, approximately, 25% of the main and regional roads are in good condition, 19% are in fair

2 2 condition and 56% are in bad or very bad condition. The comparative figures for Croatia, according to a recent survey, are 32%, 46%, and 22% respectively. Similarly, in Central and Eastern Europe, in an assessment sponsored by the World Bank in 1991, the comparable figures were 37%, 41%, and 22% respectively. The story is similar on other modes within the transport sector; 100 kilometers of the main international Pan-European railway corridor require immediate reconstruction and there are a total of 130 significant speed restrictions on the rail network. In addition, only one third of the locomotives and freight wagons and one half of the passenger coaches are regularly available. The average age of the facilities and equipment at river ports exceeds 25 years of age, and one of the legacies of the 1999 NATO bombings, the associated weakening (or even collapse) of river navigation systems have increased the risks and the costs of river transport, even in those locations where it remains an option. A recent review of the air navigation system, sponsored by the EIB, has revealed it to be obsolete and needs replacement. The concomitant to limited and inadequate transport infrastructure and equipment is increased transport costs that undermine the competitiveness and potential contribution of both Serbian industry and agriculture and constrain both domestic and international trade. Weak institutions: Throughout the 1990s, despite their human resource base, institutions within the Serbian transport sector have become weaker as systems and procedures for planning, monitoring, regulating and managing transport activities have been neglected, overlooked or even misused. The Ministry of Capital Investments (MOCI) lost a considerable number of its staff and, partly as a result of insufficient qualified personnel, has not followed trends elsewhere towards more competitive transport markets with a greater role for private suppliers of services and infrastructure. Within the road transport sector, specifically, the SRD has been unable to follow significant developments, or benefit from experiences, elsewhere over that period. Although, a number of the typical deficiencies of public sector road administrations in developing countries (overstaffing, excessive force account, lack of incentives and discipline etc) are less pronounced in Serbia, reflecting earlier attempts to restructure the agency back in the 1980 s. In operational terms, there was also a focus, understandable in the circumstances, on short-term emergency works, which were a manifestation of the often fraught relationship between the country and the outside world at that time. Modern methods for planning and budgeting road expenditures, which were introduced in the late 1980s with World Bank assistance, were abandoned and there was a steady erosion of the necessary capacities to both procure competitively and to supervise civil works, particularly in the case of the routine and winter maintenance of roads. High level of State ownership: The transport sector in Serbia remains characterized by a high level of state control, with many of the main actors, excepting road freight transport and some of the larger construction enterprises, under public ownership. A number of the parastatals, such as the national railway (SZ), the national airline (JAT), and the Belgrade public transport company (GCP) are of a significant size, but face similar problems in terms of overstaffing and weak, if not parlous, finances. The benefits of the private sector have been recognized and introduced in some areas, with early attempts to establish privately funded motorway concessions, the subcontracting of some public bus services in Belgrade and the introduction of the processes of privatization in the river ports and road maintenance enterprises. However, progress is slow, reflecting both limited capacity, in the form of insufficient knowledge of available options, and a detailed strategy for subsequent implementation. Insufficient cost recovery: A number of the public transport services are, presently, provided at a price that does not cover their operating costs, and the corresponding subsidy systems are inefficient, as they do not relate the subsidy to a well defined output, and unsustainable, reflecting the increasing inability of the

