Document of The World Bank FOROFFICIAL USE ONLY ReportNo: 34179 GE PROJECT APPRAISALDOCUMENT ONA PROPOSEDGRANT INTHEAMOUNT OFSDR3.5 MILLION (US$5 MILLION EQUIVALENT) TO GEORGIA FORAN WRASTRUCTURE PRE-INVESTMENT FACILITY PROJECT January 19,2006 InfrastructureDepartment South Caucasus CountryUnit Europe and CentralAsia Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December, 2005) Currency Unit = Georgian Lari (GEL) 1GEL = US$0.5579 US$1.0 = 1.7925 GEL US$1.4347 = SDR 1 1GEL = SDR0.39 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AP Agreed Procedures BEEPS Business Environment and Enterprise Performance Survey CPAR Country Procurement Assessment Report CPS Country Partnership Strategy CQ Consultant Qualification CQS Selection based on Consultant's Qualifications EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia EDPRP Economic Development and Poverty Reduction Program EIA Environmental Impact Assessment EMF Environmental Management Framework EMP Environmental Management Plan EMSP Electricity Market Support Project FBS Fixed Budget Selection FMS Financial Management Systems GDP Gross Domestic Product GEL Georgian Lari GoG Government o f Georgia GWh Giga Watt Hour GR Georgian Railways I C Individual Consultant ICB International Competitive Bidding ICR Implementation Completion Report IDA InternationalDevelopment Association IOC Incremental Operating Costs IPF Infrastructure Pre-InvestmentFacility kWh Kilo Watt Hour LCS Least Cost Selection M C C MillenniumChallenge Corporation MoE Ministry of Energy MoED Ministry o f Economic Development M o F Ministry o fFinance NGO Non-Governmental Organization PAS Procurement Accredited Staff PIU Project Implementation Unit PDO Project Development Objective POM Project Operational Manual PP Procurement Plan PPF Project PreparationFacility PPIAF Public-Private Infrastructure Advisory Facility PRSO Poverty Reduction Support Operation PSO Project Service Organization QCBS Quality- and Cost-Based Selection QBS Quality-Based Selection RDMED Roads Department o fthe Ministry o f Economic Development RFP Request for Proposals SF Safeguard Framework SIA Social Impact Assessment SOE Statements o f Expenditures T A Technical Assistance TAL Technical Assistance Loan TOR Terms o f Reference TRACECA Transport Corridor Europe-Caucasus -Asia TRRC Transport Reform and Rehabilitation Center VAT Value Added Tax UEDC United EnergyDistribution Company USAID United State Agency for International Development USTDA U S Trade and Development Agency Vice President: Shigeo Katsu, ECAVP ~ Country Director: D - M Dowsett-Coirolo, ECCU3 Sector ManagedDirector: Motoo KonishiFeter Thomson, ECSIE Task Team Leader: Tamara Sulukhia, ECSIE This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. GEORGIA INFRASTRUCTURE PRE-INVESTMENT FACILITY TA CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and Sector Issues................................................................................................... 1 2. Rationale for Bank Involvement......................................................................................... 4 3 . Higher Level Objectives to which the Project Contributes ................................................ 6 B . PROJECT DESCRIPTION ................................................................................................. 7 1. Lending Instrument............................................................................................................. 7 2 . Project Development Objective and Key Indicators ........................................................... 7 3. Project Components ............................................................................................................ 7 4. Lessons Learned and Reflected inthe Project Design........................................................ 9 5 . Alternatives Considered and Reasons for Rejection ......................................................... 10 C. IMPLEMENTATION ........................................................................................................ 10 1. Institutional and ImplementationArrangements .............................................................. 10 2. Monitoring and Evaluation o f Outcomes/Results ............................................................. 12 3. Sustainabillty . . . ..................................................................................................................... 13 4. Critical Risks and Possible Controversial Aspects ........................................................... 13 5. Loadcredit Conditions and Covenants ............................................................................ 14 D APPRAISAL SUMMARY . ................................................................................................. 14 1. Economic and Financial Analysis ..................................................................................... 14 2. Technical........................................................................................................................... 15 3. Fiduciary ........................................................................................................................... 15 4. Social................................................................................................................................. 16 5 . Environment ...................................................................................................................... 16 6 . Safeguard Policies ............................................................................................................. 16 7. Policy Exceptions and Readiness...................................................................................... 17 Annex 1: Country and Sector or ProgramBackground ......................................................... 18 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .................23 Annex 3: Results Framework and Monitoring ........................................................................ 25 Annex 4: Detailed Project Description ...................................................................................... 28 Annex 5: Project Costs............................................................................................................... 32 Annex 6: ImplementationArrangements ................................................................................. 33 Annex 7: FinancialManagement and Disbursement Arrangements ..................................... 35 Annex 8: Procurement Arrangements ...................................................................................... 39 Annex 9: Economic and FinancialAnalysis ............................................................................. 43 Annex 10: Safeguard Policy Issues ............................................................................................ 44 Annex 11: Project Preparationand Supervision ..................................................................... 46 Annex 12: Documents in the Project File ................................................................................. 47 Annex 13: Statement of Loans and Credits .............................................................................. 48 Annex 14: Country at a Glance ................................................................................................. 50 MAP of Georgia IBRDNo.34376 GEORGIA INFRASTRUCTURE PRE-INVESTMENT FACILITY PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSIE Date: January 16,2006 Team Leader: Tamara Sulukhia Country Director: D-MDowsett-Coirolo Sectors: General energy sector (55%); General Sector ManagedDirector: Motoo Konishi transportation sector (45%) Themes: Infrastructure services for private sector development (P);Trade facilitation and market access (S);Export development and competitiveness (S) Project ID: PO98850 Environmental screening category: Partial Assessment Lending Instrument: Technical Assistance Safeguard screening category: B Grant Project FinancingData [ ] Loan [ 3 Credit [XI Grant [ ] Guarantee [ ] Other: Source Local Foreign Total BORROWER/RECIPIENT 0.30 0.60 0.90 IDA Grant 1.30 3.70 5.00 Total: 1.60 4.30 5.90 Responsible Agency: MinistryofEnergy, 10, Lermontov Str. Tbilisi, Georgia 0105 Tel: 995-32-996098 Fax: 995-32-989930 Ministry o fEconomic Development, 12,Rustaveli Ave Tbilisi, Georgia 0108 Tel: 995-32-932846 Fax: 995-32-921786 hmulativel 0.85 1 4.25 I 5.00 I 5.00 I I Project implementation period: Start: March 15,2006 End:March 15,2009 Expected effectiveness date: March 15,2006 Expected closing date: September 30,2009 Does the project depart from the CAS incontent or other significant respects? Re$ PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Re$ PAD D.7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [XINO [s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [XIYes [ ] N o Project development objective Re$ PAD B.2, TechnicalAnnex 3 The development objective o f the Project i s to facilitate infrastructure investments that have strategic importance and/or special complexity by ensuring that proper feasibility work i s carried out in a timely manner in order to enable the government to make sound investment decisions, and where appropriate, to proceed expeditiously with further preparatory steps and mobilize adequate financing for implementation. The focus on energy and transport sectors i s consistent with Governments investment priorities and CPS objectives. Specifically, the Project will finance technical assistance (TA) to assess the feasibility and effectiveness o f identified investments through preparation work including technical and sectoral studies, engineering design, and analysis o f economic, financial and environmental feasibility, as well as financial and legal advisory services, where required. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 The Project has two major components: Component 1 will finance TA for Khudoni Hydropower Project preparation; Component 2, with two sub-components, will finance preparation o f Transit Corridor projects. The Sub-component 2.A. will provide TA for preparation o f East-West Highway Improvement Project. Sub-component 2.B. will provide TA for preparation o f other Transit Corridor projects. Scope and funding o f Sub-component 2.B. will depend upon the availability o f funding remaining after the first two priority components are financed. Which safeguard policies are triggered, ifany? Re$ PAD 0.6, TechnicalAnnex 10. Although the IPF Project i s limited to technical assistance, it has been classified as Category B, triggering OP 4.01 (Environmental Assessment) and OP 4.12 (Involuntary Resettlement), because o f the safeguard impacts o f possible follow-on investment projects, the feasibility o f which are studied under the IFP Project. To address these environmental and social safeguards during project preparation, a Safeguard Framework, as described in Section D (Appraisal Summary) has been disclosed and consultations have been held. SF is part of Project Operational Manuals to be followed during project implementation. Since the EnguriRiver, on which a possible future Khudoni hydropower plant would be located, flows into the Black Sea, the International Waterways safeguard (OP 7.50) has been triggered. The project is not expected to cause appreciable harm to the other riparians. The Commission for the "Convention on the Protection o f the Black Sea Against Pollution" has beennotified. Significant, non-standard conditions, if any, for: Ref: PAD C.7 Board presentation: None. Loadcredit effectiveness: (i) Recipient will make appropriate arrangements for its fiscal year 2006 to cover its The contribution to the financing requirements o f the Project. Such an arrangement would consist o f a letter from the Minister o f Finance to IDA ensuring that (i)inthe next budget revision for its fiscal year 2006 to be submitted to the Parliament, an appropriate budgetary allocation for the co-financing o f this Project would be included, and (ii)irrespective o f the budget submissiodapproval above, the Recipient will provide in a timely manner appropriate financing to cover its share o f incurred costs. Covenants applicable to project implementation: (i) Recipientshallensurethatadequateannualbudgetaryallocationsarebeingmadetocover The the Recipient's contribution to the financing requirementso fthe Project. (ii)TheMinistryofEnergyandthe MinistryofEconomicDevelopmentwill submitto IDA Quarterly Progress reports, in a format satisfactory to IDA, not later than 30 days after the end of each quarter outlining the progress made in the implementation o f the Project, as well as the problems encountered and how they are being addressed; (iii) road-related projectstheGovernment shallpermittheuseofdesignandconstruction For standards recommended by the European Committee for Standardization on Construction and Design o f Roads. A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues Georgia i s a small country located to the south o f the Caucasus mountain range, with Russia to the north, Armenia and Turkeyto the south, Azerbaijan to the east, and the Black Sea to the west (see map attached). It has a population o f 4.4 million'. Following independence, the loss of planned production to Soviet markets, the end o f large budget transfers from Moscow, and the impact o f civil war which displaced some 300,000 people resulted in a 70 percent drop inoutput. A stabilization and structural reform program led to a modest rebound inGDP inthe mid-1990s. However, the impact o f these reforms was blunted as Georgia took on many o f the trappings o f a failed state: fragmented political power, deterioration in law and order; widespread corruption; a build-up in arrears in public salaries, pensions, and social transfers, and a slackened pace of political reforms. In addition, the deterioration of physical works and the lack o f resources for maintenance and rehabilitation resulted ina major deteriorationo f key infrastructure, particularly the roads and power networks. These factors ledto growing dissatisfactionwith the Government which culminated in the Rose Revolution in November 2003 and the election o f a new Government in January 2004 committed to addressing governance issues head-on and providing the basic infrastructure services necessary to sustain growth. The new Government has moved quickly and decisively on a number o f fronts. It is focusing on fighting corruption and buildinggood governance; improving the fiscal stance while introducing tax reform, easing the regulatory environment for business; reforming social services, most notably in education and social protection systems; and addressing the deterioration in infrastructure, particularly in roads and power. Accomplishments in these areas over the Government's first two years have been impressive. Public salaries and pension are paid on time and most arrears have been cleared. Reforms in police and tax administration have had strong initial impact and are continuing. The regulatory and administrative environment facing business is being improved and education reform inparticular is introducing sweeping reform in Georgia's schools at all levels. Last year for the first time ever, students were admitted to colleges and universities on the basis o f standard national exams, thereby eliminating a pervasive source o f corruption. For the business environment, the Bank's Doing Business Report publishedin 2005 rated Georgia as the country with the second most improved business climate in the world. Similar results were noted in the 2005 Business Environment and Enterprise Performance survey.2 The new Government recognizes that reform, rehabilitation and development o f infrastructure is vital for its efforts to spur economic growth, generate jobs and reduce poverty and has made infrastructure a key priority. The importance o f rebuilding critical infrastructure is underpinned by the structure of the economy. At present, a significant part o f Georgia's economy remains rural based. Although agriculture has declined as a percentage o f GDP following the collapse o f traditional Soviet markets for fruits, vegetables and wine, it remains the largest sector o f the economy, accounting for 16 percent o f GDP but 52 percent o f the employment. Trade i s the second largest sector of the economy, accounting for 13 percent o f GDP and 11 percent o f ''This number does not include population o f SouthOsetia and Abkhazia. EBRDlWorld Bank (2005) "Business Environment and Enterprise Performaiice". (BEEPS). employment, while manufacturing accounts for 9 percent o f GDP and 5 percent o f employment. Rebuilding existing infrastructure necessary to sustain growth, particularly private sector led growth, inthe rural areas and rebuilding trade routes necessary to strengthen Georgia's status as a transit economy is therefore a top priority. Due to a much improved fiscal stance -- underpinnedby a stable macro-economic framework, low inflation and growing revenues - the Government in the last two years has managed to substantially increase investments in these areas. However, given that needs are much greater than available resources, mobilization of investments for rehabilitation and development of transport and energy infrastructure, including by the private sector, remains a major priority for the Government, as evidenced in the recently issued Progress Report on the