Report and Recommendation of the President to the Board of Directors

Project Number: 50062-002 Grant Number: 0508-AFG August 2017

Proposed Grant for Additional Financing Islamic Republic of Afghanistan: Road Asset Management Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 18 August 2017)

Currency unit – afghani/s (AF)

AF1.00 = $0.0145 $1.00 = AF68.692

ABBREVIATIONS

ADB – Asian Development Bank IRI – international roughness index km – kilometer MOF – Ministry of Finance MPW – Ministry of Public Works O&M – operation and maintenance PAM – project administration manual PMO – program management office

RAMS – road asset management system USAID – United States Agency for International Development

NOTE

In this report, “$” refers to US dollars.

Vice-President W. Zhang, Operations 1 Director General S. O’Sullivan, Central and West Asia Department (CWRD) Director D. Pyo, Officer-in-Charge, Transport and Communications Division,

CWRD Team leader N. Soetantri, Transport Specialist, CWRD Team members N. Djenchuraev, Senior Environment Specialist, CWRD M. Mamayson, Project Analyst, CWRD N. Mohibi, Senior Project Officer (Transport), CWRD L. Nazarbekova, Principal Counsel, Office of the General Counsel J. Nicolas, Senior Social Development Specialist (Safeguards), CWRD C. San Miguel, Senior Project Officer, CWRD A. Silverio, Senior Operations Assistant, CWRD A. Sinha Roy, Senior Disaster Management Risk Specialist (Climate

Change Adaptation), Sustainable Development and Climate Change Department

W. Tawisook, Principal Transport Specialist, CWRD N. Yousofzai, Associate Project Analyst, AFRM, CWRD

Peer reviewer M. Nishimura, Transport Specialist, Transport Division, East Asia Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Investment and Financing Plans 4 E. Implementation Arrangements 6

III. DUE DILIGENCE 7

A. Technical 7 B. Economic and Financial 7 C. Governance 8 D. Poverty and Social 9 E. Safeguards 9 F. Risks and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Revised Design and Monitoring Framework 11

2. List of Linked Documents 14

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 24022017095139292663 Generated Date: 26-Aug-2017 12:26:56 PM

1. Basic Data Project Number: 50062-002Project Name Road Asset Management Project -

Additional Financing Department/Division

CWRD/CWTC

Country Afghanistan, Islamic Republic of Executing Agency Ministry of FinanceBorrower Government of Afghanistan

2. Sector Subsector(s) ADB Financing ($ million)Transport Road transport (non-urban) 30.00

Total 30.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 1: Economic opportunities, including jobs, created and expanded

Environmentally sustainable growth (ESG)

Eco-efficiencyGlobal and regional transboundary environmental concerns

Regional integration (RCI) Pillar 1: Cross-border infrastructure

Adaptation ($ million) 0.48Climate Change impact on the Project

Medium

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacity development (GCD)

Civil society participationOrganizational development

Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areas

Private sector development (PSD)

Promotion of private sector investment

No gender elements (NGE)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

NoNoYes

Regional High

SDG Goals SDG9

6. Risk Categorization: Low.

7. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 30.00

Sovereign Grant projects: Asian Development Fund 30.00

Cofinancing 0.00

None 0.00

Counterpart 0.30

Government 0.30

Total 30.30

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed grant to the Islamic Republic of Afghanistan for the additional financing of the Road Asset Management Project. 2. The proposed grant will help finance the gap arising from changes in financing arrangements as well as a change in the project scope to include priority maintenance works for the Southern National Ring Road of Afghanistan’s regional highway from Ghazni to Kandahar, which is the economic lifeline of the country’s eastern region. The additional financing will also include a capacity development component to introduce sustainable practices in road asset management and road maintenance. The overall project will facilitate regional connectivity, improve the quality and efficiency of road transport services, and promote inclusive economic growth.

