1 - World Bank



70111RUSSIAN FEDERATIONVolgograd OblastReview of Feasibility Study of a Proposed By-Pass around the City of VolgogradMarch 2009Final Report (Phase 1)Reimbursable Technical AssistanceEUROPE AND CENTRAL ASIASUSTAINABLE DEVELOPMENT DEPARTMENT (ECSSD)Document of the World BankTable of Contents TOC \o "1-3" \h \z \u 1.Introduction PAGEREF _Toc225744402 \h 141.1Background PAGEREF _Toc225744403 \h 141.2Scope of Advisory Services PAGEREF _Toc225744404 \h 141.3Comments on the Objectives of the Existing Feasibility Study PAGEREF _Toc225744405 \h 141.4General Comments on the Existing Feasibility Report Structure and Content PAGEREF _Toc225744406 \h 151.5Proposed Enhanced Feasibility Study Outline PAGEREF _Toc225744407 \h 161.6Proposed Process for Enhancing the Feasibility Study PAGEREF _Toc225744408 \h 161.7Requirements for Investment Fund and Federal Targeted Programs PAGEREF _Toc225744409 \h 172.Review of the Regional Development Plan as a Justification for the Proposed By-Pass PAGEREF _Toc225744410 \h 192.1Justification for Considering Land Development in Conjunction with the Proposed By-Pass PAGEREF _Toc225744411 \h 192.2Land Development Benefits to the Oblast PAGEREF _Toc225744412 \h 192.3Private and Public Sector Commitments PAGEREF _Toc225744413 \h 192.4Incentives to the Private Sector PAGEREF _Toc225744414 \h 212.5Implications of Charging Tolls on Spurring Land Development PAGEREF _Toc225744415 \h 212.6Additional Traffic Generation PAGEREF _Toc225744416 \h 212.7Follow-up Activities PAGEREF _Toc225744417 \h 213.ECONOMIC ANALYSIS AND OPTIONS PAGEREF _Toc225744418 \h 223.1Rationale for Assessing By-Pass Options PAGEREF _Toc225744419 \h 223.2Identification of Other Options PAGEREF _Toc225744420 \h 223.3Options to Be Tested PAGEREF _Toc225744421 \h 233.4Assessment of the By-pass in Conjunction with the Proposed Moscow to Volgograd Motorway PAGEREF _Toc225744422 \h 243.5Assessment of the Options PAGEREF _Toc225744423 \h 253.6Preliminary Design and Cost Estimates Needed for the Proposed Options PAGEREF _Toc225744424 \h 263.7 Economic Evaluation of the Proposed Volgograd By-Pass Options PAGEREF _Toc225744425 \h 263.8Assessment Summary and Selection of the Preferred Options (or Options) PAGEREF _Toc225744426 \h 28Follow-up Activities PAGEREF _Toc225744427 \h 283.10Illustrative Multi-Criteria Assessment Matrix PAGEREF _Toc225744428 \h 284.Current Traffic Conditions, Traffic Forecasts, and Traffic assignments PAGEREF _Toc225744429 \h 304.1Existing Traffic Conditions and Impact Assessment PAGEREF _Toc225744430 \h 304.2Traffic Forecasts and Impact Assessment PAGEREF _Toc225744431 \h 324.3Traffic Assignments PAGEREF _Toc225744432 \h 324.4Follow-up Activities PAGEREF _Toc225744433 \h 334.5Detailed Assessment of the Traffic Assignment Model PAGEREF _Toc225744434 \h 335. Technical Solution and Toll Rate Assessment PAGEREF _Toc225744435 \h 345.1Introduction PAGEREF _Toc225744436 \h 345.2Traffic Analysis and Geometric Design PAGEREF _Toc225744437 \h 355.3Junctions, other structures and road safety features PAGEREF _Toc225744438 \h 365.4Pavement Design PAGEREF _Toc225744439 \h 376.CONSTRUCTION AND MAINTENANCE COST ESTIMATES PAGEREF _Toc225744440 \h 387.Introducing PPP and Implication for the Oblast PAGEREF _Toc225744441 \h 428.Review of PPP Models applicable to the by-pass PAGEREF _Toc225744442 \h 468.1Model Options under Concession Law PAGEREF _Toc225744443 \h 468.2Demand Risk Considerations in the Feasibility Study PAGEREF _Toc225744444 \h 468.3Demand Risk Mitigation (Guarantee Options) PAGEREF _Toc225744445 \h 478.4Most Viable PPP Model Option PAGEREF _Toc225744446 \h 489.REVIEW OF FINANCIAL ANALYSIS PAGEREF _Toc225744447 \h 509.2The Role of Financial Analysis PAGEREF _Toc225744448 \h 509.3Review of Feasibility Study Assumptions. PAGEREF _Toc225744449 \h 509.4Review of Conclusions of the Financial Model (Methodology) PAGEREF _Toc225744450 \h 549.9Review of Sensitivity Analysis PAGEREF _Toc225744451 \h 6310Financing options and affordability of proposed option PAGEREF _Toc225744452 \h 6410.1Sources of Funding PAGEREF _Toc225744453 \h 6410.2Affordability Analysis PAGEREF _Toc225744454 \h 6511.Review of Risk Allocation. PAGEREF _Toc225744455 \h 6712.Environmental Assessment PAGEREF _Toc225744456 \h 6913.Social Assessment PAGEREF _Toc225744457 \h 7614.Cultural Heritage Assessment PAGEREF _Toc225744458 \h 8014.1Context PAGEREF _Toc225744459 \h 8014.2Rationale PAGEREF _Toc225744460 \h 8014.3Framework guidelines and elements PAGEREF _Toc225744461 \h 8115.Annexes PAGEREF _Toc225744462 \h 83ANNEX 1: Investment Fund of the Russian Federation PAGEREF _Toc225744463 \h 83ANNEX 2:Basic Assumptions for Economic Analysis PAGEREF _Toc225744464 \h 88ANNEX 3:Framework for Social Assessment PAGEREF _Toc225744465 \h 89ANNEX 4: Framework for Resettlement and Compensation PAGEREF _Toc225744466 \h 91Executive SummaryMain Message to the Volgograd OblastThe proposed by-pass around the City of Volgograd is recognized by the Oblast as a strategic investment not only to improve transit traffic through the city, but also to support the Oblast territorial development and economic growth. The proposed road would link five main Federal highways, relieve through-traffic in the City of Volgograd, and enable the relocation and development of several companies and economic activities. The Oblast has put significant effort in this concept and is in the process of preparing a Feasibility Study with the objective of requesting Federal funding and implementing the by-pass as a Public-Private Partnership (PPP).Under the terms of the agreement signed on December 18, 2008 with the Oblast, the World Bank has reviewed the existing Feasibility Study prepared by local consultants with a view to ensuring that it will be of sufficient quality to (i) present a strong case to the Investment Fund and Federal Targeted Program for financial assistance, and (ii) determine the best possible arrangements for implementing the project as a PPP. The objective of the assignment is to enhance the prospects that the Oblast will be able to implement a solution that will support its development objectives and remain affordable at the same time. We have based our review on our experience and best practice, as well as specific requirements of the Investment Fund and other Federal Funds. As a result, we are not commenting on any ToR established between companies or methodology for feasibility studies available in Russia. The work undertaken in the past few months by the Bank team has been done with the full collaboration of the Oblast.Viability of the Proposed By Pass and Potential for Private ParticipationThe World Bank team is firmly convinced that a by-pass around Volgograd is justified. Moreover the basis for this justification can only increase over time as motor vehicle traffic increases within the Volgograd metropolitan area and on the major national and provincial highways traversing Volgograd. The need for a by-pass can be demonstrated in terms of significant travel time delays to transiting traffic on the national and oblast highway network and on the congestion that this transiting traffic causes on the Volgograd city street system. These traffic delays and congestion conditions are having an adverse impact on economic impact on both the national and local economy. Beyond these adverse conditions, the Volgograd Oblast administration has made a convincing case that a by-pass also would serve to open up outlying areas of the metropolitan area for urban development, particularly since the north-south oriented road network in the city is very limited. In summary the case for a by-pass around Volgograd city is substantial and the task is to determine the most appropriate solution taking into account a range of practical factors. While a by-pass is needed, the World Bank team does not believe that the currently proposed design solution is viable given current economic and traffic conditions. Among the reasons for this conclusion are the following. The proposed project is unlikely to attract private sector investment, especially from lenders (banks), due to (i) the lack of financial sustainability even if 75% of the capital expenditure is obtained from Federal Funds and (ii) a preliminary risk allocation which is too much in favor of the Oblast. Correcting for these deficiencies would require additional financial contribution from the Oblast as the contribution from other sources of funds is limited. In