Report and Recommendation of the President to the Board of Directors

Project Number: 49244-002 October 2016

Proposed Loan Armenia: Armenia–Georgia Border Regional Road (M6 Vanadzor–Bagratashen) Improvement 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 30 September 2016)

Currency unit – dram (AMD) AMD1.00 = $0.0021111

$1.00 = AMD473.60

ABBREVIATIONS ADB – Asian Development Bank ADS – Armenian Development Strategy EIB – European Investment Bank EMP – environmental management plan GDP – gross domestic product km – kilometer LARP – land acquisition and resettlement plan MOTC – Ministry of Transport and Communications PAM – project administration manual TPIU – Transport Project Implementation Unit

NOTE

In this report, "$" refers to US dollars and “€” refers to euro. Vice-President W. Zhang, Operations 1 Director General S. O’Sullivan, Central and West Asia Department (CWRD) Director X. Yang, Transport and Communications Division, CWRD Team leader J. Ning, Principal Transport Specialist, CWRD Team members N. Avetisyan, Associate Project Analyst, CWRD

A. Barseghyan, Senior Portfolio Management Officer, CWRD S. Campbell, Senior Social Development Specialist, CWRD M. Capulong, Senior Project Officer (Transport), CWRD B. Debnath, Principal Social Development Specialist (Safeguards),

CWRD M. Fan, Procurement Specialist, Operations Services and Financial

Management Department T. Herz, Transport Specialist, CWRD

S. Kim, Senior Audit Specialist, Office of the Auditor General A. Qadir, Principal Counsel, Office of the General Counsel

K. Sakamoto, Transport Economist, CWRD C. San Miguel, Senior Project Officer, CWRD T. Tran, Senior Environment Specialist, CWRD M. Villanueva, Associate Project Analyst, CWRD

Peer reviewer J. Miller, Principal Transport Specialist, Southeast 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. Impacts and Outcome 3

C. Outputs 4

D. Investment and Financing Plans 4

E. Implementation Arrangements 5

III. DUE DILIGENCE 6

A. Technical 6

B. Economic and Financial 6

C. Governance 7

D. Poverty and Social 8

E. Safeguards 8

F. Risks and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 13

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 23062015102917684597 Generated Date: 05-Oct-2016 15:01:08 PM

1. Basic Data Project Number: 49244-002Project Name Department

/DivisionCWRD/CWTC

Country Executing Agency Ministry of Transport & CommunicationBorrower

Armenia-Georgia Border Regional Road (M6 Vanadzor-Bagratashen) Improvement ProjectArmeniaArmenia

2. Sector Subsector(s) ADB Financing ($ million)Transport Road transport (non-urban) 50.00

Total 50.00

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

Pillar 2: Access to economic opportunities, including jobs, made more inclusive

Environmentallysustainable growth (ESG)

Environmental policy and legislationGlobal and regional transboundary environmental concerns

Regional integration(RCI)

Pillar 1: Cross-border infrastructure

Adaptation ($ million) 2.00Climate Change impact on the Project

High

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

Civil society participation

Knowledge solutions(KNS)

Application and use of new knowledge solutions in key operational areas

Partnerships (PAR) International finance institutions (IFI)Official cofinancing

Private sectordevelopment (PSD)

Public sector goods and services essential for private sector development

No gender elements (NGE)

5. Poverty and SDG Targeting Location ImpactProject directly targetspoverty and SDGs

No Rural HighUrban Low

6. Risk Categorization: Low.

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

8. Financing

Modality and Sources Amount ($ million)

ADB 50.00Sovereign Project loan: Ordinary capital resources 50.00

Cofinancing 0.00None 0.00

Counterpart 12.00 Government 12.00

Total 62.00

9. Effective Development CooperationUse of country procurement systems NoUse of country public financial management systems Yes

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I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to Armenia for the Armenia–Georgia Border Regional Road (M6 Vanadzor–Bagratashen) Improvement Project.1 2. The proposed project will improve a strategic regional link between Armenia (Vanadzor) and Georgia Border, one of the most heavily traveled roads for internal and external trade. It will rehabilitate and upgrade 51.5 kilometers (km) of the two-lane M6 highway from Vanadzor in Armenia to the border with Georgia at Bagratashen, improve facilities and safety along and in the vicinity of this road section in northern Armenia, and strengthen the institutional capacity of the Ministry of Transport and Communications (MOTC).2