II. THE PROJECT

A. Rationale

3. Afghanistan’s economy has suffered from prolonged conflict, which has destroyed the country’s minimal economic infrastructure and institutions. More than 2.5 million Afghans have been driven from their homes and livelihoods. Since the fall of Taliban regime in 2001, the country has received billions of dollars in international assistance, which increased the country’s gross domestic product fivefold to more than $20 billion since 2002. The country is beginning to recreate an economy that can address and sustain the needs of its people, but stable and sustainable economic development is still needed. To this end, the Government of Afghanistan has developed a range of policies and strategies with support from its development partners. However, not all of them have been successfully implemented. The 2008–2013 Afghanistan National Development Strategy,1 the country’s first strategy paper for poverty reduction, set the context for rebuilding the country by (i) addressing poverty through private-sector-led equitable economic growth, and (ii) exploiting the economy’s growth potential. 4. Afghanistan’s fragile and conflict-affected situation has devastated its roads. By 1994, about 80% of the 42,000-kilometer (km) network was in disrepair.2 In 2002, the government began major reconstruction programs, which focused on rebuilding damaged or destroyed roads, as well as rehabilitating roads that had fallen into disrepair because of a prolonged lack of maintenance. Nearly 8,000 km of roads have been reconstructed or rehabilitated. The government and development partners have focused their efforts on reconstruction, but there is an emerging need to ensure the sustainability of past investments. The ongoing Asian Development Bank (ADB) study on operation and maintenance (O&M) found that 85% of the road network remains in poor condition and only 50% is in serviceable, year-round condition. 5. Financial and institutional sustainability are among the main challenges Afghanistan faces in providing O&M for its road network. The Ministry of Public Works (MPW) has been unable to fully implement the various approaches proposed in its 2006–2013 O&M strategy that aimed to create a viable and efficient road maintenance system to keep the roads open year-round and allow people and goods to move safely and efficiently within Afghanistan.3 A lack of policies on

1 Government of Afghanistan. 2008. Afghanistan National Development Strategy. Kabul. 2 Asian Development Bank (ADB). 2003. Afghanistan's Transport Sector on the Road to Recovery. Manila. 3 Government of Afghanistan. 2006. Operation and Maintenance Strategy. Kabul. http://www.carecprogram.org/uploads/docs/AFG-Public-Works-Strategy.pdf

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road user charges and O&M financing complicates these financial and institutional challenges. Financially, Afghanistan is not expected to be self-reliant in the next 5 years. Institutionally, Afghanistan needs to address organizational and human resources issues from an O&M perspective. Organizationally, the mandates of the different government authorities responsible for the road network must be properly delineated. Functionally, MPW lacks the specialized system required to ensure adequate and accountable operations. A tool for planning and managing road O&M nationally does not exist. The ad hoc approach of this system must be integrated and properly developed to enable systematic planning and management of road network O&M. 6. Realizing the importance and seriousness of the issue, Afghanistan’s development partners have contributed $150 million for O&M of the road network since 2011. Under the $109 million Road Sector Sustainability Program of the United States Agency for International Development (USAID), the government and development partners have agreed on short- and long-term plans. In the short term, a 5-year transfer process has been defined, with road O&M funded by development partner contributions in the first year and by road user fees in the fifth year. In the long term, three autonomous entities—a road authority, road fund, and transportation institute—will be created to ensure sector sustainability. The road authority will manage road development and maintenance, the road fund will provide sustainable financing for road O&M, and the transportation institute will train Afghan professionals and build their capacity in transport engineering. Apart from road development, the World Bank’s $332 million National Rural Access Program also allocated (i) $21 million for routine and periodic maintenance of paved and unpaved secondary roads, and (ii) $1.5 million for a road network inventory. 7. Under Transport Network Development Investment Program Tranche 4,4 ADB provides $5 million to finance a pilot O&M subproject which aims to (i) assess MPW’s overall O&M capacity, and (ii) develop a methodology that best suits Afghanistan and will be used in future road O&M projects. The maintenance works include overlay in some sections, pothole patching, crack sealing, surface sealing, mill and fill, and roadside maintenance. The pilot subproject addressed basic O&M issues on the first 50 km of the Kabul–Jalalabad Highway (from Kabul to Surubi) by improving the international roughness index (IRI) from 8–12 to 4–5. 8. In early 2016, ADB estimated about $55.0–60.0 million will be needed to address the maintenance work on Afghanistan’s national ring road section between Kabul and Kandahar; and the strategic highway section between Kabul and Jalalabad. ADB approved the current project of $25.5 million from ADB’s Special Funds resources on 31 October 2016 with a grant effectiveness date of 5 January 2017.5 The current project was designed to (i) initiate the establishment of a sustainable road maintenance system for the country’s major highways and (ii) develop MPW’s O&M capacity. The project’s two major components are road maintenance and a road asset management system (RAMS). Two sections of national highways were selected for maintenance because of their economic and strategic importance: (i) Kabul–Jalalabad Highway from Surubi to Jalalabad and (ii) the Kabul–Kandahar Highway from Kabul to Ghazni. The project will also develop a RAMS as the primary decision-making support tool to help MPW plan and manage road O&M. ADB financed the current project through a grant of $25.5 million from its Special Funds resources. The government provided $500,000 in counterpart support in the form of office space and staff.