addition, the current situation for PPP is that long-term private or commercial debt, which is the main source of financing of PPP projects, has become very scarce and will likely become more expensive. This effectively eliminates for at least the near term future private sector investment as a primary candidate source of funding for a project of this size. The Oblast at present has very limited borrowing capability as it has committed funds for other projects and investments and therefore cannot at the present time contribute significantly to the proposed project without a major reallocation of funding commitments and/or access to increased sources of revenue. Our review concluded that, even if 75% of the capital cost is obtained from Federal sources, the Oblast will need to provide significant financial contribution during operations under a PPP agreement. New taxes and user charges have limitations in terms of generating additional revenue, and if adopted will likely restrict regional development, and will be seen as risk by the private sector.Taking into account the estimated cost of the by-pass and projected traffic volumes on this roadway, the proposed project would yield only very modest economic rates of return (in the range of 3-5%) which does not bode well for seeking Federal assistance given competing alternative projects seeking Government investment. Alternative less costly by-pass designs should be considered and prepared. The World Bank team believes that there are less costly design options for a Volgograd by-pass that could address near term needs while at the same time keeping open longer term best-solution options. A less expensive solution would also make the project more attractive to the private sector. While developing alternative by-pass schemes is beyond the scope of the current assignment, it is clear that by reducing the cost of the proposed by-pass (i) the economic rate of return of the project would substantially increase and (ii) it would become more attractive to the private sector, should the current financial crisis improve. Among the alternative options that have been proposed in this report the World Bank team recommends in particular serious consideration of Option C which is to build the by-pass in the currently proposed alignment to a substantially reduced standard by reducing the number of lanes, eliminating some or all grade separations and other cost savings measures. This lower cost option could be built in a manner that would permit sequentially upgrading as traffic volumes increase and additional funding becomes available. Other options involving the 3rd longitudinal and parts of the currently proposed by-pass also appear to be worth serious consideration.The case for Federal assistance based on the role of the by-pass within the national highway network should be investigated. It is important to recognize that a major reason for the by-pass is to accommodate long distance transit travel along the major M-6 highway corridor linking Moscow and Astrakhan. Volgograd is the largest city along this route and represents the most significant traffic bottleneck on the entire M-6 route. Given this rationale the case for Federal funding appears very reasonable as the by-pass is principally an important part of this major national highway. In many countries this major highway would be 100% funded by the central government. The case for federal funding could be made substantially stronger by proposing a much less costly by pass as described above. The case for tolling the by-pass should be examined in relation to its impact on the Oblast regional development plan. The Bank team understands that the use of tolls for the proposed by-pass would contribute to making it financially viable for the Oblast. The by-pass is seen by the Oblast as a way to open up areas of metropolitan Volgograd for urban land development. However, tolling the by-pass would certainly have the effect of discouraging some use of the by-pass for this purpose. While the assessment of any toll-policy recommendation is outside the scope of the current agreement with the World Bank, the team strongly recommend to incorporate this analysis when investigating alternative solutions.Review of the Existing Feasibility StudyAs summarized above, the existing Feasibility Study and the additional information received to date are not convincing enough to (i) justify the proposed by-pass around Volgograd as economically justified and financially viable, (ii) present a strong case for securing Federal Funding, and (iii) attract private investment under a PPP arrangement. More specifically, significant weaknesses have been identified in the following areas:Economic Justification: Although a by-pass around Volgograd appears to be warranted, the analysis has not established that other solutions (incl. less expensive ones) could not achieve the same objectives. An economic assessment of the proposed by-pass and alternative solutions would have strengthened the argument that this particular solution is needed. This assessment is even more relevant in the current global financial crisis, which could reduce the availability of Federal and private sector funds. Depth of Analysis in the existing Feasibility Study: Some key analysis, such as traffic forecasts and cost estimates, were not fully supported and/or lacked consistency, and are the back-bone of most of the subsequent analysis in the existing Feasibility Study. Financial Analysis and Affordability: The preliminary review of the financial analysis carried out by the Bank team found that much more public funding might be required to make the project viable as a PPP, including during operations. The proposed by-pass is likely to require financial contribution from the Volgograd Oblast (even if Federal Funds are obtained and if the project is implemented as a PPP), and it was not shown in the existing Feasibility Study that the Oblast would be required to make financial contributions to the project. An affordability analysis should have been undertaken, assessing (i) the project’s potential for obtaining additional sources of revenue (incl. land transaction and taxes), and (ii) the financial implication of implementing this project for the Volgograd Oblast.The Bank team considers that more could have been done not only to justify the by-pass but also to consider alternative solutions and determine the project’s affordability for the Oblast, based on more realistic assumptions (in addition to official assumptions). Although the team understands that the use of official figures was necessary to qualify for Federal support, its view is that the Oblast will have ultimately to pay for any difference between official and actual assumptions: a higher than expected interest rate or inflation rate means that the bid price of the private sector will be higher than what was initially considered. However, the Bank team believes that clear and detailed Terms of Reference between the Oblast and the consultants,, combined with strong supervision and review of intermediate results, could have improved significantly the quality of the feasibility study.We have based our review on our experience and observed best practice, as well as specific requirements of the Investment Fund and other Federal Funds. As a result, we are not commenting on any ToR established between companies or methodology for feasibility studies available in Russia. We consider that the purpose of the assignment is not to determine if a specific firm did a correct job but rather to ensure that the study determined if the proposed solution is viable and would meet the requirement of the Federal Funds.Proposed Next StepsThe World Bank team suggests that a two step approach might be best to prepare a feasibility study suitable for seeking Federal Government assistance in financing a by-pass around Volgograd. To enhance acceptance by Federal officials the World Bank team suggests that a short report outlining a less costly by-pass solution (with some options) could be prepared along with a justification for federal funding. This would be developed by the Bank team in cooperation with the Volgograd Oblast Administration with modest input from the Oblast consultants. We expect that this might require about 1-2 person month of World Bank team input. Assuming a positive response from the Federal representatives, a second step involving a more detailed