3 3 state to continue to support these programs. The most striking example of this is the national railway which, up to 2001, received almost two thirds of its revenues through state subsidies, in the form of a block grant, which was provided, essentially, to cover the cash flow deficit. In general, even after subsidies are factored in, the revenues of the 'commercial' parastatals are insufficient to allow them to maintain assets properly, or set aside sufficient reserves for asset replacement at the end of the working life. In the road transport sector, particularly, the current level of road user charges on trucks and buses is insufficient to fully cover their respective contribution to the deterioration of the road. Insufficient Funding of road maintenance: The funding of road maintenance, which was satisfactory until the early 1990s, decreased dramatically and remained at inadequate levels throughout the 1990s. Average annual maintenance expenditures on main and regional roads have been of the order of 0.3% of GNP over that period, whilst a comparable figure from countries at similar stages of development would be around 1% of GNP on road maintenance. The level of funding to the sector improved in 2002, but the actual level remains volatile, reflecting the dependency of the sector on the short term considerations and constraints imposed by the national budget. 2. Objectives The main project objective is to improve the effectiveness of the policies of the Serbian Road Directorate (SRD) for road maintenance and rehabilitation through (i) the introduction of new contracting arrangements with the private sector in two pilot districts; and (ii) enhancing the sustainability of the use of network analysis in the selection of road rehabilitation segments. 3. Rationale for Bank's Involvement Bank involvement in the project is justified for the following main reasons: (i) based on its broad experience in the transport sector and the trust that results from its long involvement in Yugoslavia prior to the 1990s, the Bank can provide substantive assistance to the Government in designing and implementing sustainable policy and institutional reforms in the sector; and (ii) the Bank is uniquely placed to help the Government and the sector s main agencies gather information from countries experiencing similar challenges (in Europe and the former Soviet Union), and also in Latin America and Asia), and connect with centers of expertise in the transport sector throughout the world, something that the Government considers a priority in improving the design of its reforms. More generally, the Bank can also use its broader lending experience, as well as its analytical and advisory assistance, to help the Government coordinate its transport sector reforms with complementary reforms both in other sectors and at the national level. 4. Description The proposed project would consist of the following two components: 1. Strengthening of SRD Institutional Capacity The institutional strengthening of SRD, which would include technical assistance, training, services, and provision of goods for (i) strengthening of SRD's Information Center, including the improvement of its computerized road and bridge databases for the main and regional road networks, as well as the establishment of a computerized system for contract management; (ii) strengthening of systems and procedures for planning and budgeting road expenditures, based on economic appraisal methodologies; (iii) improving the procurement and supervision of road works; (iv) consultancy services for supervision of road maintenance and rehabilitation works; and (v) equipment, materials, and supplies for improved road management capability in the SRD. 2. Enhancement of Road Maintenance, Rehabilitation, and Safety

4 4 The provision of priority rehabilitation needs on (i) seven main road network sections, and (ii) main and regional road maintenance by contract, on a pilot basis, in the regions of Macva and Kolubara. Measures to improve traffic safety will be included under the maintenance and rehabilitation contracts, such as improvements in road marking and signs, installation of crash barriers, modifications to dangerous intersections, together with the creation of parking/rest areas on those sections of the main network located in mountainous areas. 1. Strengthening of SRD Institutional Capacity 2. Enhancement of Road Maintenance, Rehabilitation, and Safety 5. Financing Source (Total ( US$m)) BORROWER ($6.25) IDA ($55.00) Total Project Cost: $ Implementation Implementing Entity The project will be implemented by SRD, with overall project implementation coordinated by the Head of Department of Main and Regional Roads, who will serve as Project Coordinator. The Project Coordinator will be assisted by both SRD departments (Road Information Center, Accounting, Technical Laboratory) and specialists, as required during the implementation of the project. Support will also be provided, as required, by the existing Project Implementation Team (PIT) which was established within SRD for the implementation of the road rehabilitation projects financed by EBRD and EIB, and has gained a considerable amount of positive experience from these ongoing activities. The supervision of road maintenance and rehabilitation works will also be undertaken by SRD, with support from a competitively selected consulting firm. SRD has included more detailed implementation arrangements in the PIP. Preparation of project reporting will also be the responsibility of SRD. Flow of Funds The International Development Association (IDA) would make funds available to Serbia and Montenegro (SAM) under the Credit Agreement, governing the terms and conditions of the IDA credit and specifying the project. Project funds will flow from: (i) the IDA, either via a single Special Account established in a commercial bank acceptable to the Bank or by direct payment on the basis of direct payment withdrawal applications; or (ii) the SRD, via the Treasury at the Ministry of Finance of the Republic of Serbia (MFRS) on the basis of payment instructions submitted by the SRD. The SIDA support will be provided through a twining arrangement between SRD and SNRA for an expected grant equivalent to US$1.5 million. This is a complementary, but entirely separate activity, so these funds are not included in the funds flow mechanism.