4 ADB. 2014. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche

Financing Facility to the Islamic Republic of Afghanistan for the Transport Network Development Investment Program, Tranche 4. Manila.

5 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Grant to the Islamic Republic of Afghanistan for the Road Asset Management Project. Manila (Grant 0508-AFG).

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9. The current project is performing well based on the following assessment:6

(i) Delivery of expected outputs. The current project is on track to meet the intended outputs: (a) national highways in the southern region maintained and (b) O&M and road management capacity enhanced. The condition survey for the Kabul–Jalalabad Highway and Kabul–Ghazni Highway has been completed. The engineering designs for an 85-km section of the Kabul–Jalalabad Highway and a 50-km section of the 135 km of the Kabul–Ghazni Highway have been completed.

(ii) Implementation progress. The project is progressing as scheduled. Three individual consultants for road asset management system (RAMS) namely the team leader, deputy team leader, and transportation engineer have been recruited and mobilized in June 2017. The inception report was submitted in August 2017. Recruitment of the remaining RAMS consultants is in process. The bidding documents for procurement of civil works package 1, which covers 35 km of the Kabul–Jalalabad Highway have been reviewed and tendered. The contract award is expected by September 2017. The bidding documents for civil works package 2, which covers 50 km of the Kabul–Jalalabad Highway, have been completed and submitted to ADB for review. The total contract amount expected to be awarded by November 2017 is about $15.0 million.

(iii) Compliance with safeguard policy requirements. The project is category C for the environment, involuntary resettlement, and indigenous people. It focuses on road maintenance within the boundaries of the right-of-way of existing carriageway of the Kabul–Jalalabad and Kabul–Ghazni highways. The project does not have any adverse social or environmental impacts because of the limited scale and scope of the maintenance works, and the use of small machinery and equipment for the activities. The project complies with the ADB’s safeguard requirements.

(iv) Management of risks. The project has measures to manage risks. ADB has supported the program management office (PMO) in preparing bidding documents and bid evaluation reports, and in supervising contract execution. In addition, by contracting out work in small packages for national competitive bidding, ADB has supported the development of the local market in Afghanistan. This follows the ADB and the government‘s agreed approach on enhancing project delivery in Afghanistan. ADB conducted recruitment of consultants in accordance with ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time), while the government negotiated and signed the contracts with the consultants.

(v) Project performance rating. The current project was rated on track in the project performance rating from grant effectiveness up to Q2 2017.