II. THE PROJECT

A. Rationale

3. Regional integration and transport infrastructure needs. Armenia is a landlocked country in the South Caucasus region located at the crossroads of Eastern Europe and Western Asia. Armenia has distinctive economic and geographic features that pose considerable transport challenges. Armenia shares borders with four countries: Azerbaijan, Georgia, Iran, and Turkey. However, only the southern border with Iran and the northern border with Georgia are open. The western border with Turkey and the eastern border with Azerbaijan have been closed since the early 1990s. In addition, Armenia has challenging topography and weather conditions—the country is mountainous and experiences low winter temperatures, heavy snow, and high-intensity rain. As a result, the cost of infrastructure development and maintenance has remained high. 4. Important link between Armenia and Georgia. Armenia’s economy relies heavily on trade with neighboring countries through one border crossing with Iran at Meghri and two major border crossings with Georgia at Bavra and Bagratashen (Map). Bavra is at the north end of the ongoing North–South Road Corridor Investment Program financed by the Asian Development Bank (ADB).3 The North–South road corridor will mainly serve cross-border freight traffic to western Georgia and the Black Sea ports. Bagratashen is connected to the country’s national network via the two-lane M6 highway, which will be upgraded by the proposed project. The M6 is a vital link connecting Armenia with Georgia and beyond. It is the shortest link between the respective capitals, Yerevan in Armenia and Tbilisi in Georgia. In 2014, the Bagratashen border-crossing point handled 0.85 million tons of import and export freight, representing 49% of the total import freight tonnage and goods by road.4 Several international financial institutions are working jointly to improve border crossing efficiency and develop integrated border management systems in Armenia, including improvements at Bagratashen. The project is crucial to the country’s trade and economy, and will be indispensable in the long term. 5. The M6 is ill-equipped to be a major trade artery. Originally a trail, it has been rehabilitated gradually, but to basic technical standards (especially geometric parameters) 1 The design and monitoring framework is in Appendix 1.

2 ADB provided small-scale project preparatory technical assistance on 9 July 2015 for due diligence.

3 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche

Financing Facility and Administration of Cofinancing to Armenia for the North–South Road Corridor Investment Program. Manila.

4 European Investment Bank. 2014. Feasibility Study Comprehensive Phase I Report. Luxembourg.

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because of its constrained alignment within the Debed gorge, a corridor it shares with Armenia’s only operating international rail link. The M6’s deteriorated condition imposes high transport costs on users. The road pavement is in poor condition, and safety and drainage facilities are deteriorated or damaged. Visibility is unacceptably short in several locations because of sharp bends and steep gradients. Some structures are dangerous and need to be rehabilitated immediately. Every year landslides, flooding, rock falls, and heavy snowfall cause road closures. These factors have contributed to a poor safety record—about 30 crashes and six fatalities a year during 2012–2014. To improve the whole 90 km of the M6, the government requested ADB to finance 51.5 km and the European Investment Bank (EIB) to cofinance the remaining 38.5 km.