Economic Development and Poverty Reduction Program (EDPRP). These areas are also a major area o f cooperation with IDA, as evidenced by the Country Partnership Strategy (CPS) for FY 2006-09 andthe FirstPoverty Reduction Support Operation (PRSO) approvedinAugust 2005. Energy Sector Issues: Georgia consumes about 8 billion kWh o f electricity per year, o f which about 60 percent is domestic hydropower, about 30 percent is domestic thermal power, and nearly 10 percent i s electricity imports. The thermal plants are fueled by imported natural gas, thus the import dependency inthe electricity sector is considerable. Electricity consumption is anticipated to grow by about 5 percent annually over the next three years. Georgia imports about 1.4 billion cubic meters o f natural gas, currently only from Russia, but with gas also to become available from Azerbaijan in late 2006 through a new transit pipeline crossing Georgia from Azerbaijan to Turkey. The new Government has taken an active role in the energy sector, with considerable success, notably for power. Availability o f power has substantially improved, and 24 hour service for paying customers i s a near-term reachable target for much o f the country (i.e. beyond Tbilisi where power is generally available). Problems o f electricity theft and non-payments have been vigorously addressed. Payment collections for UEDC, the dominant, state-owned power distributor outside Tbilisi, were approximately 65 percent in the fall o f 2005 as compared to about 25 percent in early 2004. Targeted investments to rehabilitate hydropower plants have increased generation capacity, and progress has also been made to mitigate risks o f failure inthe transmission system. The deployment o f international management contractors in power distribution, transmission, and for wholesale market functions, has contributed to the sector improvements by adding professionalism, improving the utility companies' cost structures, and through their successful efforts to fight corruption. The progress in the power sector since the Rose Revolution has been achieved from an abysmal starting point, and future challenges are plentiful. The Government has established an Energy Sector Strategic Action Plan to guide its work. Among the major unsolved issues i s power sector debt and liquidity. The Government, supported by international consultants, i s preparing legislation to address the sector debt, which at USS500 million is unsustainable even as 80% of it is intrastate debt. In spite o f major financial improvements, some generating companies and the power transmission company are under-funded, and some tariffs are below cost recovery level3. However, the Government provides budgetary support to the sector, and the contributions o f 'Electricitytariffsare about 6.8US centsikwhin Tbilisi and about 4.7 U S centsikWh in the regions 2 investment funds from international financial institutions are sizeable. The Government plans to privatize assets in distribution and generation as soon as practically possible. Current plans call for privatizations in2006, although such a time schedule seems optimistic. In2004, the Government identifiedself-sustainability and energy security as two mainpriorities in its-energypolicy. The goal is to create a profitable energy industrythat can sustain itself on the basis o f the financial flows from end consumers. To support its priorities, the Government wants to ensure the most efficient use o f internal resources and a diversification o f supply points for energy entering the country, using its geo-political location for transit arrangement to help ensure energy security. A cost-effective expansion o f domestic hydropower production is viewed as a potential means to mitigate the financial impact o f increasing prices o f imported fossil fuels and electricity while contributing to self-sustainability and energy security o f the country. For energy, this Infrastructure Pre-Investment Facility focuses on assessing the feasibility o f a possible Khudoni Hydropower Plant (Khudoni HPP). Construction o f the Khudoni hydropower plant in western Georgia (see map in Annex 15) started in 1985, but was terminated unfinished in 1989 due to the situation inthe Soviet Union at the time. Also the earthquake inneighboring Armenia in 1988 (Richter scale 6.9) impacted the decision to suspend building o f the dam and power plant. Later (in 1992), the planned dam was redesigned to sustain extreme earthquakes (Richter scale 9, vs. earlier 8). Dam safety i s the most critical aspect o f hydropower plant studies, including the planned feasibility assessments for the Khudoni HPP. Khudoni HPP is expected to be the least-cost large hydropower development available to Georgia. Transport Sector Issues: Georgia's geographical position makes it an important transport link between east-west (the Black Sea and the Caspian Sea) and north and south (between Russia and Turkey). Trade with its neighbors, both transit and bilateral, i s also an important feature o f Georgia's economy. Transit activities generate a direct turnover o f more that US$2 billion per year. One o f the government top priorities i s to develop Georgia's comparative advantage as a transit country by improving its East-West Transport Corridor. The development o f oil resources i s projected to increase the east-west flow o f oil and associated products4. The Government recognizes that the full potential o f its transit corridor has not been realized. The Government's focus i s modernizationo f the transit roadnetwork. The road network in Georgia consists o f 1,474 kilometers o f main roads with about 70 per cent in good to fair condition; 3,392 kilometers of secondary roads of which over 60 percent are in poor condition and need rehabilitation; and 15,429 kilometers o f local roads most o f which are in very poor condition. The current condition o f the road network in Georgia reflects a severe reduction in the resources allocated to road maintenance under the previous Government, from the early 1990s to 2004. A recent sector review5 documents the decline in road maintenance expenditures, from GEL125.1 million (US$59.5 million) in 1988 to GEL 24.8 million (US$12.4 million) in 2002, in nominal terms. The poor state o f the highway network constrains the movement o f goods and people among Georgia's cities, ports, and rural areas; and through Georgia, along the transit corridor. The long transit times, despite the relatively short distance, 'USAID. GeorgianRailway Restructuring Program, draft May 2005. 5 World Bank, (2002) "Transport Sector Review of Armenia, Azerbaijan and Georgia ", ECSIE. 3 and poor road conditions add to transport costs and deter usage o f the Georgian transit route. According to work undertaken elsewhere in the region, poor road quality can raise transport costs by between28-56%6, and in the more extreme cases could result in a complete stoppage o f service as transport operators become reluctant to operate on roads which are liable to damage their vehicles. Since coming to power the new Government has focused on improvement o f road infrastructure. Fundingprovided to the transport sector has increased substantially from GEL 51.4 million in 2003, to GEL 67.8 million in 2004 and GEL 121.4 million in 2005 with further increases projected for 2006. Moreover, the Government recognizes the need to further improve funding and management mechanisms to adequately maintain Georgia's roads. IDA-financed transport sector projects are assisting the RDMEDin developing cost-effective mechanisms to better align maintenance expenditures with existing needs, through development o f a multi-year road maintenance plan, introduction o f modern management technologies, application o f a new road classification system, and development o f new road design standards. In view o f the poor road conditions, IDA also approved in 2004 a credit o f U S $20 million for the rehabilitation o f 500 to 750 km o f local and secondary roads, which currently is under implementation. In addition to improved maintenance and road management the Government is focusing on the modernization o f the East-West highway from Georgia's major Black Sea port o f Poti to the Azeri Border at the Red Bridge. In 2005 the PPIAF funded a study which reviewed the economic feasibility o f various improvement options on the East - West route with special attention to the critical section betweenTbilisi and Rikoti as it carries the highest traffic volume and the largest proportion o f heavy vehicles. The study analyzed the options to upgrade the existing road to a highway with an alignment that would achieve the maximum design speed o f 120 km per hour. The upgrade o f the existing road to four lanes or the construction o f parallel 2x2 motonvay both have acceptable economic rates o f return. The Government has selected the option to upgrade the existingroad and has requested IDA support. 2. Rationale for BankInvolvement The Government's policy agenda recognizes infrastructure investments as one o f the major ways to support the country's accelerated economic growth and in particular it focuses on development o f energy and transport infrastructure as a top priority. This Infrastructure Pre- InvestmentFacility (IPF Project) would provide the Government with funds to conduct studies to analyze the viability o f the investment options and to more efficiently prepare projects for financing. The Project would also enable the Government to investigate financing structures that would tap funding other than IDA credits and thus increase the available financing package. The Government's commitment to the energy and transport sectors is evident from the substantial increase of funding levels from the state budget as well as from public declarations o f the country's President and the Prime-Minister. One result o f the Government's clear vision for infrastructure development is that Georgia obtained grant funding from the Millennium Challenge Corporation (MCC). In September, 2005 Georgia signed a five-year US$295.3 million Compact with MCC inorder to implement infrastructure projects that have a major social `World Bank, (20038) Op cif. 4 and economic impact. In addition, the Government is working on attracting funding from all feasible sources o f finance. Over the last decade, IDA has played a leading role in providing investment lending to the Georgian infrastructure sector and ensuring that projects are identified, prepared, implemented, and monitored ina competent way and according to highstandards. Inaddition, IDA has taken a lead inthe policy dialogue for the energy and transport sectors. Given IDA'Sengagement and its professional capacity it has a comparative advantage inproviding pre-investment assistance, and its involvement in the sector can facilitate and attract other international organizations and the private sector to participate in infrastructure investment projects, including public-private partnerships and partial-risk guarantees. Reform in the power sector has been a major priority o f IDA assistance in Georgia since 1997 due to the sector's broad implications for social welfare, commercial activity and fiscal sustainability. Currently, the Poverty Reduction Support Operation (PRSO) supports important energy reforms with a focus on establishing a financially viable power sector. An SDR 21 million IDA credit supports rehabilitation o f the power transmission system, introduction o f modem system controls (SCADA), and an international management contract for the transmission company. IDA also actively seeks to ensure adequate coordination o f activities in the energy sector that are supported by credits from various donors and international financial institutions. The new Government has directed its efforts towards reaching self-sustainability and energy security through reform o f the sector and improvement o f existing infrastructure. However, the Government also recognizes the need for diversification o f its supply points, and construction o f Khudoni Hydro Power Plant project (if proven feasible) is one such project. Bank support through the proposed project for preparation o f the Khudoni hydropower project would further enhance support to the Government's goals o f energy self-sustainability and energy security. The Khudoni Hydropower Plant, feasibility o f which i s to be assessed by this project, would produce 1500 GWh or more per year, constituting more than 15 percent o f annual electricity consumption inGeorgia and about 20 percent o f the country's hydropower production. The Government has demonstrated its commitment to develop the East West Transport Corridor by its application for and response to the PPIAF study which provided private financing options to rehabilitate the Rikoti tunnel and economic and financial analysis for the road corridor development. The Government's prompt decision after the presentation o f the options for the road corridor i s further indication o f the priority o f this investment. The Government has allocated approximately GEL 35 million in the 2006 budget to fund the upgrade o f the existing two lane road to four lanes from outside o f Tbilisi to the village o f Agaiani. The Government would like Bank financing to continue the upgrade from Agaiani towards Rikoti. The existing IDA project o f US$20 million is to rehabilitate secondary and local roads which interconnect to various road corridors. The last IDA support for the highway network was in 2000-2005 where the IDA funded rehabilitation o f sections o f the East West Highway corridor for US$40 million. The development o f East West Transit Corridor projects would directly contribute to the economy by generating hard currency earnings from transit revenues, alleviate rural poverty by 5 reducing cost and time for transport o f agricultural goods, and generate indirect economic opportunities along the transit route. Development o f the transit comdor in Georgia i s complemented by parallel investments in the transit corridor in Azerbaijan, where IDA i s supporting road and rail corridor investment projects which would link into the Georgian networks. New commitments o f US$60 million are anticipated for the transport sector in this CPS period. The only external development partner engaged inthe transport sector i s M C C with its US$103 million grant to construct a highway from Tbilisi to the isolated region o f Samtskhe- Javakheti in Southern Georgia. The Infrastructure Pre-Investment Facility is needed to investigate the viability of highimpact projects and facilitate project preparation. In railways, IDA is developing a complementary project in Azerbaijan to upgrade rail infrastructure on the Azerbaijan portion o f the rail corridor and improve coordination between the Azeri and Georgianrailways on transit movements. As the Government considers the development o f strategic infrastructure projects, preparatory work will improve its capacity to make sound investment decisions and, where appropriate, to mobilize adequate financing. The TA provided under this Project will ensure adequate capacity to undertake such feasibility work in a timely manner and with high-quality as well as, where appropriate, to proceed expeditiously with further preparatory steps and mobilize adequate financing for implementation. 3. Higher Level Objectivesto which the ProjectContributes Recognizing the importance o f infrastructure to sustainable economic development the new Government has targeted rehabilitation o f transport and energy infrastructure as a top priority and one o f the major components for poverty reduction. Over the course o f the last two years, the Government managed to substantially increase investments in these areas. However, given that needs are much greater than available resources, mobilization o f investments for rehabilitation o f transport and energy infrastructure has become a major priority for the Government as well as a major area o f cooperation with IDA, as evidenced by the Country Partnership Strategy (CPS) for FY 2006-09. Under one o f the overarching themes in the CPS - Enabling Income- and Employment-Generating Growth - improved electricity and gas infi-astructure, and improved transport infrastructure are among the key objectives. Improved electricity and gas infrastructure, and improved transport infrastructure, are development outcomes proposed by the CPS to which the IPF Project directly contributes. The CPS emphasizes that in the energy sector IDA assistance will aim to substantially improve service levels in the power sector. Inthe roads sector it will take the lead inhelping develop the main highway network. Under the CPS approximately 45% o f IDA financing is envisaged for funding o f infrastructure investmentprojects in 2006-09, and scenarios are proposed to explore the potential for IBRD enclave financing in an export oriented energy sector project. Inaddition, the CPS provides for feasibility studies for high priority infrastructure investments through an infrastructure pre-investment facility. Therefore, the proposed IPF Project directly contributes to the CPS's high level objectives. 