10. The current project intends to provide MPW with a RAMS that will support objective planning, improve road serviceability, and ensure cost-effective use of available resources. The prospect of additional financing was raised in the report and recommendation of the President for the current project (footnote 5). The additional financing is needed to (i) fill the financing gap of $30.3 million; and (ii) include the section from Kabul to Kandahar, between Ghazni and Kandahar in southeastern Afghanistan, which was part of the original scope of the 2016 need assessment for maintenance of the ring road.

6 Summary of Project Performance (accessible from the list of linked documents in Appendix 2).

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11. The additional financing will support scaling up of O&M practices. This will include

overloading control by providing weighbridges in the key locations of Afghanistan’s regional highway. It will help consolidate development outcomes by establishing sustainable road asset

management and road maintenance practices. Overall, the project meets the eligibility criteria for additional financing. The additional financing will enhance the intended impact of the current project by utilizing the existing implementation arrangements, achieving results quickly. 12. The overall project is in line with the strategic objectives, as described in ADB’s country operations business plan (COBP), 2017–2019, of ensuring continual support for road network O&M in the short term and developing the government’s O&M capacity in the long term.7 The COBP identifies investments in developing a safe, reliable, and efficient transport network connecting urban and rural centers as priorities for the transport sector and are in line with the government’s strategies for development of the sector. B. Impact and Outcome

13. The impact and outcome for the overall project will be the same as those for the current project. The overall project is aligned with the following impact: increased sustainability of Afghanistan’s road transport sector, as highlighted in Afghanistan’s O&M Strategy 2006. The overall project will have the following outcome: improved road connectivity and safety.8 C. Outputs

14. The proposed additional financing will enable the expansion of the project outputs. The incremental outputs will be periodic and routine maintenance9 works on about 328 km of the Southern National Ring Road between Ghazni and Kandahar and other locations along the Southern National Ring Road as needed. The proposed additional financing activities will also expand the capacity development component to include strengthening MPW’s capability in overloading control. D. Investment and Financing Plans 15. The overall project is estimated to cost $56.3 million, including taxes, duties, and contingencies (Table 1). The estimated climate change finance (adaptation) amount is $0.48 million.

7 ADB. 2017. Country Operations Business Plan: Afghanistan, 2017–2019. Manila. 8 The design and monitoring framework is in Appendix 1. 9 Routine maintenance comprises a range of small and simple activities, usually carried out at least once a year, but

usually widely dispersed. Typical activities include roadside verge clearing and cutting back encroaching vegetation, cleaning of silted ditches and culverts, patching and pothole repair, and light grading or reshaping of unsealed surfaces. Periodic maintenance occurs less frequently, usually after several years. Works can include re-graveling, resurfacing, resealing, and repairs to structures.

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Table 1: Project Investment Plan ($ million)

Item Current Amounta

Additional Financingb Total

A. Base Costc 1. Road maintenance 16.0 24.0 40.0 2. Road asset management 7.5 0 7.5 3. Capacity building 0 3.8 3.8 Subtotal (A) 23.5 27.8 51.3 B. Contingencies d 2.5 2.5 5.0 Total (A+B) 26.0 30.3 56.3 a Refers to the original amount. Includes taxes and duties of about $1.7 million to be financed from Asian

Development Fund resources. b Includes taxes and duties of about $1.56 million to be financed from Asian Development Fund resources. c In mid-2017 prices.

d Physical contingencies computed at 5% for civil works and 3% for consultancy services. Price contingencies computed at 2.5% on foreign exchange costs and 5.5% on local currency costs for 2017, 5.8% for 2018, and 6.0% for 2019–2022; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

Source: Asian Development Bank estimates.

16. The government has requested a grant10 not exceeding $30 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. ADB funding for the project includes the financing of taxes and duties,11 which is justified because (i) the amount will not be an excessive share of the project investment plan, and (ii) the financing of taxes and duties is material and relevant to the project’s success. This is in line with ADB’s Operations Manual.12 The government's in-kind contribution to project financing will be for incremental administrative expenses, communications, and office facilities, as required. The World Bank also follows this practice in Afghanistan. The financing plan is in Table 2. The detailed cost estimates by expenditure category and financier are in the project administration manual (PAM).13

10 A country's eligibility for Asian Development Fund grants under the revised grant framework is determined by its risk

of debt distress. The latest debt sustainability analysis determined that Afghanistan had a high risk of debt distress and was therefore eligible to receive 100% of its Asian Development Fund allocation.

