Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 21792

IMPLEMENTATION COMPLETION REPORT(SCL-41450)

ON A

LOAN

IN THE AMOUNT OF US$20.0 MILLION

TO THE

REPUBLIC OF LATVIA

FOR A HIGHWAY PROJECT

May 7, 2001

Infrastructure Sector UnitEurope and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 21, 2000)

Currency Unit = LatLat I = US$ 1.600US$ = 0.625 Lat

LATVIAFISCAL YEAR

January 1- December 31

ABBREVIATIONS AND ACRONYMSADT - Average Daily TrafficCIS - Commonwealth of Independent StatesEBRD - European Bank of Reconstruction

and DevelopmentEU - European UnionFSU - Former Soviet UnionHDM - Highway Development and Management

ModelICB - Intemational Competitive BiddingIRI - International Roughness IndexERR - Economic Rate of ReturnLRA - Latvian Road AdministrationLRD - Latvian Road Department

LRSD - Latvian Road Safety DirectorateMOT - Ministry of TransportMU - District State Road Management UnitNCB - National Competitive BiddingNPV - Net Present ValuePIU - Project Implementation UnitPMS - Pavement Management SystemRMD - Road Maintenance DivisionRRA - Regional Road Administration

Vice President: Johanes F. Linn, ECAVPCountry Director: Michael F. Carter, ECCO9

Sector Director: Ricardo A. Halperin, ECSINSector Manager: Eva Molnar, ECSIN

Program Team Leader: Cesar A. Queiroz, ECSIN

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORTREPUBLIC OF LATVIA

CONTENTS

Page No.I. Project Data I2. Principal Perfornance Ratings 1

3. Assessment of Development Objective and Design, and of Quality at Entry 14. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 106. Sustainability 117. Bank and Borrower Perfornance 128. Lessons Learned 139. Partner Comments 1410. Additional Information 20Annex 1. Key Performance Indicators/Log Frame Matrix 21Annex 2. Project Costs and Financing 22Annex 3. Economic Costs and Benefits 24Annex 4. Bank Inputs 25Annex 5. Ratings for Achievement of Objectives/Outputs of Components 26Annex 6. Ratings of Bank and Borrower Performance 27Annex 7. List of Supporting Documents 28

Map IBRD Number 28187R

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Project ID: P008532 Project Nane: HIGHWAYTeam Leader: Cesar Queiroz | TL Unit: ECSINICR Tvpe: Core ICR Report Date: May 7, 2001

1. Project Data

Name: HIGHWAY L/C/TF Nimber: SCL-41450CountrylDepartment: LATVIA Region: Europe and Central

Asia RegionSector/subsector: TH - Highways

KEY DATESOriginal Revised/Actual

PCD: 10/30/95 Effective: 08/02/97 07/10/97Appraisal: 12/07/96 MTR: 06/30/97 02/08/99Approval: 03/27/97 Closing: 12/31/2000 12/31/2000

Borrower/lImplementing Agency: REPUBLIC OF LATVIA/LATVIAN ROAD ADMINISTRATIONOther Partners: European Union (EU Phare)

STAFF Current At AppraisalVice President: Johannes F. Linn Johannes F. LinnCotntry Manager: Michael Carter Basil KavalskySector Manager: Eva Molnar Dominique LallementTeam Leader at ICR: Cesar Queiroz Anders BondeICR Primary Author: Robert Nooter

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: HS

Sustainability: HL

Institutional Development Impact: SU

Bank Performance: HS

Borrower Pelfornmance: HS

QAG (if available) ICRQuality at Entrv: S S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3. 1 Original Objective:The overall objectives of the project were to preserve the Latvian road network and to minimize total roadtransport costs in Latvia. The specific objectives were to:

(a) Expand the level of periodic maintenance where it is economically justified;

(b) Improve the efficiency and quality of the road maintenance by introducing improved technology andquality control and by increasing LRA's cost consciousness and economic justification capabilities;

(c) Support the development of the private road construction and engineering industries;

(d) Improve road safety conditions in Latvia; and

(e) Establish the mechanism and level of funding required to achieve the minimum total road transportcost.

These objectives were consistent with the Bank's strategy for Latvia in its transition from a centrallyplanned to a market economy, which included measures to stimulate and support private sectordevelopment. This project was important for improving the condition of the country's transportinfrastructure, which in turn was an essential part of the environment necessary for private sectordevelopment. The project also facilitated the objective of deepening structural reforms by encouraging thetransition from force account operations in the road sector to the use of contracting, and the development ofan efficient privately owned and operated road construction industry.

The objectives were clearly stated, and were realistic in terms of the country's capabilities. The LatviaRoad Administration (LRA) had capable engineers, but they were out of touch with the latest technologicaldevelopments in their industry because of the isolation from the West during the Soviet period. LRA'smanagement wanted to make a transition to methods consistent with a market economy, and the project wasable to provide the means to support the transition process. Thus, the project objectives reflected thestrategies of both the country and the World Bank. This coincidence of interests reduced project risksbecause of the deep sense of ownership that the road administration had in the project.

3.2 Revised Objective:The original objectives remained unchanged throughout the life of the project.

3.3 Original Conmponents:The Highway Project included a four year program of activities consisting of the following components, allof which were to be implemented by the LRA.

(a) Periodic Highway Maintenance (US$27.0 million) - Repaving and rehabilitation of approximately230 km of overlays and 750 km of surface dressings for the Main and First Class road network.

(b) Bridge Repair and Reconstruction (US$12.3 million) - Repair and reconstruction of bridges incritical condition on the Main and First Class road network.

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(c) Road Safety Improvement (US$6.0 million) - Design and implementation of remedial measures toimprove major accident black spots identified during the preparation of the project (US$2.5 million), andimprovement of road safety in the Bauska and Iecava Regions (US$3.5 million).

(d) Gravel Road Maintenance and Low Cost Bitumenization Techniques (US$0.7 million) -Technical services to introduce cost-efficient maintenance of gravel roads including low costbitumenization and to perform economic evaluation of these techniques (US$0.2 million), andimplementation of pilot projects to complement the technical services (US$0.5 million).

(e) Equipment for the Laboratory (US$0.5 million) - Laboratory equipment needed to performEuropean Union-standard testing for road maintenance and construction.

(f) Institutional Strengthening and Training (US$0.7 million) - Services to (i) review the detaileddesign, quality control and supervision of the project (US$0.3 million for highways and US$0.1 million forbridges); (ii) improve design procedures and prepare a research program to adopt EU standards (US$0.1million); (iii) strengthen the local road construction industry through the provision of training for privateroad construction and engineering companies (US$0.1 million); and (iv) improve LRA's and the LatviaRoad Safety Directorate's (LRSD) capabilities to identify accident black spots and to design remedialtreatments (US$0.1 million).

In addition to the above costs, physical contingencies of ten percent and price contingencies calculated onthe basis of estimated worldwide inflation for the foreign costs and estimated domestic inflation for thelocal costs over the project period totaling US$9.7 million were included. Thus the total project cost wasestimated to be US$56.9 million net of duties and taxes.

The design of the project components was realistic in terms of LRA's ability to implement them, and wereconsistent with the project objectives. The first and second components were supportive of the firstobjective of expanding periodic maintenance, as well as providing the means for developing the privateroad construction industry. The third component was directly relevant to achieving the improvement of roadsafety conditions. The fourth, fifth and sixth components were the means for achieving the improvements inefficiency and quality of road maintenance, as well as providing for a study of the financing arrangementsfor road maintenance. Thus, the components were directly linked to the achievement of the projectobjectives.