feasibility study might then be conducted with consultants hired by the Oblast but with some direction provided by the World Bank team, working in close cooperation with the Oblast. The subsequent full feasibility study documentation would be prepared to (i) improve the overall structure and coherence of all sections of the existing feasibility study, (ii) change key assumptions and methodology in several sections, (iii) complete the analysis in specific sections to strengthen the argument (such as traffic forecasts), (iv) develop analysis not done or superficially covered (such as an economic analysis, affordability analysis or cultural heritage impact assessment). The Bank team has prepared Terms of reference (ToR) for this additional work, which are provided in the annexes to this report. Although the Bank team believes that the consultants already involved in the preparation of the Feasibility Study could complete the work based on the proposed ToR, successful completion of the additional work will require significant coordination and assistance from the Bank team to ensure quality of the final product. The Bank team has received comments from the Volgograd Oblast on the content of this report and has updated the report. We remain available for any additional clarification and we hope that the final version of the report addresses all questions/concerns expressed by the Oblast. The World Bank TeamDetailed Summary of the Feasibility Study reviewGeneral Overview of the Feasibility StudyAs indicated above, the World Bank team has reviewed the existing Feasibility Study and the additional information provided by the Oblast. Overall, it is recognized that a significant amount of work has been put into this study but the documentation is not comprehensive enough to justify the proposed project on technical, economic, and financial grounds. Moreover, in most sections of the Feasibility Study report, the analysis done will need to be reworked, either by changing assumptions or even the methodology. Finally, the overall structure of the Feasibility Study should be improved in order to be comprehensive, including a presentation of all pertinent materials.Given the work already done, it is recommended that the Oblast should agree with the consultants on the basic outline of the final version of the enhanced Feasibility Study. It is also recommended that the main body of the enhanced Feasibility Study should be prepared as a single clear and coherent document rather than a compilation of several documents. The ToR for completing each recommended chapter of the existing Feasibility Study are presented in the annexes to this document, and are based on the assessment of the Feasibility Study.Regional Development PlanThe existing Feasibility Study did not make a strong case for the proposed by-pass in the context of the regional development plan of the Oblast. A better argument could have been made to strengthen the case for financial support from Federal Funds, by showing how the road by-pass would contribute to achieving the broader development objectives. Moreover, a stronger justification would have made the project more attractive to the private sector, by showing for example that the expected traffic forecasts are based on sound technical analyses.The section on Regional Development Plan in this report makes specific recommendations on how the proposed by-pass could be justified in the context of the Oblast Regional Development Plan. More specifically, the Feasibility Study could have been more precise in specifying the level of commitment expected from the public and private sector. Finally, the Feasibility Study could have described how the proposed Regional Development plan would increase traffic flows on the proposed by-pass and main road corridors.Traffic AssessmentAlthough a significant amount of traffic data has been provided to the Bank team, the presentation of this information in the existing Feasibility Study is not comprehensive and does not fully support the traffic forecasts. Such forecasts form the basis for the technical design, economic and financial viability of the proposed project and should be properly done to support any conclusion of the report. A more comprehensive traffic forecast section should have included the following: a) review of existing traffic conditions to establish the case for a by-pass, (b) traffic projections, including well documented assumptions and description of the methodology used for preparing these projections, and (c) traffic assignments for each of the proposed by-pass options. Careful and thorough documentation of this aspect of the Feasibility Study is absolutely critical to establish the credibility and accuracy of the study outcome. Option Identification and AnalysisThe current Feasibility Study does not properly explore possible design and alignment options. Even if some alternative options have been considered by the Oblast, a comprehensive analysis of possible alternatives would make a much stronger case for justifying the selected solution as economically viable but requiring Federal support to make it financially viable. The option analysis would also provide the Oblast with more affordable options, which is essential given the potential significant financial impact of the proposed solution (detailed in the report) for Volgograd Oblast. A list of alternative options to meet the development objectives of the Oblast is provided in this report. These options should be tested in the updated Feasibility Study. The Bank team is proposing a multi-criteria analysis which would use quantitative and qualitative criteria to identify viable options. The list of criteria could include, for example, the following: economic impact, impact on Oblast budget, potential for generating additional revenue and traffic relief.Technical SolutionThe Feasibility Study is relatively complete in relation to technical design of the by-pass option as set out in the current Feasibility Study, but the choice of technical solution should be further elaborated. Given the uncertainty of the traffic forecast, the choice of technical solution (Category 1b) cannot be confirmed by this review for the proposed by-pass in its entirety. The clarifications received from the consultants confirm the choice of technical category 1b for three out of five sections; with the other two sections falling into technical category II under the guidelines. Some explanation will be required, however, why the feasibility study recommends these two category II sections for the higher technical category 1b. The design of junctions, other structures and road safety features appear reasonable, with a few exceptions detailed in the report. Construction and Maintenance Cost EstimatesThe current Feasibility Study does not provide the requisite justification for the costs of the project. The costs for the northern section have been provided without the costing of major road items with a breakdown of estimated quantities. Some inconsistencies have also been noted in the construction cost estimates in the analysis. It would be advisable to have one section of the Feasibility Study report detailing the construction and maintenance costs for the whole by-pass. Clarifications provided by the consultant indicate a total cost of the by-pass at some 40 billion rubles, but do not match with the previous estimates for some 42 billion in one section; and the 53.7 billion amount used in the cost-effectiveness section of the Feasibility Study. In addition, the review of cost breakdown against international comparisons indicates that construction costs are high, which could be possible but remains unlikely given the flat terrain of the region. Full justification of the costs by providing precedent (similar construction contracts comparisons) is a critical component in generating higher confidence of the construction cost estimates. The inconsistencies in the maintenance costs provided in different sections, as detailed in this review also need to be clarified.The pavement design proposal appears reasonable, given the projected traffic forecast. The toll rate for passenger cars is comparable with the rates in other middle income countries. However, the review found that the toll rate for heavy trucks is relatively low and it is not clear why the rate for buses is higher than that for heavy goods vehicles. The toll structure and level is very important as it impacts the