11 The costs for taxes and duties include the business receipt tax estimated at 7%, the fixed tax on imports of 2%–7%, and customs duties of 2.5%–16.0%. These costs do not represent an excessive share of the financing plan and are within applicable country partnership strategy parameters. ADB. 2005. Innovation and Efficiency Initiative, Cost Sharing, and Eligibility of Expenditures for Asian Development Bank Financing: A New Approach. Manila

12 ADB. 2017. Cost Sharing and Eligibility of Expenditures for ADB Financing. Operations Manual. OM H3/BP. Manila. 13 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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Table 2: Financing Plan

Source

Currenta Additional Financing Total

Amount ($ million)

Share of Total (%)

Amount ($ million)

Share of Total (%)

Amount ($ million)

Share of Total (%)

Asian Development Bank Special Funds resources (grant) 25.5 98.1 30.0 99.0 55.5 98.6

Government 0.5 1.9 0.3 1.0 0.8 1.4 Total 26.0 100.0 30.3 100.0 56.3 100.0

a efers to the original amount. ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Grant to the Islamic Republic of Afghanistan for the Road Asset Management Project. Manila (Grant 0508-AFG).

Source: Asian Development Bank’s estimates.

E. Implementation Arrangements

17. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 13). 18. The additional financing will not change any of the existing implementation arrangements. The Ministry of Finance (MOF) will remain the executing agency; MPW, through the PMO, will be the implementing agency. MPW engineers will carry out quality assurance and control of the maintenance work under the supervision of the road maintenance expert engaged as part of the RAMS component of the current project. The condition survey of the project roads, including quantities and cost estimates, is being prepared as part of tranche 4 of the Transport Network Development Investment Program (footnote 4). 19. Procurement financed by the ADB grant will be undertaken in accordance with ADB's Procurement Guidelines. Advance contracting is proposed to improve project readiness. The additional financing will be used for variations of the ongoing consulting contracts under the RAMS component of the current project. The consultants, who are familiar with the work and challenges in a country classified as a fragile and conflict-affected situation, will continue to supervise the additional financing component.

Table 3: Implementation Arrangements

Aspects Arrangements

Implementation period January 2018–June 2021

Estimated completion date

June 2021 (estimated grant closing date: 31 December 2021)

Management

(i) Executing agency Ministry of Finance

(ii) Implementing agency

Ministry of Public Works

(iii) Implementation unit Program management office, 35 staff

Consulting services Individual consultants

107 person-months (30 person-months

international, 77 person-months

national)

$1.0 million

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Aspects Arrangements

Procurement International competitive bidding (goods)

1 contract $2.5 million

National competitive bidding (civil works)

6 contracts $24.0 million

Retroactive financing and/or advance contracting

Advance contracting will be applied for civil works and consulting services. Any approval of advance contracting will not constitute a commitment by the Asian Development Bank (ADB) to finance the project. Retroactive financing is not required.

Disbursement The grant proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

Source: Asian Development Bank.