6 B. PROJECT DESCRIPTION 1. LendingInstrument The proposed IPF Project i s a Technical Assistance Loan (TAL) inthe form o f grant with a focus on preparation o f priority infrastructure investment projects. The estimated total cost o f the project is US$5.9 million. O f this amount, the IDA portion will be US$5.0 million (85% o f the project cost). Retroactive financing in an amount not to exceed US$200,000 equivalent i s available under the Project for payments for Consultant's services and incremental operating costs made prior to the date o f the Financing Agreement, but on or after January 1,2006. 2. ProjectDevelopmentObjectiveand Key Indicators The development objective o f the IPF Project is to facilitate infrastructure investments that have strategic importance and/or special complexity by ensuring that proper feasibility work i s carried out in a timely manner in order to enable the government to make sound investment decisions, and where appropriate, to proceed expeditiously with further preparatory steps and mobilize adequate financing for implementation. The focus on energy and transport sectors i s consistent with Government's investment priorities and CPS objectives. Specifically, the IPF Project will finance TA to assess the feasibility and effectiveness o fproposed investmentsthrough preparation work, including technical and sectoral studies, engineeringdesign, and analysis o f economic, financial and environmental feasibility, as well as financial and legal advisory services, where required. The IPF Project will support the delivery o fthese outcomes with details to be worked out on a case-by-case basis. Keyperformance indicators to assess the fulfillment of the Project development objectives are: 0 Studies for preparation o f Khudoni Hydropower project completed satisfactorily to the Bank and the Government; 0 Studies for preparation o f Transit Corridor projects completed satisfactorily to the Bank and the Government. 3. Project Components The IPF Project has two major components: Component 1 will finance TA for Khudoni Hydropower Project preparation; Component 2, with two sub-components, will finance preparation o f Transit Corridor projects. While Components 1 and 2.A. are clearly defined, the scope o f the sub-component 2.B. is broadly determined for transit corridor projects and depends upon the availability of funds remaining after funding needs for Component 1 and 2.A. are satisfied. Inaddition, US$0.05 million has beenreserved for Incremental Operating Costs. Component 1: TA for Khudoni Hydropower Project Preparation (Component cost is US$3.3 million) The Grant would finance a study for the Khudoni Hydropower Project to assess its technical, economic and financial viability while at the same time determine how a possible development 7 o f the hydropower project could be undertaken with adequate safeguards and solutions concerning the environment and socialh-esettlement impacts. Dam safety will be given top priority in the study. The study would include a review o f original design plans (Phase I); an assessment on alternative dam and hydropower concepts (Phase II), and the development o f a feasibility study for the selected alternative (Phase 111). Phase I11would also include analyses o f potential export markets for part o f the Khudoni power as well as financing options for the project. If, on the basis o f this Phase 1-111work, the project i s determined to be feasible and adequate safeguards solutions are identified and if the Government decides to proceed, a Phase IV could be launched. Under Phase IV the consultants would develop detailed designs and specifications, undertake a prequalification process, develop biddingdocuments for building the dam and power plant, and assist during the biddingprocess. The IDA involvement in financing and execution o f Phase IV work, and the approach to Phase IV, would depend on the planned ownership structure o f the power plant and the availability o f interested investors at the time when feasibility has been determined. A Panel o f Experts to review the consultants' dam design, technical and environmental solutions, resettlement solutions and other aspects, would also be financed. The feasibility study may show the need for expanded field work - geological, geoseismical, hydrological, etc. - which might incur a need for additional financing. The Phase 1-111work (to assess feasibility) is expected to take about 12 months, and the subsequent Phase IV about 4 months, but there may be a significant time interval between Phase I11and IV for decision making, project financing, and handling o f other issues. The Khudoni project's environmental and social implications will be analyzed and developed under a separate TA contract running in parallel with the technical studies in Phase 1-111and be finished at the time when the Government would decide whether to proceed into Phase IV o fthe project (Le. detailed design and biddingprocess). Should the Khudoni HPP prove to be economically attractive (and otherwise feasible), financial analyses would be undertaken and issues addressed concerning ownership and power sales. Financial advisory services and possibly expanded market analysis would be required, and particularly inthe event o f a long-term export contract for part o f the Khudoni power, substantial legal services would also be required. Costs for such work would expectedly be large, but might substantially be carried by private sector investors in Khudoni. Nevertheless, some o f the mentioned work might best be financed by the Government, and the IPF Project will make funds available within what i s uncommitted, consistent with Government priorities. Component 2: TAfor Preparation of Transit Corridor Projects (Component cost is US$2.55million) 2. A. TAfor Preparation of East- WestHighway Improvement Project (Sub-Component cost is US$I.6million) The Government's priority i s to start modernization o f the Red Bridge-Tbilisi-Poti transit road from the most congested section from Natakhtari, which is about 12 Km west o f Tbilisi to Khashuri by upgrading the existing road from two lanes to four lanes. Therefore, the Government has allocated funds from its own budget to upgrade 15 Km o f the road from Natakhtari to Agaiani. The Project will complete a feasibility study, preliminary design and environmental assessment to continue this 4 lane upgrade from Agaiani to Sveneti 8 (approximately Km44 mark to Km 80 mark), subdividingthe highway for analysis purposes into three sections: Section 1 - Agaiani to Igoeti, Section 2 - Igoeti Bypass, and Section3 - Igoeti to Sveneti. The preliminary review will be followed by detailed design and preparation o f the biddingpackages for each section. The environmental and social implications o f the corridor improvement project will be analyzed as part o f the technical studies. 2. 3. TAfor Preparation of Other Transit Corridor Projects (Sub-component cost is US$O.95 million) The scope o f this sub-component is broadly determined for transit comdor projects (road or railways) and depends upon the availability o f funds remaining after funding needs of the other two priority components o f the project are satisfied. Increase in the estimated costs o f work on Component 1 andor Component 2.A. over and above estimates would be accommodated by reducing or eliminating work under Component 2.B. The selection criteria for projects will be guided by their strategic importance, complexity, and merit. 4. LessonsLearnedand Reflectedin the Project Design The design o f the IPF Project draws on the lessons learned from IDA supported investment and policy-based operations inGeorgia as well as from implementation o f similar projects elsewhere. The lessons learned from various technical assistance projects, i.e. ownership by local institutions, preparation of comprehensive Terms o f Reference (TORS), selection o f competent consultants, detailed reviews for ensuring quality o f consultant's outputs, realistic time-frame, and wide consultations with local institutions, donors and other stakeholders, have been taken into account in the Project design. The Government's ownership o f the reform agenda will ensure effective implementation and future sustainability o f the Project and the proposed Project has been designed to ensure a high degree o f commitment. The proposed components o f the Project have received strong political support at the highest level o f the Government and are fully aligned with the Government's stratigic agenda. A key feature o fthe Project is the inclusion of the relevant Government Ministries as an integral part o f the Project. It i s their responsibility in partnership with IDA to guide review and comment on consultants' reports and studies, as well as design the scope o f work for the consultants. The consultants will be selected according to IDA'Sguidelines and procedures for selection o f consultants. Experience with other IDA operations applying similar funding mechanisms was carefully considered and adapted to reflect the country context. The FMS team conducted an assessment o f the feasibility o f using Georgian public financial management systems to implement IDA- financed projects in general, and the proposed IPF Project in particular. In the course o f this work the capacity o f the Treasury systems was assessed for managing Project funds, providing the required level o f banking services and reporting on the use o f project funds. Disbursement arrangements were discussed at length with the M o F and Treasury service and agreements were reached on specific aspects o f the accounts to be established within the Treasury as well as financial management procedures to be introduced. 9 Experience with IDA-financed or IDA-managed technical assistance in other countries points to a need for careful and realistic planning o f the T A and close monitoring o f the consultants to ensure that the tasks are completed on schedule. IDA'Sinvolvement in ensuring clear and comprehensive Terms o f Reference, proposing realistic schedules, interimreview o f consultants work with counterparts, and coordination with donors was found to be necessary for timely and effective implementation o f technical assistanceprojects. IDA will therefore be closely involved inimplementationoftheproposedIPFProject. Project implementation capacity has been identified as one o f the key determinants o f success for all IDA-financed projects in the country and region. A fkrther determinant i s the importance o f balancing ownership for individual components and related technical knowledge. Given that both components deal with preparation o f strategic and complex infrastructure investment projects, the proposed implementation arrangements envisage that primary responsibility for Project components will be assigned to the key sectoral institutions - to the Ministry o f Energy for the Khudoni component, and to the Ministry o f Economic Development for the Transit Corridor component. Followingthe experience accumulated inthe region, specific skills will be contracted, and the consultants will work under the supervision and guidance o f a project- responsible personwith the necessary authority. 5. AlternativesConsideredand Reasonsfor Rejection Because o f the small amount o f grant resources, the option o f financing physical investments was not considered. Among the choices for technical assistance for pre-investment project preparation, several infrastructure sectors were considered initially - energy, transport, water and sanitation, and irrigation and drainage but the project was limited to the energy and transport sectors only to efficiently respond to the Government's priorities and facilitate sound decision-making in regards to its most strategic and complex projects. A feasibility study for strategic strengthening of the power transmission system was considered, but the Government has entered into agreement with USTDA to undertake such work. The Bank's Khudoni study will only address power transmission issues to the extent they remain uncovered for the purpose o f establishing Khudoni's feasibility. An alternative considered was to prepare targeted infrastructure investment projects through a PPF, but the IPF Project allows higher efficiency for project preparation, offers upstream project assessment capacity and more flexibility to conduct studies for projects where it i s not yet known iftheyarefeasibleforfurtherinvestments. C. IMPLEMENTATION 1. Institutionaland ImplementationArrangements The IPF Project will be implementedover a three year period from March 15, 2006 to March 15, 2009. The division o f institutional mandates, roles and responsibilities for the management o f 10 the program is summarized below and described in greater detail in Technical Annex 6: Implementation Arrangements. The responsibility for project implementation will lie with the two major sectoral agencies (according to the project components) - Ministry o f Energy, and Ministry o f Economic Development. These Ministries will draft Terms o f References for consultants, manage procurement, sign contracts, supervise progress, and process payments for their respective components. For the Khudoni component the implementing agency will be the Ministry o f Energy. A Deputy Minister, designated by the Minister, will be in charge o f the Project. Since procurement and financial management skills required by IDA and necessary for Project implementation are lacking within the Ministry, assistance in these areas will be provided by the Project Service Organization (PSO) which has been established to support implementation o f the Electricity Market Support Project (EMSP). The PSO i s an entity under Public Law reporting to the Ministry o f Energy. The entity has experience in managing IDA-financed projects. The activities o f the PSO under this Project will be under direct oversight o f the Deputy Minister. The Ministry will be responsible for all other functions related to implementation o f this Project, including inter alia decisions relating to the substance o f the consultants' work and decisions to proceed with the various phases o f the work. After the closure o f the EMSP project, scheduled for end o f 2007, the services o f the PSO to the IPF Project would be replaced by consulting services procured by the Ministry o f Energyunder the IPFProject. The PSO accountant/financial management specialists will be responsible for setting up and operating the project's financial management and accounting system according to IDA standards and to keep and monitor project accounts for the Khudoni component. An auditor acceptable to IDA will annually audit project-related accounts, disbursements, and Statements o f Expenditures (SOEs) according to international standards. The annual audit report will be submittedto IDA within six months o fthe endo f each fiscal year. Procurement for the Khudoni component would be carried out under the IDA procurement guidelines. The PSO will draft procurement documents for the Khudoni project, and will carry out day-to-day contract management activities. However, M o E will be responsible for decision- making issues such as decisions about evaluation committee members. Contracts will be signed by the MoE and the contractors. Contract negotiations will be carried out by the MoE with participation o f the PSO. M o E will keep originals o f all procurement documents with copies at the PSO's premises. Transit Corridor projects will be implemented by the Ministry o f Economic Development. The Deputy Minister who i s responsible for the transport sector inthe Ministry,will be designated by the Minister to be in charge o f the Project. Since procurement and financial management skills required by IDA, and necessary for project implementation, are lacking within the Ministry, assistance in these areas will be provided by the Transport Reform and Rehabilitation Center (TRRC). The TRRC was established in 1996 as an entity o f Public Law under the Ministry o f Economic Development. 