6. Road sector achievements and challenges. Road transport plays an important role in the national economy, but is constrained by road conditions and terrain. In 2014, more than 55% of freight (measured as tonnage) and more than 95% of passengers traveled by road. Armenia’s road network is 7,530 km long and comprises 1,759 km of interstate roads, 1,966 km of republican roads, and 3,806 km of local roads. Condition survey data indicates that the condition of interstate roads has declined steadily since 2010; about 66% was in good to fair condition in 2015, down from 93% in 2010. Republican roads have fared better: 66% was in a good to fair condition in 2015, up from 44% in 2010. Reliable data for local roads is not available. The poor road conditions are mainly attributed to (i) a historical lack of maintenance and limited maintenance funding; (ii) obsolete road design and technical specifications; and (iii) a lack of qualified workers, contractors, and consulting companies with the necessary knowledge and skills. 7. Road sector institutions. The MOTC is the principal government agency in charge of the transport sector. It administers all interstate and republican roads. MOTC delegates its road administration functions (including collection of road and traffic data and asset management) to the Armenian Roads Directorate, a state-owned noncommercial organization, through annual contracts. Marzes (regional administrations) and local communities manage all local roads. The institutional capacity of MOTC will be strengthened through trainings to be provided under the project management supports. 8. Road safety. The number of road traffic deaths in Armenia per 100,000 people is high.5 While the number of recorded deaths has remained at about 300 per year between 2011 and 2014, the number of crashes and the recorded number of injuries have risen about 11% per year during the same period.6 Armenia has developed a road safety action plan with support of the European Union through Transport Corridor Europe–Caucasus–Asia regional road safety project in 2014, but the implementation is still pending due to lack of fund. The National Road Safety Council, an advisory body established in 2010, is not fully operational. To augment road safety, improvements are needed in institutional coordination, traffic safety audits, road designs (including signs and markings), speed limit enforcement, and other areas. 9. Government sector strategy and plans. Improving transport system is a government priority, as reflected by its inclusion in the Armenian Development Strategy (ADS), 2014–2025. The government strategies see the development and increased efficiency of the transport system as a prerequisite for economic growth and increased access to social and economic services. The project is in line with the government’s development strategies, as well as ADB’s

5 World Health Organization. 2015. Global Status Report on Road Safety. Geneva.

6 Transport Corridor Europe–Caucasus–Asia. 2015. Armenia Road Safety Immediate Action Plan January 2015–

December 2017. Yerevan.

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country partnership strategy, 2014–2018 for Armenia.7 The project will contribute to achieving goals 3 (good health and well-being) and 9 (industry, innovation, and infrastructure) of the Sustainable Development Goals. 10. ADB’s support of sustainable road maintenance. The project will reduce the road maintenance backlog, contributing to the sustainable road maintenance initiative being developed by ADB and the World Bank under separate interventions. Under the Infrastructure Sustainability Support Program,8 approved by ADB in 2014, the government began a series of reforms to strengthen results-based management systems. The aim was to address some of the road sector constraints in order to help meet the government’s development priorities. Great progress has been made in the phase 1 of the support program: (i) several government agencies were restructured to align them more closely with the functions required in the sector, (ii) program budgeting structures were implemented to enable expenditures to be more focused on results, (iii) policies and procedures were introduced to improve road asset management, and (iv) a road sector financing strategy was prepared to allow the government to view the road sector networks as assets and understand the costs of underfunding or poor resource allocation. Phase 2 of the support program, which is being prepared and is expected to be approved in 2016, will propose an increase in the budget allocation for road network maintenance through a systematic approach until 2021. 11. Improved social benefits of the project. The project will help improve access to social services, agriculture, tourism, and jobs, with the aim of reducing regional economic and social disparities. The project will benefit Lori Marz (region), a major tourism destination with beautiful and dramatic landscapes.9 The area attracts local and international tourists from Europe, Iran, the Russian Federation, and other countries. Tourism is a significant part of the Armenian economy: international tourist arrivals have grown about 14% per year since 2006, reaching almost 1 million in 2013.10 The project will help the region transition from its historically high dependence on minerals and chemicals to a more diversified economy with an emphasis on tourism and service sectors.

12. Lessons learned. The project design has incorporated lessons learned from previous projects, including the following: (i) close monitoring and technical support on land acquisition and resettlement activities are necessary at an early stage of the project preparation; (ii) a strong project implementation unit, especially in procurement and contract management, is indispensable for successful implementation; and (iii) expeditious decision-making by the government and streamlined internal approval procedures are needed to ensure that contracts are awarded as scheduled and implementation is effective. B. Impacts and Outcome

13. The project is aligned with the following impacts: (i) accelerated deterioration of the road network prevented; and (ii) safe, quick, and easy transportation ensured.11 The outcome will be improved transport efficiency and safety along the Vanadzor–Bagratashen section of the M6.

7 ADB. 2014. Country Partnership Strategy: Armenia, 2014–2018. Manila.

8 ADB. 2014. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Grant

and Technical Assistance Grant to Armenia for the Infrastructure Sustainability Support Program. Manila. 9 United States Agency for International Development. 2014. Assessment of Rural Tourism Opportunity in Lori Marz.