III. DUE DILIGENCE

A. Technical

20. An initial assessment of pavement conditions along the Southern National Ring Road indicates varying surface quality, with IRI between 8 and 12 in most sections. This is well below the acceptable technical standards, which suggest that roughness along a route of this kind should be within an IRI range of 4–5.14 The proposed maintenance along this route will address the pavement deficiencies identified and improve ride quality, pavement life, and overall safety. A team of local engineers with the support of MPW’s O&M department will conduct the condition survey of the project roads, including quantities and cost estimates, as part of tranche 4 of the Transport Network Development Investment Program (footnote 4). It is expected to be completed in December 2017. The detailed maintenance and repair methodology will be based on the original methodology developed under the pilot O&M subproject and implemented in the current project. 21. Preliminary climate risk screening shows that the project’s climate change risk is medium, even though the project scope only includes partial overlay and repair of pavement. The development of awareness of climate risks and knowledge of mitigation measures for the road project design will be considered as part of the RAMS component in the current project. B. Economic and Financial

22. The project will help achieve the envisaged benefits of an improved transport corridor, including lower transport costs and shorter travel times. The economic evaluation of the project was undertaken using ADB’s Guidelines for the Economic Analysis of Projects15 and followed the analytical framework of the highway development and management model.16 The traffic forecast is based on traffic counts on the project road in early 2015. Based on the 2015 average daily

14 Sayers, M.W. On the Calculation of International Roughness Index from Longitudinal Road Profile,

Transportation Research Record 1501, 1995, pp 1-12. Downloaded from: http://www.umtri.umich.edu/our-focus/road-roughness . (accessed 18 June 2017).

15 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 16 World Road Association. 2002. Highway Development and Management Model-4 Version 2. Paris.

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traffic volume, annual normal traffic growth is forecast at 3% for 2018–2040. Project costs and benefits are calculated based on a comparison of with- and without-project scenarios. The economic costs are (i) capital cost, including physical contingencies, but excluding taxes; and (ii) O&M, notably the cost of periodic maintenance assumed to be undertaken at 6-year intervals. The economic benefits are savings in vehicle operating costs resulting from the improved project road and time savings. The results of the economic analysis show that the project is economically feasible with an estimated economic internal rate of return of 44.9%. This confirms ADB’s experience with maintenance projects, which tend to generate high economic returns. Sensitivity tests confirmed that the project would remain viable if the envisaged project costs increase or benefits were reduced. No financial analysis was undertaken because the project road will not generate revenue. 23. The current project intended to address two financial sustainability concerns: the lack of an effective O&M regime and a chronic shortage of O&M funds. In the next 5 years, government funding for maintenance is unlikely to meet the requirements to preserve the value of the road assets. The government would have to raise about $251 million annually to meet the maintenance needs of its core road network. In 2015 the government collected $83 million through road user fees and taxes, but more needs to be done. Given the country’s narrow economic base, fragile security situation, and competing demands for scarce budget resources, Afghanistan is not expected to be financially self-reliant and will need to rely on contributions from development partners to finance road maintenance. Accordingly, development partners should balance their assistance between investments and O&M support. An increase in O&M funds is necessary but not sufficient to ensure road asset sustainability. Institutional strengthening to create sufficient capacity for managing future maintenance will be developed as part of the current project and in conjunction with the overall project. C. Governance

24. Governance is a major challenge in Afghanistan. The project has been designed to mitigate these risks, especially in the areas of financial management and procurement. An updated financial management assessment of MPW and its PMO took into consideration their overall capacity, including funds-flow arrangements, governance, staffing, budgeting, accounting and financial reporting systems, internal control procedures, financial information systems, and internal and external auditing arrangements. This assessment found that, from a financial management perspective, the overall control risk is moderate. MPW and PMO have adequate experience and capacity in financial management to manage the project funds as well as adequate funds flow, accounting systems, and budgeting arrangements. The 2015 restructuring of the PMO significantly improved its overall capacity. The PMO’s finance department staff includes a manager, five accountants, and a trainee. MPW conducts internal audits periodically, and annual external audits have yielded satisfactory results since ADB’s engagement with MPW in 2003. MPW is responsible for ensuring an adequate audit trail; the annual financial statements are audited by an independent auditor acceptable to ADB in accordance with auditing standards. 25. Improvement is needed in accounting policies and procedures and reporting and monitoring. In accounting policies and procedures, the PMO has been using a manual book accounting approach, which is inferior to modern accounting software. The PMO has demonstrated the capacity to monitor and report project finances based on ADB requirements. However, the submission of some project financial statements has been delayed. Thus, the updated financial management assessment recommended that (i) modern accounting software be procured and installed as soon as possible so that PMO staff can be trained to use it; and (ii) an international financial management specialist be recruited to help PMO staff conduct financial