The project design also reflected the lessons leamed about the road sector from prior projects, both in ECAand throughout the world. This is demonstrated in the emphasis placed on maintenance rather than newinvestment, in the provision of timely maintenance to avoid excessive future maintenance costs, in the useof economic analysis for the selection of priorities for the use of available financing, and in the use ofcontracting instead of force account for periodic maintenance operations.

3.4 Revised Components:The components remained the same throughout the life of the project. Adjustments were made in the lengthsof road repaired and the number of bridges rehabilitated, depending on the rate of deterioration of the roadsurfaces during the implementation period and detailed surveys made each year, as indicated below.

(a) Periodic Highway Maintenance (US$34.95 million) - The actual works were more intensive thanplanned during preparation, especially in regard to the need for leveling layers on many of the road surfacesthat had been considered for surface dressings only. Specifically, 220.7 km of roads were treated with asingle surface dressing compared to a planned 750 km at appraisal. As the additional leveling is a more

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expensive procedure than a single surface treatment, only a total of 752.4 km of roads were able to berehabilitated compared to an estimated 980 km at appraisal. However, as the leveling made a greaterimprovement in the road by reducing the roughness more than would have been the case with only a surfacedressing, this resulted in an increase in the economic rate of return (see para. 4.3 and Annex 3). Decisionsto alter the original design were taken with the use of careful economic analysis and in keeping with soundroad management practice.

(b) Bridge Repair and Reconstruction (US$10.71 million) - The exact number of bridges to berepaired was left open at appraisal, and was to be based on detailed field investigations. A total of eightbridges were rehabilitated or reconstructed on the Main and First Class road network, as shown on theattached map.

(c) Road Safety Improvement (US$7.41 million) - This component was carried out as originallyplanned, including design and implementation of remedial measures to improve major accident black spotsidentified during the preparation of the project, and improvement of road safety in the Bauska and lecavaRegions. The improvements in the Bauska Region, fnanced by EU-Phare, are still under implementationand are expected to add an additional US$2.2 million to the total spent for road safety under the project.

(d) Gravel Road Maintenance and Low Cost Bitumenization Techniques (US$0.32 million) - Thiscomponent was also carried out as originally planned, although at a somewhat lower cost.

(e) Equipment for the Laboratory (US$0.22 million) - Laboratory equipment was purchased asplanned, but at somewhat lower cost since equipment was also received from other donors.

(f) Institutional Strengthening and Training (US$0.79 million) - This component was also carried outas originally planned, as described in para. 4.2 (f) below.

In summary, the overall total project costs were US$54.40 million at the time of the closing of theIBRD loan, compared to the appraisal estimate of US$56.90 million. The work still to be completed forthe road safety improvements in the Bauskas Region, financed by the EU-Phare and the Government'scounterpart contribution, will add an additional estimated US$2.2 million to the final overall cost of theproject, for a total of US$56.20 million.

3.5 Quialitv at Entty:There was no Quality Assurance Group assessment of this project, but the ICR finds the quality at entry tobe satisfactory. The objectives are consistent with the objectives of the Bank's strategy for Latvia and theGovernment's priorities, the quality of the design is appropriate for a country that was just emerging fromthe Soviet Union, the preparation took into account the Bank's safeguard policies with special relevance toenvironmental considerations (wherein an environmental review was carried out during project preparationand safeguards implemented during implementation), and the risks were appropriately assessed andaddressed. The economic analysis was done competently for improvements in roads, bridges, and roadsafety covering 96 percent of total project costs.

4. Achievement of Objective and Outputs

4.1 Outcome/achiev ement of objectiv 'e:All of the project objectives were achieved or exceeded, and overall the project deserves a HighlySatisfactory rating. Specifically:

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(a) Expand the Level of Periodic Maintenance Where It Is Economically Justified. The level offinancing from Latvian sources for maintenance of the national road network was expanded from US$25.5million in 1996, the year prior to project startup, to an estimated US$60.0 million in 2000. This substantialincrease was the result of the creation of a Road Fund for the accumulation of road user charges (see belowfor a more complete explanation of the Road Fund), a portion of which is allocated to LRA's budget forroad maintenance. In the early years of the project, World Bank financing made an important addition tothe amount of rehabilitation that could be carried out, thus helping to mitigate the deterioration in thecondition of the roads. While the LRA would like to have more funds than the amounts available in recentyears, the country's financing for road improvements is at the level of 1.0 percent of Latvia's GDP, whichcompares favorably with other developed and developing countries around the world. Overall, the level ofperiodic maintenance has been expanded substantially, and to a generally satisfactory level compared toother countries.

(b) Improve the Efficiency and Quality of the Road Maintenance by Introducing ImprovedTechnology and Quality Control and by Increasing LRA 's Cost Consciousness and EconomicJustification Capability. Improvements in the technologies and operating methods used by LRA hadalready been started at LRA's own initiative, with support from an EBRD project that preceded theHighway Project. Also, LRA had contracted for the installation of a system for evaluating the priorities forroad maintenance (the Belman system), and was in process of introducing it at the time of preparation ofthis project. The project added to these changes in several important ways that are described in para. 4.2below.

The most significant improvement in efficiency was the reduction in the unit costs for basic periodicmaintenance operations such as overlays and surface dressings. During project preparation, the Bank staffobserved that unit costs for work being performed under previous work programs was high compared toother Baltic countries. Contracts were being let under national bidding procedures, without foreigncompetition. The Bank urged the LRA to utilize ICB procedures instead of national bidding in order tocreate a more competitive environment. The local contracting industry objected to the change, but the LRAagreed with the Bank and proceeded accordingly. This led to bidding by contractors from neighboringcountries and to the formation of joint ventures between local and foreign companies (the Danish companyColas and the Finnish company Lemminkainen both formed joint ventures with local companies), resultingin bids that were about 30 percent lower than estimates that were based on the cost of previous contractedworks.

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Latvia Unit Costs in Lats for Road Improvements

Unit 1998 1999 2000

Pothole Patching t 47,21 48,62 42,00

Crack Sealing m 0,67 0,72 0,79

Bitumen Tack Coat m 0,19 0,21 0,11

Asphalt Concrete Leveling Course t 36,08 32,65 26,9

Single Surface Dressing m 1,06 1,10 0,81

Grading and Compacting of Shoulders 2 0,19 0,19 0,12

Cutting of Bushes ha 513,10 528,5 382,32

Asphalt Concrete Wearing Course, 4 cm m2 5,31 3,39 2,732

Asphalt Concrete Wearing Course, 6 cm m 4,93 5,09 3,962

Hot Remix-Plus m 2,91 3,59 2,78

Road Marking m2 4,80 4,27 4,21

Of particular significance is the reduction in the unit costs for asphalt concrete leveling and wearingcourses and for surface dressings, since these make up most of the cost of the periodic road works includedin the project.

In addition, quality controls were reinforced by insistence on rigid inspection of completed works as a basisfor full payment of contracted work. Links were established between LRA and its Nordic counterparts in amanner that will facilitate LRA's access to new technologies over the coming years, as is described morefully in 4.2 (f) below.

(c) Support the Development of the Pivate Road Construction and Engineening Industries. Prior tothe start of the project, all of the road construction companies had been privatized. Training carried outunder the project was helpful in improving the operations of these private road contractors in Latvia,including contract bidding procedures, cost accounting, and private sector management skills. Also, theintroduction of International Competitive Bidding for the placing of periodic maintenance contractsintensified the pressure on the local contractors to find ways to lower their costs and improve their qualityin order to be able to compete. In the final analysis, this made them better and stronger companies able tocarry out high quality work at competitive prices.