11 The main function o f the TRRC will be assisting the implementing Ministry to undertake procurement work, project financial management and accounting, disbursements, financial reporting, and auditing arrangements. The activities o f the TRRC under this Project will be under direct oversight o f the Deputy Minister. The TRRC has experience in managing IDA projects having implemented four IDA-financed transport projects. (The ongoing Secondary and local Roads project has a similar implementation arrangement, whereby the TRRC assists the Roads Department o f the Ministry o f Economic Development based on a the specific agreement). The Ministry will be responsible for all other hnctions related to implementation o f this Project, including inter alia decisions relating to the substance o f the consultants' work and decisions relating to enteringthe various phases ofthe work. The TRRC accountant/financial management specialists will be responsible for setting up Project financial and accounting system according to IDA standards and to keep and monitor project accounts for the Transit Corridor component. An auditor acceptable to IDA will annually audit project-related accounts, disbursements, and Statements o f Expenditures (SOEs) according to international standards. The annual audit report will be submitted to IDA within six months o f the end o f each fiscal year. Procurement under this Project will be carried out under the IDA procurement guidelines. The TRRC will draft procurement documentation for Component 2 o f the project, and will carry out day-to-day contract management activities. However, MoED will be responsible for decision- making. Contracts will be also signed by MoED and contractors. Contract negotiations will be camed out by the MoED with participation o f TRRC. MoED will keep originals o f all procurement documents with copies at TRRC premises. All correspondence with project stakeholders and/or consultants will be sent and received by the respective implementing Ministry. All deliverables from the contractors will be received, reviewed and accepted or rejected with certain comments by M o E and MoED for their respective Project components. Project Operational Manuals are developed by PSO and TRRC, agreed with the MoE and MoED, and approved by IDA. Project Operational Manuals incorporate a Financial Management section reflecting Treasury accounting and reporting. The Ministry o f Finance will have the authority to make decisions and take actions concerning the allocation o f the remaining amounts o f funds inthe Project. Not later than December, 2006 the Government will review completed work on the studies under Components 1 and 2.A., will determine whether funds are available to address Component 2.B and within 30 days will develop the scope o f this component, acceptable to IDA. Any increase inthe estimated costs o fwork on Component 1and/or Component 2.A. would be accommodated by reducing or eliminating work under Component 2.B. 2. Monitoring and Evaluation of Outcomes/Results The target outcomes and results o f the government's program will be monitored on the basis o f the agreed performance indicators shown in the Project Design Summary provided in Annex 3. The Ministry o f Energy and the Ministry of Economic Development will be in charge o f 12 monitoring the progress against the performance indicators. These organizations will monitor the performance o f consultants in accordance with the contract, review and approve the Project inception reports, mid-termreports, and final reports issued by consultants. Quarterly reports will be submitted to IDA by the Ministry o f Energy and Ministry o f Economic Development within 30 days after the end o f each project quarter. Annual Reports will be submittedto IDA by the Ministry o f Energy and Ministry o f Economic Development within 30 days o f end o f each project year. Based on IDA'Sreview o f the quarterly reports, annual reports, and outcomes o f the supervision mission, measures will be taken to ensure that the Project's subcomponents are completed without delay and achieve their planned outcomes, and adjustments will be made, if necessary. The Government will transmit to IDA a Project Implementation Completion Report (ICR), within three months o f project closing. Regular supervision missions who will monitor Project implementation progress and report the findings in Aide-Memoires shared with the relevant stakeholders. The Implementation Completion Report will be preparedjointly by IDA and the relevant implementingunits, and the results discussed and presented to the stakeholders. 3. Sustainability Sustainability o f the technical assistance provided by the Project requires that the recommendations developed under the Project are effectively used and applied. Preparation of the investment projects under the IPF Project will assist the government in making sound investment decisions, and where applicable to mobilize financing for respective investment projects. The latter largely depends on political stability, continued availability o f resources, and government's continued commitment to implementation o f those projects. The expected duration o f the Project i s three years, while the impact o f the project - effective application o f its recommendations resulted in and applied during implementation o f the respective infrastructure investment projects - may become visible in the longer run. Therefore, project sustainability largely depends upon the Government's continued commitment to its current infrastructure investment priorities as well as availability o f funds for implementation o f those investment projects. 4. Critical Risks and Possible ControversialAspects One o f the greatest risks associated with this operation is potential slow decision-making associated with integration o f some PIU functions into respective Ministries. While such integration builds the most ownership and commitment, it also represents a potential risk, as the Deputy Ministers who are responsible for Project management will have competing claims on their time.This may result in slow decision-making, and/or slow utilization o f funds. The second risk is that the Khudoni and/or East-West highway components o f the Project may cost more than currently anticipated, not leaving funding available for Component 2.B. The potential for higher cost can only be assessed after the detailed design studies have been initiated. This will be mitigated in several ways. First, the project outcome largely depends on the two main activities, Khudoni and the East-West Highway. Additional feasibility studies planned under the Project (Component 2.B) contribute to the outcome, but they are not essential for Project 13 success. Second, decisions on funding for Component 2.B. will be made only by December 2006, after a clearer picture on the cost o f Components 1 and 2.A i s available. Another risk i s connected to govemment not acting on the findings o f studies. Inorder to mitigate all the above stated risks, there will be several actions taken throughout the Project preparation and implementation. Specifically, TORS were developed for the main TA activities before Negotiations; implementation o f studies will be carefully monitored by the Government and IDA; and IDA will maintain continuous dialogue with the key counterparts at all stages o f Project planningand implementation. 5. Loadcredit Conditionsand Covenants Conditionsfor Effectiveness: (i) The Recipient will make appropriate arrangements for its fiscal year 2006 to cover its contribution to the financing requirements o f the Project. Such an arrangement would consist o f a letter from the Minister o f Finance to IDA ensuringthat (i) the next budget revision for its fiscal year 2006 to be submitted in to the Parliament, an appropriate budgetary allocation for the co-financing o f this Project would be included, and (ii) irrespective o f the budget submissiodapproval above, the Recipient will provide in a timely manner appropriate financing to cover its share o f incurred costs. CovenantsApplicable to Project Implementation: (i) The Recipient shall ensure that adequate annual budgetary allocations are being made to cover the Recipient's contribution to the financing requirements o f the Project; (ii) The Ministry o f Energy and the Ministry o f Economic Development will submit to IDA Quarterly Progress reports, in a format satisfactory to the IDA, not later than 30 days after the end of each quarter outlining the progress made in the implementation o f the Project, as well as the problems encountered and how they are being addressed; (iii) For road-related projects the Government shall permit the use o f design and construction standards recommended by the European Committee for Standardization on Construction and Design o f Roads. D. APPRAISAL SUMMARY 1. Economicand FinancialAnalysis This Project i s going to finance only studies required for preparation o f investment projects, therefore no economic or financial analysis has been conducted. 14 2. Technical This Project is going to finance only studies required for preparation o f investment projects, therefore no technical issues are expected. Technical issues related to the investment projects preparedunder this Project will be identified by qualified international consultants, hiredthrough this Project. 3. Fiduciary A. Procurement An assessment o f the procurement capacities o f each o f the agencies identified to carry out procurement functions for the Grant beneficiaries was carried out in November and December 2005. The two respective reports (agency procurement capacity assessments) were presentedto partners. The main conclusions are that, inboth cases, the agencies involved are deemed capable o f carrying out their respective procurement functions with due regard to risk, efficiency and economy. Recommendations for measures to mitigate risk are presented in the two reports. These are in short: (i)the MOED/TRRC needs to prepare an Operations Manual covering in particular the procurement actions that are due under the transport component; (ii) MOE/PSO the also needs to revise and extend its present Operational Manual to reflect the procurement that i s expected under the energy component such revisions should be made with due regard to the fact that the two entities do not have prior experience in working under the new Guidelines and are not familiar with the corresponding changes in the RFP and the consequences with respect to evaluations. A Country Procurement Assessment for Georgia was made in 2003 to assess all aspects o f risks - institutional, political, procedural etc. - that may negatively affect the abilities o f implementing agencies to carry out procurements in Georgia. The associated report (the CPAR) rates Georgia a high risk country. Accordingly, the customary prior review practices normally exercised by the Bank in countries representinghigh risk will also apply to this operation including the setting o f prior review thresholds incompliance with standard ECA policy. The CPAR needs to be updated on a number o f developments that have occurred since 2003. A desk review will be undertaken to assess a revision o f the Public Procurement Law that was introduced inJanuary 2006. The PAS for this Project is stationed in the Country Office in Tbilisi and will monitor all procurement actions by way o f customary prior and post reviews and will provide regular guidance on all procurement-related matters. A. Financial Management As o f November 2005 PSO and TRRC have acceptable financial management arrangements in place to meet the current IDA requirements for the quality o f accounting, reporting and internal controls system and also for the audit arrangements, and are ready to start Project implementation. 15 The annual audited Project financial statements for both components will be provided to IDA within six months of the end of each fiscal year and also at the closing o f the Project. Both components o f the Project will produce a full set o f quarterly Financial Monitoring Reports (FMRs) throughout the life o f the Project. 4. Social The IPF Project is limited to the provision o f technical assistance for the preparation o f follow- on investment, and no negative impact on society i s expected from the implementation of the IPF Project itself. However, since the follow-on investments being prepared under the IPF Project include components that could have a social impact, the technical assistance under the IPF Project includes the preparation of social impact assessments. An overview o f the approach to be taken has been provided in a Safeguard Framework (SF) specifically prepared for the IPF project. The SF is a new approach to due diligence on TA loans and has been prepared to meet the Bank's safeguards requirements. The SF approach has been assessed by the Regional Safeguards Coordinator (ECSSD) and other relevant experts and has been found to be in compliance with IDA policy requirements. The SF summarizes the approach to safeguards to be taken during the implementation o f the IPF Project, which will include preparation o f Social Impact Assessments (SIAs) for the follow-on investments. The assessment process will be conducted in accordance with the World Bank policies and guidelines. The SF has been disclosed in country and through the World Bank INFO Shop, and i s to be part o f Project Operational Manuals to be followed during project implementation. (See Annex 10 for additional information). 5. Environment As for social impact, no negative impact on the environment is expected from the implementation o f the IPF Project itself. However, since the follow-on investments being prepared under the umbrella o f the IPF Project include components that could have environmental impact, the technical assistance under the IPF Project includes the preparation o f environmental impact assessments. The SF summarizes the approach to environmental safeguards to be taken during the implementation o f the IPF Project, which will include preparation o f Environmental Impact Assessment (EIA) for the follow-on investments. The assessmentprocess will be conducted in accordance with IDA policies and guidelines. 6. Safeguard Policies Although the IPF Project i s limited to technical assistance, it has been classified as Category B, triggering OP 4.01 (Environmental Assessment) and OP 4.12 (Involuntary Resettlement), because o f the safeguard impacts o f possible follow-on investment projects, the feasibility o f which are studied under the IFP Project. To address these environmental and social safeguards duringproject preparation, a Safeguard Framework, as described in the sections above, has been disclosed and consultations have been held. SF i s to be part o f Project Operational Manuals to be followed during Project implementation. Since the Enguri River, on which a possible future Khudoni hydropower plant would be located, flows into the Black Sea, the International Waterways safeguard (OP 7.50) has been triggered. The Project i s not expected to cause 16 appreciable harm to the other riparians. The Commission for the "Convention on the Protection o f the Black Sea Against Pollution" has been notified. SafeguardPoliciesTriggeredby the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [ I Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, beingrevised as OP 4.11) Involuntary Resettlement (OPBP 4.12) Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) Forests (OP/BP 4.36) Safety o f Dams (OP/BP 4.37) Projects inDisputed Areas (OP/BP/GP 7.60)* Projects on International Waterways (OP/BP/GP 7.50) 7. PolicyExceptionsand Readiness There are no policy exceptions and the documents for the first several months of implementation program are ready. * By slipporting theproposed project, the Bank does riot interid to prejudice thefinal deterniinntrori of the parties` clniiizs011the disputed areas. 17 Annex 1:Country and Sector or ProgramBackground GEORGIA: INFRASTRUCTUREPRE-INVESTMENTFACILITY Georgia i s a small country located to the south o f the Caucasus mountain range, with Russia to the North, Armenia and Turkey to the South, Azerbaijan to the East, and the Black Sea to the West (see map attached). It has a population o f4.4 million'. Following independence, the loss o f planned production to Soviet markets, the end o f large budget transfers from Moscow, and the impact o f civil war which displaced some 300,000 people resultedina 70 percent drop inoutput. A stabilization and structural reform program led to a modest rebound inGDP inthe mid-1990s. However, the impact o f these reforms was bluntedas Georgia took on many o f the trappings o f a failed state: fragmented political power, deterioration in law and order; widespread corruption; a build-up in arrears in public salaries, pensions, and social transfers, and a slackened pace of political reforms. Inaddition, the deterioration of physical works and the lack of resources for maintenance and rehabilitation resulted in a major deterioration o fkey infrastructure, particularly the roads and power networks. These factors ledto growing dissatisfactionwith the Government which culminated in the Rose Revolution in November 2003 and the election o f a new Government in January 2004 committed to addressing governance issues head-on and providing the basic infrastructure services necessary to sustain growth. The new Government has moved quickly and decisively on a number o f fronts. It is focusing on fighting corruption and building good governance; improving the fiscal stance while introducing tax reform, easing the regulatory environment for business; reforming social services, most notably in education and social protection systems; and addressing the deterioration in infrastructure, particularly in roads and power. Accomplishments in these areas over the Government's first two years have been impressive. Public salaries and pension are paid on time and most arrears have been cleared. Reforms in police and tax administration have had strong initial impact and are continuing. The regulatory and administrative environment facing business i s being improved and education reform inparticular i s introducing sweeping reform in Georgia's schools at all levels. Last year for the first time ever, students were admitted to colleges and universities on the basis o f standard national exams, thereby eliminating a pervasive source o f corruption. For the business environment, the Bank's Doing Business Report publishedin 2005 rated Georgia as the country with the second most improved business climate in the world. Similar results were noted in the 2005 Business Environment and Enterprise Performance survey.