traffic and financial viability of the solution. Explanations for the decisions and recommendations made in the Feasibility Study are necessary to make it a more robust document.Introducing PPP and Implications for the OblastPPP can potentially provide investment to the proposed by-pass but is very complex to develop due to the complexity of the contractual nature of the arrangement and the requirement to define most features of the investment before signing the concession agreement. PPP projects take time to develop and it is not uncommon to see procurement taking up to 24 months. PPP projects can have significant fiscal risk for the Oblast (including traffic/revenue guarantees) and therefore financial commitments have to be properly assessed. Experience from around the world has shown that several failures and delays could have been avoided with a comprehensive Feasibility Study, transparent and competitive procurement, and strong public sector institutional capacity.The current international financial crisis is likely to make PPP investment more difficult to attract and, given the lack of experience of Volgograd Oblast in PPP and toll roads, the private sector will probably consider the project extremely risky. The Oblast should therefore seriously consider (i) waiting for the market conditions to improve before starting any tendering, should it want the proposed project to be implemented as PPP, or (ii) consider alternative options to PPP, such as public financing.Financial AnalysisThe financial analysis is central to assessing if a project is viable as a PPP. It will not only determine if the project will be attractive to the private sector, but will also estimate the necessary level of public funding. The financial model that was used for the current Feasibility Study was not provided to the Bank team but given its importance, a preliminary model was developed by the Bank team to test the conclusions. A subsequent meeting in Moscow with the consultants responsible for the financial model allowed the Bank team to clarify a few assumptions but did not change the conclusions in terms of financial implication to the Oblast. The financial analysis should be redone with a different objective and set of assumptions or at least with sensitivity analysis to reflect the difference between official assumptions and those most likely to be used by the private sector. The Bank team reviewed the assumptions made (financial, economic, etc…) and concluded that although some of the financial assumptions appear reasonable, several of these assumptions, such as the level of inflation or the financing mechanism were found to be either outdated or unrealistic. However, the team understands that the use of official assumptions is necessary to qualify for Federal support. One solution could have been to use official figures for the feasibility study and incorporate the difference in value into sensitivity analysis: for example, if official inflation is 2% lower than the private sector expectation, the base case scenario could have been with the official figures and the sensitivity analysis with inflation 2% higher. In addition, the revenue assumptions are not in line with what was determined earlier in the existing Feasibility Study, resulting in what seem to be overoptimistic results. Finally, the sensitivity analysis did not assess the impact on public sector contribution and might mislead the Oblast in thinking that the private sector will accept all the traffic, toll and cost assumptions without adjusting them in their proposal, resulting in an Oblast financial contribution likely to be higher than forecasted.The Bank team developed a preliminary model to test the impact of changes in the assumptions used in the current Feasibility Study. The assumptions made by the Bank would have significant implications on the financial viability of the proposed project. The preliminary finding is that the project would not appear to be financially viable without significant additional financial support (from the Oblast or other sources), including during operation. These conclusions are fundamentally different from the conclusions of the Feasibility Study.PPP options and Risk allocationThe current Feasibility Study is realistic in terms of applicable forms of PPP, given the scope of the Federal Concession law. However, the approach to risk analysis needs to be completely reviewed, given that the principle of risk allocation has not been applied. Risk allocation is a central component in the preparation of a PPP project, and although it can be fine-tuned at a later stage, a preliminary proposal of risk allocation should have been included in the current Feasibility Study report.One of the key risks is demand risk (ie. traffic and associated revenue). The Feasibility Study implies that the traffic risk could be allocated to the private sector, but did not assess the feasibility of such assumption. Although this is certainly the preferred solution for the Oblast (if traffic is lower than expected, it is the responsibility of the concessionaire), it is unlikely that the private sector would accept such risk (even if minimum revenue guarantee is provided). Given the lack of experience of the Oblast in PPP, the size of the investment, and the perceived project risk, it is more likely that an Availability Payment mechanism would be requested by the private sector. Although it is understood that the Feasibility Study’s objective was to request Federal support, it should at least have described basic demand risk and carried out a preliminary assessment of such risk and payment mechanisms.Affordability and Financing OptionsThe issue of affordability has not been properly addressed in the Feasibility Study. The Feasibility Study simply calculates the financial contribution necessary to complement private investment and make the project viable as a PPP, without looking at sources of funding. Even at a preliminary stage, the Feasibility Study should have looked at ways to finance the project and not assume that all the public sector contribution will come from federal funds. Even if federal funds and additional sources (such as additional taxes) are secured, the project will most likely require funding from the Oblast budget. The study should have therefore undertaken a review of public expenditure of the Volgograd Oblast in the transport sector, in order to identify ways to prioritize projects to free additional resources. In addition to Federal Funds and Oblast budget, the most viable source of funding could be the increase in value of the land located near the proposed by-pass (especially close to the intersection with the Federal highways). The Oblast could capture the increase in value of publicly-owned land after construction of the by-pass or integrate it as contribution to the concession (in this case the concessionaire responsible for implementing the by-pass would develop the land). However, it is essential for this option to be viable that the Oblast refrains from selling now any piece of land, even at a premium, as this would prevent it from capturing the full benefit of the project.Environmental AssessmentEnvironmental and social considerations today are an integral part of all large scale transport infrastructure projects and are demanded and critically reviewed by the affected population as well as national and international NGOs. Major international lenders and financial institutions (IFI) have committed to the Equator Principles, which guide environmental and social conduct in project financing. Many investors consider that an environmental due diligence process, which complies with international good practice, substantially mitigates overall project risk. Risk mitigation influences public attitudes towards the project and reliability of environmental authorities, especially for construction and operational permits. The World Bank team was impressed with the amount of data collected and how it was analyzed, interpreted and presented. However, the Feasibility Study should also: (i) provide environmental information with a level of detail corresponding to the engineering design, (ii) define how the environmental framework will be used for the project, (iii) develop public awareness and participation activities that comply with best practice international policies and procedures, and (iv) assess and mitigate the broader environmental impact of the project.Social