At the time of project preparation, routine maintenance was being carried out by 26 publicly ownedRegional Road Administrations, each responsible for the routine maintenance operations in oneadministrative unit of the country. These units were combined into four publicly owned companies, each ofwhich operates on a contract basis for its respective area of the country, based on contracts issued by the

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LRA and with payments made only for actual work performed. Some of the routine maintenance functions,however, including road marking and some of the installations of road signs, barriers, and reflectors, arecontracted out in open tendering to private companies.

(d) Improve Road Safety Conditions in Latvia. The physical improvements in the areas identified asaccident black spots have led to a significant reduction in the number of accidents and fatalities at theselocations. The construction of underpasses on major routes, for example, made access to facilities on bothsides of the roadway more accessible, especially for children, disabled, and old people who had previouslyhad difficulty in crossing busy thoroughfares. While the data is based on only the past two years (and insome cases even less), the average number of accidents involving personal injury has been reduced at theselocations from 12 accidents per year to one, and the number of fatalities from 9 to zero.

For the country as a whole, road fatalities declined from 611 in 1995 to 588 in 2000, and the total numberof accidents involving personal injury declined from 4,903 in 1995 to 4,482 in 2000. During the sameperiod, registered vehicles increased from 368,000 in 1995 to 701,804 at the beginning of 2000. Thus, on aper vehicle basis, there was a significant reduction in the rate of fatalities and accidents during the projectperiod, with the fatalities per 10,000 vehicles falling from 16.6 in 1995 to 8.4 in 2000.

On October 21, 1997, the Road Traffic Law was passed. On the basis of this law, road traffic regulations,regulations for equipping work areas on roads and streets, normative documents for vehicle technicalcontrol, vehicle registration regulations, drivers' qualification regulations, regulations for road signs,vehicle marking, emergency vehicle coloring and equipment, road marking and other state standards forLatvia have been developed.

On October 25, 1991, a new public institution was established at the Ministry of Transport andCommunications called the Road Traffic Safety Directorate (CSDD). CSDD is a non-profit public jointstock company dealing with vehicle registration, administering of qualification examinations for drivers andissuing of driving licenses, securing technical inspection of vehicles, surveillance of roads for safe traffic,and developing and maintaining a vehicle and drivers' register and data base. Reporting on traffic safetyconditions has improved, including availability of road safety data, which is now available on the RoadTraffic Safety Directorate web site at www.csdd.pv. Latvia has also adopted the 1968 Vienna Conventionstandards "On Road Traffic" and "On Road Signs and Signals".

(e) Establish the Mechanism and Level of Funding Required to Achieve the Minimum Total RoadTransport Cost. The Government introduced a Road Fund during the period when the project was underpreparation, which began to accumulate funds in April 1994. The key features of the Latvian Road Fundwhich stands out as an example of global best practice are as follows: (i) Revenues come from vehiclelicense fees (collected by the Road Fund) and a levy added to the price of fuel. Key to its success was themanner in which the levy was introduced. The Ministry of Finance made certain that when the levy wasproposed (as well as each time it was increased), it remained budget-neutral, i.e. if the Road Fund levywent up by 2 cents per litre, the general tax on fuel went up by more than 2 cents. General taxes, therefore,increased rather than being diverted to the Road Fund; (ii) The Fund has a broad-based oversight board,which is truly independent. It has only advisory status, but appears to be quite effective. Its 13 membersinclude a chairman (the Minister of Transport and Communications), six representatives of the centralgovernment, two representatives of local government and six representatives of civil society. The centralgovernment members are ex officio, while the rest are nominated by the organizations that they represent;(iii) The Road fund finances national, municipal and local roads (30 percent goes to the municipalities andlocal roads). They operate with transparent and very well thought out formulas for dividing the findsbetween the various municipalities and local entities; (iv) Finally, the Road Fund is rigorously audited.

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There are extensive checks to ensure that the funds have been spent on approved programs and that workhas been carried out according to specifications. There have been some problems at the municipal level(some municipalities initially spent the money on school buildings), but work is ongoing to tighten financialcontrols on spending.

As Road Fund revenues increased, other sources of financing for road maintenance (principallyGovernment budget support) were phased out. Road Fund revenues channeled to LRA increased due to theincreases in vehicles in Latvia, plus some adjustments in the level of taxation. At present, 50 percent of theexcise duty on fuel, as well as vehicle registration fees, must be put into the Road Fund on a regular basis.No financing is provided from the general budget for road maintenance except for a rural roadrehabilitation program, and foreign loans that are used for road maintenance are expected to be repaid fromRoad Fund resources. The Road Fund finances subsidies to the railway system and bus transportation inrural areas, and road maintenance for municipalities, in addition to the operations of LRA. At present,about 67 percent of the Road Fund revenues now are available to LRA for the maintenance andimprovement of the national road network.

The overall result of the creation of the Road Fund was an increase in revenues available to LRA for roadrehabilitation from US$25.5 million in 1995 to an estimated US$60.0 million in 2000 (without includingforeign loans). Road Fund resources available for the national road network equaled 1. I percent of Latvia'sGDP in 1998, which compares favorably with allocations for road maintenance in developed countries.There was an eight percent decline in income to the Road Fund in 2000 compared to 1999 due to theapparent failure on the part of the Ministry of Finance collection agencies to collect all fuel excise taxes,but the overall level of financing for road maintenance was still at an acceptable level. At the same time, theuse of the Belman system for planning road maintenance activities based on economic analysis assures thatthe available funds are being used to the best advantage.

The introduction of the Road Fund in 1994 undoubtedly added to the resources available for roadmaintenance in Latvia, in contrast to other countries that relied solely on budget allocations for thispurpose. The fact that the Road Fund also financed municipal streets and subsidies for other forms oftransportation probably helped to secure support for the Road Fund Law at inception, and to keep the RoadFund in place. At the same time, those who oppose the use of Road Funds would argue that theincorporation of certain road user charges into compulsory financing arrangements results in a lack offlexibility for programming the use of public resources at the time the budget is prepared. On the whole,however, in Latvia's case the use of a Road Fund provided resources at what appears to be a reasonablelevel of financing on a secure and regular basis, and as such can be considered as a desirable development.

4.2 Outputs by components:(a) Periodic Highway Maintenance. The periodic maintenance component was carried out on scheduleand at the estimated cost. A total of 752.4 km of roads were improved at an average cost of US$46,451 perkm, including improvements in drainage, road markings and signs, and other related improvements inaddition to the basic improvement of the pavements. The project helped to improve the roughness of theentire Main Road Network, 1610 km in length, as indicated by the average roughness of the network asfollows:

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Year Roughness (IRI, m/km)1997 3.381998 3.561999 3.032000 3.01

(b) Bridge Repair and Reconstruction. A total of eight bridges were repaired or reconstructed (see mapattached).

(c) Road Safety Improvement. Under the project, improvements in accident black spots identifiedthrough data collection introduced under the project were designed with the help of highly qualifiedintemational consultants, and construction is now completed. Also, local design personnel were trained inaccident black spot design techniques so that they could carry out similar designs after the experts haddeparted. A total of nine accident black spots were improved.

Also, Latvia carried out a broad based road safety program involving many Government agencies. Itestablished a Traffic Safety Council under the Cabinet of Ministers, composed of members from theMinistry of Transport and Communications, the Ministry of Interior, the Municipality of Riga, and theCommunity of Municipalities. The Council reviews and approves traffic safety programs, and sets tasksfor the Ministry of Transport and Communications in the road safety area. It has also prepared a TrafficSafety Program for the years 2000-2006 with a target of reducing the number of fatalities from 627 (1998)to a level of 300 by the end of the period. As part of this program, the Government has established a targetfor annual road safety expenditures of at least Lat 3.0 million, which is about 10 percent of the annual roadbudget. The combined impact of these activities and the improvements in accident black spots resulted insignificant improvements in road safety conditions, as described in para. 4.1 (d) above.

