World Bank Documentdocuments.worldbank.org/curated/en/807291468772213246/pdf/multi-page.pdfAddress: Central Govermment Building,Rr.Nene Tereza, Pristina, Kosovo Contact Person: Patrick

Document of

The World Bank

Report No: 20555 KOS

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED TRUST FUND GRANT

IN THE AMOUNT OF US$5 MILLION EQUIVALENT

TO THE

UNITED NATIONS INTERIM ADMINISTRATION IN KOSOVOFOR THE BENEFIT OF KOSOVO, FEDERAL REPUBLIC OF YUGOSLAVIA

(SERBIA AND MONTENEGRO) (KOSOVO)

FOR AN

URGENT ROAD PROJECT

July 25, 2000

Infrastructure Sector UnitCountry Unit for Bosnia and HerzegovinaEurope and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 7/25/2000)

Currency Unit = DMDM1 = US$ 0.476

US$ 1 = DM2.09

FISCAL YEARJanuary 1 December 31

ABBREVIATIONS AND ACRONYMS

AFD: Agence Francaise de DevelopmentCFA: United Nations Mission in Kosovo Central Fiscal AuthorityCPE: United Nations Mission in Kosovo Joint-Interim Central Procurement EntityDoR: Directorate of RoadsDoT: United Nations Mission in Kosovo Joint-Interim Administrative Department of

Transport and InfrastructureEC: European CommissionERR: Economic Rate of ReturnGTZ: Deutsche Gesellschaft fur Technische ZusammenarbeitICB: International Competitive BiddingIRR: Internal Rate of ReturnIS: International ShoppingKFOR: Kosovo ForceKfW: Kreditanstallt fur WiederaufbauNCB: National Competitive BiddingNGO: Non-Governmental OrganizationNPV: Net Present ValuePMR: Project Management ReportQCBS: Quality and Cost Based SelectionTSS: Kosovo Transitional Support StrategyUNMIK: United Nations Mission in Kosovo

Vice President: Johannes F. Linn, ECACountry Director: Christiaan Poortman, ECCO4

Sector Director/Manager: Ricardo Halperin/Eva Molnar, ECSINTeam Leader: Aymeric-Albin Meyer, ECSIN

KOSOVOURGENT ROAD PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 3

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Government strategy 43. Sectoir issues to be addressed by the project and strategic choices 6

C. Project Description Summary

1. Project components 72. Key policy and institutional reforms supported by the project 83. Benefits and target population 84. Institutional and implementation arrangements 8

D. Project Rationale

1. Project alternatives considered and reasons for rejection 92. Major related projects financed by the Bank and other development agencies 103. Lessons learned and reflected in proposed project design 114. Indications of borrower commitment and ownership 125. Value added of Bank support in this project 12

E. Summary Project Analysis

1. Economic 132. Financial 133. Technical 134. InstitLtional 145. Environmental 146. Social 157. Safeguard Policies 17

F. Sustainability and Risks

1. Sustainability 172. Critical risks 173. Possible controversial aspects 19

G. Main Grant Conditions

1. Effectiveness Condition 192. Other Conditions 20

H. Readiness for Implementation 20

I. Compliance with Bank Policies 20

Annexes

Annex 1: Project Design Summary 21Annex 2: Project Description 24Annex 3: Estimated Project Costs 28Annex 4: Cost Benefit Analysis Summary 29Annex 5: Financial Summary 31Annex 6: Procurement and Disbursement Arrangements 32Annex 7: Project Processing Schedule 40Annex 8: Documents in the Project File 41Annex 9: Statement of Loans and Credits n.a.Annex 10: Country at a Glance n.a.Annex 11: Draft Understanding on the Mandate and Scope of Activities of the Directorate of

Roads 42Annex 12: Environmental Management Plan 45

KOSOVO

Urgent Road Project

Project Appraisal Document

Europe and Central Asia RegionECSIN

Date: July 25, 2000 Team Leader: Aymeric-Albin MeyerCountry Manager/Director: Christiaan J. Poortman Sector Manager/Director: Ricardo A. HalperinProject ID: P070295 Sector(s): TY - Other TransportationLending Instrument: Grant from the Trust Fund for Kosovo Theme(s): Transport

Poverty Targeted Intervention: N

Project Financing DataO Loan El Credit 12 Grant FII Guarantee O Other (Specify)

For Loans/CreditslOthers:Amount (US$m): 5.00

Fiano Planr Source Local Foreign TotalGOVERNMENT 0.00 0.00 0.00

SPECIAL FINANCING 2.58 2.42 5.00

Total: 2.58 2.42 5.00

Borrower: UNITED NATIONS INTERIM ADMIN. IN KOSOVOResponsible agency: JOINT INTERIM ADM. DEPT. OF TRANSPORTATION, UNMIK

Address: Central Govermment Building,Rr.Nene Tereza, Pristina, KosovoContact Person: Patrick Auffret, Director, Joint-Interim Administration Department of Transport and InfrastructureTel: 381 38 500 223 Fax: 1 212 963 8442 Email: [email protected]

Project implementation period: 2.5 yearsExpected effectiveness date: 08/09/2000 Expected closing date: 06/30/2003

A. Project Development Objective

1. Project development objective: (see Annex 1)

The primary objective of the Project is to contribute to the reconstruction and economic development ofKosovo, by: (i) supporting the Program's component (see below) aiming at an eventual re-establishment ofa road management capacity in Kosovo; (ii) supporting emergency road maintenance activities on the mainnetwork; and (iii) helping, through road maintenance activities funded under the Project, to restore a localcontracting capacity for road/bridge rehabilitation and summer/winter maintenance.

The Project is the Bank-financed part of a comprehensive program (the Program) of interventions in theroad sector for the next two to three years. The Bank will coordinate with donors their activities in the roadsector so as to facilitate the funding of the Program and the achievements of its goals. The Program hasbeen built up by the Bank on the findings of the reconstruction and recovery program prepared by the Bankand the EC ("Toward Stability and Prosperity: A program for reconstruction and recovery in Kosovo",dated November 3, 1999). The Program is inscribed in the Regional Strategy for South Eastem Europeprepared by the Bank in March 2000, and is part of the Quick Start Regional Infrastructure Projects thatthe international community has agreed to fund under the Stability Pact. The Program will: (i) fund roadrehabilitation/maintenance and bridge rehabilitation on the main network over a two to three year period;(ii) support the first steps toward the re-establishment of the Road Administration; and (iii) provideassistance in priority areas such as treatment of traffic congestion and traffic safety issues. The Programcosts and financing are presented in the table below.

Program Indicative Cost Main Sources of Financing(US$ million)

Road Maintenance 12.1World Bank (maintenance of about 570 kms of the main

network)Agence Francaise de Developement (maintenance of about

80 kms of the main network)Total Funded 3.9

Road Rehabilitation 31.9European Commission (Rehabilitation of the Pristina-Blaceand Sllatine-Tetovo roads, sections of the Pristina-Peje and

Pristina-Prizren roads)Kreditanstallt fur Wiederaufbau (Rehabilitation of most of

the Pristina-Frizren road)World Bank (Overlay on sections of the Pristina-Gjilan

road)Total Funded 21.7

Bridge Rehabilitation 8.0European Commission (Rehabilitation of Milosevo,

Zajmovo, Vrani Do and Luzane bridges)Total Funded 2.7

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Support to Road 8.0ManagernentCapacity

World Bank (TA and goods)Deutsche Gesellschaft fur Technische Zusammenarbeit

(TA and goods)Agence Francaise de Developement (TA)

UNMIK (goods)Total Funded 5.1

TOTAL 60.0PROGRAM

COSTTOTAL PROGRAM 33.4

FlJNDED I I

Discussions are ongoing with the Government of the Netherlands which intends to grant up to US$7 millionto the costs of the program, through a Bank-administered Trust Fund. The contribution is intended toaddress essential needs mainly in the areas of road maintenance, bridge rehabilitation and technicalassistance, such as road safety, road classification, development of basic material testing capacity, andassistance to DoT.

2. Key performance indicators: (see Annex 1)

The key performance indicators will be: (i) the effectiveness of the Directorate of Roads (DoR) activities,as evaluated by the supervision missions, including quality of road maintenance programs and volume ofmaintenance activities, adequacy of contract management capacity (including planning, contract tendering,supervision and traffic management), as well as relevance and impact of the Directorate of Roads (DoR)advice to the United Nations Joint-Interim Administration through the Department of Transportation (DoT); (ii) the 2001 and 2002 levels of funding allocated from the Kosovo budget to DoR for road maintenance;(iii) the percentage of the main road network on which maintenance will have been contracted out by theend of the project implementation period; (iv) the development of the local contracting industry; and (v) theconditioin of the main road network by the end of the project implementation period (it is noted that thisindicator will summarize the impact of all activities under the Program completed by December 31, 2002).

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: n.a. Date of latest CAS discussion:

A Transitional Support Strategy (TSS) for Kosovo (in the form of a President's Memorandum to theExecutive Directors of IBRD and IDA, dated September 16, 1999) was discussed by the Board on October7, 1999. The document stresses that projects to be funded by the Bank would be selected according to theirconsistency with the reconstruction and recovery program prepared by the Bank and the EC ("TowardStability and Prosperity: A program for reconstruction and recovery in Kosovo", dated November 3, 1999).The proposed project supports one of the main strategic objectives of the reconstruction and recoveryprogram, namely "the rehabilitation of infrastructure networks for economic recovery". In addition, theproposed project is in line with the TSS objective of supporting "reconstruction activities in sectors thatmay be critical to Kosovo's sustainable economic recovery, and investments and policy reforms that willunderpin the needs of an evolving market economy."

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2. Main sector issues and Government strategy:

a. Issues

Network and TrafficThe road network of Kosovo consists of about 3,800 kilometers of roads, including 623 kilometers ofmain roads, and 1,300 kilometers of regional roads. Most of the main and regional roads are paved.Network density is relatively low, at about 0.35kmlkm2. Current traffic on the main network is about5,000 to 6,000 vehicles per day, with some sections having considerably higher volumes. Although noextensive or regular traffic counts have been produced so far, the number of privately owned vehicles inKosovo seems to grow at a significant rate, especially in the main cities. In addition to that, there is asignificant heavy traffic induced by the presence of the international community and the resumption oftrade, which puts an extra burden on already exhausted road structures. Finally, there is virtually notraffic management capacity in Kosovo. Growing traffic and absence of traffic management result incongestion especially in the main cities and at the border crossing of Blace (border with the FormerYugoslav Republic of Macedonia).

Network ConditionAdequate development and maintenance of the road network in Kosovo has been an issue since the1 970s. While the road network has been developed, road maintenance has been persistentlyunder-funded. This has resulted in a continuous deterioration of the road network. Although mostsections on the main and regional networks are passable, the conditions vary (e.g. it now takes, mainlybecause of the road condition, about 2.5 hours to go from Pristina to Prizren, a distance of about 70km). The pervasive lack of maintenance and the recent events have had a significant impact on thecondition of the road network: besides bombed bridges and landslides, more than half of the network isin very poor condition, and if action is not taken immediately, this will lead to the closure of certain roadsections to civilian traffic and would require, in the near future, the complete reconstruction of thedamaged sections, an investment that Kosovo will not be able to afford any time soon.