Washington, DC. 10

Avenue Consulting Group. 2014. Tourism and Services Development Tendencies in Armenia. Yerevan. 11

Government of Armenia. 2014. Armenia Development Strategy for 2014–2025. Yerevan.

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C. Outputs

14. The outputs will be (i) 51.5 km of the M6’s Vanadzor–Bagratashen section reconstructed with improved pavement condition, safety features, and climate-change adaptation measures; and (ii) institutional capacity of the Ministry of Transport and Communications (MOTC) strengthened; and provision of project implementation support. D. Investment and Financing Plans 15. The project is estimated to cost $62.0 million. The financing plan is in Table 1.

Table 1: Project Investment Plan ($ million)

Item Amounta

A. Base Costb

1. Land acquisition and resettlement 1.8 2. Civil works 43.8

2. Consulting services and incremental cost 5.7 Subtotal (A) 51.3 B. Contingencies

c 10.0

C. Financing Charges During Implementationd 0.7

Total (A+B+C) 62.0 a Includes taxes and duties of $8.3 million to be financed from government resources.

b In March 2016 prices.

c Including physical and financial contingencies. Physical contingencies are computed at 10% for civil works.

Price contingencies are computed at 1.4%–1.5% on foreign exchange costs and 3.9%–4.3% on local currency costs, and include provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

d Includes interest and commitment charges.

Source: Asian Development Bank estimates. 16. The government has requested a loan of €44,037,000.00 (equivalent to $50 million based on the 23 August 2016 exchange rate) from ADB’s ordinary capital resources to help finance the project. The loan will have a 22-year term, including a grace period of 15 years, a straight-line repayment method, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility,12 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 set forth in the draft loan agreement. The average loan maturity is 18.25 years and the maturity premium payable to ADB is 0.20% per year. The financing plan is in Table 2.

Table 2: Financing Plan

Source Amount ($ million) Share of Total (%) Asian Development Bank

Ordinary capital resources (loan) 50.0 80.7 Government 12.0 19.3

Total 62.0 100.0 Source: Asian Development Bank estimates.

17. The government also requested cofinancing of up to €51 million in the form of a loan from the EIB. The EIB cofinancing is parallel and collaborative, and will not be administered by

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The interest includes a maturity premium of 20 basis points. This is based on the loan terms described in para. 15 and the government’s choice of repayment option and dates.

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ADB.13 Of the total 90.0 km to be reconstructed, EIB will finance 38.5 km and ADB will finance 51.5 km. A cofinancing letter was signed by EIB and issued to ADB on 4 July 2016. E. Implementation Arrangements

18. The MOTC will be the executing agency. The Transport Project Implementation Unit (TPIU), which was established in 2006 and satisfactorily implemented the World Bank’s Lifeline Road Network Improvement Project, will be the implementing unit. The TPIU, which is headed by a director, has about 15 permanent staff and 10 contractual staff. Recognizing that the TPIU needs to be strengthened, ADB and EIB agreed to use part of their loan proceeds to provide support to TPIU in the areas of safeguards and procurement to ensure successful project implementation. 19. ADB and EIB agreed to fully share information acquired in connection with the project so that it may be used by both banks in project processing and implementation. Such information may include documentation relating to environmental and social issues, such as social and environmental assessment, monitoring, and implementation. ADB and EIB will also cooperate in the course of administering their components through joint missions and information sharing. 20. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM).14

Table 3: Implementation Arrangements

Aspects Arrangements

Implementation period November 2016–November 2020

Estimated completion date

30 November 2020

Loan closing date 31 May 2021

Management (i) Oversight body Project governing council, comprising members from Armenia's ministries

of economy, finance, justice, transport and communication, territorial administration, and civil societies, co-chaired by the ministers of economy and transport and communication. It will provide overall guidance on the execution of the project.