* The new Government recognizes that reform, rehabilitation and development o f infrastructure is vital for its efforts to spur economic growth, generate jobs and reduce poverty and has made infrastructure a key priority. The importance o f rebuilding critical infrastructure i s underpinned by the structure o f the economy. At present, a significant part o f Georgia's economy remains rural based. Although agriculture has declined as a percentage o f GDP following the collapse o f traditional Soviet markets for fruits, vegetables and wine, it remains the largest sector o f the economy, accounting for 16 percent o f GDP but 52 percent o f the employment. Trade i s the ` This number does not includepopulation of SouthOsetiaandAbkhazia. EBRDiWorld Bank (2005) "Business Environment and Enterprise Performance". (BEEPS). 18 second largest sector o f the economy, accounting for 13 percent o f GDP and 11 percent o f employment, while manufacturing accounts for 9 percent o f GDP and 5 percent o f employment. Rebuilding existing infrastructure necessary to sustain growth, particularly private sector led growth, inthe rural areas and rebuilding trade routes necessary to strengthen Georgia's status as a transit economy i s therefore a top priority. Due to a much improved fiscal stance -- underpinned by a stable macro-economic framework, low inflation and growing revenues - the Government in the last two years has managed to substantially increase investments in these areas. However, given that needs are much greater than available resources, mobilization o f investments for rehabilitation and development o f transport and energy infrastructure, including by the private sector, remains a major priority for the Government, as evidenced in the recently issued Progress Report on the Economic Development and Poverty Reduction Program (EDPRP). These areas are also a major area o f cooperation with IDA, as evidenced by the Country Partnership Strategy (CPS) for FY 2006-09 and the First Poverty Reduction Support Operation (PRSO) approved inAugust 2005. Energy Sector Issues: Georgia consumes about 8 billion kWh o f electricity per year, o f which about 60 percent i s domestic hydropower, about 30 percent i s domestic thermal power, and nearly 10 percent i s electricity imports. The thermal plants are fueled by imported natural gas, thus the import dependency in the electricity sector is considerable. Electricity consumption is anticipated to grow by about 5 percent annually over the next three years. Georgia imports about 1.4 billion cubic meters o f natural gas, currently only from Russia, but with gas also to become available from Azerbaijan in late 2006 through a new transit pipeline crossing Georgia from Azerbaijan to Turkey. Georgia i s well endowed with hydropower resources, particularly in the western region o f the country. 2,700 MW o f hydropower have been developed, o f which currently about 1,800 MW are operational. About 35 plants in operation produced 6,000 GWh in2004. Another 18 potential hydropower plants have been analyzed, constituting 1947 MW and with a potential annual production potential o f about 6,900 GWh9. Khudoni is considered the most attractive investment opportunity among these possible plants. In addition, Georgia has about 370 MW o f thermal power generation capacity that produced 800 GWh in 2004. With net imports o f electricity o f 1,200 GWh, overall power supply was 8,000 GWh. The dominant Enguri Hydropower Plant (downstream o f Khudoni) produced 2,700 GWh in 2004. All plants are interconnected through the transmission grid within the country and with neighboring countries Russia, Armenia, Azerbaijan, and Turkey, although cross-border power exchanges are made in island mode except with Russia. The new Government has taken an active role in the energy sector, with considerable success, notably for power. Availability o f power has substantially improved, and 24 hour service for paying customers is a near-term reachable target for much o f the country (Le. beyond Tbilisi where power is generally available). Problems o f electricity theft and non-payments have been vigorously addressed. Payment collections for UEDC, the dominant, state-owned power distributor outside Tbilisi, were approximately 65 percent in the fall o f 2005 as compared to about 25 percent in early 2004. Targeted investments to rehabilitate hydropower plants have GeorgiaElectricity Sector Least Cost Development Plan, September 1998 (USAID). 19 increased generation capacity, and progress has also been made to mitigate risks o f failure inthe transmission system. The deployment o f international management contractors in power distribution, transmission, and for wholesale market functions, has contributed to the sector improvements by adding professionalism, improving the utility companies' cost structures, and through their successful efforts to fight corruption. The progress in the power sector since the Rose Revolution has been achieved from an abysmal starting point, and future challenges are plentiful. The Government has established an Energy Sector Strategic Action Plan to guide its work. Among the major unsolved issues i s power sector debt and liquidity. The Government, supported by international consultants, is preparing legislation to address the sector debt, which at US$ 500 million i s unsustainable even as 80% o f it is intrastate debt. In spite o f major financial improvements, some generating companies and the power transmission company are under-funded, and some tariffs are below cost recovery level". However, the Government provides budgetary support to the sector, and the contributions o f investment funds from international financial institutions are sizeable. The Government plans to privatize assets in distribution and generation as soon as practically possible. Current plans call for privatizations in 2006, although such a time schedule seems optimistic. In2004, the Government identifiedself-sustainability and energy secuvity as two mainpriorities inits energypolicy. The goal is to create a profitable energy industrythat can sustain itself on the basis of the financial flows from end consumers. To support its priorities, the Government wants to ensure the most efficient use o f internal resources and a diversification o f supply points for energy entering the country, using its geo-political location for transit arrangements to help ensure energy security. A cost-effective expansion o f domestic hydropower production is viewed as a potential means to mitigate the financial impact o f increasing prices o f imported fossil fuels and electricity while contributing to self-sustainability and energy security o f the country. For energy, this Infrastructure Pre-Investment Facility focuses on assessing the feasibility o f a possible Khudoni Hydropower Plant (Khudoni HPP). Construction o f the Khudoni hydropower plant in western Georgia (see annexed map) started in 1985, but was terminated unfinished in 1989 due to the situation in the Soviet Union at the time. Also the earthquake in neighboring Armenia in 1988 (Richter scale 6.9) impacted the decision to suspend building o f the dam and power plant. Later (in 1992), the planned dam was redesigned to sustain extreme earthquakes (Richter scale 9, vs. earlier 8). Dam safety i s the most critical aspect o f hydropower plant studies, including the planned feasibility assessments for the Khudoni HPP. Khudoni HPP i s expected to be the least-cost large hydropower development available to Georgia. Transport Sector Issues: Georgia's geographical position makes it an important transport link between East-West (the Black Sea and the Caspian Sea) and North and South (between Russia and Turkey). Trade with its neighbors, both transit and bilateral, i s also an important feature o f Georgia's economy. Transit activities generate a direct turnover o f more that US$2 billion per year. One o f the government's top priorities i s to develop Georgia's comparative advantage as a transit country by improving its East-West Transport Corridor. The development o f oil resources 10Electricity tariffs are about 6.8 U S centsikWhinTbilisi and about 4.7 US centsikWhin the regions 20 i s projected to increase the east-west flow o f oil and associated products". The Government recognizes that the full potential of its transit corridor has not been realized. The Government's focus is modernizationo f the transit roadnetwork. The road network in Georgia consists o f 1,474 kilometers o f main roads with about 70 per cent in good to fair condition; 3,392 kilometers of secondary roads of which over 60 percent are in poor condition and needrehabilitation; and 15,429 kilometers o f local roads most of which are in very poor condition. The current condition o f the road network in Georgia reflects a severe reduction in the resources allocated to road maintenance under the previous Government, from the early 1990s to 2004. A recent sector review12 documents the decline in road maintenance expenditures, from GEL125.1 million (US$59.5 million) in 1988 to GEL 24.8 million (US$12.4 million) in 2002, in nominal terms. The poor state o f the highway network constrains the movement o f goods and people among Georgia's cities, ports, and rural areas; and through Georgia, along the transit corridor. The long transit times, despite the relatively short distance and poor road conditions add to transport costs and deter usage o f the Georgian transit route. According to work undertaken elsewhere in the region, poor road quality can raise transport costs by between28-56%13, and inthe more extreme cases could result ina complete stoppage o f service as transport operators become reluctant to operate on roads which are liable to damage their vehicles. Since coming to power, the new Government has focused on improvement o f road infrastructure. Funding provided to the transport sector has increased substantially from GEL 51.4 million in 2003, to GEL 67.8 million in 2004 and GEL 121.4 million in 2005 with further increases projected for 2006. Moreover, the Government recognizes the need to further improve funding and management mechanisms to adequately maintain Georgia's roads. IDA financed transport sector projects are assisting the RDMEDin developing cost-effective mechanisms to better align maintenance expenditures with existing needs, through development o f a multi-year road maintenance plan, introduction o f modem management technologies, application o f a new road classification system, and development o f new road design standards. In view o f the poor road conditions, IDA also approved in2004 a credit o f U S $20 million for the rehabilitation o f 500 to 750 km o f local and secondary roads, which currently is under implementation. In addition to improved maintenance and road management the Government is focusing on the modernization o f the East-West highway from Georgia's major Black Sea port o f Poti to the Azeri Border at the Red Bridge. In 2005 the PPIAF funded a study which reviewed the economic feasibility o f various improvement options on the East - West route with special attention to the critical section between Tbilisi and Rikoti, as it carries the highest traffic volume and the largest proportion o f heavy vehicles. The study analyzed the options to upgrade the existing road to a highway with an alignment that would achieve the maximum design speed o f 120 km per hour. The upgrade o f the existing road to four lanes or the construction o f parallel 2x2 motonvay both have acceptable economic rates o f return. The Government has selected the option to upgrade the existing road and has requested the IDA support. II `'World USAID. GeorgianRailway Reshuchiring Program,draft May 2005. Bank. (2002) "Transport Sector Rei reiv of Armenia, Azerbaijan and Georgia", ECSIE. `jWorld Bank, (2003a) Op crt 21 There has been no study on traffic accidents on Georgian roads. It is not known whether there are comprehensive local or central records o ftraffic accidents, although the police are requiredto record the details o f traffic accidents. Anecdotal evidence indicates that there i s a high accident rate especially on the east-west transit route. The IDA report "Road Safety in Individual ECA Countries" for 1999 suggests that for Georgia the social economic costs o f road traffic accidents are approximately 1.l% o f GDP. Accident studies and road safety issues should be an integral component o f any road improvement studies. Georgian Railway (GR) is located on the western part o f the land bridge connecting the Black Sea and the Caspian Sea. Over half o f its traffic and revenue i s provided by transit oil and oil products traffic moving from Kazakhstan, Turkmenistan, and Azerbaijan to Georgia's Black Sea ports o f Batumi and Poti. This traffic i s profitable, and provides the financial backbone for all GR operations. GR traffic o f oil and oil products is forecast to grow substantially from 8.6 million to 18.7 million tons between 2004 and 201514. GR will need to invest an estimated US$774 million over the next ten years to rehabilitate the railway and accommodate this traffic growth. Georgian Railways (GR), with the support o f USAID consultant," has been analyzing how it should restructure to become more commercial and financially viable. l4 Booz Allen & Hamilton (BAH), most likely traffic forecast used in Strategy-Based Transformation and Implementation Planfor Georgian Railway (October 2005). This growth takes into account the opening o f the Baku - Tbilisi Ceyhan (BTC) pipeline. At 2004 exchange rates, this 10 million ton increase in traffic is worth US$70 - million inrevenue per year. 15Booz Allen & Hamilton. 22 Annex 2: Major RelatedProjects Financedby the Bank and/or other Agencies GEORGIA: INFRASTRUCTURE PRE-INVESTMENT FACILITY This annex provides a short summary of related projects by IDA and other international agencies inthe country, inthe energyandtransport infrastructure sector. IDA-funded transportprojects: e Transport Rehabilitation project, 1995-1999, with a credit amount o f US$12.0 million. The Government's focus was modernization of the transit road network. Project rated satisfactory. e Restructuring of the Ministry of Transport project, 1998-2003, with credit amount of US$2.5. The project rated satisfactory. e Roads project, 2000-2005, with credit amount of US$40 million. The project rated as satisfactory. e Secondary and Local Roads project, 2004-2008, in amount of US$20 million. Project i s rated as satisfactory. IDA-funded energyprojects: Power Rehabilitation Project, 1997-2000 inthe amount ofUS$52.3 million. Project rated satisfactory. Oil Institution Building TA Project, 1997-2000, in the amount of US$1.4 million. Rated highly satisfactory. Energy SECAC (adjustment credit), 1999-2002, in the amount of US$25.0 million. Project rated unsatisfactory. Electricity Market Support Project, 2001-2007, with credit amount SDR21 million. Project i s rated as satisfactory. Energy Transit InstitutionBuilding Project, 2001-2007. Credit amount is US$9.6 million. Project i s rated as satisfactory. Other donor's major activities in infrastructure: KfW,2005, RehabilitationofPower DistributionI. million. (ongoing). 25 KfW,2005, SectorProgram, Power Supply.8.3 million. (ongoing). KfW,2005, Regional PowerNetworkRehabilitationI. 0 million. (ongoing). 1 KfW,2005, Program for the PromotionofRenewable Energy. 5.1 million. (ongoing). KfW,2004, Power TransmissionRehabilitationProgramI1(BM).3.3 million. (ongoing). e USAID, 2003, Georgian Energy Security Initiative (GESI)16.US$25 million. (ongoing). e USAID, 2005, RuralEnergy andEnvironmentDevelopment. US$I3.5 million.(ongoing). e USAID, 2004, Georgia Railways Restructuring Assistance. (Ongoing) 16GESI financed Georgian Winter Heat Assistance Program and management contract of UEDC: 23 0 EBRD, 1998,Rehabilitation ofEnguriHydroPower Plant. US$30million. (ongoing) 0 EBRD, 2002, loan of $20 millionto Georgian Railways for rail and other track materials, track machines, 168 tank wagons and fiber-optic cables. 0 MCC, 2005, Rehabilitation ofthe North South Gas Pipeline. US$40million. (ongoing) 0 MCC, 2005, Javakheti Road Rehabilitation Project (US$103). (Ongoing) 0 PPIAF, 2005, Framework for Public Private ParticipationinRoad Sector. (ongoing). 0 TACIS, 2003, Rehabilitation of CaucasianHighways. Pre-feasibility study for Modernizationof the ExistingRoadPoti-Tbilisi-RedBridge, Georgia. 24 Annex 3: Results Framework and Monitoring GEORGIA: INFRASTRUCTURE PRE-INVESTMENT FACILITY Results Framework PDO ProjectOutcome Indicators Use of Project Outcome [nformation Studies for preparation of Sound investment decisions are infrastructure investment projects made, and where appropriate hrther 1. Ensurequality of conducted. preparatory steps are taken and implementationand its impact adequate financing is mobilized for on achievementof PDO. investments. 