Road ManagementIn terms of road management structure, until 1989, planning and administration of the main andregional road networks were handled principally by a provincial Road Organization, staffed with about550 employees, and headed by a Board whose members represented various groups having an interest inroads. After the end of provincial autonomy in 1989, resources allocated to the rehabilitation andmaintenance were very limited. Following the departure of Serb staff, the Road Organization wasre-staffed spontaneously in June 1999 by Kosovar Albanians, some of whom were part of the staff priorto 1989. The Road Administration has since been formally integrated in the Joint-InterimAdministration structure. However, while DoR has a defacto responsibility for road management onthe important roads in Kosovo (which comprises the main network and part of the regional network, asdefined by the road classification in effect so far, thereafter referred to as the main network), there is noformal agreement as to which part of the road network DoR should be responsible for. As such, a newroad classification needs to be agreed upon, and massive support provided, in order to allow DoR tostart operating on a significant and efficient scale. DoR presently employs about 20 staff and there is nointention to expand it much further in the foreseeable future. The previous situation with 550 staff wasbased on a situation with maintenance and much of the construction being done by force account.

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Road Maintenance FundingThe funding mechanisms for road maintenance have been totally disrupted. As of today, there is little

prospect: to see significant amounts of locally raised funds allocated to road maintenance at least in the

next two years, donor funding being the only realistic source of funding. This issue is linked to theoverall situation prevailing in Kosovo: events in the last 10 years have significantly reduced the tax

base, tax and charges collection has yet to be fully restored, and the present Kosovo budget, even if

supported by the donor community, is very limited, especially as a substantial part of it is funding

current expenditures.

Road Maintenance Contracting CapacityThere are four main construction and maintenance companies located in Kosovo. They are mainly able

to undertake road maintenance works. They can also undertake light rehabilitation works on roads and

bridges. The companies have lost part of their equipment and liquid assets, organizational structures

have been partially disrupted, the labor base has significantly shrunk, and, at this stage, access to creditremains very difficult in Kosovo. On the other hand, and depending on demand, these companies havethe capacity of growing quickly as: (i) with an unemployment rate estimated at about 70%, availabilityof labor is not an issue, and most of the companies' former staff is ready to restart work; (ii) it is

intended to use these companies under the Project to carry out small road maintenance contracts; and(iii) the relatively light equipment required for the purposes of the Project can be leased in part locally,with the remaining part from neighboring countries. It is expected that the companies would usepayments under the first contracts to strengthen their capacity both in terms of equipment and staff. Inaddition, Kosovo represents a small but untouched and potentially attractive market for foreigncontractors. Associations between local and foreign contractors have already been observed in thecrushed stone market, and potential associations are being discussed among construction firms. While itis thus expected that local contractors' capacity has a good potential to significantly recover over thecoming years, the process of associations, at the company level, with foreign contractors will most

probably be slow given the deficiencies of the legal and banking systems, as well as the virtual absenceof private sector regulatory structures.

b. Strategy

The long-term strategy is to build institutions which will be capable of administering and managing theroad network. This involves primarily DoT and DoR. DoT is establishing itself to fulfill the functions,appropriate under the circumstances, of a Ministry, under the jurisdiction of which DoR works. For

DoT most of the questions have up till now been of an emergency nature. Thus, policy and strategyhave largely not yet been analyzed and decided upon. However, for the road sector there is an acceptedunderstanding that the strategy is to: (i) rehabilitate as soon as possible most of the damaged parts of theroad network; (ii) reduce as much as possible the road maintenance backlog; and (iii) set up an adequateroad management capacity in Kosovo, including: (a) a lean and efficient road administration; (b) adecentralization of road maintenance on the local network to local communities; (c) a frameworkenabling DoR to fulfill its tasks (especially planning and contractual arrangements); (d) mechanismsallowing for sufficient resources to be allocated to road maintenance; and (e) an adequate contractingcapacity. The Program constitutes a first step toward the implementation of the long-term strategy,including the first priority elements of the strategy, while taking into account the uncertainties related tothe future of Kosovo. Specifically, the Program will:

* support the establishment of a core road administration in Pristina. The administration will besufficiently small and flexible to remain relevant under most political scenarios Kosovo may befacing in the future;

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* prepare a proposed road classification;* work with DoT and CFA to ensure that DoR has the means to fulfill its tasks and that DoR

advice/plans are taken into account;* be the framework in which further fund raising activities will take place, and fund a Road User

Charges Study to assess the possibility of developing a funding system to complementallocations to be received from the Kosovo budget; and

* fund road maintenance contracts through which local contractors can restart their activities onan adequate scale, as well as road rehabilitation activities which most likely will result inassociation with foreign contractors.

3. Sector issues to be addressed by the project and strategic choices:

Within a two to three year horizon, the project will set up the framework in which the issues mentionedabove will be addressed. Given the urgent nature of the project, the most pressing needs will be addressedand it is thus not foreseen that all the issues will be fully resolved by the end of the project implementationperiod. In particular: (i) the project will deal with emergency maintenance activities on most of the mainnetwork, and the issue of the maintenance backlog on the whole of the main network will have to beaddressed later; (it is estimated that at least US$30 million would need to be spent each year over the next10 years to both cany out maintenance and significantly reduce the backlog); (ii) the project will supportthe program's objective to develop the core competencies of DoR, but it should not be expected that, by theend of the project implementation period, DoR will be a fully fledged administration; and (iii) while theproject aims at laying the ground for the long-term sustainability of road management, it is far from certainthat such a sustainability could be achieved within the framework of this project, especially as the amountof resources for road maintenance in the future (being from international or local sources), as well as theallocations from the budget are virtually unknown at this stage. Given that the program has a funding gapwhich is expected to be filled by additional donor contributions, the project has to take such contributionsinto account. This will be done through annual reviews so that before launching the bids for the season, theactual funding situation and the items covered by financing are taken into account, and the project items forthe season adjusted if warranted.

As explained in other parts of this document, the strategic choice which has been made for the physicalcomponent of the project is to focus mainly on road maintenance rather than road or bridge rehabilitationas: (i) other donors have indicated their preference to fund rehabilitation; and (ii) while rehabilitation isindeed required, maintenance activities have to be performed on as much as possible of the road network toprevent it from further deterioration. Under the Project, it is foreseen that only one overlay on 14 km of thePristina-Gjilan road will be carried out as: (a) damage on this section of the main network should beremedied as soon as possible and, according to the assessment of the road condition carried out duringproject preparation, the level of damage on some parts of the section requires overlaying; and (b) donorsunder the Program have not yet shown any willingness to allocate funds for this activity. With respect tothe institutional component, the project will aim at supporting the framework for the establishment of acore road administration capacity, by funding activities (such as building adequate project supervisioncapacity in DoR and conducting a road user charges study) which would not be covered by other donors.The main donor in the program's institutional building component is the Deutsche Gesellschaft furTechnische Zusammenarbeit (GTZ), which intends to provide a comprehensive 2 to 3 years technicalassistance package to DoR including advice on: (i) drafting of the legal documents and regulations to DoRmandate and financing of road maintenance; (ii) implementation of priority road maintenance andrehabilitation projects; (iii) strengthening of DoR planning and contract management system; and (iv)definition and preparation of trainings for local contractors and consultants.

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C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The Project is inscribed in the Program that has been developed and agreed upon during preparation. TheProject will be funded from a Bank Grant of US$5 million. A description of the activities to be fundedunder the Project and Program is provided in Annex 2. The Project will focus on the following ProgramComponents:

Road maintenance. the Project will fund about one-third of the Program's road maintenance component. Itis expected that about 570 km of roads will be maintained under the Project. The list of these road sectionsis provided in Annex 2.

Road r ehabilitation: the Project will fund overlay on a 14km high priority stretch of the Pristina (Prishtine)- Gnjilane (Gjilani) road which has not been considered for funding by other donors.

Support to road management capacity: the Project will fund a study on the potential introduction of roaduser charges, will provide for a site engineer to organize supervision of the works carried out under theProject and strengthen supervision within DoR. The Project will also contain allocations for assistance inspecific areas such as project implementation or DoR strengthening, in case commitments made by otherdonors fail to materialize in a timely manner. Finally, the project will fimd the costs of the annual audits.

Indicative Bank- % OfComponent Sector Costs % of financing Bank-

(US$M) Total (US$M) financingRoad Maintenance Highways 3.28 65.6 3.28 65.6Road Rehabilitation Highways 1.22 24.4 1.22 24.4Support to Road Management Capacity Highways 0.50 10.0 0.50 10.0

Total Project Costs 5.00 100.0 5.00 100.0

Total Financing Required 5.00 100.0 5.00 100.0

Other Program ItemsRoad Maintenance Highways 7.02 11.7 0.00 0.0

Road Rehabilitation Highways 32.78 54.6 0.00 0.0

Bridge Rehabilitation Highways 8.70 14.5 0.00 0.0

Support to Road Management

Capacity Highways 6.50 10.8 0.00 0.0

Total Costs for other Program Items 55.00 91.7 0.00 0.0

Total Program Costs 60.00 100.0 5.00 8.3

Presently available Funding 33.30 55.5_

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2. Key policy and institutional reforms supported by the project:

Despite the fact that this Project will be executed in an exceptional environment, it also seeks to achievepolicy and institutional goals that are particularly demanding because of the special political context andconstraints. The Project will support the first steps toward the establishment and operation of DoR, willhelp to develop a framework for adequate funding mechanisms for road maintenance, and will establishcriteria to be followed in drawing up road maintenance programs.

3. Benefits and target population:

Major benefits expected from the implementation of the Project include:* cost savings by preventing degradation of road sections through maintenance activities funded under

the Project;* significant savings in travel costs, which will in turn decrease costs of goods and services;* fostering employment through the reactivation of the local construction industry; and* steps toward the establishment of an efficient road management.

4. Institutional and implementation arrangements:

Institutional ArrangementsIt is expected that the Project will be implemented over a 2.5-year period, with a closing date of December31, 2002. Daily project responsibilities will be undertaken by DoR, under the monitoring of DoT, theCentral Fiscal Authority (CFA) and the Central Procurement Entity (CPE). DoR has existed de facto sincelast year and was officially established within the UN Joint-hIterim Administration structure at thebeginning of May, 2000, and approved by the Director. Since its formation in 1999, DoR has had about20 staff, of which 8 experienced engineers, 3 technicians, 2 accountants and 2 lawyers. DoR is intended tobe the central administration in charge of road management in Kosovo. In the short-term, it is not expectedthat DoR will need to significantly expand, nor that local road administrations will need to be createdthroughout Kosovo. DoR staff have the knowledge of the network (most of the staff worked in the RoadAdministration prior to 1989), they have proven to be very capable when it comes to preparation of damageassessments and road rehabilitation/maintenance planning, and they know how to manage and supervisecontracts (some of DoR staff actually worked as supervisors under previous Bank loans to the formerSocialist Federal Republic of Yugoslavia), although not in accordance with presently accepted internationalstandards. In addition, DoR staff lack basic equipment to perform their duties. The Joint-InterimAdministration has been providing some computer equipmr-ent as well as two cars.

However, more will be needed to ensure DoR's effectiveness. First, while DoR has been officiallyestablished, its precise mandate and scope of activities need to be agreed upon, in order to allow DoR tobecome operational. As such, an understanding with respect to DoR's mandate and scope of activities wasreached between DoT and the Bank. A copy of the understanding is presented in Annex 11. Second, DoRwill be supported in several ways within the Program: (i) GTZ has prepared a comprehensive technicalassistance package focusing on procurement, financial management, project supervision, and training in theEnglish language; (ii) the Government of France has provided technical expertise on specific issues (adviceto DoT and DoR in setting up an organizational structure for the Directorate of Roads, and drafting oftechnical specifications) and intends to continue doing so; and (iii) a limited number of focused consultantassignments could be funded, if need be, from Bank-administered funds. In addition, DoR will need torecruit at once a small number of staff to be able to fully deal with project implementation.