(ii) Executing agency Ministry of Transport and Communication (iii) Implementation unit Transport project implementation unit (Yerevan)

Procurement The procurement of goods and civil works financed from the ADB loan will follow ADB’s Procurement Guidelines (2015, as amended from time to time). International competitive bidding

Three lots (civil works) $43.8 million

Consulting services Consultants financed by the ADB loan will be engaged in accordance with ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time) 90:10 quality- and cost- One construction supervision $3.5 million

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EIB and ADB agreed that each of their respective policies and procedures will be followed in (i) the procurement of works and goods, and the use of consulting services to be financed by its respective loan; (ii) the disbursement arrangements and establishment of accounts used for payments from its respective loan; (iii) the reporting mechanism and auditing of project accounts relating to its respective loan and monitoring, reporting, and evaluation of such loan and the project; and (iv) measures against fraud, corruption, money laundering, and the financing of terrorism.

14 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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Aspects Arrangements

based selection method

201 person-months

Least-cost selection One financial audit $0.1million Individual consultants Project management support

200 person-months Road safety consultants

$0.7 million

$0.4 million Retroactive financing and/or advance contracting

Retroactive financing is allowed for expenditures incurred up to 12 months before the date of signing of the loan agreement, subject to the ceiling of 20% of the loan amount.

a Advance contracting for civil works and

consultant recruitments is envisaged. Disbursement

a The loan proceeds will be disbursed in accordance with ADB’s Loan

Disbursement Handbook (2015, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

ADB = Asian Development Bank. a Approval of advance contracting and retroactive financing does not commit ADB to finance the project.

Source: Asian Development Bank estimates.

III. DUE DILIGENCE

A. Technical

21. The project does not present any significant technical challenges. It will improve the existing two-lane highway from Vanadzor to the Georgia border at Bagratashen, following the existing alignment except for a few sections where minor realignments are required to improve geometric alignment, sight distance, and safety. The project road will be reconstructed with a carriageway width of 6.6 meters and 1.5–2.4-meter shoulders. The design speed is 60–80 km per hour in rolling terrain with a maximum grade of 3%, and 40–60 km per hour in hilly terrain with a maximum grade of 8%. The scope of construction work includes earthwork and pavement works; reconstruction of some bridges; drainage; roadside improvements; and safety engineering features such as traffic signs, road markings, and traffic barriers. In addition, a climate change risk mitigation assessment will be carried out before construction starts, focusing on measures such as slope protection and stabilization, rock fall protection, landslide and flood protection, and other issues related to climate change. The detailed design was prepared by an international consultant engaged by EIB in accordance with acceptable Armenia standards and international practices. B. Economic and Financial

22. The economic and financial analysis concluded that the project is economically viable. The economic evaluation covered the entire 90 km of road for both the with-project and without-project scenarios. The project will generate economic benefits mainly through (i) vehicle operating cost savings; (ii) travel time savings of users; and (iii) improved road safety as a result of better pavement conditions, geometric design, and sight distances. The economic analysis shows that such benefits would allow the project to produce an economic internal rate of return of 20.9%. Although they may not be readily quantifiable, additional economic benefits are likely to accrue through lower emissions of air pollutants, noise, and greenhouse gases, as well as the promotion of local tourism that creates more jobs along the road. 23. The project road will not earn revenue through tolls. However, the project is expected to reduce the periodic and routine maintenance requirements of the M6 considerably. After the project, the routine unit maintenance requirements will be close to the budget allocation;

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periodic maintenance requirements, when averaged over the evaluation period, will be greater than the current budget allocation. Even the reduced requirements will be a challenge for the government to cover. The 2016 budget for periodic and routine maintenance is AMD4.0 billion for all interstates and AMD6.25 billion for republican roads. Special measures will be required to ensure that adequate budget is allocated to road maintenance, including for this project. Under phase 2 of the support program,15 ADB is helping the government to take proactive steps to increase the budget allocation for road maintenance and enhance its effectiveness through policy dialogue. 24. Sensitivity tests and calculations of switching values were carried out to determine the effect of variations in key input parameters. The result shows switching values of 174% for construction costs and 45% for benefits—meaning the project would be economically efficient if construction costs were to rise by 74% or the benefits were to fall by 55% of the base case values. Project viability is also robust in the face of traffic diversion to Bavra from 2022, the absence of crash cost benefits and larger-than-anticipated traffic disruption during construction. C. Governance