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management, ensuring that the audited project financial statements are submitted in a timely manner. Financial management risks and risk mitigation measures will be reviewed and updated throughout the project’s life. 26. All goods and works will be procured in accordance with ADB’s Procurement Guidelines, and all consulting services will be recruited in accordance with ADB’s Guidelines on the Use of

Consultants. ADB agreed to the government’s request to recruit the individual consultants, which

will ensure the transparency of the procurement process and mitigate the risk of delays. MPW will remain responsible for negotiating and signing the contracts, issuing the notice to proceed, and

supervising the contracts. This is consistent with the agreement between ADB and the government of Afghanistan on the approach to enhance project delivery and the objective of

ADB’s policy on additional financing to promote efficiency gains through timely and seamless

transition from project preparation to implementation. The policy requirements and measures are described in the PAM (footnote 13).

27. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, MOF, and MPW. The specific policy requirements and supplementary measures are described in the PAM (footnote 13). D. Poverty and Social

28. The poverty and social assessment conducted for the project revealed the extent of poverty in the country, including (i) food insecurity affecting one-third of the population, (ii) a lack of access to improved water resources, and (iii) limited access to education and health services. The gender assessment revealed high maternal and infant mortality rates, limited mobility of women compared with that of men, and overall low status of women. While the project’s long-term impact is expected to improve women’s physical access to education, health, and other services by shortening travel times and making roads safer, these are indirect benefits. The project will promote equal work pay for men and women. The project is categorized as no gender elements. E. Safeguards

29. All three safeguard categories are categorized as C since (i) no land acquisition or involuntary resettlement is required, as the maintenance work will be carried out within the right-of-way of existing roads; (ii) no indigenous peoples, as defined by ADB for operational purposes, live within the project area; and (iii) the environmental impact will be minimal, not requiring mitigation actions. Thus, no land acquisition and resettlement plan, indigenous peoples plan, or initial environment assessment and environmental monitoring plan will be required. F. Risks and Mitigating Measures

30. The major residual risk is the political stability of the country, which has led to security threats to development operations. With the proposed mitigation measures, the overall risk assessment is moderate, while the integrated benefits and impacts are expected to outweigh the costs. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.17

17 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures

Risks Mitigating Measures

Implementation of periodic maintenance has been limited by weak capacity and inadequate budget flows, resulting in unsustainability of road maintenance

Development partners are helping the government to create a road authority, road fund, and transportation institute. The overall project will improve operation and maintenance planning and management, thus making budget use more efficient.

Severe security threats in the project area Civil works will be procured in small national competitive bidding contract packages that aim to engage local contractors in the project area.

Lack of sustainability of road investment, which leads to rapid road deterioration

Development partners are helping the government to improve operation and maintenance planning and management. A road asset management system is being developed under the current project to help the government prioritize maintenance work and spend the budget more efficiently.

Source: Asian Development Bank.

IV. ASSURANCES

31. The government, MOF, and MPW 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 PAM and loan documents. 32. The government, MOF, and MPW have agreed with ADB on certain covenants for the project, which are set forth in the grant agreement.

V. RECOMMENDATION

33. I am satisfied that the proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the grant not exceeding $30,000,000 to the Islamic Republic of Afghanistan, from ADB’s Special Funds resources (Asian Development Fund), for the additional financing of the Road Asset Management Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board.