Implementation ArrangementsIn order to ensure a quality implementation, DoR will receive international assistance, especially during the

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coming year. It is fundamental that DoR be in charge of the daily implementation of the Project, ascontract administration and supervision is at the core of the activities performed by Road Administrations.With respect to procurement, it is proposed that DoR be responsible for the drafting of the biddingdocuments, including the technical parts. However, at least for the 2000 procurement round, it isrecommended that the actual tendering and selection of bidders proposed for contract awards as well ascontract signing be handled by CPE, in collaboration with DoR. Bid openings and bid evaluation will behandled by a Committee consisting of representatives of DoR, GTZ, DoT and CPE acting as thecoordinator. Once the bid evaluation report has been approved by the Committee, it will be sent to the Bankfor No-Objection. Upon receipt of the No-Objection, CPE will sign the contract and revert implementationresponsibility to DoR, which, with the support of GTZ, will monitor contract implementation and willcertify invoices before forwarding them to CFA for payment. Finally, DoR will be responsible for thepreparation and update of the project's physical and procurement progress tables, to be forwarded to CFAwhich will be in charge of preparing the quarterly progress reports for the Bank. DoR progress withrespect to project implementation capacity will be monitored by the Bank regular supervision missions,which, if appropriate, will recommend to delegate more responsibility to DoR. Other donors will beencouraged to avail themselves of the services of DoR as much as feasible.

According to the structure of UNMIK, only the Central Fiscal Authority (CFA), which acts as the Ministryof Finance, has the authority to open bank accounts, conduct and monitor financial transactions, includingthe appointment of an independent auditor, and to establish the regulatory framework for procurement andpayments transactions. It is therefore proposed that the CFA be responsible for the financial managementaspects of the Grant administration, including: (i) opening of a Special Account as a sub-account to theirexisting commercial bank account; (ii) replenishment of the Special Account using their financialaccounting system; (iii) preparation of the required Bank reports; and (iv) auditing of the Grant funds on anannual basis. An assessment of the financial capacity of the CFA has been conducted. It was concludedthat the existing system meets the minimum criteria for proper Grant administration and reporting. Thesystem will be programmed so that it is able to produce a PMR no later than September 30, 2001. TheCFA will be appointing the European Court of Auditors to undertake an audit of the entire Kosovo budget.It is acceptable to the Association to have an opinion on the project accounts as a part of the overall audit.Traditional disbursement procedures will be utilized. Once acceptable PMRs are produced, a move toPMR-based disbursements could be considered. More details are provided in Annex 6.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

As indicated below, several alternatives have been considered.

World Bank Stand-alone ProjectAn option would have been to define the project without actively participating in the definition andelaboration of a comprehensive program for the road sector. This would have kept the project designsimple, limited preparation costs, but prospects of ensuring that issues in the road sector be addressed in aco-ordinated fashion by the different donors would have also been limited. This option was rejected earlyon, as it was felt that such an uncoordinated approach would not provide a sufficient basis to ensure thesustainability of the activities, which are foreseen to be carried out over the next two years.

Focusing the World Bank component exclusively on institution buildingDuring project preparation, discussions were held with all the main donors involved in the rehabilitation ofthe road sector. The discussions revealed that almost all donors favor road rehabilitation to road

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maintenance, and prefer, at this stage, to administer directly the implementation of the items funded bythem rather than using local capacity. Despite the fact that road maintenance provides less visibility and ismore cumbersome to implement, it is a vitally essential element of a post-conflict road sector strategy, astypically conflicts hinder road maintenance over extensive periods of time (in the present case, almost 10years). It thus gradually appeared that the Bank would need to finance road maintenance to: (i) preserve asmuch as possible of the main road network; and (ii) allow the Road Administration to start performing itsduties as soon as possible.

Larger Allocation to Road Maintenance ActivitiesIdeally, two to three times more resources should be allocated for road maintenance than is presentlyrealistically foreseeable. This situation is based on several factors: (i) few donors are attracted to firiancingroad maintenance; (ii) it is understood that the Bank would not be able to grant more funds to therehabilitation of the road sector; and (iii) UNMIK or local resources are not expected, at least over the nexttwo years, to be able to cover a significant part of the needs for road maintenance/rehabilitation. TheProject will start addressing the issue by funding a Road User Charges Study to identify possible sources offunding besides the donor community and the Kosovo budget.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned). There has been no significant project carried out so far in the road sector inKosovo. Some donors have started road maintenance and equipment supply activities on a small scale. Sofar, these activities have been administered by the donors, virtually in isolation from the Kosovars orUNMIK. In addition, the recent events in Kosovo have resulted in such major changes in the organizationaland operational structures of Kosovo that lessons leamed previously in the former Socialist FederalRepublic of Yugoslavia have little relevance.

Implementation Development

Bank-financed Progress (IP) Objective (DO)

Reconstruction/rehabilitation/ Emergency Transport HS Smaintenance needs Reconstruction Project for

Bosnia (Project cost: US$162million, Bank contribution:US$35 million)

Reconstruction/rehabilitation/ Second Emergency Transport S Smaintenance needs Reconstruction Project for

Bosnia (Project cost: US$183million, Bank contribution:US$39 million)

Rehabilitation /maintenance needs Emergency Road Repair S SProject for Albania (Projectcost: US$14.5 million, Bankcontribution: 13.6 million)

Other development agenciesRoad Patching in Kosovo EC (ongoing): 1999-2000 Road

Patching

Organization of Road Management in AFD (ongoing): Provision ofKosovo TA to UNMIK

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Support to the Directorate of Roads in Various donors, throughKosovo UNMIK (ongoing): Road

Administration Operating Costs

iP/DO R,atings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

There have been projects similar to the subject project in the region. In Albania, the Emergency RoadRepair Project was successfully prepared, appraised and negotiated in a very short time. However, theeffectiveness required Parliamentary ratification which took much longer than anticipated, therebydelaying the project start. In Kosovo there are no such requirements, although other factors might causedelays. In Bosnia and Herzegovina, both the Emergency Transport Reconstruction Projects have used theconcept of Project and Program, the latter at the outset with a large unfunded part. The concept has provedto be very useful and has allowed to adjust the reconstruction to evolving needs.

3. Lessons learned and reflected in the project design:

The activities implemented so far in the road sector have revealed some issues which are inherent to anypost-crisis situation: (i) low productivity of the local contractors; (ii) difficulties in finding materials; and(iii) misunderstandings related to the operational procedures followed by the donors on one hand, and DoRand the contractors on the other hand.

In a more general perspective, experience from emergency road rehabilitation projects in other post-conflictsituations in the region shows that: (i) the scope of such operations and related procurement rules should bekept as simple as possible; (ii) involve local structure and knowledge in project preparation as much aspossible; (iii) provide local structure and involve foreign assistance only when required; (iv) ensure acontinuous dialogue between donors and local structures to build trust and transparency and ensureefficient: project implementation; and (v) increase the efficiency of donor co-ordination by lessening theneed for it through a decentralized approach. The above lessons have been fully incorporated in the projectdesign.

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4. Indications of borrower commitment and ownership:

UNMIK realizes that parts of the main road network will virtually become impassable in the near futureif remedial action is not taken immediately. Despite the United Nations Interim Administration'sdaunting task, a number of actions have already been taken since the beginning of the year: (i) theregulation establishing DoT has been signed; (ii) the administrative directives establishing theDirectorate of Roads and its Director have been signed; (iii) a 2000 road rehabilitation program hasbeen prepared and a study of the development of the road management capacity in Kosovo completed;and (iv) the 2000 Kosovo budget includes an allocation for DoR operating costs and supply of basicequipment. In addition, DoT and CFA have been looking for support from the international community,especially in the road sector, and have welcomed the proposal of different donors and the Bank to .develop a comprehensive program to address both short and medium-term issues in the road sector.CFA has committed itself to include an allocation for road maintenance starting with the 2001 budget,while recognizing that the economic conditions likely to prevail in Kosovo in the foreseeable future willseverely constrain the size of the Kosovo budget. CFA is also very supportive of the idea to introduceroad user charges to pay for road maintenance. CFA and DoT have proposed the Bank to provide anadvance on the Bank Grant out of the Kosovo budget for an amount up to DEMI million, in order toadvance the start of the works this season. Finally, the staff of the Road Administration is fullycommitted to the Program and Project objectives and is anxiously awaiting to start its work as soon aspossible. DoR has already prepared a program for road/bridge maintenance and rehabilitation, as wellas several proposals to collect funds for maintenance.

5. Value added of Bank support in this project:

The proposed project supports a key objective in the reconstruction strategy of Kosovo, namely therehabilitation of the road network, a prerequisite for economic recovery. In addition, the Bank has beenseen as a reliable partner able to build a consensus among the different actors involved in the sector on thecontent of the road rehabilitation program and the role of the different participants. The Bank activities willcomplement those of the other donors, which will essentially focus on road/bridge rehabilitation on the mostdeteriorated road sections, while the Bank will support road maintenance activities on about 570km of themain network, to prevent further deterioration and delay as long as possible reconstruction activities whichwould mobilize a significant part of the scarce resources likely to be available for road maintenance in thenear-term. Finally, the Bank, through its focus on road maintenance, will support the revival of the localconstruction industry, and participate in the development of DoR, as:

(i) even in the past, local contractors located in Kosovo did not have the capacity to build bridges or toundertake major road works. In recent years, local contractors' capacity has been declining and today is atits lowest. While they now slowly recover staff and equipment, they need revenues to sustain their recovery.As such, at this stage, they would not qualify as prime contractors under most of the rehabilitationactivities financed by other donors. However, they will qualify to undertake the smaller road maintenanceactivities supported by the Bank; and(ii) most of the other donors have already indicated that they would not use DoR to implement theiractivities as their intended interventions call for relatively big intemational contracts which they want toadminister themselves.

The Bank, together with the French and German Governments, is already assisting the RoadAdministration in starting its operations through provision of expert advice in critical areas. In addition,once Bank funds become available, the Bank will, in collaboration with DoT, support DoR to: (i) carry outbasic traffic counts on the main network; (ii) prepare road maintenance programs for discussions withUNMIK; (iii) suggest funding mechanisms for road maintenance to CFA; and (iv) administer, on a daily

- 12 -

basis, activities financed by Bank-administered funds. Basically, the Bank will assist the RoadAdministration in restarting activities.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):* Cost benefit NPV=US$15 million; ERR = 57 % (see Annex 4)O Cost effectivenessO Other (specify)The results are presented in detail in Annex 4. Given the bad condition of the road network, the ERRs forthe various road sections to be maintained or overlayed under the Bank Grant are high, especially for thoseroad sections with higher traffic volumes.

2. Financial (see Annex 5):NPV=IJS$ million; FRR = % (see Annex 4)There are no revenue-earning entities involved in the project.

Fiscal Impact:

Impact on the fiscal resources is expected to be positive, as rehabilitation/maintenance activities carried outat this stage will spare scarce fiscal resources in the future. As shown in the Program Financing Table,financing has been committed so far for 55.5% of the Program needs by 6 donors. It is estimated that thecurrent financing gap of US$26.7 million will be manageable given how resources have flowed in therecent past under similar projects in the Region. The size of the financing gap reflects the need to puttogether, at this stage, a 2.5 year road rehabilitation plan in order to provide a sufficiently long-termframework to ensure that institutional and policy objectives of the Program are attained. In addition, anumber of donors allocate their support on an annual basis, and some donors have already appeared willingto continue their support to the road sector next year. Finally, the 2001 Kosovo budget will include anallocation for road maintenance, but the amount is not yet defined.