25. Financial management. A financial management assessment of the MOTC confirmed that it has sufficient capacity to manage and maintain the accounting systems, financial controls, and audit arrangements required for the project. The MOTC’s financial accounting, auditing rules, and internal control systems follow generally accepted international accounting and auditing practices. The MOTC will maintain separate project records and accounts to identify (i) the works, goods, and services financed from the loan proceeds; (ii) financing resources received; (iii) expenditures incurred for the project; and (iv) the use of counterpart funds, including adequate internal controls and financial reporting arrangements. An independent chartered accounting firm will audit the project accounts and related financial statements annually in accordance with national and international auditing standards. 26. The TPIU’s financial management risk is considered moderate and can be lowered by mitigating measures. An assessment identified two main financial management risks: (i) the project and TPIU will be unable to comply with ADB’s requirements on financial management and loan disbursements because of inexperience with ADB projects, and (ii) high turnover of TPIU financial management staff because of low salaries and significant workloads may result in operating inefficiency. These financial management risks will be closely monitored during project implementation.

27. Procurement. A procurement risk assessment of the MOTC indicated that procurement risk is moderate. The government has established a sound governance mechanism and has the experience to undertake procurement according to the World Bank’s procurement policy. The MOTC’s main procurement management challenges are (i) high turnover of experienced procurement staff, (ii) complex and bureaucratic internal approval systems that can cause project startup delays, and (iii) multiple layers of review and approving authorities. To mitigate these risks, a master bidding document was prepared, advance procurement has been sought, and a procurement consultant will be recruited to assist the TPIU. The procurement consultant will also provide some on-the-job training to ensure experience will stay after the project.

15

ADB. 2015. Technical Assistance to Armenia for the Infrastructure Sustainability Support Program, Phase 2. Manila (TA 9065-ARM).

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28. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the MOTC. The specific policy requirements and supplementary measures are described in the PAM (footnote 14).

D. Poverty and Social

29. An assessment of social impacts and analysis of key stakeholders’ perceptions and concerns about the project have been conducted with positive feedback. The project will help the area to transition from an abandoned chemical hub to a tourist and leisure destination. The potential beneficiaries are local communities, regional and cross-border road users, passengers, and transporters of goods. The project will provide them with safer and faster access to Georgia and the countries to the north, and will reduce their transportation costs. The main gender issues in the area are unemployment, and vertical and horizontal labor force segregation. Women are present in a narrower band of occupational categories—generally the ones with lower remuneration such as education and health—and at lower levels of responsibility. The project does not have gender design elements because of its focus on construction of road works. Increased tourism arrivals may have indirect benefits for women working in this sector. E. Safeguards

30. ADB and EIB agreed to adopt a single social and environmental assessment and planning process, as well as unified safeguard documentation, consultation, and disclosure requirements to satisfy both ADB’s Safeguard Policy Statement (2009) and EIB’s environmental and social standards as stipulated in the EIB’s Statement on the Environmental and Social Principles and Standards and EIB’s Environmental and Social Handbook. 16 During project implementation, ADB will be responsible for supervising and monitoring the environmental and social aspects of the ADB-financed section, while EIB will be responsible for reviewing and monitoring the environmental and social aspects of the EIB-financed section. 31. Environment. The project for the ADB-financed section is classified category B for the environment. The environmental management plan (EMP), prepared as part of the initial environmental examination for the ADB-financed road section, includes mitigation measures to address all construction and operational impacts. The EMP will form part of the bidding documents. During project implementation, ADB will be responsible for supervising and monitoring the environmental compliance of the ADB-financed section. The TPIU at MOTC will be responsible for the implementation of all safeguards requirements, and the TPIU has engaged a contractual environment specialist for this purpose. However, the TPIU needs to build environment capacity and will be required to hire a full-time qualified environment specialist to review and oversee the implementation of the initial environmental examination and EMP. The contractors will be responsible for implementing mitigation measures in the field through an environment specialist. The environment specialist of the supervision consultant will conduct environmental supervision in the field. A grievance redress mechanism to handle both environmental and social safeguard issues will be established to receive feedback and complaints, if any, from affected parties and to address them during construction and operation. The TPIU will submit to ADB and relevant government authorities the semiannual environmental monitoring reports for the ADB-financed section. These reports will be disclosed to the public on websites of the MOTC (Armenian) and ADB (English).