2. EndPY3: Identify and assess needs for additional I investmentslfunding. IntermediateOutcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Component 1. a. Feasibility study Delaysindelivery of reports and producedaccepted; bidding documentscomparedto Studies for Khudoni Hydropower agreed schedules would trigger Plant Project completed. b. Environmental and Social ImpactAssessment investigations into the causes and produced/accepted; remedial actions. c. Decision to proceedwith the Non-acceptanceof reportswould investmentproject, or trigger review ofpossible quality otherwise, made by the problems andremedial actions. Government; d. Detailed designs and bidding Reluctance by the Governmentto documents produced accepted make necessary decisions for work (this indicator i s optional based to proceedwould trigger on indicator "c" above). investigation of causes and seeking for solutions. a. Preliminary Designsand Delays indelivery of reports and Subcomponent2.A. Environmental Impact bidding documents comparedto Assessmentproducedaccepted; agreed schedules would trigger Studies for East-WestTransport b. Final designs and bidding investigations into the causes and Corridor Project completed documents producediaccepted remedial actions. for section 1; c. Final designs andbidding Non-acceptance ofreports would documents producedaccepted trigger review ofpossible quality for section2; problems andremedial actions. d. Final designs and bidding documents producedaccepted for section3. Component 2. a. TBD (Decision on availability Reluctanceby the Governmentto Subcomponent2.B. of funding, and if funding make necessary decision on the available, on the scope of the availability of funds and scope of project, will be made by the component would trigger discussion on effective application of funds. Studies for Transit Corridor Governmentby December Project(s) Completed 2006). 25 x t? w s 4 4 8 d 3 3 cd d d s v1 rn sVJ E s v1 sv) 3 0 c Annex 4: DetailedProjectDescription GEORGIA: INFRASTRUCTUREPRE-INVESTMENTFACILITY The Project has two major components: Component 1 will finance T A for Khudoni Hydropower Project preparation; Component 2, with two sub-components, will finance preparation o f Transit Corridor projects. While Components 1 and 2.A. are clearly defined, the scope o f the sub- component 2.B. i s broadly determined for transit corridor projects and depends upon the availability o f funds remaining after funding needs for Component 1 and 2.A. are satisfied. In addition, US$0.05 million has beenreserved for Incremental Operating Costs. Component 1: TAfor Khudoni Hydro Electric Power Project Preparation (Component cost is US$3.3 million) The proposed Khudoni hydropower plant would be located in the Enguri River in a narrow canyon with steep slopes. The Khudoni site i s situated about 32 km upstream o f the existing Enguri hydropower/irrigation project which was completed in 1980. Enguri comprises a concrete arch dam with a structural height o f 272 m (the highest concrete arch dam inthe world) and a crest length o f 728 m, including 123 m o f abutment length. Enguri's installed capacity i s 1,300 MW, but less than halfo fthis capacity has been available inlater years. Construction o f the Khudoni hydropower plant started in full in 1985 (although officially in 1979)and was terminated unfinishedin 1989 due to the situation inthe Soviet Union at the time. Also the earthquake inneighboring Armenia in 1988 (Richter scale 6.9) impacted the decision to suspend building of the dam and power plant. At the time, the project comprised an arch dam including spillway, diversion tunnel, coffer dams, water intake and penstocks, underground power house, tailrace tunnels, low level water outlets, and a 500 kV switchyard and line. The project was modified in 1992, notably the planned dam height was reduced by 29.5 m to 170.5 m maximum height with crest length 420 m at 670 m elevation. The reduced dam height (and possible other measures) would enable Khudoni to resist earthquakes o f category 9 (Richter scale) as compared to category 8 for the original design. The nominal capacity to be installed in the underground powerhouse was planned at 638 MW (three units o f 212.7 MW each, Francis turbines). Based on the reduced dam height, the estimated average annual energy was 1,445 GWh. A 500 kV substation and transmission line would link Khudoni to the transmission grid. A t the time o f termination o f the construction works in June 1989, the following works were already completed or partially completed: 0 Access road to Project Site 0 Permanent and temporary roads, tunnels and bridges (40 km concrete road from Jvari to Khaishi; six tunnels, and 100 m long bridge over the Lakhanitskali river) 0 Accommodation for constructionworkers 0 Upstream and downstream cofferdams 0 River diversion works duringconstruction 0 Excavation o f the undergroundpower house and partial concreting 0 Intake and headrace pressure tunnel 28 Excavation o f the undergroundpower house and partial concreting Access tunnels to undergroundpower house Lekhara River diversion tunnel into Khudoni reservoir Outdoor 500 kV substation. The approximate progress o f the works as o fthat date were estimated as follows: 60% o f earth moving and rock drilling operation for power unit foundation area 80% o f earth moving and rock drilling operation for undergroundprofile o f arch dam, as well as 60% o f concrete placing works 60% o f earth moving and rock boring operations for underground construction o f power unit, as well as 45% ofconcrete andreinforcedconcrete placingworks Construction diversion tunnel completed and water runtested 70% o f road constructionworks Placement o f 83,500 m3o f concrete inthe dam foundation area o f left abutment 40% o f works within flooded area Completed upstream and downstream cofferdams. Due to civil war and lack of maintenance funds, many o f the works and structure have been damaged over the twenty-five year period that has elapsed: The construction diversion tunnel exit portal has beenscoured and has collapsed The Lekara River diversion tunnel is blocked The sediment transported by the Lekhara River has accumulated on the area o f the dam foundation Builtconcrete foundation has beendamaged The current status o f the intake works/tunnels, headrace pressure tunnel, access tunnels i s not known due to landslides blocking the entrances Concrete mixing plant has been cannibalized Buildings and other structures are in poor condition; a saw mill has been set up in the area o f the auto transport mechanical shop Accommodations have deteriorated Storage and warehouse buildings are inbad shape Private saw mills have been set up in the area o f the 500 kV substation and laboratory building. Existing investments have thus been substantially reduced in value, but presumably still constitute valuable assets, by some accounts estimated at a magnitude o f $50 mill. The original choice o f a concrete arch dam was made in the context o f the plan to build Khudoni in parallel with or shortly after the Enguriconcrete arch dam. Today, various gravity and rock-fill dams are interesting alternatives to the old design. IDA would finance a study for the Khudoni Hydropower Project to assess its technical, economic and financial viability while at the same time determine how a possible development o f the hydropower project could be undertaken with adequate safeguards and solutions 29 concerning the environment and socialh-esettlement impacts. D a m safety will be given top priority in the study. The study would include a review o f original design plans (Phase I); an assessment o n alternative dam and hydropower concepts (Phase II), and the development of a feasibility study for the selected alternative (Phase 111). Phase I11would also include analyses of potential export markets for part of the Khudoni power as w e l l as financing options for the project. If, on the basis of this Phase 1-111work, the project is determined to be feasible and adequate safeguards solutions are identified and if the Government decides to proceed, a Phase IV could be launched. Under Phase IV the consultants would develop detailed designs and specifications, undertake a prequalification process, develop bidding documents for buildingthe dam and power plant, and assist during the bidding process. The IDA'S involvement in financing and execution of Phase IV work, and the approach to Phase IV,would depend on the planned ownership structure of the power plant and the availability of interested investors at the time feasibility has been determined. A Panel o f Experts to review the consultants' dam design, technical and environmental solutions, resettlement solutions and other aspects, would also b e financed. The feasibility study m a y show the need for expanded field work - geological, geoseismical, hydrological, etc. - which might incur a need for additional financing. The Phase 1-111work (to assess feasibility) is expected to take about 12 months, and the subsequent Phase IV about 4 months, but there may be a significant time interval between Phase I11and IV for decision making, project financing, and handling of other issues. The Khudoni project's environmental and social implications will be analyzed and developed under a separate TA contract running in parallel with the technical studies in Phase 1-111and b e finished at the time when the Government would decide whether to proceed into Phase IV o f the project (Le. implementing the investment project). Should the Khudoni HPP prove to b e economically attractive (and otherwise feasible), financial analyses should b e determined and issues addressed concerning ownership and power sales. Financial advisory services and possibly expanded market analysis would b e required, and particularly inthe event o f a long-term export contract for part o f the Khudonipower, substantial legal services would also b e required. Costs for such work would expectedly b e large, but might substantially be carried by private sector investors in Khudoni. Nevertheless, some of the mentioned work might best b e financed by the Government, and the IPF Project will make funds available within what is uncommitted, consistent with Government priorities. The Khudoni hydropower plant is expected to be the least-cost large-scale new hydropower expansion available to Georgia. In a Georgia Electricity Sector Least Cost Development Plan undertaken in 1998 with U S A I D funding, Khudoni is by a large margin the least cost project in an assessment of 18 possible new hydropower plants. Khudoni's relative attractiveness seems clear in spite o f the fact that the cost o f the project appears to b e significantly underestimated in the study. Component 2: TA for Preparation of Transit Corridor Projects (Component cost is US$2.55 million) 2. A. TAfor Preparation of East-West Highway Improvement Project (Sub-component cost is US$I.6million) 30 The Government's priority is to start modernization o f the Red Bridge-Tbilisi-Poti transit road from the most congested section from Natakhtari, which i s about 12 Km west o f Tbilisi to Khashuri by upgrading the existing road from two lanes to four lanes. Therefore, the Government has allocated funds from its own budget to upgrade 15 Km o f the road from Natakhtari to Agaiani. The Project will complete a feasibility study, preliminary design and environmental assessment to continue this 4 lane upgrade fi-om Agaiani to Sveneti (approximately Km44 mark to Km 80 mark), subdividingthe highway for analysis purposes into three sections: Section 1 - Agaiani to Igoeti, Section 2 - Igoeti Bypass, and Section3 - Igoeti to Sveneti. The preliminary review will be followed by detailed design and preparation o f the bidding packages for each section. The environmental and social implications o f the corridor improvement project will be analyzed as part o f technical studies. 2. B. TAfor Preparation of Other Transit Corridor Projects (Sub-component cost is US$0.95 million) The scope o f this sub-component is broadly determined for transit corridor projects (road or railways) and depends upon the availability o f funds remaining after funding needs o f the other two priority components o f the project are satisfied. Increase in the estimated costs o f work on Component 1 and/or Component 2.A. over and above estimates would be accommodated by reducing or eliminating work under Component 2.B. The selection criteria for projects will be guidedby their strategic importance, complexity, andmerit. 31 Annex 5: ProjectCosts GEORGIA: INFRASTRUCTURE PRE-INVESTMENT FACILITY Project Cost By Component and/or Activity Local Foreign Total US$million US $million US $million Component 1. T A for Khudoni Hydropower Project 0.8 2.5 3.3 Preparation Component 2. T A for Preparation of Transit Corridor Projects Subcomponent 2.A. TA for Preparationof East- 0.45 1.15 1.6 West Highway Improvement Project Subcomponent 2.B. TA for Preparation o f Other 0.30 0.65 0.95 Transit Corridor Projects Incremental Operating Costs 0.05 0 0.05 Total Baseline Cost 1.60 4.30 5.9 Physical Contingencies Price Contingencies TotalProject Costs 1.60 4.30 5.9 Interest during construction Front-end Fee Total FinancingRequired 1.60 4.30 5.9 32 Annex 6: ImplementationArrangements GEORGIA: INFRASTRUCTURE PRE-INVESTMENT FACILITY The IPF Project will be implemented over a three year period from March 15, 2006 to March 15, 2009. The division o f institutional mandates, roles and responsibilities for the management o f the program i s summarized below. The responsibility for project implementation will lie with the two major sectoral agencies (according to the project components) - Ministry o f Energy, and Ministry o f Economic Development. These Ministries will draft Terms o f Reference for consultants, manage procurement, sign contracts, supervise progress, and process payments for their respective components. For the Khudoni component the implementing agency will be the Ministry o f Energy. A Deputy Minister, designated by the Minister, will be in charge o f the Project. Since procurement and financial management skills required by IDA and necessary for Project implementation are lacking within the Ministry, assistance in these areas will be provided by the Project Service Organization (PSO) which has been established to support implementation o f the Electricity Market Support Project (EMSP). The PSO i s an entity under Public L a w reporting to the Ministry o f Energy. The entity has experience in managing IDA-financed projects. The activities o f the PSO under this Project will be under direct oversight o f the Deputy Minister. The Ministry will be responsible for all other functions related to implementation o f this Project, including inter alia decisions relating to the substance o f the consultants' work and decisions to proceed with the various phases o f the work. After the closure o f the EMSP project, scheduled for end o f 2007, the services o f the PSO to the IPF Project would be replaced by consulting services procured by the Ministryo f Energy under the IPFProject. The PSO accountant/financial management specialists will be responsible to set up and operate the Project's financial management and accounting system according to IDA standards and to keep and monitor project accounts for the Khudoni component. An auditor acceptable to IDA will annually audit Project-related accounts, disbursements, and Statements o f Expenditures (SOEs) according to international standards. The annual audit report will be submitted to IDA within six months o fthe end o f each fiscal year. Procurement for the Khudoni component would be carried out under IDA procurement guidelines. The PSO will draft procurement documents for the Khudoni project, and will carry out day-to-day contract management activities. However, M o E will be responsible for decision- making issues such as decisions about evaluation committee members. Contracts will be signed by the M o E and the contractors. Contract negotiations will be carried out by the M o E with participation o f the PSO. M o E will keep originals o f all procurement documents with copies at the PSO's premises. Transit Corridor projects will be implemented by the Ministry o f Economic Development. The Deputy Minister who i s responsible for the transport sector in the Ministry, will be designated by the Minister to be in charge o f the Project. Since procurement and financial management skills 33 required by IDA, and necessary for project implementation are lacking within the Ministry, assistance in these areas will be provided by the Transport Reform and Rehabilitation Center (TRRC). The TRRC was established in 1996 as an entity o f Public Law under the Ministry o f Economic Development. The main function of the TRRC will be assisting the implementing Ministry to undertake procurement work, Project financial management and accounting, disbursements, financial reporting, and auditing arrangements. The activities o fthe TRRC under this Project will be under direct oversight of the Deputy Minister. The TRRC has experience in managing IDA-financed projects having implemented four IDA-financed transport projects. (Ongoing Secondary and local Roads project has a similar implementation arrangement, whereby the TRRC assists the Roads Department of the Ministry o f Economic Development based on the specific agreement). The Ministrywill be responsible for all other functions related to implementation o f this Project, including inter alia decisions relating to the substance o f the consultants' work and decisions relating to entering the various phases o f the work. The TRRC accountantifinancial management specialists will be responsible to set up Project financial and accounting system according to IDA standards and to keep and monitor project accounts for the Transit Corridor component. An auditor acceptable to IDA will annually audit Project-related accounts, disbursements, and Statements o f Expenditures (SOEs) according to international standards. The annual audit report will be submittedto IDA within six months o f the endo f each fiscal year. Procurement under this Project will be carried out under the IDA procurement guidelines. The TRRC will draft procurement documentation for Component 2 o f the Project, and will carry out day-to-day contract management activities. However, MoED