AssessmentThe most important social issues in the proposed project are resettlement and economic displacement, and consultations with the population. These issues have been adequately considered in the framework of current Russian legislation and its customary narrow interpretation. Public consultations have been held in districts with most exposure to the by-pass construction. Compensation has been assessed for temporary/permanent loss of public/private land and property. However, it is unclear how this compensation (particularly in case of public/private assets that is not agricultural land) has been evaluated. Unfortunately, no grievance/conflict mitigation mechanism exists for disputes over the value of property. This means that these grievances may occur afterwards, increasing the risk, and thus cost, of the investment.The above-listed social issues should be separately considered in a document, which would (1) show how to make a particular list of public/private beneficiaries; (2) explain the calculation and the principle of compensation; and (3) establish a framework for a resettlement/compensation action plan, a monitoring and reporting system, and a separate grievance mechanism for out-of-court conflict resolution. A special entity/person should manage the resettlement action plan throughout the life of the project. Public consultations should include information campaigns, and feedback mechanisms for the communication between the affected population, institutional stakeholders, the Volgograd administration, and the Contractor. If the Oblast of Volgograd raises the treatment of social issues to international standards, the project will not only be socially more viable, but it will also appear less risky for private investors. Cultural Heritage AssessmentThe Volgograd by-pass will likely overlap terrain on which the Battle of Stalingrad was fought during the Second World War. Therefore, it is probable that human remains and undetonated weapons will be encountered during construction. While federal and national legislation regulates both visible and undiscovered historical and cultural heritage, the discovery of human remains could cause controversy and political tension, and thus erode investor confidence. The current Feasibility Study did not review the potentially high risks involved with cultural heritage issues. An assessment of the historic and cultural assets in the project area should identify and mitigate the potentially adverse impacts on these assets from the project. The main output would consist of a Management Plan including the likely impact area, likely impact activities, type of impact, mitigation measures for such impacts, procedures for archeological discoveries, implementation responsibilities, financial responsibilities, public information campaigns and monitoring procedures. Summary of main issues and relevance for the project Below is a summary of the identified issues, organized according to the requirements of (i) Federal Funds (such as Investment Fund), (ii) international private investors and IFI (for financing), and (iii) good practice that will ultimately benefit the project and the OblastIssues likely to impact the Oblast’s request for Federal FundsLack of coherence and systematic analysis in the existing feasibility studyNeed to strengthen analysis to meet quantitative criteria for Federal FundsWeak justification of how the proposed project would specifically support the Oblast regional development plan (incl. assessment of investment needs and broad benefit of the project)Lack of comprehensive traffic forecasts, weakening the justification of technical solution and assessment of needs for Federal FundsInconsistencies in cost estimates resulting in uncertainty on the total cost of the project, and weakening the justification for specific grant needsLack of economic assessment of alternative options, weakening the argument that there is no alternative solutionIssues likely to impact the project’s financial viability and attractiveness to investorsLack of comprehensive traffic forecasts, increasing the risk that revenue from tolls might be lower than expectedInconsistencies in cost estimates, suggesting that capital cost of the project might be different from estimationNeed to strengthen environmental, social and cultural heritage assessment and plan to align it with international standards (for IFI and commercial lenders)Lack of affordability assessment of the project, raising serious doubt that it will be financially sustainable for the OblastLack of allocation of key risks between the Oblast and private sector in a way that balances requirements for private investors and benefit for the Oblast (traffic risk should be carefully analyzed, including the choice between Minimum Revenue Guarantee and Availability Payments) Weak financial analysis, raising doubt on the ability of the Oblast to provide the level of financial contribution (from all sources) to make this project attractive to investors Additional recommendations that will benefit the project and the OblastNeed to strengthen environmental, social and cultural heritage assessment and plan to prevent negative impact of these issues on the project, Oblast and citizens of VolgogradPublic Expenditure review to investigate options to contribute additional resources to the project and increase borrowing capacity of the OblastImplementation of additional measures to reduce congestion within the Volgograd Municipality (incl. improvement of passenger transport system, traffic management systems)Introduction BackgroundThe Volgograd Oblast hired consultants to prepare a Feasibility Study for a proposed by-pass around Volgograd city under a PPP arrangement. The feasibility study report was prepared with the objectives of securing both Federal Government grant funding and private sector financing of the proposed by-pass. The World Bank team has been requested to assist in this process principally by: (a) reviewing the existing Feasibility Study and providing detailed guidance to the Volgograd Oblast Administration in finalizing this study, and (b) providing guidance in implementing the preferred solution as a PPP project, as might be feasible.Scope of Advisory ServicesAn agreement for technical collaboration was signed on December 18, 2008 between the Volgograd Oblast and the World Bank. Under the terms of this agreement, the World Bank assistance in relation to this project is organized in three phases.Phase 1: Initial Assessment of the Feasibility Study and Recommendations for Improvement (including identification of financing options)Phase 2: Guidance on updating the Feasibility Study and requesting financial support from identified investors/lenders Phase 3: Assistance in Implementing the Proposed Solution (including detailed preparation of a PPP)This report represents the main output for Phase 1. Upon completion of this phase the terms of reference and cost of Phase 2 will be assessed and the Oblast and the World Bank will determine whether to proceed with Phase 2. Similarly, and assuming that the proposed PPP option is found to be feasible during Phase 2, detailed terms of reference and costs will be prepared during and a decision to move forward with Phase 3 will be made jointly by the Oblast and the Bank. This report presents the findings of the World Bank team in reviewing the existing Feasibility Study and other documentation received to date. The report also presents suggestions for improving the overall Feasibility Study documentation, including the report structure and content, and the process for collaboration in refining the Feasibility Study content. The report does not pre-suppose that Phase 2 will be implemented, and the recommendations are based on the review by the Bank team of the available documents and perception of the ments on the Objectives of the Existing Feasibility StudyThe following observations are based on the first World Bank mission to Volgograd in September 2008, after which an Aide-Memoire was prepared and sent to the Oblast. The review of the Feasibility Study is based on the following fundamental assumptions regarding the objectives of the existing Feasibility Study.The primary objective of the Feasibility Study is to determine the most feasible means to improve conditions for through transit travel around Volgograd city to reduce travel time and operating costs of this transiting traffic. The secondary objectives