16

EIB. 2009. Statement on the Environmental and Social Principles and Standards. Luxembourg; and EIB. 2013. Environmental and Social Handbook. Luxembourg.

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32. Involuntary resettlement. The project is classified category B for involuntary resettlement. With ADB’s assistance, the MOTC has prepared a draft land acquisition and resettlement plan (LARP) that contains a preliminary social impact assessment based on the cadastral data. The assessment indicates that the project will permanently acquire 542 land plots covering 212,871 square meters in nine communities, affecting private, community, and state land. This includes 44 residential land plots, 10 businesses, and 11 leaseholders on state and community lands. The project will affect 303 households (788 persons at an average household size of 2.6), most of which will be partially but permanently affected. For implementation, the LARP will be updated with census data, an assets inventory, and consultations with the identified affected households during the detailed measurement survey upon issuance of the requisite decree by the government. In Armenia, there are chronic discrepancies between cadastral maps and the objects on the ground. Therefore, the detailed measurement survey will determine the correct status of the affected structures and the consequent number of the project-affected persons, which may have been overestimated earlier. Based on the current data, 44 residential and 10 business structures are expected to be relocated. 33. The draft LARP details the impacts of land acquisition and proposes ways to mitigate them, including an entitlement matrix. Provisions have been made for (i) the loss of land, residential and nonresidential buildings, public property, crops, businesses, and jobs; (ii) allowances for severe impacts; (iii) relocation allowance; and (iv) temporary impacts. The LARP also covers asset valuation, compensation provisions, organizational setup, a grievance redress mechanism, and compliance with ADB information disclosure and consultation requirements. The provisions of the draft LARP have been discussed and disclosed during consultations with the community. The TPIU has implemented World Bank and ADB projects involving involuntary resettlement and has engaged a safeguards consultant. Generally, executing agencies in Armenia have a strong commitment to meeting ADB’s safeguards requirements and managing the social risks. The LARP was disclosed to the public on the websites of the MOTC (Armenian) and ADB (English). After implementation of the LARP, a compliance report prepared by an external monitor will be submitted to ADB, which will be a precondition for initiating the civil works. 34. Indigenous peoples. The project is classified category C for indigenous peoples, as there are no indigenous peoples near the ADB-financed road section or in the country, as defined in ADB’s Safeguard Policy Statement (2009) for operational purposes. Accordingly, no indigenous peoples planning documents will be required. F. Risks and Mitigating Measures

35. Major risks and mitigating measure are summarized in Table 4 and described in detail in the risk assessment and risk management plan. 17 Overall, the risks can be managed by adopting mitigating measures, and the integrated benefits and impacts are expected to outweigh the costs of mitigation.

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 program budgeting has been limited by weak capacity and poor information flows, which results in unsustainability of road maintenance

ADB’s Infrastructure Sustainability Support Programa (phase 1 is

ongoing, phase 2 is being prepared) will help strengthen capacity and improve program budgeting in the road subsector. A policy matrix to increase the budget allocation for road maintenance will be included in phase 2, which will further improve the sustainability of road maintenance.

Inadequate project management capacity of the TPIU and extra workload to meet ADB and EIB requirements might delay project procurement and implementation

A lack of experienced staff and high staff turnover in the TPIU because of uncompetitive salaries have undermined its performance. ADB has discussed with the government increasing salaries with a special arrangement for TPIU staff, but it may take more time to be effective. The government agreed to hire consultants, including specialists in procurement, engineering, environment, safeguards, and financial management, under the loan to strengthen the TPIU during project implementation. EIB also agreed to allocate funds to strengthen the TPIU’s capacity. ADB and EIB agreed to enhance coordination through joint missions and sharing of information. Advanced contracting actions have been initiated for consultants and civil works.

Cost overruns A sufficient contingency has been allocated to ensure better cost estimates before awarding of civil works contracts.

Inadequate measures for climate change impact risk

Located in mountainous terrain, the project is vulnerable to disasters such as floods, landslides, rock falls, slope erosion, and snowfall. A climate change expert with a strong engineering background will be engaged to review the existing design and propose specific engineering solutions and measures to adapt to the climate change impacts.

