The World Bank Third Highway Project (P118023) REPORT NO.: RES40213 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THIRD HIGHWAY PROJECT APPROVED ON MAY 25, 2010 TO MINISTRY OF FINANCE TRANSPORT EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Sebastian-A Molineus Regional Director: Lucio Monari Practice Manager/Manager: Karla Gonzalez Carvajal Task Team Leader(s): Nijat Valiyev The World Bank Third Highway Project (P118023) I. BASIC DATA Product Information Project ID Financing Instrument P118023 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 25-May-2010 31-Dec-2019 Organizations Borrower Responsible Agency Ministry of Finance State Roads Agency Project Development Objective (PDO) Original PDO The Project Development Objective is "to contribute to a more efficient and safer Baku-Shamakhi road and higher quality roadservices as part of the upgrading to motorway standards, and to improve the management of the nascent motorway network." Current PDO “To contribute to a more efficient and safer Baku-Shamakhi and Yenikend-Shorsulu roads and higher quality road services as part of the general network upgrading to motorway standard, and to improve the management of the nascent motorway network.” Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-86020 28-Mar-2016 07-Apr-2016 29-Jun-2016 31-Dec-2019 140.00 70.84 69.16 IBRD-78890 25-May-2010 11-Aug-2010 08-Nov-2010 31-Dec-2019 171.60 171.60 0 IDA-47230 25-May-2010 11-Aug-2010 08-Nov-2010 31-Dec-2019 70.00 64.69 .19 The World Bank Third Highway Project (P118023) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES The loan disbursements by the end-December 2019 have reached US$307 million (approx. 82 % of the total Bank commitments including additional financing). The project has substantial (more than 60 mln USD) undisbursed loan funds, mostly resulting from the fluctuation of the national currency exchange rate in 2015-2016 and cancellation of some of the procurement activities. The earlier internal government consultations and discussions with the Bank team have not yet resulted in a decision on utilization of these funds. Implementation of all project activities has been completed, except construction of road maintenance offices and depots for the three motorway maintenance units. The last road reconstruction contract under the project for M4 section km 91-107 has been finished in December 2019 and the road section officially opened. At previous stages of the project, the full length of the M4 road from Baku to Shamakhi (between km 13-91) has been upgraded to dual carriageway under four construction contracts and taken over. Similarly, the construction of two M3 motorway sections between Yenikend and Shorsulu (km 31-80.6) and new Kur river bridge (as well as parallel works to improve structurally the old Kur river bridge) has also been fully completed and constructed infrastructure is under normal operation now. The highway sections financed under the project represent key segments of country's East-West and North-South transport/transit corridors. They also provide domestic connectivity for development of agriculture, tourism, and other important sectors of economy in Southern, Mountainous Shirvan, and other regions of Azerbaijan. The project has helped to improve the transportation costs and travel times along these corridors and had a very positive (much higher than originally targeted) impact on road safety situation and reduction of fatalities and injuries on these highways. The project supports the sub-component for road data collection and related capacity building for the road agency. The last phase of this contract has been finalized and apparently resulted in significant improvement of the road agency’s ability to collect and process the road data. The project also supports a reform agenda of the government to improve management of the nascent motorway network, which was largely upgraded over the recent years. The related institutional development activities included implementation of studies to identify the dedicated reform options for management and maintenance of motorways, support on making decisions on selection of policy alternatives, design and implementation of major structural changes to establish seven regional motorway maintenance units and central motorway maintenance department, staff capacity building and trainings, and, finally, introduction of performance based service level contracts for maintenance of motorway sections. All seven regional units for maintenance of motorways established within the project are operational and the three priority Regional Maintenance Units along highways M2 and M4 have been operating under Service-Level Agreements since January 2019. The project consultancies provided formal and on-the-job trainings for the staff of Motorway Maintenance Unit (MMU) and Regional Maintenance Units (RMUs). The three RMUs have been capacitated to maintain the roads based on the service level requirements. Meanwhile, the payments to RMUs by the road agency The World Bank Third Highway Project (P118023) are not yet fully based on the SLA parameters, with the calculation and application of penalty points being the main challenge. During the recent mission, the Bank team focused its efforts on this issue and was informed towards the end of the mission that MMU felt comfortable to submit the payment certificates based on the SLA requirements, but so far this was not confirmed. Also, the ongoing construction of the motorway maintenance facilities will not be completed by the project closing date (December 31, 2019), with the overall implementation progress not expected to exceed 50%. All project PDO and Intermediate Results Indicators have been achieved with the partial exception of the indicator on maintenance of motorways under service level parameters given the delay with the full operationalization of the payment provisions of contracts, as mentioned above. Given the recent lack of progress with implementation of the motorway maintenance component of the project, including issues with application of payment provisions of SLAs and delays in construction of road maintenance facilities, the latest project ratings on the progress towards achievement of PDO and overall implementation progress were downgraded to moderately satisfactory level. There are no overdue audits under the project. The Government of Azerbaijan has sent a request letter to the Bank dated December 30, 2019 for extension of the project for one year to allow for usage of undisbursed loan funds and completion of the construction of the regional motorway maintenance facilities. The Bank team supports the extension of the project closing date by six months until June 30, 2020, to allow for more progress in operationalization of the Service Level Agreements and completion of the construction of the regional motorway maintenance facilities as well as procurement of office equipment for RMUs and MMU (the related procurement was cancelled due to difficulties with delivery of procured goods within limited time left until project closing). The recent Bank mission visited construction sites for maintenance facilities and observed good recent progress in pace of construction works after the initial delays due to design, land-availability, and contractor performance issues. The extension of the project closing date would contribute to successful implementation of the key project component on motorway maintenance reforms and achievement of the project development objectives. The team does not see sufficient justification for the requested one year extension of the project given that remaining project activities can be completed within six months and requested time is not sufficient for the utilization of the remaining large loan amount. It is suggested to continue discussions with the government counterparts on the potential use of project savings during the extended period of project life and make further decision depending on the outcomes of these discussions. II. DETAILED CHANGES LOAN CLOSING DATE(S) The World Bank Third Highway Project (P118023) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications 30-Sep-2016, 31-Dec- IBRD-78890 31-Mar-2015 2019 IBRD-86020 31-Dec-2019 30-Jun-2020 30-Oct-2020 30-Sep-2016, 31-Dec- IDA-47230 31-Mar-2015 2019