5 5 7. Sustainability In respect of the necessary institutional and regulatory changes, there is a strong commitment from MOCI and SRD and a focus on the needs of transport users, which provides a good basis for sustainability. Reforms, if properly designed, will have many beneficiaries and these will form a constituency that will enhance their sustainability. The main risk to the sustainability of this part of the project stems from potential rapid turnover of staff and related institutional disruptions. Measures to mitigate this risk are described succinctly below. In respect of the road maintenance and road rehabilitation components, sustainability will depend to a large extent on sufficient and settled levels of future road maintenance funding. There has, fortunately, been a positive change in this respect, with the new political regime, and proper funding provided in 2002 and allocated for The Road Management and Maintenance Policy Letter, to which both MOCI and the SRD adhere, provides for a long term commitment to sound policies in the sector. The importance of road maintenance was well understood in Yugoslavia prior to the 1990s and it is expected that, as before, technical views on this subject will continue to prevail. The improvements in road monitoring and budget formulation to which the project will contribute, will also help demonstrate the benefits of adequate maintenance funding and strengthen the case for the provision of a secure flow of funds. 8. Lessons learned from past operations in the country/sector The prior experience with transport projects in both Central and Eastern Europe and the Former Soviet Union has illustrated the importance of: (i) limiting the complexity of the project s design to what can be achieved realistically in a single operation; (ii) focusing on issues that are perceived as real priorities by the Borrower; (iii) having a committed, trained, and stable counterpart team in the Government and implementation agencies, able to move the project forward; (iv) involving, wherever and as far as possible, local consultants and technical institutes together with users in project design and implementation; (v) disseminating lessons of world experience in the transport sector; (vi) carrying pilot activities whenever possible to do so; (vii) giving detailed attention early on to procurement and other project implementation issues; and (viii) maintaining flexibility to facilitate project implementation. All these lessons have been considered in the project design, and reflected in the selection of project components, including the pilot nature of the proposed road maintenance works, and the selection of institutional development priorities for SRD. 9. Environment Aspects (including any public consultation) Issues : In accordance with World Bank Safeguard Policies (OP/BP/GP 4.01 Environmental Assessment) the project is rated environmental category B and an Environmental Management Plan (EMP) has been prepared by SRD. The project is expected to have only minor negative impacts on the environment, as it will focus on road rehabilitation and maintenance activities. No resettlement or land acquisition is involved. Slight negative impacts would be of a temporary nature during the construction phase, and would be restricted to road works related to movement of men and materials (asphalt, dust, noise etc.), disposal of wastes and associated activities of road crews. After completion, the project will have positive indirect impacts on human health and safety through decreased number of accidents, and reduced air pollution from more even travel speeds on rehabilitated road sections. Materials (e.g. asphalt, stone, etc.) would be supplied only from sources with approved licenses, permits, and/or approvals for environment and worker safety, and any equipment used during construction would meet internationally recognized standards for environment and worker health and safety.

6 6 10. List of factual technical documents: Annual Report of the Road Directorate of Serbia for years 2001, 2002, and Program of the Road Directorate of Serbia for 2003 Organization of the Directorate of Roads, Road Directorate of Serbia, November 2001 Institutional Project in Transport Sector, Mission Completion Report, European Agency for Reconstruction, September 2003 Technical Assistance Project and Roads Recovery Plan, Stakeholder Workshop, Booz Allen Hamilton, Belgrade, September 2003 Proceedings from Stakeholder Workshop, Serbian Roads Directorate and Booz Allen Hamilton, September 2003 Map: Position of sections to be repaired-program from the World Bank credit, Serbian Roads Directorate, October 13, 2003 Feasability studies for primary roads rehabilitation in World Bank program, Serbian Roads Directorate, April 2003 Rehabilitation of arterial roads from the World Bank Credit, Republic Directorate for Roads, September 2002 Proposal for World Bank loan-institutional strengthening, Executive Summary, Serbian Roads Directorate, October 2003 Transport Project for World Bank Financing : Rehabilitation Arterial Roads, Serbian Roads Directorate, October 2003 Feasibility Study: Road Rehabilitation: Project No 05, The Highway Institute, Traffic and Economy Department, Belgrade November 2002 Serbia - Motorway Sector and the Potential for Public-Private Partnerships by Dr. Andras Timar, August Contact Point: Task Manager Cesar Queiroz The World Bank 1818 H Street, NW Washington D.C Telephone: Fax: For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.