3. Technical:Local contractors' capacity is presently weak, and supervision capacity is not fully developed yet.Contractors' capacity is expected to be enhanced in two ways: (i) through association with foreigncontractors, as is already happening in the crushed stone supply market; and (ii) through maintenancecontracts tailored to contractors' actual capacity. With respect to supervision, the capacity will be builtthrough support provided by foreign experts to the DoR.

The costs of civil works to be carried out under the Program and the Project have been estimated on thebasis of average costs used in the past and average costs of the few civil works contracts which have beencontracted since last July, taking into account the fact that actual costs of civil works will decreasegradually as the situation in Kosovo normalizes, which would imply lower costs through introduction ofcompetition. As a reality check, the cost estimates were compared to the costs of civil works of a similarnature in Bosnia and Herzegovina. However, it should be recognized that there is a higher element ofuncertainty than in more settled country conditions, and thus both under and overruns are more likely, inwhich case the quantities of work will need to be adjusted accordingly.

4. Institutional:

4.1 Executing agencies:

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The executing agency for the Project is proposed to be DoT.

4.2 Project management:

Daily project management is proposed to be undertaken by DoR under the supervision of DoT, CFA andCPE. In addition, DoR will be supported in project management by GTZ and other consultants as needed.GTZ assistance is planned to last 2 to 3 years. Depending on progress achieved by DoR in fundamentalareas such as English language training, contract management, disbursement and contract supervision, thefocus ofthe technical assistance could be shifted after the first year.

4.3 Procurement issues:

The number of Kosovars familiar with public procurement rules (including the Bank's rules) is low.Therefore, foreign technical assistance will be provided to DoR to prepare bidding documents, and, at leastfor the first round of bidding, the tendering and evaluation process will be put in the hands of CPE. Underthe Bank Grant, road maintenance and overlay works will be procured using: (i) National CompetitiveBidding (NCB), for an estimated amount of US$2.1 million; and (ii) Intemational Competitive Bidding(ICB), for an estimated amount of US$2.4 million.

4.4 Financial management issues:

A financial management capacity assessment has been completed by a certified Financial ManagementSpecialist with the conclusion that the existing system of the UNMIK Interim Administration for operatingthe consolidated Kosovo budget meets the Association's minimum requirements. The project has received a4-B certificate for purposes of financial management. The project funds will flow through the CFA'ssingle treasury system. The financial management risks still exist mainly due to the uncertain and changingenvironment. Also, there is little capacity and inadequate local financial institutional arrangements to allowfor many small payments. Therefore, the project will be structured as much as possible into relatively largecontracts which can be processed by the CFA through bank transfers from their foreign commercialaccount directly into the account of the contractor or supplier. In addition, technical assistance will beprovided to DoR to strengthen their own financial management capacity, which at the moment is weak.Technical assistance will be provided by GTZ. GTZ is carrying out an assessment of DoR requirements,and their report, including an action plan to strengthen the Road Administration's financial, procurementand management activities will be sent to the Bank by the end of September, 2000.

5. Environmental: Enviromnental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The Project has been rated "B" for purposes of OP4.01 because a 5 cm overlay on 14km of the mainnetwork is intended to be funded under the Project. Otherwise, the Project will focus exclusively on minorroad maintenance activities. As such, the project will have a positive impact on environment, as it willallow for the cleaning of road shoulders and restoration of drainage systems. In addition, rehabilitatedroads will result in more even travel speeds, which will lead to improved traffic safety and lower fuelconsumption. The crushed stone and asphalt would be supplied from equipment meeting intemationalstandards for environment and worker safety, since it seems likely that westem contractors will be heavilyinvolved in materials supply. This is already the case for crushed stone. The bidding documents for theBank-financed component will include provisions to ensure that bidders guarantee that the materials thatthey will be using will have been supplied from equipment meeting intemational standards for environmentand worker safety. With respect to the overlay of 14km, an Environmental Management Plan (EMP),acceptable to the Bank, has been prepared by the Recipient of the Grant.

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5.2 Wliat are the main features of the EMP and are they adequate?

The main features of the EMP involve mitigation measures during works, such as materials to be producedand works to be performed with equipment meeting international environmental standards, monitoring ofimpact on environment during works (such as noise, dust, traffic disruption and water pollution). Thesemitigation measures will be specified in the bidding document. The main features of the EMP (see Annex12) are adequate considering the difficult circumstances in Kosovo, including the absence of anyregulatory, legislative or institutional capacity in the environmental sector.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

Given the limited impact on environment that a 14 km long overlay can have, and the specificcircumstances in Kosovo, an Environmental Assessment was deemed not appropriate. The final draftEnvironmental Management Plan was received from the Borrower on July 13, 2000.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

In view of the urgent nature of the works involved, the lack of institutional or regulatory framework inKosovci, and the minor, rehabilitative nature of the proposed activity, which would improve both safety andconvenience to local residents, the need for formal public consultation was deemed impractical and notsuitable. The Bank's Environmental Department has agreed to this.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvirornment? Do the indicators reflect the objectives and results of the EMP?

DoR, supported by consultants funded by the Governments of France and Germany, will be in charge ofmonitoring and evaluating the impact of the 14km long overlay on the environment, while supervising theworks. Given the short duration of the works (expected to last about 3 weeks) and the absence of anyenvironmental monitoring capacity in Kosovo, it has been estimated that visual or audio observations willbe the most appropriate way to ensure that the impact on environment be minimized.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The Program and the Project are expected to have a positive social impact as: (i) roadrehabilitation/maintenance activities will generate employment, through the revitalization of the localconstruction industry; (ii) rehabilitated roads and bridges will reduce travel time and cost, and will increaseaccessibility; and (iii) rehabilitation/maintenance activities undertaken at this stage will conserve scarcefiscal resources in the future. With respect to the potential introduction of user charges, the project willfinance a study to evaluate the appropriate levels of the charges, when they could start to be levied, andthrough which agencies, as well as the capacity and willingness of the users to pay and the impact on theroad users themselves.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The project involves different stakeholders for different purposes. The first group of stakeholders involvedare donors and the KFOR which control outcomes by deciding on level of funding and scope of activitieswithin the Program. During project preparation, there have been intensive discussions with KFOR and thedonors interested in the rehabilitation of the road sector to build a consensus on the strategy to be followedto ensure that activities selected by individual donors address emergency needs, and to coordinate among

- 15-

the donors to avoid overlaps and construction delays. Discussions with the donor community and KFORwill continue during project implementation to review progress achieved and identify further funding toclose the financing gap under the Program. The second stakeholder involved is the UNMIK administration,especially CFA and DoT, including DoR which will be in charge of the daily implementation matters.These entities have been participating in the elaboration of the long-term strategy for the road sector andthe Program. In addition, there has been consultations with CFA to agree on a strategy to start resolvingthe issue of the total lack of resources for road maintenance. Finally, these entities are key to ensure asuccessful implementation of the project, and as such, implementation arrangements have been defined incollaboration with them. During project imnplementation, consultations with CFA and DoT will be pursuedto ensure progress on the institutional and road maintenance funding issues. The third group ofstakeholders involved are local contractors. There have been in-depth discussions with the localcontracting industry to better understand the problems they face, their capacity and what could be done tosupport a quality construction industry in Kosovo. Discussions will continue as appropriate during projectimplementation and assessments of the progress realized by local contractors will be conducted by DoR.Finally, the fourth group of stakeholders are road users and persons living next to road sections to betreated under the project. While there have been discussions with some road users (such as bus operators)during project preparation, the involvement of this group has been limited due to the emergency nature ofthe activities to be undertaken under the Project and the size of the needs that are to be addressed.However, for the future it is envisaged that consultations with interested parties will be an integral part ofDoR's procedures.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

During project preparation, no civil society organization has manifested any specific concern or wish withrespect to what should be achieved under the project. The only feedback received has been from a limitednumber of road users who very much welcome the program, while stressing that implementation shouldstart as soon as possible. The parts of the main road network to be improved have already been selected inaccordance with damage level and traffic volume criteria. This selection is likely to be partially modifiedover the project implementation period, as it is not known at this stage what donors will be exactly willingto do or which allocations will be made from the Kosovo budget over the next two years. However, giventhe extent of the needs for road maintenance/rehabilitation and the scarcity of funding available for thispurpose, it is not expected that such a selection of alternative road sections will pose any particularproblem. At the same time, relevant concerns from civil society organizations will be taken into accountthrough DoR which will be the focal point in these matters, receiving feedback from the civil societyorganizations and transmitting it as appropriate to DoT and the Bank. This is to be seen as the first steptoward a broader goal: DoR, as a to be fully fledged road administration, will need to create a forum inwhich civil society organizations can express demands and concerns with respect to the maintenance andespecially development of the road network.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The implementation of road maintenance activities will lead to enhanced access to health services, increasedroad safety, better accessibility to goods and services (through more efficient transport services), expandedjob search horizons (through increased mobility), and decreased air pollution levels. These outcomes willbe most tangible in communities located on or close to the road sections considered under the project.

6.5 How will the project monitor performance in terms of social development outcomes?

No specific monitoring process in terms of the performance of social development outcomes has been

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designed given the nature of the project.

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

El Environental Assessment (OP 4.01, BP 4.01. GP 4.01) O Yes (2 NoEl Natural habitats (OP 4.04. BP 4.04 GP 4.04) L Yes 1 NoEl Forestry (OP 4.36. GP 4.36) 2 Yes 1 NoEl Pest Management (OP 4.09) EL Yes 1X1 NoEl Cultural Property (OPN 11.03) O Yes N NoEl IndiLenous Peoples fOD 4.20) Yes I NoEl Involuntary Resettlement (OD 4.30) Ol Yes 1X NoEl Safety of Dams (OP 4.37. BP 4.37) El Yes l NoEl Projects in International Waters (OP 7.50. BP 7.50. GP 7.50) El Yes 1 NoEl Projects in Disputed Areas (OP 7.60, BP 7.60. GP 7.60) ] Yes 3 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

n.a.

F. Sustainability and Risks

1. Sustainability:

The political situation in Kosovo provides an environment that is inherently high risk. With respect to theProject, works will be carried out according to international quality standards, and it is expected thatmaintenance contracts with local contractors will help restore maintenance capacity. In addition, theproject will be a first step towards the re-establishment of an efficient Road Administration. Although anadequate level of funding to road maintenance is the key to ensure long-term sustainability of the activitiesfunded umder the project, and although the Project will focus on identifying adequate funding mechanismsfor road maintenance (e.g. introduction of user charges), it is clear that the size of the Kosovo budget will,at least in the short-term, greatly constrain the actual level of road maintenance budgets. To demonstrateUNMIK 's willingness to cope with the issue in an as adequate as possible manner, the CFA has sent acomfort letter to the Bank, indicating in substance that it will endeavor to cover DoR operating costs andwill include an initial allocation for road/bridge maintenance in the 2001 budget. The allocation will beincreased over time, commensurate with the prevailing economic conditions in Kosovo over the next years.

2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk R|sk Rating I Risk Minimia MesureFrom Outputs to ObjectiveDeterioration of the situation in Kosovo S n.a.