(d) Gravel Road Maintenance and Low Cost Bitumenization Techniques. International consultantswere engaged to design test sections for trying alternative techniques for the bitumenization of gravel roads.The test sections were installed in 1998, and are now in process of evaluation. While it is too early toassess which of the techniques offers the best choices for Latvia, the work that has been carried out hasbeen satisfactory.

(e) Equipment for the Laboratory. Laboratory equipment was procured for the purpose of upgradingthe capacity for conducting tests on asphalt concrete and other road construction materials. The equipmentwas installed and put into operation in a satisfactory manner. The total amount of equipment financed bythe project was somewhat less than originally planned since LRA received support for this purpose fromother financing agencies.

(f) Institutional Strengthening and Training. International consultants, financed through technicalassistance programs from Sweden, Finland and Denmark, were engaged in conjunction with localconsultants to introduce modem design and quality control practices, using the project's periodic worksprogram as a practical example. Task teams were organized to review and update Latvia's design standardsconsistent with EU standards; this work is still ongoing, but is making good progress. Training wasprovided in Latvia to the local road construction industry in competitive bidding procedures and how tocarry out contracts, augmented by workshops in Estonia and France. LRA introduced internationalcompetitive bidding, as described above, resulting in a local industry that is able to compete with foreign

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firms. A pavement improvement technique called "mill and fill", whereby a milling machine is used toremove high spots on the pavement surface and asphalt concrete is applied to fill the remaining low spots,was introduced and tried on a test basis. The final results of quality and cost are still being evaluated, but ata minimum Latvia now has access to this technique for future use in appropriate applications. While LRAwas already installing a Belman system for determining road maintenance priorities, it has also begun touse the World Bank computer program HDM-4.

LRA's linkages to other road administrations in all of the Nordic countries were strengthened. ManyLatvian road engineers visited the Nordic road administrations, and Latvia was invited to participate in theNordic Road Council meetings. Swedish bilateral finding was obtained for establishing vehicle testingstations and other applications that were additional to the project itself. Finland and the US FederalHighway Authority helped to build up Latvian technical competence through the T-2 center that wasestablished in Latvia. Also, cooperation between the road administrations of the three Baltic countries wasencouraged. A recent example of this was the Regional Transport Seminar held on November 16-17, 2000,which was hosted by the Latvian Ministry of Transport and Communications in Riga, to which the othertwo Baltic countries were invited. The purpose of the conference, which was well attended by all threecountries, was to assess the progress made in each country in restructuring their transport sectors, and tocompare the progress made in each subsector. In summary, through its exposure through these contacts,Latvia has leamed how to access interesting new technologies and policy options, and they are now able tofind what they need themselves.

In summary, all of the planned improvements in quality and institutional strengthening, as well as someadditional improvements, were carried out as planned and in a highly satisfactory manner.

4.3 iVet Present IValue/Economic rate of return:Net Present Values (NPVs) and economic rates of return (ERRs) were calculated at project completionbased on actual costs and updated traffic counts, with the following results:

Project Component V at Appraisal NPV at Completion ERR at Appraisal ERR at______________ ________________ ______________ C om p letion

Periodic Highway US$87.5 million US$148.6 million 34.9 % 56.8 %Maintenance Bridge Repairs and US$525.0 million US$550.7 million 227 % 289 %Reconstruction l

The cost of capital used for both calculations of NPV was 12 percent.

Economic rates of return and NPVs were not calculated for the Road Safety component due to therelatively short time period for accumulating data on accidents since the improvements were made.However, based on the preliminary data described in para. 4.1 above, the results should easily exceed theERR of 65.0 percent and NPV of US$10.2 million estimated at appraisal.

4.4 Financial rate of/return:

Not applicable.

4.5 Institutional development inipact:

The institutional development impact was considerable, as described in 4.2 (f) above. LRA had alreadystarted the process of adopting modem road maintenance techniques before the project began, but thisprocess was further stimulated and accelerated by the activities that were carried out as part of the

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Highway Project.

5. Major Factors Affecting Implementation and Outcome

5. 1 Factors outside the control of govenmment or implementing agencY:There were no significant factors outside of the control of the Govermment that affected the progress of theproject. The only factor that had some negative impact, outside of the control of the implementing agency(LRA), was the recent decline in the collection of road user charges described in para. 4.1 (e).

5.2 Factors generally siubject to government control:The Government fulfilled all of its obligations under the project, including making counterpart fundingavailable through the operation of the Road Fund. Loan signing and effectiveness were achieved on orahead of schedule, and the project was completed within the original time frame.

5.3 Factors generally subject to inmplementing agency control:There were no factors under LRA's control that affected the project adversely.

5.4 Costs and financing:There was one major change in the financing arrangements for the project. During preparation, there werefirm indications that the Kuwait Fund would provide US$15.0 million in co-financing for the project.However, the Government preferred to minimize its foreign borrowing, and decided to finance the US$15.0million from its own resources, which was facilitated by the World Bank Structural Adjustment Loan thatwas available at that time. Consequently, the Government, at its own initiative, provided both the agreedcounterpart financing of US$15.4 million and the co-financing amount. US$20.4 million of this amountcame from the Structural Adjustment Loan, US$3.7 million from the Road Fund, and US$6.4 million fromthe Government budget for a total of US$30.5 million. This revised financing plan did not alter the project,which remained the same as originally planned in scope and size.

Co-financing included in the project preparation was estimated at US$5.8 million in grant financing fromEU-Phare for the renovation of two of the bridges included in the project, and for major road safetyimprovements in the Bauska and lecava Regions. The EU component was delayed somewhat due to thenecessity of adapting the bidding documents and procedures to EU rules. However, the work on the twobridges and the improvements in the Iecava Region has been completed, and the work in the Bauska Regionis now under way. Financing from the EU-Phare grant disbursed as of December 31, 2000 was US$3.58million and is included in the project summary. The cost of the remaining work in Bauska is expected toadd an additional US$2.2 million to the cost of the project when completed (US$1.5 million from EU-Phareand US$0.7 million counterpart financing from the Government), for a total EU-Phare contribution to theproject of US$5.08 million.

Co-financing from Sweden (US$0.3 million), Finland (US$0.3 million) and France (US$0.1 million) fortechnical support for improved gravel road maintenance techniques, quality control, design standards, andtraining in road safety and for private contractors was made available as planned.

6. Sustainability

6.1 Rationale. for sustainability rating:Sustainability of the project objectives is highly likely due to the Government's awareness of the importanceof road maintenance and road transport for national development. This is evident in its commitment to theuse of a dedicated Road Fund and its willingness to finance the Fund at an adequate level. Also, theenvironment within the Government is conducive to good management practices, with no apparent political

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interference with operations or corrupt practices. Furthermore, there is a high level of commitment at thetechnical level to improving operations and introducing best practices. All of this bodes well for a continuedhigh level of performance.

In the recent past, there has been some reduction in the level of collections of fuel excise taxes even thoughthere has been an increase in the number of registered vehicles and an obvious increase in traffic on theroads. LRA has called this to the attention of the tax collection agencies that have responsibility forcollections. Until this situation is improved, financing available to LRA for road maintenance will beadversely affected, but not to such a degree that serious road deterioration would result unless the situationworsens significantly.

Latvia is undergoing a comprehensive civil service reform that will affect all parts of the Government. InLRA's case, this will mean that its organizational structure will change from that of a non-profitstate-owned joint stock company to an agency of the Government, reporting to the Ministry of Transport.However, the functions for which LRA will be responsible remain the same as previously, and thereforethis change should not have any adverse effect on its operations or the sustainability of the projectobjectives.