will be responsible for decision- making. Contracts will be also signed by MoED and contractors. Contract negotiations will be carried out by the MoED with participation o f TRRC. MoED will keep originals o f all procurement documents with copies at TRRC premises. All correspondence with Project stakeholders and/or consultants will be sent and received by the respective implementing Ministry. All deliverables from the contractors will be received, reviewed and accepted or rejected with certain comments by MoE and MoED for their respective Project components. Project Operational Manuals are developed by PSO and TRRC, agreed with the MoE and MoED, and approved by IDA. Project Operational Manuals incorporate Financial Management section reflecting Treasury accounting and reporting. The Ministry o f Finance will have the authority to make decisions and take actions concerning the allocation o f the remaining amounts o f funds inthe Project. Not later than December, 2006 the Government will review completed work on the studies under Components 1 and 2.A and will determine whether funds are available to address Component 2.B, and within 30 days will develop the scope o f this component, acceptable to IDA. Any increase in the estimated costs of work on Component 1 and/or Component 2.A. would be accommodated by reducing or eliminating work under Component 2.B. 34 Annex 7: FinancialManagementand DisbursementArrangements GEORGIA: INFRASTRUCTUREPRE-INVESTMENTFACILITY A. FinancialManagement Country Issues. The most recent CFAA was conducted in September 2003 and updated in March 2004. The CFAA assessed each component of the public expenditure management framework throughout the report and analyzed the fiduciary risks in the system of internal controls. The individual assessments took account o f the level and magnitude of risk presented in each component. The CFAA team adopted the European Union's Public Internal Financial Control Systems (PIFCS) model o f internal control as the basis for its analysis o f the Government's internal control framework. Significant and serious weaknesses remain in many parts of the public expenditure management system. However, the Government i s taking actions to improve its systems of financial management. Particularly, the treasury function was transferred from the NBG to the Treasury and a system for cash management has been introduced. The severe cash shortages of the past few years appear to have been addressed. A single treasury revenue account has been established. Treasury has committed itself to introduce a Treasury Single Account effective from January 1, 2006. In addition, Treasury is devising plans to rollout the central Treasury systems to its regional offices and is in the process o f implementing a modern Treasury system with the support o f the proposed IDA-financed Public Sector Financial Management Reform Support Project that is currently under preparation. Inaddition, the IDA financial management team has reviewed the Treasury system and assessed it as satisfactory for holdingspecial accounts ofthe project. Strengths and Weaknesses. The significant strengths that provide a basis of reliance on the Project financial management systems include: (i) significant experience of P S O and TRRC in implementing IDA-financed projects (1997 - PSO, 1996- TRRC); and (ii) good quality o f the audit reports issued by PSO's and TRRC's project auditors for the past years; (iii) highly qualified staff and automated accounting system inplace. There are n o significant weaknesses identified either in PSO nor in TRRC. However, implementing arrangements between MOE and PSO, as well as between MOED and TRRC need to be clarified, particularly in terms of reporting and ministries' involvement in the support functions o f the Plus. There i s a remote risk that the Treasury (i) fail to provide the types would of services and the quality o f those services required to implement both components of the Project; as well as (ii)delay with the provision o f funds under the project if the country experiences cash shortages. Agreement is reached with the borrower to mitigate those weaknesseslrisks. Funds Flow. Project funds will flow from (i) either via two Special Accounts (Treasury IDA, foreign currency sub accounts in the National Bank o f Georgia) to b e maintained in the Treasury for each o f the two components o f the project, which will be replenished on the basis o f SOEs or by direct payment o n the basis of direct payment withdrawal applications, received from implementing agencies, and (ii)the Government, via the Treasury through normal Budget 35 allocation procedures initiated by the implementing agencies in accordance with standard Georgian Treasury and Budget execution regulations. Those funds will be used to finance eligible expenditure under the project. Staffing. There is only one accountant/financial manager at the PSOresponsible for accounting, statutory and management reporting, budgeting, banking, disbursements and other financial management functions. Those responsibilities are defined in the current FMM and the financial manager's TOR. The financial manager works based on an open ended contract untilthe end o f the project. A part time accountant may need to be recruited during the initial stage o f the project implementation to manage the expected increase in the workload on the accounting personnel as a result o f following Treasury procedures for funds disbursement. TRRC includes the Director, a finance team comprising Financial Manager and part-time Accountant, a Procurement Specialist, and infrastructure specialist. There are formally documented duties and responsibilities o f the staff which i s recruited on half a year contract duration. There may be a need to transfer the part time accountant o f the TRRC to a full time position during initial stage o f the project implementation and enhance the segregation o f duties betweenaccounting personnel. Financial Managers o fboth PIUs have beenworking intheir respective PIUs for many years. Accounting Policies and Procedures. The PSO and TRRC follow Georgian accounting standards. The accounting books and records are maintained on a cash basis and project financial statements are presented in United States dollars. The Financial Management Manuals o f both PIUs were updated to the new specifics o f the project and also to reflect Treasury accounting and reporting procedures. Internal Audit. Neither PSO nor TRRC have internal audit function and none is considered necessary given the size o f the PIUs. External Audit. The auditing arrangements for the project will follow the standard procedures adopted for ECA. The audit o f the project will be conducted by independent private auditors acceptable to the Bank and on terms o f reference (TOR) acceptable to IDA. There i s a List o f audit firms eligible to perform audits o f IDA-financed projects in ECA countries, which i s updated regularly, and there i s a standard audit TOR applicable for ECA, which is also updated regularly to take account o f the developments in the overall Bank audit policy. The Project will choose the auditor from the above-mentioned List and will use the ECA standard audit TOR as a basis for preparation o f its own audit TOR, which i s to be cleared with the project FMS annually irregardless o f the term o f contracts concluded with the auditors (one year contract or several years contract). The contract for the audit awarded during the first year o f Project implementation may be extended from year-to-year with the same auditor, subject to satisfactory performance. The cost o f the audit will be financed from the proceeds o f the credit. 36 Table 7.2. Auditing Arrangements I Audit ReDort I Due Date I Financial statements - continuing entity Not applicable. Financial statements - TKRC and PSO are based on the 11Within six months of the end of quarterly FMRs and include balance sheet, summary o f each fiscal year and also at the sources and uses of funds, summary of uses o f funds by closing of the project project components, SOE summary schedule, statement o f Special Account andnotes to financial statements Other (specify) None Single audit opinion is required for every component of the Project on all the above listed financial statements. Reporting and Monitoring. Project management-oriented Financial Monitoring Reports (FMRs) will b e used for project monitoring and supervision and the indicative formats of these have already been discussed with bothPSO and TRRC and agreed with IDA. Information Systems. TRRC and PSO implemented ORIS accounting package, which is used by a number o f PIUs inGeorgia and considered to be reliable and flexible system. BothPIUs are goingto use the same system for the new Project. The accounting software of both entities need to be updated to produce the necessary financial reports required by the project and to reflect Treasury accounting and reporting procedures. Supervision Plan. During project implementation, IDA will supervise the Project's financial management arrangements in two main ways: (i) review the project's quarterly F M R s and six- monthly management reports on two separate components, as well as the project's components annual audited financial statements and auditor's management letter; and (ii)during IDA supervision missions, review the project's financial management and disbursement arrangements (including a review o f a sample o f SOEs and movements o n the Special Accounts) to ensure compliance with IDA'Sminimum requirements. A s required by IDA and ECA guidelines, Country Financial Management Specialist for Armenia and Georgia will carry out regular FM supervisions o f the project. B. DisbursementArrangements A designated account will be maintained at the Central Bank of Georgia under terms and conditions acceptable to IDA. The account will b e denominated in US$ with an authorized allocation not exceeding US$500,000. Documentation of project expenditure and requests for replenishment o f the designated account (according to project component) will b e prepared by the Ministry o f Energy, Ministry of Economic Development, and the Treasury submitted to IDA at regular intervals though monthly reporting is encouraged. Proceeds o f the grant will be used to finance consultants services as described in the detailed procurement plan. Statement of expenditure (SOE) procedure will used for payments against contracts below USS200,OOO equivalent for consulting firms and US$50,000 equivalent for individual consultants and incremental operating costs; all other expenditures reported through summary sheets will require 37 full supporting documentation. The implementing agencies will be required to retain all documentation to support payments out o f the designated account and to make these available to internal and external auditors, and to IDA supervision missions. Direct payments, if required, may be made from the Grant and the minimum application size will be US$lOO,OOO equivalent. The designated account will be subject to annual audit in accordance with terms o f reference approved by IDA and by independent auditors to be agreed with IDA. Table: 7.4. Allocationof ProposedGrant Expenditure Category Amount inUS$ million Financing Percentage Consultancy services and incremental 5.00 85% operating costs 38 Annex 8: ProcurementArrangements GEORGIA: INFRASTRUCTUREPRE-INVESTMENT FACILITY A. General There will b e no procurement o f goods and works under the Project, which will only finance procurement of consultants services and certain technical services like translations and advertisements. Procurement for the proposed Project would be carried out in accordance with IDA "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated M a y 2004 (Consultant Guidelines) and the provisions stipulated inthe Grant Agreement. The various items of expenditure are described ingeneral below. For each contract to b e financed by the Grant, the different selection methods, estimated costs, prior review requirements and time frame have'been agreed between the Recipient and IDA and summarized in the Procurement Plan. Procurement o f a limited number of very small contracts for translation and advertisements will also follow procedures acceptable to IDA. The Procurement Plan will b e updated at least quarterly or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurementof Goods:As stated above, there will be no procurement of goods contracts. Procurement of Non-consultingServices:As stated above, there will be a limited number o f very small contracts for translations and advertisements. Procurementof Works: As stated above, there will be no procurement ofworks contracts. Selection of Consultants:Consulting services will be required to carry out feasibility studies, environment and social impact assessments, preliminary and detailed designs, preparation of technical specifications, bidding documents, support for conduct of bidding incl. evaluation and award of contracts etc. One large contract will b e made for a feasibility study to continue to develop the Khudoni dam and hydropower plant. The selection methods to be used in this case will be QBS as this is a technically complex assignment with a high downstream impact and whose inputs are difficult to estimate in advance. QCBS or L C S will b e used for the environment and social impact assessment o f the Khudoni Project. A number of assignments under Component 2 are n o w estimated at about US$200,000 and will b e procured under CQS. However, the estimates are uncertain. QCBS will b e the selection method indicated for the assignment which attempts to combine works under the remaining sections of the highway into one relatively large contract. Short lists for consultants for services estimated to cost less than US$lOO,OOO equivalent per contract m a y be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. No contracts that would engage ineligible government-owned institutions, NGOs or individual consultants are envisaged. 39 Operating Costs: There will be a small allocation o fUS$50,000 to cover incremental operating costs (IOC) mainly inthe form o f costs for necessary translations and advertising. Other Activities: There will be no study tours or training activities under the Grant. The selection procedures and documents to be used for each method, as w e l l as model contracts will be those presented inthe respective PIU's Project Operational Manual. B. Assessment ofthe Agency's Capacity to ImplementProcurement The selection o f consulting services contracts and the administration and management of contracts would b e handled by two entities: (i) PSO being the PTU for the Electricity Market the Support Project (ESMP) would assist the MOE to handle procurement with respect to the assignments related to the Khudoni Project (ii) the TRRC would assist the MOED to handle the assignments required for the preparation o f Transit Corridor Projects. B o t h named agencies are experienced in IDA-financed procurement while their respective clients have n o such experience. The two sets of agencies working intandem are deemed capable o f taking on the additional work required by the various studies and assignments (altogether no more than a dozen) required under the Grant. Each agency's respective administrative procedures have been examined, are found to b e deficient in some respects and need some improvements to become acceptable to IDA. Assessments of the capacity o f each of the two implementing agencies to implement procurement actions under the Grant Agreement were camed out in November and December 2005. The assessments reviewed the organizational structure for implementing the project and the interaction between each agency staff responsible for procurement and the respective Ministry's relevant central unit for administration and finance. The k e y issues and risks concerning procurement for implementation o f the project have been identified and are further described in the respective reports. Corrective measures have been agreed and these are also described in sufficient detail in the two capacity assessments. The overall risk for procurement inGeorgia is high. C. ProcurementPlan At appraisal, the Beneficiary developed a Procurement Plan (PP) for implementation of the various assignments to be financed under the Grant. The PP summarizes the selection method to b e followed. The PP was agreed between the Recipient and the project Team on January 10, 2006 and will be available at the PSO and TRRC at their respective addresses. The Plan will also b e available in the Project's database and in the Bank's external website. The PP will b e updated upon consultation with the project Team on a quarterly basis or as required to reflect the actual implementation needs and improvements in institutional capacity. 40 D. Details ofthe ProcurementArrangements 1. Consulting Services and Technical Services (Cost details are suppressed). (a) The Grant will finance the following list of consulting assignments. 2 3 4 5 6 7 Description I Estimated I Proc/Sel. I Bank I Contr. 