are to reduce traffic congestion within the Volgograd municipality and to open up additional land for urban development. The conclusion of the first World Bank mission was that a by-pass would help in addressing congestion within the Volgograd municipality. However, the Bank team believes that this roadway improvement will not be sufficient to have a major impact (with the possible exception in southern Volgograd) unless several additional complimentary measures are undertaken within Volgograd city. These measures include improvements to the passenger transport system, improved traffic management, and additional road network improvements. Similarly, opening up additional land for urban development will require substantial additional expenditures beyond that of a by-pass road including additional road network improvements, extension of utilities and passenger transport services, as well as substantial commitments by the private sector. Therefore, the team preparing this report has been assuming, as mentioned in the Aide-Memoire, that these secondary objectives would be considered but only as by-products of the primary Feasibility Study objective.General Comments on the Existing Feasibility Report Structure and ContentIt is recognized that the current Feasibility Study is a work in progress and that it did not include all information available. The Bank team requested additional information from the Oblast and has prepared this review based on the documents received, although some of the information/analysis requested has not been received. As a result, the comments on the adequacy of the current Feasibility Study might be occasionally partial, although all efforts have been made to limit this situation to the minimum. While a substantial amount of work has been undertaken in preparing the existing Feasibility Study report, the structure and content of the documentation as presented is not to a standard that would be internationally recognized as suitable for justifying such a major road investment. The overall structure of the Feasibility Study documentation is not conducive to a clear and coherent story line. The clarity of the document is important to show that the study has been prepared in a professional way and can influence the credibility of the analysis. It is therefore recommended that the existing Feasibility Study should be redrafted in a logical sequence that builds the case for a proposed by-pass. Moreover, the content of the presentation in some cases will need to be substantially strengthened to convincingly make the case. As is described later in this report, the Bank team suggests in particular that the Feasibility Study report should be improved in the following way:More information should be provided on existing travel conditions and the current reasons for justifying a by-pass around Volgograd cityClear explanation should be given of the assumptions and methodology used for the traffic forecastsA thorough and systematic review of several proposed possible by-pass options should be undertaken other than the single by-pass option as currently presented in the Feasibility Study More specific information should be presented on actual commitments of the private and public sector to advance land development within the by-pass impact zoneA more comprehensive discussion should be given of PPPs (incl. institutional review, value of implementing the project as PPP, affordability of proposed solution for the Oblast, etc…) and other financing options.Proposed Enhanced Feasibility Study OutlineBased on the above comments, it is recommended that the following outline be used for the final version of the Feasibility Study. Terms of reference for completing each chapter of the Feasibility Study as outlined in Box 1 are presented in the annexes to this report and are based on the detailed assessments of the Feasibility Study as set out in the following sections of this report. Box 1.1: Proposed Outline of the Enhanced Feasibility StudyExecutive Summary Introduction & Study ObjectivesExisting Traffic Conditions and the Need for a By-PassLand Development Proposals in Conjunction with the Proposed By-pass and Regional Development PlanIdentification and Descriptions of by-Pass OptionsIntroduction for PPP and Review of the PPP FrameworkTraffic Forecast and Assignments to the Selected By-Pass OptionsAssessment of the By-Pass Options and Selection of the Preferred OptionTechnical Solution for Road Tolling and Toll Rate Assessment Capital and Operating Expenditures for Preferred By-Pass OptionPPP Assessment of the Proposed option Environmental, Social and Cultural Impact Assessments of the Preferred By-Pass OptionSummary of Feasibility Study and Recommended next stepsAnnexes Proposed Process for Enhancing the Feasibility StudyAs indicated in the proposal, the Bank team has (a) reviewed and commented on the current Feasibility Study, and (b) has made detailed recommendations on how the feasibility study can be improved. The team could also provide specialized inputs to the Feasibility Study including, in particular, recommendations on public-private-partnership arrangements. However, it is strongly recommended that the responsibility for preparing the final feasibility report rest with the lead consulting firm hired by the Volgograd Oblast. To ensure that the final Feasibility Study document(s) will be of a high standard, it will be important for the World Bank team to work in close consultation with the lead consulting firm hired by the Oblast as well as with Oblast representatives (the client). For specific assignments, the current consultants might not be able to complete the work and the use of international consultants might be needed. Enhancing the Feasibility Study will have financial implications for the Oblasts, but they should be taken in light of the importance of the investment. More specifically, the principal output of this phase I activity consists of a detailed set of recommendations on additional work the lead consulting firm will need to undertake to improve the existing Feasibility Study. Once these recommendations are reviewed by the Volgograd Oblast and the lead consulting firm, it will be important to reach agreement among all parties on the intermediate and final study outputs and a timetable for these outputs. During phase 2, the Bank team will review the intermediate and final outputs and will communicate in a timely fashion these reviews. Subject to approval of the client, the consultant will incorporate the Bank team’s comments in the Feasibility Study document(s). The team believes that this approach will be the most cost and time efficient for the Oblast.For this process to work smoothly, the Bank team would require very close cooperation with the lead consulting firm through frequent interactions and reviews of the study outputs as they are being prepared. 1.7Requirements for Investment Fund and Federal Targeted ProgramsAssessment of the Feasibility StudyThe Volgograd Oblast is planning to request Federal Funds in order to finance the proposed by-pass. These funds have very specified set of quantitative and qualitative criteria, which need to be fulfilled to receive financing contribution. This section summarizes the requirement and presents the implication for the project. A more detailed description of the requirements is presented in Annex 1.However, the Oblast is also considering implementing the project as a PPP, which would bring international investors, including International Financial Institutions (IFI, such as EBRD or IFC). In addition to seeking a financially sustainable project, IFIs tend to have specific requirement in terms of social, environmental and cultural heritage issues. These issues have to be addressed as well by the Feasibility Study.Finally, the Bank team believes that the proposed project should meet international standards of best practices. Applying international best practices will not only result in a more sustainable project but would help the Oblast meet several qualitative criteria of the Federal Funds. The economic analysis recommended by the Bank team is not strictly speaking required by the Federal Funds but would make stronger its case. For example, a solid economic analysis of the different options would justify the need to demonstrate “substantial lack of substitute products” (see qualitative criteria for Federal Budgetary Funds).The Feasibility Study made an attempt to