6.2 Transitioni arrangement to regular operations:Through the assistance of project consultants and training, LRA has developed design standards based onWestem models that are used for both international and local contracting for periodic maintenance. It hasalso introduced competitive bidding procedures for periodic maintenance on a regular basis, and thetraining carried out under the project has developed the contractors' ability to function on this basis.Contractors have purchased new equipment to be able to comply with the requirements of Westemstandards. Thus the operational procedures introduced during project implementation have now beenincorporated into LRA's regular operations.

In the area of road safety, the Traffic Safety Council has been established, and a new division has beenestablished in LRA that is responsible for traffic safety functions. Also, financial sustainability is securedby the existence of the Road Fund, supervised by a Road Fund Board, which consists of representativesfrom Government, road users and civil society.

The establishment of these organizations and operational procedures should provide reasonable assurancethat the improvements in the road network made because of the project will be maintained in the future.

7. Bank and Borrower Performance

Bank7.1 Lending:Project preparation was carried out expeditiously and in a highly professional manner, and consequently theBank's performance is rated as Highly Satisfactory. The project identification phase took into considerationthe Government's and the Bank's assistance strategies, which recognized the importance of an adequateroad network as essential for reaching the country's development goals. The project design benefited fromlessons learned about the transport sector from other World Bank projects, resulting in placing emphasis onmaintenance instead of new construction, the need to introduce new technologies and operational methodsin order to modernize road maintenance operations, and the importance of an adequate and regular sourceof financing for road maintenance. The project counterpart was a single agency (LRA), which simplifiedthe implementation process. Preparation was carried out with only four Bank staff, which was adequate toprepare all of the essential elements of the project while keeping the preparation cost to a minimum. TheBank staff correctly assessed that the Government counterparts were dedicated and competent, with a

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sincere commitment to carrying out the project and sustaining it after completion, and that the Governmentwas prepared to support the project with adequate financing.

7.2 Supervision:The supervision of the project was also Highly Satisfactory. Supervision missions were carried out on aregular basis with competent professional staff. Reporting was timely and reflected the progress beingmade. The compliance with legal covenants and the reporting of the Project Monitoring Indicators wasdone regularly. The numbers of Bank staff devoted to supervision was minimal, but fully adequate to keeptrack of project developments and progress. There were no deviations from Bank policies, and no revisionsto the project design were necessary.

7.3 Overall Bank performa77ce:For the reasons outlined above, the Bank's performance is rated as Highly Satisfactory.

Borrower7.4 Preparation:The borrower was fully involved and cooperative in the preparation process. Both the Ministry ofTransport (MOT) and the LRA had a keen interest in moving the preparation along as rapidly as possible,and provided all necessary information and support. The borrower had prior experience with intemationalagencies through the implementation of an EBRD loan for road improvements, which greatly expedited theprocess of understanding procurement and contracting procedures to be followed in the Highway Project.The Government was already aware of the need to modemize its road maintenance operations, and manychanges were already under way, so that the Highway Project could build on this base and take anotherstep forward. Thus the Govermnent's role in the preparation process is also rated as Highly Satisfactory.

7.5 Government implementation performance:The Government met its commitments under the project without fail, including the timely and adequateprovision of counterpart funding. All legal commitments were complied with, and there were no deviationsfrom the Bank's safeguard policies. The MOT pursued the establishment of a Road Fund on its owninitiative, as it recognized that this was essential for assuring a regular flow of funds for road maintenance.

7.6 Implementing Agency:LRA, the implementing agency, also deserves a Highly Satisfactory rating for its role as the principleimplementing agency. Implementation was facilitated by the fact that an effective Project ImplementingUnit (PIU) had been established for the preceding EBRD project, and could be used for the implementationof the Highway Project without the usual delay needed for the establishment of a new organization. Also,the LRA performed its tasks expeditiously and with competence, and was eager to adopt new technologiesthat proved effective.

7.7 Overall Borrower pe;fornmance:

The borrower's overall performance is rated as Highly Satisfactory for the reasons outlined above.

8. Lessons Learned

There were a number lessons that emerged from this project that have relevance to other projects in thissector:

(a) Competent Counterparts Significantly Improve the Chances for a Successful Project. This, andits opposite (poor counterparts often lead to poor projects), is a lesson that is leamed repeatedly in WorldBank operations, but can not be repeated too often. In this case, every step of the project, from preparation

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to completion and then to sustainability, was facilitated by the extremely competent and dedicated staff atLRA and MOT. On the contrary, the best project design would have had limited impact if this were not thecase.

(b) A Maximum Degree of Competition is Necessary to Achieve Efficiency of Contracted Works. Thepreceding EBRD project was well designed and implemented, and there was a competent local constructionindustry capable of doing good quality work. However, the absence of international contractors reduced thelevel of competition, with the result that contracted operations were more costly than those in neighboringcountries. The introduction of Intemational Competitive Bidding intensified the competition, withreductions in unit costs of 30 percent or more over the life of the project. The lesson to be leamed is thatprocurement procedures should take into account the maximizing of competition. In road operations, thiscan best be achieved when both local and foreign firms compete through the use of ICB, but with biddingpackages sufficiently subdivided so that local fimns with limited financial capacity can also participate.

(c) Simplicity Pays Off. Experience has indicated that simpler projects tend to be more successful, andthe present project confirms this observation. The project had a single counterpart agency, the LatvianRoad Administration, under the authority of the Ministry of Transport and Communications, which wasresponsible for implementation of all project components. This simplified both project preparation andsupervision, and allowed the Bank staff to concentrate its efforts in a manner not possible with morecomplicated projects.

(d) Continuity of Staff is Important. There was no change in the local counterpart staff over the life ofthe project. On the Bank side, there was one change of Team Leader, but with good transition andcontinuity as both Team Leaders remained in the same department (ECSIN). This allowed the participantsin the project activities to have a continuous dialogue, and to develop trust and understanding of eachother's viewpoints by working together over an extended period of time.

(e) "Second Generation" Type Road Funds Work In Latvia, a "second generation" Road Funddemonstrated that this type of fund could win the recognition and support of the public at large whileputting road managememt on a sound commercial footing. As such, it can also play an important role inmeeting European integration requirements. Essential conditions for success were its transparency, anoversight board that is broad-based, independent and includes nongovemment members, beneficiaries of thefund that include local and municipal govenmments, and road user charges that are designed not to reducegeneral revenues.

(f) Involvement of Highly Developed Countries in Bank-financed Projects Speeds InternationalIntegration. When highly developed countries (in this case, Sweden, Finland, France and the EU) are keyforeign stakeholders in economic growth of a country, the availability of grants for technical assistance tosupport important refonn programs helps to re-integrate the economy into the intemational community andresults in unusual speed in changing the traditional patterns of doing business.

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9. Partner Comments

(a) Borrowerlimplementing agency:

Comments of the Latvia Road Administration

Historical Background

After gaining independence Latvia started a transition period towards the market economy. The road sectorbudget decreased drastically in year 1992 and only emergency road repairs could be carried out resulting in agrowing backlog of periodic road maintenance. An important step towards improving of road financing was theestablishment of the Road Fund in 1994. The road construction industry was partly privatized. Latvia had noexperience in public procurement and the relevant legislation had to be developed. The standards for geometricand pavement design were still based on the former Soviet Union design manual. Axle loads often exceeded thedesigned capacity of roads. The first Road Project in Latvia was being implemented from 1994 to 1996. TheProject was financed by EBRD and JEXIM and included road periodic maintenance (120 km of overlays), theequipment for efficient winter maintenance and procurement of testing equipment according to Westernstandards. The institutional strengthening component included Asphalt Technology Study, Road User ChargesStudy, and Road Management Reorganization Sturdy. The EU-PHARE program was expected to finance partof the improvements of the Via Baltica road.