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Delays in dealing with the UN H The project management and monitoringJoint-Interim Administration arrangements have been set up in a way to limit

the demands on the UNMIK Joint-InterimAdministration, in order not to further burden it.Support will be provided to DoR by GTZ andthe project team in the areas of projectmanagement and monitoring. In addition, theproject design allows for sufficient flexibility tohire additional consultants if need be.

Kosovo budget not to include an S During project preparation, CFA has shown aappropriate allocation for road good understanding of the consequences of amaintenance (note: given the limited size funding shortfall in the road sector. The roadof the Kosovo budget, severe network is in such a condition that not fundingunderfunding is a risk that all public road maintenance would have immediate andservices face). visible consequences. In addition, there are

strong pressures both from road users andUNMIK to have the condition of the roadnetwork be improved quickly. So far, CFA hasbeen very proactive on this issue, having fundedequipment to DoR, paying operating costs andhaving advanced DEMI million on the BankGrant in order to jump-start works this season.In addition, CFA has provided a comfort letterto the Bank ensuring that the 2001 Kosovobudgets will include an allocation to roadmaintenance. During implementation, theproject team will pursue an active dialogue withCFA to ensure that, in as much as feasible,adequate allocations be devoted to roadmaintenance. The consequences of differentfunding levels will be reviewed annually and theproject components will be re-examined in lightof this. Finally, the project will explore ways tointroduce user charges, also in consultation withCFA.

Failure to close the financing gap M The project team and DoT will explore fundingoptions during project implementation, rangingfrom direct contacts with potential donors topresentation of funding needs to donors'conferences. In addition, the project design ismodular, so that components to be funded byeach donor would be lirnited should this riskmaterialize.

From Components to OutputsQuality of road/bridge repairs and M Assistance and training in supervision will bemaintenance might be poor provided by foreign experts to DoR.

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DoR capacity M DoR staff is impatient to start working again ona significant scale as soon as possible. Since theend of the hostilities last June, they haveprepared on their own damage assessmentreports, proposals to re-establish signalling onthe main network, and have managed last wintermost of the winter maintenance handled bycivilians. DoR staff has a solid roadmanagement experience. However, the languagebarrier and lack of experience withinternationally accepted procurement andfinancial management rules need to be addressedas soon as possible. A comprehensive technicalassistance package will be provided by GTZ toDoR to buildup the core of an efficient RoadAdministration. In parallel, DoR will be fullyinvolved in the implementation of the Project,which will provide the necessary hands-ontraining with the support of the project team.

Procurement S Procurement responsibility will lie with CPE, atleast for the first round of bidding. In addition,international experts will assist DoR in draftingthe bidding documents and CPE in conductingthe tendering process. Finally, procurementtraining will be supplied to DoR staff by GTZand the Bank.

Overall Risk Rating

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

It is not expected that the implementation of the Project would raise controversy. However, the role of theinternational community in the reconstruction of Kosovo could become controversial if no progress isshown rapidly. To mitigate the possible negative impact of a slow start of international assistance, theProject has been designed as a stand-alone part of the Program. Thus, even if commitments made by otherdonors fail to materialize or if implementation of other parts of the Program is delayed, the activities fundedunder the Bank Grant will remain implementable according to schedule. In addition, the Program has agradual implementation schedule, with some donors ready to implement their activities, and others ready toimplement by summer and fall, which should allow for a number of activities to be completed before theend of the 2000 construction season.

G. Main Grant Conditions

1. Effectiveness Condition

There will be no conditions for the effectiveness of the Grant.

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2. Other [classify according to covenant types used in the Legal Agreements.]

The following conditions to negotiations have been fulfilled:

(i) the Bank has received a letter from CFA, indicating in substance that it will endeavor to cover DoRoperating costs and will include an initial allocation for road/bridge maintenance in the 2001 budget. Theallocation will be increased over time, commensurate with the prevailing economic conditions in Kosovoover the next years; and

(ii) agreement has been reached with DoT and DoR on DoR's mandate and scope of activities.

Finally, the Bank has received from DoT a satisfactory winter maintenance plan for the comingwinter, which was the condition to be fulfilled prior to Grant approval.

H. Readiness for Implementation

1 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

a 1. b) Not applicable.

12 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

1 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

Z 1. This project complies with all applicable Bank policies.a 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Aymeric bn rRicardo A - Christiaan J. PoortmanTeam ader Sector Mrector Country Manager/Director

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Annex 1: Project Design SummaryKOSOVO: Urgent Road Project

_ -~~~K~ P etf-::o--m: . .<of: _ E 0 ,C,i.-'.', _3 g

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Rehabilitating infrastructure Rehabilitation of the road Donor Report Stability and growth innetworks for economic network and establishment of Kosovorecovery adequate operation and

maintenance capacity

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Contribute to the Core Road Administration set Supervision Missions reports Support of the Joint-Interimreconstruction and economic up, and able to carry out basic Administration and staffdevelopment of Kosovo, by tasks on an efficient basis. adequately trainedsupporting the first steps Indicators will include:towards the re-establishment * quality of road maintenanceof a road maintenance programs and progressadministration and budget reports;financing mechanisms, as well * adequacy of contractas urgent emergency repairs to management capacity;the network. * proactivity of DoR in

dealing with donors;* Impact and relevance ofDoR advise to DoT

Improved main road network Indicator of main road Technical assistance providedcondition by December 31, network condition to be to DoR and DoR monitoring2002 computed by DoR and capacity in place

compared to the condition in2000 (2000 indicator to becomputed by the end of 2000of the basis of the roaddamage assessment reportcompiled by IMG)

Agreement reached on an Supervision Mission reports Support from DoT and CFAAction Plan to implement thefindings of the Road UsersCharges Study

Percentage of road Report prepared by DoR Support from CFA and DoTmaintenance contracted out by Supervision Mission reportsDecember 31, 2002

Development of local Industry analysis survey to be Support from DoTcontracting capacity conducted by DoT in the first

half of 2003

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",4;ta,:S ~ ~~~s 4Q &:.' ' Evalua>U*iOi\t2ion Critical Ass ons IOutput from each Output Indicators: Project reports: (from Outputs to Objective)component:Institutional Development and 2001 and 2002 level of CFA Consolidated Budget Full commitment of theCapacity Building funding raised locally equal to Review project components in Joint-Interim Administration

an acceptable level; light of budget levels to resolve the roadmaintenance funding question

* Increased quality of road Supervision Missions reports Support of the Joint-Interimmaintenance programs; Administration and staff* Increasing volume of adequately trainedmaintenance activities;* Adequate contractmanagement capacity(including planning, contracttendering, supervision andtraffic management);

Road User Charges Study Supervision Mission reports Support from DoT and CFAcompleted and review of the study report

Road About 570 km of road sections Project progress reports Local contractors able tomaintenance/rehabilitation rehabilitated/maintained; bid/mobilize and availability

of materials

Adequate traffic managementduring works

Size and timely availability ofdonors' contributions

- 22 -

Lw t .of, --_iOr.$ , M, RO,*Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)

Institutional Development and During project preparation: Preparation Missions BTOs Genuine agreement on the

Capacity Buiilding US$100,000 (Bank content of the roadadministrative budget and rehabilitation program

French TF) reached between the mainactors present in the roadsector

During Project Project progress andimplementation: supervision missions reports Proper support provided to

US$0.5 million from the Bank DoRGrant

Road US$4.5 million from the Bank Project progress and Agreement to be reached with

maintenance/rehabilitation Grant supervision missions reports the Joint-Interim

and bridge rehabilitation Administration on efficientimplementation arrangements

- 23 -

Annex 2: Project Description

KOSOVO: Urgent Road Project

By Component:

Project Component 1 - US$3.30 millionThe Project will fund about 30% of the Program's road maintenance component. It is expected that about570 km of roads will be maintained under the Project. The list of road sections on which maintenance isgoing to funded under the Bank Grant is provided below.

Project Component 2 - US$1.20 millionThe Project will fund overlay on a 14km high priority stretch of the Pristina (Prishtine) - Gnjilane (Gjilani)road which has not been considered for funding by other donors.

Project Component 3 - US$ 0.50 millionThe Project will fund a study on the potential introduction of road user charges, will provide for a siteengineer to organize supervision of the works carried out under the Project and strengthen supervisionwithin DoR. The Project will also contain an allocation for assistance in specific areas such as projectimplementation or DoR strengthening, in case commitments made by other donors fail to materialize in atimely manner. Finally, the project will fund the costs of the annual audits.

PROGRAM DESCRIPTION

Program Road Maintenance Component - US$12.1 milionActivities under this component will be focused exclusively on funding road maintenance on those sectionsof the main network which do not require rehabilitation but urgently need to be maintained in order toremain serviceable. This component will allow perforning maintenance on about 1,500 km of the mainnetwork. Maintenance activities will include treatment of potholes and cracks to defer as long as possiblecostly rehabilitation activities, surface dressing, cleaning of drainage systems, culverts and shoulders, andrestoration of horizontal and vertical signalization (with respect to the latter, the focus will be on restoringtraffic safety-related signaling). A list of the road sections included under the Program is presented below.

Program Road Rehabilitation - US$31.9 millionThis component will allow road rehabilitation activities to be performed on about 150 km of the mainnetwork. Rehabilitation will include restoration of culverts/drainage systems, overlays and, on a selectivebasis, emergency reconstruction on some of the most degraded sections on the main road network. In somecases, road rehabilitation will need to be preceded by repairs to leaking water/sewerage pipes located underthe road. Although a number of road sections need reconstruction, these sections have not been included inthe Project, given high costs of reconstruction and the relatively low availability of funds which is foreseento be available in the road sector. A list of the road sections included under the Program is presentedbelow.

In order to implement road maintenance/rehabilitation activities, the issue of traffic management will needto be tackled to address: (i) KFOR requirement that strategic roads must remain open at any time: on thoseroad sections without any adequate road bypass, cooperation between KFOR, UNMIK, DoR and thecontractor will be essential; and (ii) the narrowness of the roads and the poor alternative itineraries: this

- 24 -

will warrant the construction of temporary bypasses on some of the sections to be treated under the Project.

Program Bridge Rehabilitation - US$8.00 millionThe Program covers the reconstruction/rehabilitation costs of 9 bridges located on the main road network.It is noted that local contractors do not have the capacity of building bridges. Bridge rehabilitationactivities are not expected to interfere with the KFOR requirement that strategic roads must remain open atany time, as temporary bypasses are in place on most of the bridges to be rehabilitated. A list of thebridges included under the Program is presented below.

Program Support to Road Management Capacity Component - US$8.00 millionThe Program will support the re-establishment of a core road management capacity in Kosovo. The maintasks to be carried out by DoR have been agreed upon (see Annex 9) and the technical assistance providedunder the Program aims at supporting DoR to carry out those tasks which are deemed absolutely essential.As such, DoR will be supported with technical assistance in the following areas: (i) project implementation,including procurement, disbursement, and supervision activities; (ii) road maintenance/rehabilitationplanning in accordance with economic prioritization principles; (iii) staff skills enhancement/update throughon-site training and collaboration/exchange (which could take the form of a twinning) with a reputableRoad Administration; and (iv) financial management. Basic equipment (such as office equipment, cars andthe like) will also be provided to DoR as well as basic laboratory equipment, to ensure the quality of thematerials used for maintenance and rehabilitation activities. In addition, the Program will provideassistance to DoT to: (i) fund studies in the areas of road user charges, traffic congestion and safety, andwill support the preparation of a proposed new road classification; (ii) draft road sector-related regulations;and (iii) provide a road expert to help DoT carry out the basic tasks of a Transport Ministry in the roadsector, including planning, development, road safety and regulations.