ADB = Asian Development Bank, EIB = European Investment Bank, TPIU = Transport Project Implementation Unit. a ADB. 2014. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan

and Technical Assistance Grant to Armenia for the Infrastructure Sustainability Support Program. Manila. Source: Asian Development Bank.

IV. ASSURANCES

36. The government and the MOTC 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 agreement. The government and the MOTC have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement.

V. RECOMMENDATION

37. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the loan of €44,037,000.00 to Armenia for the Armenia–Georgia Border Regional Road (M6 Vanadzor–Bagratashen) Improvement Project, from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 22 years, including a grace period of 15 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Stephen Groff Vice-President

6 October 2016

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Impacts the Project is Aligned with

Accelerated deterioration of the road network prevented; and safe, quick, and easy transportation ensureda

Results Chain Performance Indicators with

Targets and Baselines Data Sources and

Reporting Mechanisms Risks Outcome By 2021: Transport efficiency and safety along the Vanadzor–Bagratashen section of the M6 improved

a. Travel time from Vanadzor to Bagratashen at the Georgia border reduced to 101 minutes (2014 baseline: 113 minutes) b. Average annual daily traffic along Vanadzor–Alaverdi–Bagratashen at the Georgia border increased to 3,500 vehicles (2014 baseline: 2,840 vehicles) c. Average annual road accident fatalities along M6 Vanadzor–Bagratashen at the Georgia border reduced to four during 2019–2021 (Baseline: six during 2012–2014)

a. Armenia Statistical Yearbook b. Armenia Roads Directorate Report

c. Provincial Police Department

Lack of sufficient funds for sustainable road maintenance

Outputs By 2020: 1. Road in M6 Vanadzor–Bagratashen section totaling 51.5 km (Km 38+500–Km 90+000) reconstructed

1a. 51.5 km of the M6’s Vanadzor–Bagratashen section reconstructed with improved pavement condition, safety features, and climate-change adaptation measures

1a–1b. PMC’s final report Inadequate project management capacity of TPIU and extra workloads to meet both ADB and EIB requirements might delay project implementation and cause cost overruns.

1b. International roughness index value reduced to 3.0 (2015 baseline: About 6.0)

2. Institutional capacity of MOTC strengthened

2a. At least 10 MOTC staff trained on blackspots

b

management (2015 baseline: zero) 2b. At least 100 MOTC staff trained on project management and FIDIC (2015 baseline: 10 staff per year)

2a–2b. PMC project progress report

Key Activities with Milestones

1. Road in M6 Vanadzor–Bagratashen section totaling 51.5 km (Km 38+500–Km 90+000) reconstructed

1.1 Mobilize PMC by 31 March 2017 1.2 Award civil works contract(s) by 31 March 2017 1.3 Complete civil works by 30 November 2020 2. Institutional capacity of MOTC strengthened 2.1 Engage road safety consultant by 1 October 2017

12 Appendix 1

Key Activities with Milestones 2.2 Submit report and conduct presentation on road safety assessment (including blackspots identification and

proposed treatment) by 31 September 2018 2.3 Complete training of MOTC staff on blackspot management by 30 November 2017 2.4 Complete project management training by 30 November 2020 Inputs

ADB: €44,037,000.00 from ordinary capital resources (equivalent to $50 million) Government: $12 million Assumptions for Partner Financing

EIB: €51 million loan

ADB = Asian Development Bank, EIB = European Investment Bank, FIDIC = Fédération Internationale Des Ingénieurs-Conseils (International Federation of Consulting Engineers), MOTC = Ministry of Transport and Communications, PMC = project management consultant. a Government of Armenia. 2014. Armenia Development Strategy for 2014–2025. Yerevan.

b Blackspots are road locations that have a record of large numbers of crashes.

Source: Asian Development Bank.

Appendix 2 13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=49244-002-3

1. Loan Agreement 2. Sector Assessment (Summary): Transport (Nonurban Road Transport)

3. Project Administration Manual 4. Contribution to the ADB Results Framework 5. Development Coordination 6. Economic and Financial Analysis

7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Initial Environmental Examination 10. Land Acquisition and Resettlement Plan 11. Risk Assessment and Risk Management Plan