Project Objectives

The overall objective of the Latvia Highway Project was to minimize total road transport costs in Latvia. Thefollowing specific objectives were outlined to compliment the overall objective:

(a) Expand The Level of Periodic Maintenance Where It Is Economically Justfied

It was agreed in the Loan agreement, that each year the Borrower shall submit to the Bank an economicallyjustified work program.

Repaving Work

LRA uses the Danish Belman pavement management system. The sections are prioritized comparing the effectand cost of the selected solutions. After the implementation of the Project economic intemal rates of return andnet present values were recalculated with the help of HDM3 model taking into account actual contract pricesand vehicle operating costs. In most cases the actual benefit was higher than planned. IRRs in all casesexceeded 20% thus confirming the high cost effectiveness of the Project. In general, the current financing levelis insufficient to cover periodic maintenance needs for all the state road network. In order to avoidconcentration of all works only on the busy roads around Riga, and leaving some regions without any periodicmaintenance, minimum financing quotas have been set for each region. LRA prepares an annual workprogram taking into account regional needs in addition to the cost benefit analysis.

Bridge Maintenance

The priority list of bridges was prepared by a consultant from SweRoad. The sequence of repairs was based onthe actual technical condition of the bridges. Eight bridges were repaired under the Project. Other bridges fromthe list were repaired or will be repaired using local funds. The planned rates of return for bridges were

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calculated as extremely high and remained such after recalculation at the end of the Project. In order tominimize road users' costs in all the cases temporary bridges or one free line for traffic was provided duringreconstruction. Only on Gauja Bridge the heavy traffic was diverted to an altemative route.

Traffic Safety

At the beginning of the project LRA did not have a methodology for black spot analysis. Traffic safety expertsfrom SweRoad prepared a manual for evaluation of various measures for the elimination of black spots. Blackspot improvement works were started in 1998. The actual effect from black spot improvements can not beproperly valuated yet because the period after reconstruction is too short. However, the fact that during theperiod after reconstruction heavy accidents have not been registered in the treated black spots make us believethat measures taken have been effective.

(b) Improve the Efficiency and Quality of the Road Maintenance by Introducing Improved Technologyand Quality Control and by Increasing LRA 's Cost Consciousness and Economic JustificationCapabilities

Design standards and specifications of the former Soviet Union were still in force in Latvia, but LRA hadstarted the process of adapting design, specifications, construction technology and testing of road standardsused in the European Union. In order to improve the efficiency and quality of the road maintenance the Projectincludes several studies oriented to introducing of Western design standards and improving of contractmanagement and supervision.

The Technical assistance was given by DHW Consultants to LRA and Technical Conmmittee forStandardization to review and adapt suitable EU standards regarding road geometric design, pavementstructural design and related specifications and testing methods. Close cooperation was established betweenLatvian and European institutions of standardization. For the period until European norms will be developedSwedish asphalt norms "Road 94" were accepted for use in Latvia. Since 2001, LRA has developed newstandard specifications for state roads. The new asphalt specifications are completely based on Westernstandards.

LRA, in cooperation with local design companies and the State asphalt laboratory, developed repaving worksspecifications for the Highway project. The bidding documents were prepared according to the World BankGuidelines by PIU. The works were contracted out to private enterprises on a contract basis throughcompetitive bidding. The contracts described new requirements to the quality to be met and the penalties faced.The innovations in the contracts required improvements in contract management and supervision. Theconsultants from Finnish National Road Administration were assigned for contract management andsupervision study. The consultant observed local contract management practice and made recommendations fororganization and reporting obligations for contract management as well as substantial assistance was given topractical site supervision. The supervision of works was performed by supervisors on a contract basis or forsmaller sections by LRA's regular staff. New model templates, such as site diary, quantity measurement form,payment certificates, etc., were introduced in practice not only for World Bank project, but for all periodicmaintenance and reconstruction including EU and locally financed contracts. Improvements in contractmanagement and supervision made possible more accurate evaluation of quality. The quality requirements andimproved supervision made contractors concentrate more on quality and consider investments in newtechnologies.

Latvia has 60,000 km of gravel roads of which 12,000 are state roads. For gravel roads LRA does not have apavement management system. The Project included two components towards improving LRA's ability of

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economic justification of gravel road maintenance projects. With the technical assistance from SweRoad,Scandinavian gravel road maintenance technologies for preventing of dusting were tested. In order to compareperformance of local materials a pilot section was treated with three types of stone materials. We gotinformation about approximate costs of the tested technologies. LRA provided the follow-up and maintenanceof the pilot sections in order to evaluate the complete cost and durability of the tested technologies. The pilotproject for introducing of the economic evaluation model HDM4 was started in one region with 300 km ofgravel roads. There is software in the LRA and a trained project team capable to continue implementation ofthe HDM4 model in the entire country. Currently due to lack of financing for gravel roads, the Government hasnot ordered further implementation of the project.

(c) Support the Development of the Private Road Construction and Engineering Industries

The Latvia Highway Project introduced intemational bidding in the road construction market of Latvia. Frenchconsultant Ponts Formation Edition conducted a series of seminars in order to improve capability of localcontractors to compete and to perform the contracts according to intemational contracting practice. Fiveseminars for directors and technical managers were held in Latvia, also one workshop in Estonia and Lithuaniaas well as a study tour to France. The main topics of seminars were financial management, qualitymanagement and the latest construction technology. The Highway Project also increased the periodicmaintenance market in Latvia. This increase improved the economic situation of the local constructionindustry. The contractors invested in new technologies thus improving the quality of works.

(d) Improve Road Safety Conditions in Latvia

Latvian statistics on road accidents are among the worst in Europe. The Latvia Highway Project includedseveral measures to improve the traffic safety situation on the state roads. SweRoad consultants assisted toprepare Road Safety Program of the Project. In order to develop local expertise in accident black spot analysisSwedish traffic safety experts were working in close cooperation with the newly established trafficorganization division in LRA. Eight accident black spots were improved in the World Bank Project and Pharefinanced traffic organization improvements in lecava and Bauska towns on Via-Baltica.

(e) Establish the Mechanism and Level of Funding Required to Achieve the Minimum Total RoadTransport Cost

Since 1994, Latvia has established a state road fund. The revenues of the State Road Fund consists of theannual vehicles tax and 50% of the excise duty on fuel. Although the State Road Fund can not cover the actualneeds of the entire road network, it was continuously growing and the legal base of the Fund has beendeveloped. An important contribution to the State Road Fund was given by the amendments to the law "OnExcise Duty" adopted by the Parliament on May 16, 1996. They clearly determined the state policy towardsthe increase of excise duty in order to draw nearer the tax rates to those minimum rates determined by theEuropean Union. Unfortunately, currently, the Road Fund does not ensure the level of funding required toachieve the minimum total road transport cost. In year 1999 and 2000 the collection from fuel excise tax wasbelow the expectations and currently the Road fund ensures only 1/3 of optimal financing needs. At the sametime, the Road Fund has become an example of how to involve all stakeholders in planing process of roadtransport funding. Road Fund Advisory Board includes representatives of state, municipalities, road buildersand road users. Regular information about Road Fund budget and planned road maintenance activities hasincreased public awareness that road infrastructure is a service to be paid for. Road users start taking care ofwhere their money goes and how it comes back to the road.