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ROAD MAINTENANCE PROGRAM

AmountRoad Estimated CommittedNumber Road Section cost (US$) so far (US$) Financiers

Banje-Mitrovica-M2 Pristina-Blace 1,425,000 250,000 AFD

Podujeve-Prstina-M25 Lipjan-Prizren 1,487,000 189,000 IDAM9 Pristina-Peje 1,176,000 300,000 EC

543,000 IDAM22.3 Mitrovica-Leshak 390,000

DoIc-Gjakove-M9.1 Ponoshec 397,000 150,000 IDAM25.2 Pristine-Gjilan 380,000 380,000 IDAM25.3 Shtime-Ferizaj-Gjilan 770,000 190,000 IDAR101 Mitrovice-Peje 663,000 186,000 IDAR102 Kucice-Komaran 185,000 185,000 IDAR104 Istog-DolIc 339,000R107 Peje-Prizren 500,000 180,000 IDAR108 Vitomirice-Kulla 190,000 190,000 IDAR110 Xerxe-AriIat 385,000 385,000 IDAR113 Zhur-Dragashi 195,000 195,000 IDAR115 Przren-Gabrica 394,000R118 Shuahreke-Shterpce 259,000R119 Duhile-Kijeve 365,000 365,000 IDAR120 Sllatina-Janjeve 682,000 190,000 IDAR121 Raushiq-Zajme 281,000R123a Kamenice-Strezovce 169,000R124 Domorove-Kataceve 233,000R126 Podujeve-Recice 153,000R129 Mitrovice-Kempimeh 311,000R202 Junik-Rastavice 70,000R205 Pirane-Studencan 133,000

R206 Ferizaj-Jezerce 128,000R211 Viti-Vernez 149,000R212 Zherger-Stanciq 135,000R214 Hodonoc-Terstene 63,000

R215 Shipashnice-Hogosht 68,000R219 Gjonaj-Zym 27,000 _

TOTAL ROAD MAINTENANCE 12,102,000 3,878,000

- 26 -

ROAD REHABILITATION PROGRAM

AmountRoad Estimated CommiftedNumber Road Section cost (US$) so far (USS) FinanciersM2 Prstina-Blace 7,000,000 7,000,000 ECM9 Pristina-Peje 5,000,000 1,500,000 ECM25 Lipjan-Prizren 7,800,000 7,800,000 KfWM25.2 Pristine-Gjilan 3,600,000 1,217,000 IDAR107 Peje-Prizren 4,300,000R108 Peje-Kulla 1,200,000 1,200,000 KfW

RI 16 Sllatine-Tetovo 3,000,000 3,000,000 ECTOTAL REHABILITATION 31,900,000 21,717,000

BRIDGE REHABILITATION PROGRAM

AmountEstimated Committed

Bridge Name Bridge Location Works required Cost (US$) so far (USS) FinancierM9, 40 km W of Construction new

Lozica Pristina bridge 2,140,000M2, 10 kms NW from Construction new

Milosevo Pristina bridge 980,000 980,000 ECM9, 57km W of Rehabilitation

Zajmovo Pristina existing bridge 385,000 385,000 ECM9.1, between Construction new

Rakovina Road Dakovica and Klina bridge 2,440,000Construction new

Vrani Do M25, near Lebanje bridge 1,060,000 1,060,000 ECM25, 20kms N. of Rehabilitation

Luzane Pristina existing bridge 245,000 245,000 ECRI 11, 25kms NW of Rehabilitation

Zrze Prizren existing bridge 100,000R125, 40 kms. NE of Rehabilitation

Orlane Pristina existing bridge 280,000RIOI, 80kms E of Construction new

Durakovac Pristina bridge 330,000TOTAL 7,960,000 1 2,670,000

-27 -

Annex 3: Estimated Project Costs

KOSOVO: Urgent Road Project

WORKS 0.00Road Maintenance 2.03 0.83 2.86Road Rehabilitation 0.31 0.70 1.01GOODS 0.00Equipment for DoRlMaterial Testing Equipment 0.18 0.18SERVICES 0.00Other Services, TA, Studies 0.00 0.45 0.45Total Baseline Cost 2.34 2.16 4.50Physical Contingencies 0.13 0.14 0.27Price Contingencies 0.11 0.12 0.23

Total Project Costs 2.58 2.42 5.00Total Financing Required 2.58 2.42 5.00

4H, ~ ~ ~ ~ LI oeinTotalProjct~~ :* tt:y Catiagy US $io,,U $ign US $wil~ion

WORKS 0.00Road Maintenance 2.23 1.05 3.28Road Rehabilitation 0.35 0.87 1.22GOODS 0.20 0.20SERVICES 0.30 0.30

Total Project Costs 2.58 2.42 5.00Total Financing Required 2.58 2.42 5.00

- 28 -

Annex 4: Cost Benefit Analysis Summary

KOSOVO: Urgent Road Project

1. The economic evaluation of the Project has been carried out by running HDM on the road sections

to be maintained and rehabilitated under the Bank Grant. The case under which the road sections will be

maintained/rehabilitated under the Project has been compared to a base case, under which nothing is being

done until the condition of the road section warrants a complete resurfacing. Given the bad condition of the

road network, this stage is reached, on average, within a 3 to 4 year period. This base case is

representative of the situation likely to prevail in Kosovo over the coming years, during which little will be

allocated to road maintenance (and definitively nothing in 2000), due to heavy constraints on the Kosovo

budget. It is assumed that the allocations that will be made to road maintenance in 2001 and 2002 will be

used on those road sections where no intervention is foreseen over the same period under the Program. The

net annual benefits stream on which Net Present Values (NPV) and Economic Rate of Returns (ERR) are

computed consists of the following annual differences in:

* economic vehicle operating costs;* economic travel times; and* capital and recurrent expenditures.

2. It has been difficult to gather data to conduct this economic evaluation. The Road Administration

has been in place for less than a year, a number of archives have disappeared, recent events have modified

both traffic volumes and patterns, and no comprehensive survey has been carried out so far. In addition,

recent events have also distorted the prices, and the basis constituted by maintenance contracts awarded

since last year's events is very slim. As such, the data used for the computation are the results of visual

observations, rudimentary traffic counts, and estirnates based on data available for neighboring countries

and adjusted to the situation in Kosovo.

3. Based on the costs streams computed by HDM for each road section, the net present value of the

road maintenance and overlay activities to be funded under the Bank Grant is US$14.98 million, and the

conresponding IRR is 57%. The NPVs and ERRs for the individual road sections are presented in the

Table below.

Road Section Length of ERR NPV@12%section (km) (US$, million)

Overlay

M:25.2: Pristina-Gjilan 17 69.20% 2.67

Miraintenance

M[25.2: Pristina-Gjilan 30 Over 4.1100%

M9: Pristina-Peje 80 Over 1.77100%

MI9. 1: Dolc-Ponoshec 45 44.60% 0.36

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M25: Pristina-Merdare 34 82.30% 1.87

M25.2: Pristina-Gjilan 20 Over 1.41100%

M25.3: Gjilan-Konculi 24 67.30% 1.57

RIOl: Mitrovica-Peje 71 77.40% 3.6

R102: Kucice-Komaran 29 38.90% 0.69

R107: Peje-Prizren 68 71.00% 4.34

R108: Vitomirice-Kulle 20 27.80% 0.27

RI 1O: Arlat-Malsheve 21 44.90% 0.53

Rl l O: Javice-Xerxe 18 80.10% 0.26

R1113: Zhur-Restilice 18 23.60% 0.19

Rl19: Dhul-Jashanice 33 21.40% 0.29

R120: Lebane-Janjeve 57 71.20% 2.97

- 30 -

Annex 5: Financial Summary

KOSOVO: Urgent Road Project

Years EndingDecember 31

l Year i Year 2 | Year 3 Year 4 | Year 5 | Year 6 7 Year7Totall Financing RequiredProject CostsInvestment Costs 1.0 3.2 0.8 0.0 0.0 0.0 0.0Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Totall ProjectCosts 1.0 3.2 0.8 0.0 0.0 0.0 0.0Total Financing 1.0 3.2 0.8 0.0 0.0 0.0 0.0

FinancingIBRDIIDA 1.0 3.2 0.8 0.0 0.0 0.0 0.0Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 1.0 3.2 0.8 0.0 0.0 0.0 0.0

Main assumptions:n.a.

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Annex 6: Procurement and Disbursement Arrangements

KOSOVO: Urgent Road Project

Procurement

Civil works, goods and services to be financed by the Bank wiU be procured in accordancewith the Bank's procurement guidelines. The project elements, their estirnated cost andprocurement methods are summarized in Tables A and Al. The thresholds for eachprocurement method and Bank prior review (including aggregate values) are shown inTable B. A procurement plan detailing the packaging and estimated schedule of the majorprocurement actions is available as part of the Project Implementation Plan. TheDisbursement Schedule is shown as Table C.

Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Prcrment MethodExpenditure Category IC cur 0 2; ., .F. Total Cost

1. Works 2.40 2.10 0.00 0.00 4.50(2.40) (2.10) (0.00) (0.00) (4.50)

2. Goods 0.15 0.00 0.05 0.00 0.20(0.15) (0.00) (0.05) (0.00) (0.20)

3. Services 0.00 0.00 0.30 0.00 0.30(0.00) (0.00) (0.30) (0.00) (0.30)

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

Total 2.55 2.10 0.35 0.00 5.00(2.55) (2.10) (0.35) (0.00) (5.00)

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

' Includes civil works and goods to be procured through national shopping, consulting services, services ofcontracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local governmentunits.

-32 -

Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Consultant Slecton Metho - -., -'Servlces- - -.- , -',, . ,' ' ;-..- - t,..

expb_ftre QCIIS, QoS SFB LCS CQ e "iTt"at.CoulCabtgoy . ._.

A. Firms 0.20 0.00 0.00 0.00 0.00 0.00 0.00 0.20____________ (0.20) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00.) (0.20)_

B. Individuals 0.00 0.00 0.00 0.00 0.00 0.10 0.00 0.10(0.00) (0.00) (0.00) (0.00) (0.00) (0. 10 ) (0.00) (0. 1 0)

Total 0.20 0.00 0.00 0.00 0.00 0.10 0.00 0.30_____________ (0.20) (0.00) (0.00) (0.00) (0.00) (0.10) (0.00) (0.30)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.

N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Grant.

- 33 -

Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Subject toThreshold Procurement PriorReiew

ExpenditureCategory (US$ thousands) Method (US$ million) :1. Works $200,000 or > ICB US$2,400,000

<$200.000 NCB US$ 400,0002. Goods $100,000 or > ICB US$150,000

< $100,000 IS

3. Services Not Applicable QCBS, All TORs and contractsexceeding $100,000 with

firms (US$200,000 inaggregate)

Individual Qualifications All TORs and contracts(Individuals) exceeding $50,000 with

individuals (US$100,000 inaggregate)

4. Miscellaneous5. Miscellaneous6. Miscellanaous

Total value of contracts subject to prior review: US$3.25 million

Overall Procurement Risk Assessment

High

Frequency of procurement supervision missions proposed: One every 6 months (includes specialprocurement supervision for post-review/audits)

1. Procurement of Civil Works

Civil Works (US$4.5 million) will be procured as follows:

(a) International Competitive Bidding (ICB). All civil works contractsestimated to be above US$200,000 equivalent will be procured through ICB. Twocivil works contracts are foreseen to be procured under ICB procedures. Theestimated value of these contracts is US$2.4 million.