Takehiko Nakao President

28 August 2017

Appendix 1 11

REVISED DESIGN AND MONITORING FRAMEWORK

Impact the Project is Aligned with Current project Increased sustainability of Afghanistan’s road transport sector (Afghanistan’s O&M Strategy 2006)a Overall project Unchanged

Results Chain

Performance Indicators with Targets and

Baselines

Data Sources and Reporting

Mechanisms Risks

Outcome

Current project

Improved road connectivity and safety

By 2020

a. Average travel time from Kabul to Ghazni reduced to 2.2 hours (2016 baseline: 2.5 hours)

b. Number of accidents on the two project roads reduced to 1,250 per year (2016 baseline: 1,760 accidents)

a.–b. Post-implementation report of MPW as endorsed by the Government of Afghanistan

Political instability within the country

Overall project

Road connectivity and safety improved

By 2022

a. Average travel time from Kabul to Kandahar reduced to 8 hours; Kabul to Jalalabad to 3 hours (2016 baseline: Kabul to Kandahar, 10.5 hours; Kabul to Jalalabad, 5 hours)

b. Unchanged

c. Improve pavement condition to IRI 4–5 (2015 baseline: IRI 8–12)

a.–c. Post-implementation report of MPW as endorsed by the Government of Afghanistan

Political instability within the country

Outputs

Output 1

Current project

1. National highways in the southeastern region maintained

1. Periodic maintenance of about 220 kilometers of national highways completed by 2020

1. MPW monitoring and completion reports

Deteriorating security situation within the country

12 Appendix 1

Results Chain

Performance Indicators with Targets and

Baselines

Data Sources and Reporting

Mechanisms Risks

Overall project

Unchanged

1. Periodic and routine maintenance of about 460 kilometers of national highways completed by 2021

1. MPW monitoring and completion reports

Rapid deterioration of road infrastructure

Output 2

Current project

2. O&M and road asset management capacity enhanced

2a. Road asset management system established in MPW by 2018

2b. At least 30 MPW engineers trained in road O&M and road asset management by 2019

2a-b. Consultant’s report as endorsed by the government

Overall project

Unchanged

2a. Unchanged

2b. At least 30 MPW engineers, at least 20% women, trained in road O&M and road asset management by 2021

2b. Post-evaluation report of training participants endorsed by MPW

Key Activities with Milestones

1. National highways in the southeastern region maintained 1.1 Complete road condition surveys for Kabul to Jalalabad and Kabul to Ghazni by December 2016,

and Ghazni to Kandahar by December 2017 (changed). 1.2 Complete procurement of civil works for maintenance of Kabul to Jalalabad and Kabul to Ghazni by

December 2017, and Ghazni to Kandahar by September 2019 (changed). 1.3 Complete road maintenance works on Kabul to Jalalabad and Kabul to Ghazni by June 2020, and

Ghazni to Kandahar by June 2021 (changed). 2. O&M and road asset management capacity enhanced 2.1 Complete recruitment of consultants by December 2019 (changed). 2.2 Establish road asset management system by September 2018 (unchanged). 2.3 Enhance capacity of MPW staff in road O&M and road asset management by September 2021

(changed).

Appendix 1 13

Inputs

Asian Development Bank (Grant)

$25,500,000.00 (current)

$30,000,000.00 (additional)

$55,500,000.00 (overall project)

_____________________

Government of Afghanistan

$500,000.00 (current)

$300,000.00 (additional)

$800,000.00 (overall project)

Assumptions for Partner Financing

Current project

Not applicable

Overall project

Unchanged

IRI = international roughness index, MPW = Ministry of Public Works, O&M = operation and maintenance. a Government of Afghanistan. 2006. Operation and Maintenance Strategy. Kabul.

Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=50062-002-2

1. Grant Agreement

2. Sector Assessment (Summary): Transport (Road Transport [Nonurban])

3. Project Administration Manual

4. Summary of Project Performance

5. Contribution to the ADB Results Framework

6. Development Coordination

7. Economic and Financial Analysis

8. Country Economic Indicators

9. Summary Poverty Reduction and Social Strategy

10. Risk Assessment and Risk Management Plan

Supplementary Document

11. Financial Management Assessment Report