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Project Expenditures

Components Total Project Funding from(USS million) Costs World Bank

1. Works(a) Highway Maintenance 34,95 14,42(b) Bridge Rehabilitation 10,71 3,05(c) Road Safety Improvements 7,41 2,00(d) Gravel Road Works 0,32 0,24

2. Equipment and Materials 0,22 0,203. Consulting and Training 0,79 0,09Total Cost 54,40 20,00

Borrower's Performance

Preparation

The borrower established a project team with the necessary competence and capacity for project preparation.At the time of preparation of the project. The EBRD project was already coming to the end of implementation.The Borrower had good experience in road projects financed by IFI. MoT and LRA had clear views on actualtransport infrastructure needs. The proposals of project components were economically justified andcorresponded to the actual situation. The borrower provided the necessary information for project preparationon time. The relevant feasibility studies were prepared and stake-holding institutions involved in projectpreparatory stage.

Implementation

It was agreed to keep PIU from the previous project. PIU had good experience of EBRD procurement andfinancing procedures. There were no difficulties to learn World Bank procedures and ensure adequateimplementation. The loan covenants were followed and proper reporting ensured. A wide range of local expertswere involved in implementation of the project. Close cooperation between the consultants and local expertsmade it easier to adapt project innovations and ensured sustainability. Innovations in contract management andsupervision have become a usual practice in all LRA's works contracts. The Government ensured counterpartfinancing during the whole project cycle. All payments of interest were made timely and in full amnount.Annual audit of project expenditures confirmed that funds had been spent according to the provisions of theLoan agreement. The most difficult cases during project implementation were:

(a) Termination of two asphalt works contracts that had not been completed until the end of the season;(b) Two contracts were awarded without having Banks no objection and were financed from another source;(c) Contractors clairn on the decision of evaluation cormmittee.

In all cases, the Bank agreed that the borrower has respected the Bank's procedures.

Bank's Performance

Project was prepared in the best way satisfying the borrowers needs. Often, IFIs are interested in the projectswith big scale contracts, in this case the economic benefit was the priority. The Bank's experts bring to theproject a lot of experience from similar projects in neighboring countries. The World Bank experience of

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various projects around the world is the most valuable benefit for the borrower. It is worth mentioning thatduring all of the project cycle we enjoyed working with very competent and communicable Bank staff.Normally, in similar projects, a problem appears that standard requirements of the IFI may not well fit in thesituation of the beneficiary country. In such situations, good communications, clear position and flexibility hasgreat value. In our project, the Bank's project team always respected borrower's arguments and had clear, welljustified position. The Bank's lending operations were performed in accordance with the loan agreement.Exchange of information fully satisfied the borrower's needs.

Lessons Learned

The project team is one of the key issues for successful implementation of the project. Only competentconsultant in combination with adequate local counterpart staff can ensure a sustainable benefit. If one of thecomponents does not perform well we always get lower final output. More attention to the counterpart team forvarious project components shall be drawn in stage of project preparation. It is almost impossible duringrelatively short project cycle to identify and correct shortcomings. Good communications between the Bankand the borrower facilitate solving of problems in the earliest stage. During the implementation of the project,problems appear when parties shall come to a mutually acceptable compromise in a short time. The Bank'sproject team facilitated good communications and demonstrated clarity of position.

In road projects, timing is important because of the seasonal character of the works. We caused qualityproblems and extremely hard contract management issues, which could be avoided if bidding would havestarted earlier. Already in project preparation stage shall be set threshold dates for key actions, when scheduleshall be reconsidered.

(b) Cofinianciers:EU-Phare, the only co-financier for the project, made the following comments:

March 26, 2001

Under the Phare Programme, the European Commission has co-financed four subprojects from the"Highway" project:

o the reconstruction of Memele Bridge- the reconstruction of Gauja Bridge* lecava road improvements* Bauska road improvements.

The technical design of these projects has generally been carried out by local companies with the assistanceof international consultants. The necessity to adapt the documents of the Tender Dossiers to the EuropeanCommission's rules has caused some delays but the subprojects were nevertheless completed in time withthe exception of the Bauska one. In the case of Bauska's subproject, the works' beginning has beenpostponed due among others to the European Commission's request that more than one bid be received inthe framework of the tendering procedure. This subproject is still ongoing.

The Ministry of Transport has undeniably profited from the cooperation with the European Commissionwhen launching intemational tenders and the collaboration with foreign consultants for the preparation ofthe sub projects has also benefited to LRA and the local designers .There is no doubt about thesustainability of these effects. Still, the important staff turn-over existing within the Latvian Civil Servicein general may pose a threat in the long run. In the future, the European Commission's support to Latvian

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road sector will mainly be channeled through ISPA Progamme. The amounts of ISPA projects are expectedto be much higher than those of Phare projects. Nevertheless, the ISPA financing instrument retains a lot ofcommon features with Phare Progamme. In a way, the four co-financed sub projects were a goodpreparation for ISPA.

Best regards,

Luc FaberTask Manager

(c) Other partners (NGOs/private sector):

10. Additional Information

EU Accession. European integration is clearly a priority for the highway sector of Latvia as well as for therest of the economy. Major achievements have already been made in this direction, particularly with regardto the introduction of modem design standards in conformity with European practice. Progress has alsobeen made in the field of legislation for the transport sector, which now approximates European legislation.The adoption of the EC standards, particularly increased axle-load standards for roadways, poses a majorfinancial challenge as it requires the strengthening of the whole road network. In this regard and also toaccelerate the inter-connections with the European regions, as well as to assure a smooth flow of roadtransit, considerable funding - ISPA grants combined with IFI lending - is going into the development of thekey Pan-European corridors. At the same time, there is an urgent need to improve the conditions of ruralroads, which would enable small to medium sized settlements to have physical and economic integrationwith the faster growing urban areas. On the other hand, urban infrastructure (urban roads) cannot benefitfrom increased European financial support, and the burden for these stays with the municipalities, whichhave not been adequatly empowered to deal with the growing demand.

Improved traffic safety is also on the accession agenda. The early results (e.g. the establishment of theRoad Traffic Safety Directorate) are very promising indeed. As on average the cost of road accidents to thesociety is around 2 percent of GDP, efforts should not be relaxed to improve traffic safety. Further jointactions of the transport, health and education sectors are also called for. The good results of the previousBaltic cooperation could be a basis for a closer regional approach to road safety.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome I Impact Indicators:tndlcatoriftWx Proned in last PSR AcluaLeast Esffimte

1. Percentage of funds allocated for main 90 % 85 %and regional roads new construction orperiodic maintenance utilizing cost-benefitanalysis.2. Ratio of IRI Desired/IRI Achieved for road 0.9 0.9sections included in the project.3. Index of fatalities for 10,000 km. 80 % 51 %1995=1004. Reduction in number of fatalities per year 9 9on treated accident black spots.5. Reduction in number of accidents with 12 12injured per year on treated accident blackspots.

*The use of cost-benefit analysis for allocating road maintenance funds is reduced somewhat by the Government'sdesire to increase the financing for regional and rural roads that have relatively low traffic volumes and thereforedo not compare favorably with the roads with higher traffic volumes in the absence of a revised ranking system thattakes social indicators into account.Output Indicators:

|Indkatortlatrx Projected In last PSR Acti/lLatest Esdmate1. Ratio of budget allocation for periodic 0.6 0.6maintenance/optimal budget for peniodicmaintenance.2. Cost per square meter of a 4 cm overlay US$6.5/sq m US$5.40/sq m3. Percentage of contracts meeting quality 90 % 90 %specifications.4. Percentage of periodic maintenance and 100 % 100 %new construction performed by privatecontractors.5. Percentage of contracts included in the 60 % 95 %project awarded to Latvian companies orjoint-ventures.