justify that the proposed by-pass would meet the criteria set for the Investment Fund and Federal Budgetary Funds. However, this exercise has not been done in a systematic way and results in a weak justification. Moreover, some required analysis, such as the economic and budgetary efficiency appears not to have been undertaken. Although the Feasibility Study considered that the project would be implemented as PPP, it did not incorporate most of the analysis that would be expected to secure interest from private investors and IFI. Finally, as shown in subsequent sections, the Feasibility Study is missing key analysis that would either support the qualitative criteria or ensure the sustainability of the project (including the impact on the Oblast’s budget).Summary of Federal Funds requirementsSome key implication for the Investment Fund and Federal Budgetary Funds are as follows:Investment Fund (IF)Although IF allows for investment/concession projects and projects of federal/regional significance, they should be implemented as PPP. Investors are expected to contribute at least 25% for regional projects and 50% for federal projects.The regional budgets are expected to provide a share of co-financing for implementation of regional projects supported by the IF. For Volgograd Oblast, the Ministry of Regional Development put this share as 24%.All projects are expected to meet the following quantitative criteriaFinancial efficiency: met if NPV is negative without IF support and becomes positive with IF supportBudgetary efficiency: met if ratio of discounted sum of direct and indirect tax payments to Federal budget and savings (over 10 years) to the amount of the planned budgetary allocation from the IF is equal or higher than 1Economic efficiency: met if the ratio of direct and indirect contribution of the project to the (regional) GEP over a period of 10 years is higher than 0.01%Any project claiming IF financing shall be supported by a positive opinion of an investment consultant reflecting the projects’ compliance with the qualitative and quantitative eligibility criteriaFederal Budgetary FundsFederal Budgetary Funds have a set of qualitative and quantitative criteriaQualitative criteria include: (i) substantial lack of substitute products, (ii) justification of a need for construction of a capital construction object under the investment project, and (iii) favorable conclusion of the State Expertise on the design and project documentation and the results of site investigations for capital construction objects;The precise criteria for the Federal Targeted Program have not yet been approved.Implication for the proposed by-passBased on the information above, the implication for the proposed by-pass are the following:An economic evaluation of alternative options would likely be needed to justify the need for the proposed by-pass;The Feasibility Study should clearly state and demonstrate that the proposed project meets the financial efficiency, economic efficiency and budget efficiency criteria;Even if Investment Grant is obtained from the Investment Fund, the Oblast will need to provide co-financing, which has not been assessed in the Feasibility Study;It is not possible at this stage to define how the Feasibility Study should be written to fulfill the requirement for the Federal Targeted Funds;A final step following the completion of the Feasibility Study would be to have an independent review confirming that all the selection criteria have been met.2.Review of the Regional Development Plan as a Justification for the Proposed By-Pass2.1Justification for Considering Land Development in Conjunction with the Proposed By-PassThe Volgograd Oblast has introduced land development as a major factor in justifying investment in the by-pass. This is a sensible approach as road development and land development often occur together, especially when new roads traverse open lands near urbanized areas. This approach also clarifies the regional development plan and corresponding investment programs for the metropolitan Volgograd region. It will also be easier to secure Federal grant funding, for the proposed by-pass, which is conditional on substantial private sector investment While the World Bank team concurs with the approach, the land development section of the Feasibility Study does not convincingly support the argument for a by-pass. This could be accomplished with a relatively modest amount of additional work based on the information already on hand with the Feasibility Study team. The remainder of this section presents suggestions for improving the presentation which we suggest should be included in a separate section of the revised Feasibility Study report. 2.2Land Development Benefits to the OblastThe current Feasibility Study documentation has attempted to present a case for the proposed land development that is likely to accompany the proposed by-pass. The suggested benefits include:It would open up a large land area for new developmentIt would encourage relocation of constrained (and/or undesirable) land users in Volgograd to relocate outside the city, in some cases reducing traffic congestion and pollution. It would improve the tax base of the Volgograd regionIt would create additional jobsHowever, the Feasibility Study does not present these positive outcomes (or any other positive land development features) that are to be spurred by the proposed by-pass in a concise and convincing format. Doing so would have shown the project’s strategic importance to the Federal Authorities. It would also reassure potential investors in this project (should it be implemented as PPP) that the Oblast properly assessed the need for the project and is committed to its realization. 2.3Private and Public Sector CommitmentsPrivate Sector Commitments. While possible private sector commitments to undertake new development in the by-pass impact zone have been identified, the Feasibility Study would be more convincing to the Federal Authorities if the details of these commitments, and the process for securing them, were more specifically described. More specifically, the following is suggested:List the names of the companies that have made commitments, the type and scale of the proposed investment, the likely employment level, and the estimated cost of the developmentIndicate the process that each private sector developer and the public sector will undergo in order to secure firm private sector commitment to land development in the by-pass zone. Indicate to the extent possible the precise current level of commitment of each above listed private sector developer to actually invest in the by-pass impact zone, and when. Indicate the estimated timetable for these investment to occur Describing the current commitment would likely strengthen the development plan and attract more private participation. If any private sector commitments can be mapped in proposed locations, this also would be helpful.The Feasibility Study should have described current land ownership and made a strong case for maintaining land around the by-pass under public hand (except those already under private ownership). Should the proposed by-pass be implemented, land value around the road is expected to increase significantly. The increase in land value can contribute to the financing of the project. As a result, it is important to identify the ownership of strategically located pieces of land (especially at the intersection of the proposed by-pass and the Federal roads). An important issue is to avoid early selling of land owned by the Oblast, as this might reduce benefit of the transaction to the Oblast and the subsequent financial viability of the proposed project.Public Sector Commitments. The proposed by-pass alone will not be sufficient to permit extensive land development in the by-pass impact zone. This holds even with the assumption that private sector investment will be attracted (directly in the proposed by-pass or following completion of the project). A substantial amount of public sector investment at least in roads, utilities, and public transport services will be required for the proposed land development. Beyond these commitments, additional public facilities such as administrative buildings, schools, and parks may be required. While it is understood that the consultants preparing the initial Feasibility Study might have seen it in isolation, the completion of the Feasibility Study could