1 Contr 1 costs Method Review start Compl Date Date Component 1. TA for Khudoni Hydro ElectricPower Project 4. Sub-component 2. A. TA for Preparationof East-West Highway ImprovementProject Preliminary DesigdEA 36 kmsection CQS Prior Apr-06 Jul-06 Agaiani - Sveneti Detail DesigdBDs for 1st sectionof CQS Prior Jul-06 Sep-06 6 Agaiani - Sveneti ENLAP for 2nd sectionof IgoetiEast QCBS Prior Jul-06 Nov-06 - Sveneti Detail DesigdBDs for 2nd sectionof Feb-07 Agaiani - Sveneti - 8.4. Detail DesigdBDs for IgoetiBridge Feb-07 Preliminary DesigdEA for 3rd section Feb-07 to be determined * The scope o f this sub-componentwill be determined not later than December 31, 2006 basedupon availability of funds. 41 (b) Consultancy services for firms estimated to cost above US$lOO,OOO or equivalent per contract will be subject to prior review by the Bank. All other consultant firms would be post review. (c) Individual consultants' contracts estimated at US$50,000 or more will be subject to Bank prior review. All other individual consultant's contracts would be post review. (d) Short lists o f consultants' assignments estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. (e) No withdrawal shall be made for payments made prior to the date o f the Financing Agreement, except that withdrawals up to an aggregate amount not to exceed US$200,000 equivalent may be made for payments made prior to this date but on or after January 1,2006. E. Frequency of Procurement Supervision In addition to the regular procurement prior review and supervision to be carried out from the Bank's office in Tbilisi, the procurement capacity assessments recommend supervision missions by IDA Team every six months in connection with regular supervision o f other projects. Post review o f procurement actions will be carried out by the procurement staff stationed inTbilisi. 42 Annex 9: Economicand FinancialAnalysis GEORGIA: INFRASTRUCTURE PRE-INVESTMENT FACILITY This Project is going to finance only studies required for preparation of investment projects; therefore no economic or financial analysis has beenconducted. 43 Annex 10: SafeguardPolicyIssues GEORGIA: INFRASTRUCTURE PRE-INVESTMENT FACILITY EnvironmentalAssessment The IPF Project i s limited to the provision o f technical assistance for the preparation o f follow- on investments, and no negative impact on the environment or society, therefore, i s expected from the implementation o f the proposed TA. Since the follow-on investments under the umbrella o f the IPF Project include components that would be at least Category B and possibly Category A, however, the IPFProject i s classed as Category B. Normally Category B projects require the preparation o f an Environmental (Safeguard) Assessment and an associated Environmental Management Plan (EMP) as a condition o f appraisal. These investment-specific due diligence instruments are not relevant to a technical assistance facility. A Safeguard Framework (SF), however, i s a new approach to due diligence on TA loans and has been prepared to meet the Bank's safeguard requirements. The SF approach has been assessed by the Regional Safeguards Coordinator (ECSSD) and other relevant experts and has been found to be in compliance with the Bank policy requirements. The SF summarizes the approach to safeguards to be taken during the implementation o f the IPF Project, which will include the preparation o f Environmental Impact Assessments (EIAs) and Social Impact Assessments (SIAs) for the follow-on investments. The assessment process will be conducted in accordance with World Bank policies and guidelines. The discussion in the SF covers the both the power and transport sector components. Disclosure to the public o f assessment documents and public feedback is an essential part o f the safeguard process. Inthis case the SF itself has been disclosed in country and through the World Bank INFOShop. The SF outlines the disclosure process to be followed for the respective components during the implementation o f the IPF Project and identifies the documentation to be produced during implementation o f the IPF Project. SF is to be part o f Project Operational Manuals to be followed duringproject implementation. Natural Habitats: Not Applicable Pest Management: Not Applicable InvoluntaryResettlement Although the IPF Project provides only for technical assistance, the follow-on projects would potentially include elements o f resettlement and/or land acquisition. The technical studies for Component 1 would include the preparation o f a Resettlement Action Plan for Khudoni, and under component 2 similar plans would be prepared for those segments identified as triggering this requirement. IndigenousPeople: Not Applicable Forests: Not Applicable 44 SafetyofDams: After consultation with the Legal Department it was considered that the technical assistance under this project was not directly linked to this issue to warrant the triggering o f Dam Safety Safeguard. It would be triggered, however, for any future investment projects. CulturalProperty: Not Applicable Projectsin DisputedAreas: Not Applicable Projectson InternationalWaterways Since the EnguriRiver, on which a possible future Khudoni hydropower plant would be located, flows into the Black Sea, the International Waterways safeguard (OP 7.50) has been triggered. The Project is not expected to cause appreciable harm to the other riparians. The Commission for the "Convention on the Protection o f the Black Sea Against Pollution" has been notified and the internal and external notification requirements o f OP 7.50 have been met. 45 Annex 11:ProjectPreparationand Supervision GEORGIA: INFRASTRUCTUREPRE-INVESTMENT FACILITY , Project processing schedule: Planned Actual PCNreview 10/31/2005 10/31/2005 Initial PID to PIC 11/07/2005 11/04/2005 Initial ISDS to PIC 11/07/2005 11/08/2005 Pre-Appraisal 11/09/2005 11/09/2005 Appraisal 12/10/2005 12/20/2005 Negotiations 01/10/2006 01/09/2006 BoardRVP approval 02/14/2006 Planned date o f effectiveness 03/15/2006 Planned closing date 09/30/2009 K e y institutions responsible for preparation o f the Project are the Ministry o f Energy for the Component 1,and the Ministry o f Economic Development for the Component 2. IDA staff and consultants who worked on the Project included: Name Title Unit Tamara Sulukhia Task Team Leader ESCIE Bjorn Hamso Senior Energy Economist ECSIE Olivier L e Ber Senior Transport Specialist ECSIE Martha Lawrence Senior Transport Specialist ECSIE Elizabeth Wang Senior Financial Officer ECSIE Jane Ebinger Energy Specialist ECSIE Elena Chesheva Operations Analyst ECSIE Karl Skansing Procurement Specialist ECSPS Arman Vatyan, Financial Specialist ECSPS Philip Moeller Safeguards Consultant ECSIE Joseph Melitauri Operations Officer ECSIE Satoshi Ishihara Social Development Specialist ECSSD Gennady Pilch Senior Counsel LEGEC IDA funds expendedto date on Project preparation: 1. Bank resources: US$ 100,000 2. Trust funds: 0 3. Total: us$100,000 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$30,000 2. Estimated annual supervision cost: US$80,000 46 Annex 12: Documents in the ProjectFile GEORGIA: INFRASTRUCTURE PRE-INVESTMENT FACILITY A. Bank Staff Assessments and Documents Financial Management Assessment Report, November 2005. Procurement Assessment Report, 2003. Assessment o f the Proposed Khudoni Dam and Hydropower Plant (HPP) in Georgia by P.N. Gupta, Consultant, August 2005. B. Other Documents Government o f Georgia. Safeguards Framework. December 2005. Khudoni Hydropower Project: Terms o f Reference for the Preparation o f Project Definition, Feasibility Study, and Procurement. Khudoni Hydropower Project: Terms o f Reference for Preparation o f Environmental Impact Assessment and Resettlement Action Plan. World Bank "Trade and Transport Facilitation inthe South Caucasus - Georgia Policy Note", 2003. World Bank, "Transport Sector Review o f Armenia, Azerbaijan and Georgia", 2002. East-West Corridor Improvement Financial Feasibility Report. PPIAF fundedProject "Framework for Public Private Participation inRoad Sector." TACIS fundedRehabilitation o f Caucasian Highways. Pre-feasibility study for Modernization o fthe Existing Road Poti-Tbilisi-red Bridge Georgia. e Report on Georgian Railways Restructuring. 2005. USAIDBooz Allen Hamilton. 47 Annex 13: Statementof Loans and Credits GEORGIA: InfrastructurePre-InvestmentFacility Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO88820 2006 PRSO 0.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 PO78544 2005 RURAL DEVT 0.00 10.00 0.00 0.00 0.00 8.99 0.55 0.00 PO86277 2004 SECILOC ROADS 0.00 20.00 0.00 0.00 0.00 18.29 1.64 0.00 PO77368 2003 MUNIDEVT & DECENTRLZN2 0.00 19.41 0.00 0.00 0.00 9.09 3.60 0.15 PO74361 2003 SIF 2 0.00 15.00 0.00 0.00 0.00 9.97 5.60 0.00 PO40555 2003 PRIM HEALTH CARE DEVT 0.00 20.30 0.00 0.00 0.00 19.27 13.23 -1.25 PO44800 2003 FORESTRY 0.00 15.70 0.00 0.00 0.00 12.48 I.59 0.00 PO48791 2001 PROT AREAS DEV (GEF) 0.00 0.00 0.00 8.70 0.00 5.51 4.12 -0.36 PO54886 2001 ELEC MRKT SUPPORT 0.00 27.37 0.00 0.00 0.00 26.23 19.58 16.66 PO55068 2001 IWDRAINREHAB (APL #I) 0.00 27.00 0.00 0.00 0.00 28.51 9.62 -I.94 PO72394 2001 ENERGY TRANSIT INST BLDG 0.00 9.63 0.00 0.00 0.00 3.49 2.25 0.00 PO55173 2001 EDUC 1 (APL) 0.00 25.90 0.00 0.00 0.00 8.61 6.07 -1.86 PO65715 2000 AGR RES EXT & TRG 0.00 7.60 0.00 0.00 0.00 2.27 2.10 0.41 PO64091 2000 AGRIC RES EXT TRG (GEF) 0.00 0.00 0.00 2.48 0.00 0.41 0.41 -0.04 PO52154 1999 STRUCT REF SUPPORT 0.00 16.50 0.00 0.00 0.00 4.99 4.73 3.1I PO50911 1999 INTGD COASTAL MGMT 0.00 4.40 0.00 1.30 0.00 I.03 0.72 0.14 PO60009 1999 INTGD COASTAL MGMT (GEF) 0.00 0.00 0.00 1.30 0.00 0.62 0.55 0.27 PO57813 1999 JUDICIAL REFORM 0.00 13.40 0.00 0.00 0.00 0.48 0.52 0.00 PO08416 1999 ENT REHAB 0.00 15.00 0.00 0.00 0.00 0.65 0.56 0.00 PO39929 1998 SIF 0.00 20.00 0.00 0.00 0.00 0.84 -3.85 0.00 Total 000 28721 000 1378 0 0 0 161 73 7359 15 29 48 GEORGIA STATEMENT OF IFC's HeldandDisbursedPortfolio InMillions ofU S Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2000 Bank of Georgia 0.80 0.00 0.00 0.00 0.80 0.00 0.00 0.00 2003 Bank o f Georgia 4.55 0.00 0.00 0.00 4.55 0.00 0.00 0.00 1998 Ksani 4.92 0.00 2.50 0.00 4.92 0.00 2.50 0.00 1999 Procredit GEO 0.00 0.48 0.00 0.00 0.00 0.48 0.00 0.00 2001 Procredit GEO 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.00 2002 Procredit GEO 4.29 0.74 0.00 0.00 4.29 0.74 0.00 0.00 2004 Procredit GEO 3.50 0.67 0.00 0.00 3.50 0.67 0.00 0.00 1998 TBC Bank 0.00 0.86 0.00 0.00 0.00 0.86 0.00 0.00 2002 TBC Bank 1.91 0.00 0.00 0.00 1.91 0.00 0.00 0.00 2004 TBC Bank 0.50 0.00 4.00 0.00 0.04 0.00 4.00 0.00 2006 TBC Bank 0.00 8.75 0.00 0.00 0.00 8.73 0.00 0.00 2005 TBC Leasing 3.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 Total portfolio: 23.47 11.79 6.50 0.00 22.01 11.77 6.50 0.00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. ~~~ 1997 GGMW 0.00 0.00 0.00 0.00 Total pendingcommitment: 0.00 0.00 0.00 0.00 49 Annex 14: Country at a Glance GEORGIA: InfrastructurePre-InvestmentFacility Europe 8 Lower- POVERTY and SOCIAL Central middle- Georgia Asia income Development diamond' 2004 Population. mid-year(millions) 4.5 472 2,430 I GNI percapita (Atlas method, US$) 1,030 3,290 1.580 Life expectancy GNI(Atlasmethod, US$ billions) 4.7 1,553 3,847 Average annual growth, 1998-04 Population (%) -1.2 -0.1 1.0 i Labor force (%) -0.1 -0.5 0.7 GNI Gross per p n m w M o s t recent estimate (latest year available, 1998-04) capita enrollment Poverty (%of population belownationalpovertyline) Urban population (%of to talpopulation) 52 64 49 Life expectancyat birth (years) 73 66 70 II - Infant mortality(per1OOOlive births) 41 29 33 Child malnutrition (%ofchildren under5) 3 11 Access to imorovedwatersource Access to an improved water source (%ofpopulation) 76 91 81 Literacy(%ofpopulation age 159 97 90 Gross primaryenrollment (%of school-age population) 90 101 114 1 -Georgia Male 91 D 3 115 Lowr-middle-income group ~ Female 90 101 1G KEY ECONOMIC R A T I O S and LONG-TERM TRENDS 1984 1994 2003 2004 ~~ ~~~ ~ ~ I E c o n o m i c ratios* GDP (US$ billions) 2 5 4 0 5 1 Gross capital formationiGDP 328 2 6 24 4 E q o r t s of goods and sewicesIGDP 57 8 318 Trade Gross domestic savingsiGDP 353 -487 9 7 Gross national savingsiGDP -29 4 121 Current account balance/GDP -111 -9 8 -8 5 Interest paymentsiGDP 0 2 10 Domestic Total debtiGDP 57 7 48 4 savings k. formation Total debt sewiceieqorts 12 118 Present value of debtiGDP 38 0 Present value of debtlexports 99 5 Indebtedness 1984-94 1994-04 2003 2004 2004-08 (average annualgro wth) GDP -145 5 7 111 8 5 4 9 ------Georgia GDP percapita -144 7 0 123 9 6 4 2 Lower-middle-income group E q o r t s of goods and sewices 108 4 8 STRUCTURE o f the ECONOMY 1984 1994 2003 2004 ~- Growth o f capital and G D P (Yo) (%of GDP) Agriculture 257 517 20 5 100 Industry 360 197 25 5 50 '% Manufacturing 278 148 188 -I L -0 _ _ Sewices 383 286 54 1 0 %'&e/'; \ * ; 04 - - Household final consumption expenditure 528 0 8 9 814 100 General gov't final consumption eqenditure 119 9 8 8 9 Imports of goods and services 109 1 46 4 ---GCF -GDP I 1984-94 1994-04 2003 2004 Growth o f exports and%-ports (%) (average annualgrowth) Agriculture -0 2 1)5 60 Industry 8 2 151 Manufacturing 2 4 6 9 Sewices 120 t31 Householdfinal consumption expenditure 4 5 7 5 General gov't final consumption ependiture 2 4 4 9 2 2 Gross capitai formation 129 28 0 Imports of goods and serwces 7 5 3 6 Note 2004 data are preliminaryestlmates This table was producedfrom the Development Economics LDB database 'Thediamonds showfour key indicators in thecountry(in bo1d)comparedmth its income-groupaverage ff data are missing thediamondmll 50 PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Inflation (%) Domestic prices ~ (% change) 25 T Consumer prices .. 15.606.5 4.8 5 2 Implicit GDP deflator 1.3 6,041.6 3.5 4 9 Government finance (% of GDP, includes current grants) 0 Current revenue 11.7 15.4 I 99 00 01 02 03 041 Current budget balance -22.5 -0.8 -GDP deflator +CPI Overall surplus/deficit -26.3 -2.5 TRADE 1984 1994 2003 2004 (US$ millions) Total exports (fob) 381 831 556 Aircraft, spacecraft and parts thereof (HS88) 0 37 Beverages, spirits and vinegar (HS 22) 9 102 Manufactures 331 424 Total imports (cif) 744 1,467 1312 Food 184 236 Fuel and energy 278 210 Capital goods 88 229 98 99 00 01 02 03 04 Export price index (2000=100) 110 127 import price index (2000=100) 109 120 Exports Imports Terms of trade (2000=100) 101 106 BALANCE of PAYMENTS 1984 1994 2003 2004 (US$ millions) ,lCurrent account balance to GDP ( O h ) Exports of goods and services 473 1,273 1128 Imports of goods and services 893 1.856 1766 Resource balance -420 -583 -637 Net income -30 34 22 Net current transfers 173 158 185 Current account balance -278 -391 -430 Financing items (net) 280 384 509 Changes in net reserves -2 7 79 -15 1 Memo: Reserves including gold (US%millions) 43 192 187 Conversion rate (DEC, locai/US$) 0.4 2.1 1 9 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 __ -~ ~~ (US$ millions) Composition of 2003 debt (US$ mill ) Total debt outstanding and disbursed 1,450 1,935 IBRD 0 0 IDA 1 583 F 47 38 Total debt service 6 181 IBRD 0 0 IDA 0 4 Composition of net resource flows Official grants 172 81 Official creditors 94 15 Private creditors -1 -18 Foreign direct investment (net inflows) 8 338 Portfolio equity (net inflows) 0 0 D 160 World Bank program Commitments 28 20 A - l6RD E - Bilateral Disbursements 1 44 B IDA - D -Other multilateral F Pnvate - Principal repayments 0 0 C - IMF G - Short-tern Net flows 1 44 Interest payments 0 4 Net transfers 1 40 Note' This table was produced from the Development Economics LDB database. 8/25/05 51 MAP SECTION IBRD 34376 40° 41° 42° 43° 44° 45° 46° G E O R G I A INFRASTRUCTURE PRE-INVESTMENT To R U S S I A N F E D E R A T I O N FACILITY Soci ROAD SECTION STUDIED UNDER THE PROJECT GLACIER AREAS EAST - WEST ROAD CORRIDOR RIVERS MAIN ROADS Gagra Gagra SELECTED CITIES EAST - WEST RAILWAY CORRIDOR NATIONAL CAPITAL OTHER RAILWAYS INTERNATIONAL BOUNDARIES PROPOSED KHUDONI HYDROPOWER PLANT 43° Sokhumi Sokhumi Enguri Mestia Mestia 43° Tkvarceli Tkvarceli Akarmara Akarmara Proposed KHUDONI Hydropower Plant To Vladikavkaz 0 15 30 45 60 75 KILOMETERS Enguri Hydropower Plant Ocamcira Ocamcira Dzvari Dzvari Kazbegi Kazbegi Oni Oni Rioni Enguri Zugdidi Zugdidi Chenisckali i Ambrolauri Ambrolauri B l a c k Rion Aragvi Chaltubo Chaltubo Sachere Sachere R U S S I A N Tkibuli Tkibuli Kulevi Kulevi Senaki Senaki Kvirilk Kutaisi Kutaisi Chinvali Chinvali F E D E R A T I O N Brotseula Brotseula S e a Rioni Iori Mukhiani Mukhiani PotiPoti Samtredia Samtredia ZestaponiZestaponi Surami Surami Project Study: Supsa Supsa AGAIANI-SVENETI Ahmeta Ahmeta 42° 42° Alazanl KhasuriKhasuri Ozurgeti Ozurgeti GoriGori Telavi Telavi Lagodehi Lagodehi Mtkvari Mtskheta Mtskheta KobuletiKobuleti Borjomi Borjomi (Kura) Zagesiagesi Zagesi Gurdzaani Gurdzaani Bakuriani Bakuriani TBILISITBILISI To Fonichalaonichala Fonichala Zagatala Batumi Batumi Iori 40° 41° Vale Vale Ahalcihe Ahalcihe Snoris Tskali Snoris Tskali RustaviRustavi To Trabzon U K R A I N E KAZAKHSTAN Marneuli Marneuli Gardabani Gardabani Dedopis-Ckaro Dedopis-Ckaro roki Ahalkalaki Ahalkalaki Vakhtangisi Vakhtangisi RUSSIAN Cho Kazreti Kazreti FEDERATION Red Bridge Red ed Bridge To Ninocminda Ninocminda Gazah Mtkvari l (Kura) B l a c k S e a Alazan C a s p i a n To GEORGIA Iori S e a T U R K E Y To Tasir Alaverdi Tbilisi TURKMENIST 41° ARMENIA 41° To Gyumri AZERBAIJAN This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown T U R K E Y AN on this map do not imply, on the part of The World Bank Group, any A R M E N I A judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. A Z E R B A I J A N SYRIAN ARAB REP. IRAQ ISLAMIC REP. OF IRAN 42° 43° 44° 45° 46° DECEMBER 2005