(b) National Competitive Bidding (NCB). All civil works contracts estimatedto cost less than US$200,000 equivalent will be procured through NCB. About11 civil works contracts are foreseen to be procured under NCB procedures, for atotal estimated value of US$2.1 million.

- 34 -

2. Procurement of Goods

Goods (approximatel.i TJSS0.2 million) will be supplied in package sizes that willencourage competitiv, bidding. It is foreseen to supply basic road material testingequipment and 3 cars to the Directorate of Roads as follows:

(a) International Ccmpetitive Bidding (ICB) procedures will be used for goodsestirnated to cost USK 100,000 equivalent or above per contract such as for theprocurement of road material testing equipment.

(b) International Shopping (IS) procedures will be used for readily availableoff-the-shelf goods ot standard specifications (cars), estimated to cost less thanUS$ 100,000 equivalent per contract up to an aggregate amount of US$0.05million. IS procedure will require quotations from at least (3) three suppliers fromtwo different countries.

3. Selection Procedures for Consulting Services

Contracts for Consulting Services (US$0.3 million in technical assistance isrequired for the Project) will be awardecl following the World Bank Guidelines"Selection and Emplovinent of Consultants by World Bank Borrowers" datedJanuary 1997, revisecl September 1997 and January 1999. To the extent possible,contracts have been packaged to include a combination of related skills andservices and increase competition. The following methods of procurement will befollowed:

(a) Quality-and Cost-Based Selection (QCBS) procedures will be used forconsultant services and training contracts up to an aggregate amount of US$0.2million equivalenit.

(b) Individual Consultant based on Qualification procedures will be used forassignments which meet the criteria specified in Section V of the Guidelines.There is one contract for which the total estimated value is US$0.1 million to funda Sitre Engineer.

4. Notification of Business Opportunities

A General Procuremcnt Notice (GPN) has been published in the June 30, 2000issue of Development Business and will be updated annually if there are anyoutstanding ICB tenders thereafter. For consultants' contracts above US$200,000a Specific Procurement Notices/Request for Expression of Interest will beadvertised in Develorment Business, in the Public Procurement Bulletin of theUNIMIK Interim Administration as well as another appropriate newspaper of widelocal circulation. The Invitation to Bid for the civil works contract procuredfollowing ICB procedures will also be advertised in Development Business, in thePublic Procurement EBulletin of the UNMAIK Interim Administration and anappropriate newspaper of wide local circulation. Civil works procured by NCB

- 35 -

will be advertised in the Public Procurement Bulletin of the UNMIK InterimAdministration and an appropriate newspaper of wide local circulation.

5. Review by the Bank of Procurement Decisions

Scheduling of Procurement. Prior to the issuance of any invitation for bidding,the proposed procurement plan for the project will be reviewed by UNMIK(specifically the Departmnent of Transportation and the Central ProcurementEntity) and the Association will be advised of any revisions for its review inaccordance with the provisions of paragraph 1 of Annex I of the ProcurementGuidelines. Procurement of civil works, goods and services for the project will becarried out in accordance with the agreed procurement plan which will be modifiedas appropriate and included in the progress reports subject to Bank review.

Prior review: (a) Goods: All ICB contracts will be subject to prior review. (b)Civil Works: All ICB and the 2 first NCB contracts will be subject to priorreview. (c) Consulting Services: Terrns of reference for all consulting andtraining assignmnents will be subject to prior review. Request for Proposals (RFP),short lists, termns and condition of contracts as well as evaluation reports andrecommendation for award will be prior reviewed for contracts for individualconsultants above $50,000 and firms above $100,000.

After award of contract, should any material modifications or waiver of terms andconditions of a contract resulting in an increase above 15% of the original amount,the Bank will reserve the right to prior review of such modifications (includingmodifications to contracts for consulting services).

Ex-post review: All tenders, regardless of value, are subject to ex-post review.All documentation, including, but not limited to: TOR, bidding documents orrequest-for-proposals, bids or proposals received, correspondence on all bidseither prior to or following award of contract including Bank no objections,contracts and any subsequent amendments should be maintained until at least twoyears following the close of the Project. During Bank supervision missions, notless than 1 in 5 tenders not subject to Bank prior review will be examined ex-post.

6. Preference for Domestic Manufacturers

Domestic preference will not apply to any contracts awarded under this Grant.Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement

Documentation" and contact the Regional Procurement Adviser for guidance.

- 36 -

Disbursement

Allocation of grant proceeds (Table C)The Bank Grant is expected to be disbursed over a period of two years. The disbursement profile will take

intC) account the fact that local contractors and the Road Administration capacity will gradually build up.

Retroactive financing will be allowed up to US$500,000 for eligible expenditures incurred after July 1,

2000. The CFA has agreed to advance the funds to the UNMIK Department of Transport in order to

ensure that as much as possible road maintenance activity can be carried out this construction season.

Three road maintenance contracts (the procurement of which is almost completed) will be funded initially

through the advance.

Table C: Allocation of Grant Proceeds

Expenditure Category Amount in US$million Financing Percentage

Civil Works 3.80 100% net of taxes

Goods 0.00 100% net of taxes

Consultant Services 0.30 100% net of taxes

Unallocated 0.90

Total Project Costs 5.00

Total 5.00

Use of statements of expenditures (SOEs):

Somne of the proceeds of the grant are expected to be disbursed on the basis of Statement of Expenditures

(SOEs) as follows: (a) civil works for all contracts costing less than US$200,000 equivalent each; .(b)

goods costing less than US$150,000 equivalent each contract; (c) services contracts for (i) individuals

costing less than US$50,000 equivalent each; (ii) firrns costing less than US$100,000 equivalent each; and

(d) training and study tours for less than US$20,000 equivalent each. Disbursements against goods and

services exceeding the above limits will be made against full documentation and respective procurement

guidelines. SOEs will be certified locally by the CFA. Related documentation in support of SOEs will not

be submitted to the Bank, but will be retained by the CFA for at least one year, after receipt by the Bank of

the audit report for the year in which the last disbursement is made. This documentation will be made

available for review by the auditors and supervision missions. If ineligible expenditures, including those

nolt justified by the evidence furnished, are financed from the Special Accounts (SA), the Bank will have the

right to withhold further deposits in the SA. The Bank may exercise this right until the Recipient has: (a)

refunded the amounts involved, or (b) (if the Bank agrees) submitted evidence of other eligible expenditures

that can be used to offset the ineligible amounts.

Special account:To facilitate timely project implementation, UNMIK will establish, maintain and operate, under conditions

acceptable to the Bank, a Special Account in US dollars in a commercial bank acceptable to the Bank. An

initial authorized Special Account allocation of $350,000 will be established. An authorized allocation of

the Special Account will be US$750,000 once the aggregate disbursements of the Grant total $1,000,000

or more. The account size is justified for several reasons: (i) being able to authorize payments directly

from the Special Account to contracts rather than requesting any direct disbursements will be

administratively easier for the CFA to manage; (ii) frequent Special Account replenishment applicationswould also be an undue administrative burden on the CFA; (iii) the Special Account will be held in a very

- 37 -

secure banking environment as it will be a sub-account of the bank account containing all donor fundssupporting the Kosovo consolidated budget; and (iv) the Project has a short implementation period,requiring a very quick disbursement method. The minimum amount of each application should be 20% ofthe authorized allocation. Replenishment applications should be submitted by the CFA at least every fourmonths, and must include reconciled bank statements as well as other appropriate supporting documents.

* Project Accounting

The CFA, acting under the authority of the Special Representative of the Secretary-General, isresponsible for the overall financial management of the Kosovo Budget and tre bucgets lnder theresponsibility of the municipalities, which together form the Kosovo Consolidated Budget (KCB).Specifically, the CFA is responsible for budget process and preparation, treasurv tlunctions, revenueanalysis, tax collection and customs administration. Currently, the CFA is fLnded primarily throughthe International donor comrnunity and its day-to-day management is conduced by interriationalexperts. One of its key objectives is to allocate, commit and track funds for public sector spendingthrough an automated system to enhance accountability and govermment financial operations.

To ensure that expenditures are consistent with the amounts and purpose set out in the KCB,regulations have been approved by the Special Representative of the Secretary-General. To preventabuse and fraud, explicit administrative instructions and procedures are in place for the commitmentand expenditure of public money. Also, in order to minimize the risk of fraud and malfeasance, anindependent officer from the procurement process checks and confirms that these rules have beenadhered to. A detailed description of the instructions and procedures are found in the ProjectImplementation Plan.

Bank's reporting requirements for projects and the need for the establishment of a proper financialmanagement system to produce Project Management Reports (PMR) was discussed with the CFAduring the appraisal mission. It is nevertheless underlined that the current system will not be able, forthe time being, to produce the integrated PMRs (Financial report, Progress Report and ProcurementManagement Report), as required by IDA. However, the following modifications will allow the currentsystem to produce the required PMRs:

* A chart of accounts will be developed for the project by the CFA in co-ordination with the RoadAdministration, and will be incorporated into CFA's own chart of accounts with budget classificationcodes based on the GFMIS;

* The CFA will be responsible for the preparation of PMRs;

* DoR, supported by intemational experts to be funded by the Governmett of Germany. wili prepare thephysical implementation part of the PMRs, once the staff capacity has been buldt up;

* The CFA will utilize traditional Bank disbursement procedures. A move to PMR based disbursementswill be considered once a Bank FMS has reviewed and certified the PMRs as acceptable fordisbursements; and

* Confirmation that the European Court of Auditors appointed by UNMIK will include in its scope ofwork audit of the project accounts has been received at negotiations.

- 38 -

The Treasury Department of the CFA is expected to have:

* adequate financial management capacity to properly handle the tasks of disbursement and accountingrequired for implementation of the project objectives; and

* proper monitoring mechanism to report accurately on the status of the expenditure for the project as a

whole, its various components and each expenditure category as represented in the Grant Agreement,

by each funding source.

Project records will be maintained in accordance with International Accounting Standards (IAS) as

issued by the Intemational Accounting Standard Committee (IASD). An action plan for thestrengthening of the Financial Management System will be attached to the PIP.

Project Audit and Other Reporting

Project Audits

UNMIK has decided to appoint the European Court of Auditors to undertake annual audits of the entireconisolidated Kosovo budget. Agreement was reached during negotiations on these arrangements. The

audit costs would be funded from the Bank Grant as part of its operating costs. If a separate independentaudit is necessary, then the costs for this audit should be considered as part of the Grant expenditures.Project accounts, financial statements, the Special Account and Statement of Expenditures will be auditedin accordance with the Guidelines for Financial Reporting and Auditing for Projects Financed by the WorldBank (March 1982) as well as the Financial Accounting Reporting and Auditing Handbook (January1995). In particular, International Auditing Standards (IAS) as published by the International Federation

of Accountants (IFAC) will be consistently applied. The CFA will provide the Bank (within six months ofthe end of each fiscal year), an audit report of such scope and detail as the Bank may reasonably request,including an opinion by an independent auditor acceptable to the Bank, on disbursements against certifiedSOEs, or against PMRs. The opinion should mention whether the SOEs/PMRs submitted during the fiscalyear, together with the procedures and internal controls involved in their preparation, can be relied upon to

support the related withdrawal applications.