End of project

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Annex 2. Project Costs and Financing

Project Cost by Comrponent (in US$ million equivalent)Appraisal Actualatest Percentage of

Prjc Cost Rt0 y tCmpqy40nt0 XS r :$f 0 t3Soi* t US$ million ; 1. Periodic Highway Maintenance 27.00 34.95 129.52. Bridge Repairs and Reconstruction 12.30 10.71 87.13. Road Safety Improvement 6.00 7.41 123.54. Gravel Road Maintenance and Low Cost 0.70 0.32 45.7Bitumenization Techniques5. Equipment for Laboratory 0.50 0.22 43.66. Institutional Strengthening and Training 0.70 0.79 112.1

Total Baseline Cost 47.20 54.40Physical Contingencies 4.70 0.00Price Contingencies 5.00 0.00

Total Project Costs 56.90 54.40Total Financing Required 56.90 54.40

roject Costs by Procurement Arrangements (A praisal Estimate) (US$ million equivalent)

PencItU _ Ct9OfY ica .l?Xf;tt N. N S.FM.0:: Total Cos

1. Works 19.10 4.80 0.00 31.20 55.10(15.00) (4.00) (0.00) (0.00) (19.00)

2. Goods 0.00 0.00 0.90 0.00 0.90(0.00) (0.00) (0.80) (0.00) (0.80)

3. Services 0.00 0.00 0.20 0.70 0.90(0.00) (0.00) (0.20) (0.00) (0.20)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00_____.___(0.00)________ (0.00) (0.00) (0.00) (0.00)

Total 19.10 4.80 1.10 31.90 56.90(15.00) (4.00) (1.00) (0.00) (20.00)

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Ependiur Catego Y 2 N.B.F. Total CostNCB ~Other ____

1. Works 22.63 3.29 0.00 27.49 53.41(17.21) (2.50) (0.00) (0.00) (19.71)

2. Goods 0.00 0.00 0.20 0.00 0.20(0.00) (0.00) (0.20) (0.00) (0.20)

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3. Services 0.00 0.00 0.09 0.70 0.79(0.00) (0.00) (0.09) (0.00) (0.09)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 22.63 3.29 0.29 28.19 54.40(17.21) (2.50) (0.29) (0.00) (20.00)

Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.

2 Includes civil works and goods to be procured through national shopping, consulting services, services of contractedstaff of the project management office, training, technical assistance services, and incremental operating costs related to(i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (Appraisal Contingencies have been added to AppraisalEstimates) (in US$ million equivalent)

Percentage of AppraisalCompont (Appaisl Appraisal Estimate ActualLatest Estimate

Contingencies have beenadded to Appraisal

Estimates) Bank ____ CO. Baink Govt. CoF. ,Bnk Govt. CoF.

Highway Maintenance 12.87 9.02 10.76 14.42 20.53 0.00 112.0 227.6 0.0Bridge Maintenance 3.28 4.40 7.17 3.05 4.98 2.68 93.0 113.2 37.4Road Safety Improvements 2.54 1.83 2.86 2.00 4.51 0.90 78.7 246.4 31.5Gravel Road Works 0.50 0.12 0.00 0.24 0.08 0.00 48.0 66.7 0.0Equipment & Materials 0.61 0.00 0.24 0.20 0.02 0.00 32.8 0.0 0.0Consultancies & Training 0.20 0.00 0.50 0.09 0.00 0.70 45.0 0.0 140.0

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Annex 3: Economic Costs and Benefits

Periodic Highway Maintenance

At appraisal, NPV based on a cost of capital of 12 percent was estimated to be US$85.5 million and theeconomic rate of return (ERR) was estimated to be 34.9 percent. The calculations were based on the use ofthe Highway Design and Maintenance Model (HDM-3), with data from road surveys for roughness andvisual inspection for surface conditions of the pavement, traffic counts for each road section, the cost ofvehicle maintenance and operation in Latvia, depreciation of vehicles, and alternative maintenancestrategies.

The NPV and economic rate of return were calculated at project completion, also using the HDM-3computer model. The calculations were based on the actual cost of construction, actual roughness of thepavements after rehabilitation, and updated traffic counts and vehicle operating costs. On this basis, theNPV was calculated at US$148.6 million and the ERR was 56.8 percent. The improvement in the resultscompared to the appraisal estimate is attributed to the reduction in construction unit costs, greater thananticipated traffic levels, and the substantial increase in the cost of fuel (which increases the vehicleoperating costs and hence the benefits from improved roads).

Bridge Repairs

At project completion, the ERR and NPV for the bridge component were calculated using the samemethodology as at appraisal, which compared the savings that could be achieved by avoiding the diversionof traffic when the bridge was no longer usable to the cost of the repairs. Actual cost of the repairs orreconstruction and updated traffic counts were used for this calculation at completion. A cost of capital of12 percent was used for calculating the NPV at both appraisal and completion. The average ERR atcompletion was 289 percent compared to an estimated 227 percent, and the total NPV was US$550.7million compared to an estimated NPV of US$525.0 million at appraisal.

Road Safety Improvements

Economic rates of return and NPVs were not calculated for the Road Safety component due to therelatively short time period for accumulating data on accidents since the improvements were made.However, based on the preliminary data described in para. 4.1 (d) above, the results should easily exceedthe estimated ERR of 65.0 percent and NPV of US$10.2 million.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/PreparationDecember 1995 4 3 Engineers, I EconomistJune 1996 3 2 Engineers, I Economist

Appraisal/NegotiationDecember 1996 4 3 Engineers, I Economist

SupervisionMay 1997 3 2 Engineers, I Economist S SSeptember 1997 2 2 Engineers S SFebruary 1998 1 1 Engineer S SJune 1998 1 1 Engineer S SSeptember 1998 1 1 Engineer S SFebruary 1999 3 3 Engineers S SJune 1999 3 1 Sector Leader, I Engineer, I S S

Procurement SpecialistNovember 1999 2 2 Engineers S SMarch 2000 2 1 Section Leader, I Engineer S SAugust 2000 2 1 Engineer, I Procurement S S

Specialist

ICRNovember 2000 1 1 Engineer S S

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 63.1/63.1 120.3/120.3Appraisal/Negotiation 7.7/7.7 12.6/12.6Supervision 47.4/50.0 145.1/153.0ICR 0.2/2.0 0.5/6.0Total 118.4/122.8 278.5/291.9

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingOI Macro policies ORH OSUOM O N * NAOi Sector Policies OH * SUOM O N O NAEl Physical * H OSUOM ON O NAO Financial O H *SUOM O N O NAO Institutional Development O H 0 SU 0 M 0 N 0 NAEl Environmental O H OSUOM O N O NA

SocialO Poverty Reduction 0 H OSUOM ON * NAO Gender O H OSUOM O N * NAZ Other (Please specify) 0 H 0 SU 0 M 0 N 0 NAImpact on road safety

E Private sector development 0 H O SU O M 0 N 0 NAE Public sector management 0 H 0 SU O M 0 N 0 NAE Other (Please specify) 0 H 0 SU 0 M 0 N 0 NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

O Lending OHS OS OU OHUOl Supervision *HS OS OU OHUOl Overall *H HS Os O U O HU

6.2 Borrower performance Rating

El Preparation OHS OS O U O HUF Government implementation performance O HS O S 0 U 0 HUEl Implementation agency performance OHS Os OU OHUOl Overall OHS OS O U O HU

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Annex 7. List of Supporting Documents

ICR Mission Aide Memoire, November 15-21, 2000.

"Improvement of Gravel Road Maintenance and Introduction of Low-Cost Bitumenization Techniques",SweRoad, December 1999.

"National ISPA Strategy: Transport Sector", Ministry of Transport of the Republic of Latvia, October1999.

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