Project Reporting

UNMIK, lead by DoT, in co-ordination with the CFA and CPE, will ensure that DoR prepare properproject progress reports to be submitted to IDA in a timely fashion. These include comprehensive quarterlyreports covering project financing, implementation progress (including variance reporting), procurementprogress and contract expenditure. The reporting system will be in compliance with the formats providedby the IDA in the Project Financial Management Manual (Exposure Draft, February 1999). A copy hasbeen given to the CFA and DoR. These would include project status reports, reflecting: (i) the status ofimplementation progress, problems encountered, corrective actions needed, rationale for actions; (ii) thecurrent state of project indicators; and (iii) the current costs of each project component and estimated costs

of completion. Procurement reports would include: (i) progress of procurement activities against the plansseit forth in the PIP, variations in progress, reasons for variations, and remedial actions; and (ii) bidevaluation reports, as they arise in the procurement processes.

- 39 -

Annex 7: Project Processing ScheduleKOSOVO: Urgent Road Project

Projec Schedule M =0 Planned tualTime taken to prepare the project (months) 4 4First Bank mission (identification) 03/17/2000

Appraisal mission departure 05/09/2000 05/10/2000

Negotiations 07/24/2000 07/17/2000

Planned Date of Effectiveness 08/09/2000

Prepared by:

World Bank in collaboration with UNMIK and DoR.

Preparation assistance:

Govermnent of France (through Agence Francaise de Developement and Partnership Trust Fundadministered by the Bank) and Government of Germany (through Deutsche Gesellschaft fur TechnischeZusammenarbeit)

Bank staff who worked on the project included:

Name Speciality

Aymeric-Albin Meyer (TTL) Transport SpecialistEnn Vasur Transport EconomistAhmet Gokce Procurement SpecialistHiran Herat Financial Management SpecialistFelix Jakob Peer ReviewerJose L. Irigoyen Peer ReviewerBernard Baratz Environmental Specialist

- 40 -

Annex 8: Documents in the Project File*KOSOVO: Urgent Road Project

A. Project Implementation Plan

Yres

B. Bank Staff Assessments

Procurement Assessment;Financial Management Assessment;E]conomic Evaluation.

C. Other

Kosovo: A Program for Economic Recovery. EC and WB 1999

Organization of the Road System in Kosovo. UNMIK

Kosovo: Programme 2000 d'Entretien et de Remise en Etat du Reseau Routier. Caisse des Depots. Janvier,2000

Studie Zur Analyse der Aktuellen Situation der Strassen im. Kosovo Sowie zur Unterstutzung des LandesBeim Aufbau Einer Funktionsfahigen, Strassenerhaltungsorganisation.GTZ. February, 2000.

*The Road to Stability and Prosperity in South Eastern Europe. A Regional Strategy Paper. World Bank,March 2000.*Including electronic files

-41 -

Annex 11

KOSOVO

URGENT ROAD PROJECT

UNDERSTANDING

ON THE MANDATE AND SCOPE OF ACTIVITIES OF THE

DIRECTORATE OF ROADS

1. The Directorate of Roads (DoR) has been officially established throughAdministrative Directive 2000/1 from the Joint-Interim Administration Department forTransportation (DoT) in May, 2000. The Directive stipulates that DoR shall be the soleentity responsible for management, maintenance and development of the main andregional roads, while being an adviser to municipalities with respect to the managementof local roads. This note summarizes the understandings reached among the differentparticipants supporting the establishment of DoR within the framework of the UrgentRoad Project, so as to provide a common framework for the development and the actionsneeded for DoR for the next few years. This note is intended to be attached to theMinutes of Negotiations of the Urgent Road Project, once the Project will have beennegotiated.

2. One of the main objectives of the Urgent Road Project is to support DoT in settingup a framework which would lead to the development of an efficient Directorate ofRoads. To achieve this objective, the following understandings have been reached amongDoT, GTZ, DoR, and the Bank:

(i) DoT and DoR agree on the scope of activities which should be covered by DoR underthe guidance and supervision from DoT. The activities are presented in Paragraph 3below;

(ii) DoR will, as much as its capacity allows, be in charge of the implementation of atleast the activities to be funded under Bank-administered funds (i.e. Bank Grant andDonor Trust Funds administered by the Bank), as well as activities to be funded under theKosovo budget. This will allow DoR to develop its planning, contracting and supervisioncapacities, which are part of the core activities of a Road Administration. At least duringa first phase, DoR, supported by GTZ and other consultants as needed, will be in chargeof preparing bidding documents and supervising works, while the tendering process willbe conducted by the CPE and disbursements handled by the CFA;

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(iii) a comprehensive technical assistance package will be provided DoR by GTZ over thenext two years. The package includes, inter alia, support to develop adequate capacity inthe following areas: financial management, procurement (including training), staffing,road maintenance planning and preparation of annual budget proposals for roadmaintenance to be submitted to UNMIK;

(iv) while acknowledging the fact that a full fledged Road Administration cannot bedeveloped in two years, studies in areas of concern to a Road Administration (e.g. trafficmanagement, winter maintenance, road user charges) will be conducted by internationalexperts to help DoR and DoT in tackling as quickly as possible issues in these areas.

3. The main activities to be performed by DoR include:

(i) conduct road condition and traffic surveys, including traffic counts, focusinginitially on the main network;

(ii) organize collection of infornation on traffic congestion and accidents;

(iii) prepare annual road/bridge maintenance (including both summer and wintermaintenance) and rehabilitation programs to be submitted to UNMIK for fundingunder the Kosovo budget. The activities to be funded under the programs will beselected on the basis of traffic and road condition data, while, whenever feasible,optimizing the impact of the programs on less favored communities;

(iv) set-up and update a database recording donor proposed and present activities onthe main and regional road network;

(v) be, as much as feasible and as soon as possible, in charge of contract preparation,implementation and supervision, for at least those activities to be funded fromBank-administered grants and from the Kosovo budget;

(vi) be responsible for maintenance/rehabilitation and new construction qualitycontrols and appropriateness of technical standards;

(vii) involve stakeholders, such as road users and less favored collectivities, whendrafting road/bridge maintenance and rehabilitation, as well as new constructionprograms;

(viii) carry out traffic counts, and monitor heavy vehicle axle weights, by organizingweight actions to preserve the structure of the road network;

(ix) set-up and maintain a comprehensive road condition inventory database;

(x) on the basis of traffic counts and road condition, prepare on the basis of economiccriteria and in consultation with stakeholders, annual and longer-term plans formaintenance and rehabilitation;

(xi) through DoT, propose and discuss with UNMIK sustainable road maintenancefunding mechanisms (e.g. road user charges, including possibly introduction of aspecific fee on fuel), as well as related implementation procedures;

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(xii) participate as necessary in the implementation and operation of the agreed roadmaintenance funding mechanisms, and management of collected funds; and

(xiii) participate to the elaboration and implementation of traffic management and roadsafety policies.

4. Recognizing the present weakness of DoR, it was agreed that, in a first phase, thescarce human and financial resources available should be focused on points (i) to (v) asdefined in Paragraph 3 above. Finally, it is understood that DoR will also require externalsupport in order to carry out activities mentioned in points (vi) to (xiii).

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ENVIRONMENTAL MANAGEMENT PLAN Annex 12KOSOVO URGENT ROAD PROJECT

A. MITIGATION PLAN

Cost Institutional Responsibility Comments(e.g. secondary

impacts)

Phase Issue Mitigating Measure Install Operate Install Operate

Construction Mateial Supplv Material Supply(a) Asphalt Mixing Plant (a) Material to be supplied NA NA (a) Asphalt Plant (a) Asphalt Plant

-dust from equipment meeting-worker health/safety international environmental

standards

Material Transvort Material Tran3o (a) Minimal (a) Minimal (a) Truck (a) Truck (a), and (b)(a) Asphalt (a) Truck load covered or wet operator operator to be specified in

-dust/fumes bid documents(b) Traffic Management (b) Haul material at off peak (b) NA (b) Minimal (b) Truck (b) Truck

-noise and vehicular traffic hours operator operatorexhaust, road Use routes to minimizecongestion major traffic sites

Construction Site Construction Site(a) Noise (a) Limit activities to (a) NA (a) NA (a) Construction (a) Construction

reasonable hours (not Contractor Contractorbetween 11 PM and 9 AM

(b) Dust (b) Water construction site (b) Minor (b) Minor (b) Construction (b) Constructionand materials storage sites Contractor Contractor (a), (b), (c), (d), (e)as appropriate to be specified in

(c) Traffic Disruption (c) Appropriate measures to (c) Minor (c) Minor (c) Construction (c) Construction bid documents(during construction redirect traffic that are Contractor Contractoractivity) easily seen or easy to

follow(d) Vehicular/Pedestrian (d) Appropriate lighting and (d) Minor (d) Minor (d) Construction (d) Construction

Safety well defined safety signs Contractor Contractor(off hours when there isno construction activity)

(e) Water Pollution from (e) Cover material storage areas (e) Minor (e) Minor (e) Construction (e) ConstructionImproper Materials Construct channels to direct Contractor ContractorStorage/Management runoff to sewage system or

appropriate treatmnentfacility

Operation Maintenance of Maintenance of RehabilitatedRehabilitated Road Road(a) Noise (a) Limit activities to (a) NA (a) Minimal DoR DoR with

reasonable hours (not consultantbetween I1I PM and 9 AMor as agreed

4-I0"

B. MONITORING PLAN

Cost Institutional______________ ________R_ ~ aRe nsibility

Phase What is to be Where How When Why Install Operate Install Operate

monitored Is the parameter Is the Is the parameter toto be monitoredl parameter to be be monitored

type of monitoredmonitoringequipment

ConstructMaterial Supoly(a) Asphalt Plant (a) Environm!!ntal (a) NA (a) DoR review (a) Before work Assure plant (a) NA (a) NA (a) Plant (a) Plant

standard of begins compliance with Operator Operatorequipment internationally

acceptedMaterial (a) Truck load (a) Job site (a) DoR (a) After work environment, health (a) NA (a) Small (a) NA (a) GRDTransport covered or wet (b) See (a) supervision starts-several and safety Regional(a) Asphalt (b) Hours and unannounced requirements Maintenance(b) Traffic routes selected inspections DepartmentManagement (b) See (a) (b) See (a) (b) See (a) (b) Small (b) See (a) (b) See (a)

Construction Site (a) Noise levels (a) At site or (a) Observation (a) When locals(a) Noise nearest homes complain (a) NA (a) Minor (a) NA (a) DoR with

consultant

(b) Air quality (b) At site (b) Observation (b) During(b) Dust (dust) material delivery (b) NA (b) Minor (b) NA (b) DoR

and construction withconsultant

(c) Traffic (c) Traffic patterns (c) At or near (c) Observation (c) Once/week at (c) NA (c) Minor (c) NA (c) DoR withDisruption site peak and non consultant(during peak periodsconstruction)

(d) Water (d) Water quality (d) Runoff from (d) Observation (d) During (d) NA (d) Minor (d) NA (d) DoRPollution (from (primarily site or materials precipitation withImproper suspended solids) storage areas (rain, snow etc.) consultantMaterialsStorage/Management) .

Operate

Maintenance ofRehabilitatedRoad(a) Noise (a) Noise levels (a) At site or (a) Observation (a) When locals (a) NA (a) Minor (a) NA (a) DoR with

nearest homes complain consultantRoad SafetyCondition of Along highway Visual Observation One-two NA Minor NA DoR withhazard signs segment include times/year consultant

I_d in project I

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