include a preliminary assessment of the investment required around the proposed by-pass in relation to the proposed regional development plan. More specifically, it would be helpful to estimate in the near term (five years) what public sector commitments (type and cost) are to be made in the impact zone, and what level of commitments would need to be made over the longer term (10-20 years) to permit the land development proposals to occur. If specific public sector commitments (such as new roads and land developments) can also be mapped in proposed locations, the case for the proposed by-pass would be strengthened. This information could be available in an existing General masterplan for the Volgograd City.2.4Incentives to the Private SectorIncentives to Land Developers. Beyond public sector commitments for supporting roads and utilities, there may be additional incentives to entice private sector developers to either relocate to the by-pass impact zone (such as industries presently located on the Volga River waterfront) or to develop new land uses in this area. One of these incentives might be short or medium term tax breaks or other monetary incentives. Also, any non-monetary incentives that are anticipated could be documented here. Land Development Incentives for the Private Sector Road Concessionaire. The existing Feasibility Study documentation indicates that a high percentage of the land in the vicinity of the by-pass is “state property.” This being the case, the possibility of transferring some of these lands to the selected private sector road concessionaire might be considered as part of the overall concession package. Some of this land, especially parcels at or near major interchanges with the by-pass, would have considerable market value and might be particularly interesting to potential road investors and, as a result, might encourage them to propose to cover a higher percentage of the total estimated by-pass cost. If this option is to be considered it should be documented in this section of the Feasibility Study. 2.5Implications of Charging Tolls on Spurring Land DevelopmentWhile the proposed by-pass will encourage more land development in its impact zone by virtue of high accessibility, a toll road option may be less attractive than the non-toll alternative for some proposed land uses. This section of the feasibility report should accordingly assess this land development potential for both toll and non-toll options, and which potential land uses could be most affected. 2.6Additional Traffic GenerationOnce these land developments occur, additional traffic will be generated for the by-pass and the rest of the road network. To make the by-pass more attractive, the Feasibility Study team should prepare estimates of this additional traffic on the proposed by-pass based on reasonable assumptions of the level and type of land development that will occur within the by-pass impact zone. These estimates could also be used in evaluating the alternatives to the by-pass. 2.7Follow-up ActivitiesThe World Bank team recognizes that the above suggestions for improving the land development presentation will require additional work and that some of the suggestions may not be practical. We suggest that, once this section of the report has been reviewed, the Volgograd Oblast and its principal consultant will discuss in detail the process for advancing this portion of the Feasibility Study.3.ECONOMIC ANALYSIS AND OPTIONS3.1Rationale for Assessing By-Pass OptionsThe World Bank team has reviewed the current feasibility study report which proposes a major motorway of approximately 98 km in length to by-pass Volgograd city. The primary objective of this by-pass is to facilitate transiting traffic around the city. Secondary objectives are to reduce traffic congestion in Volgograd city and to facilitate land development in open land west of Volgograd city. While acknowledging the merits of this proposal, and understanding its importance for the oblast’s development plan, an objective feasibility study needs to thoroughly review and assess alternative by-pass options. This options analysis should constitute a separate section of the feasibility study. Based on the documentation received to date, and the September 2008 field visit to Volgograd, the World Bank team concurs that a by-pass around Volgograd city appears justified. However, the current feasibility study documentation does not adequately explore possible design and alignment options. Since the Federal Infrastructure Fund requires demonstrating that the by-pass cannot be constructed without the Fund’s budget allocation, the lack of an alternatives analysis could be considered a serious omission. Alternatives to the proposed by-bass should have been considered to show that it is the most economical option and can only be implemented with Federal support. Financial constraints, including the current adverse global financial conditions, also call for exploring alternative by-pass options. The private sector under current conditions is likely to be more risk averse than normal to financing road investments. The financial model in the existing Feasibility Study predicts that even if all revenues from tolls are collected by the private sector, the public sector (most probably a combination of Federal and Oblast resources) will need to finance about 75% of the total capital cost of the proposed by-pass design. Given this large estimated public sector contribution, it is important to consider alternative by-pass options that would be less costly and would achieve most of the objectives of the Volgograd administration. It will be important, in particular, to assess other possible by-pass options if Federal Funding cannot be obtained. 3.2Identification of Other OptionsMany alternative by-pass arrangements could be tested, including different routes around Volgograd city and different design standards for each of these routes. A feasibility study should address all potentially less costly options that would achieve most of the objectives before proposing the preferred option (or options). The proposed options set out below rely on one or more of the following criteria: (a) Greater use of existing road infrastructure, (b) Alternative by-pass options already proposed, (c) Constructing only part of the proposed by-pass, (d) Considering lower design standards for the currently preferred by-pass option, and(e) Options based on combinations of the above listed criteria.3.3Options to Be TestedThe following specific by-pass options are suggested by the World Bank team to be tested for feasibility. This will require traffic assignments, cost estimates, a map showing the options, and other information as set out in later in this section of the report. The proposed options to be tested are as follows: Option A: Do nothing significant to improve the existing road network with the exception of routine maintenance. Under this option no improvements to the existing road network, other than routine maintenance, would be undertaken. While a by-pass is likely to be needed, a good feasibility study should test all options against the “do-nothing” option.Option B: Build the by-pass in the alignment and to standards as proposed in the current feasibility study. This facility would be approximately 98 km in length, constructed to motorway standards with 4 lanes divided. All access to and from this roadway would be via grade separated interchanges. This is the stated preferred alternative against which other alternatives will be evaluated. This option should be evaluated with tolling and non-tolling sub-options.Option C: Build the by-pass in the alignment as proposed in the current feasibility study but to significantly lower design standards. This option would permit the eventual construction of the by-pass to the standards proposed in option B when traffic volumes will be higher by securing the same right of way alignment and width, but with initially constructing the roadway to much lower design standards. Various design sub-options should be considered including the elimination of some if not all grade separated interchanges, reducing median and lane widths, and possibly reducing the number of total travel lanes to only two in the least traveled sections. No road tolling would be considered under this option. Option D: Build only the northern part of Option B. This facility would extend from the Saratov Road (P226) to the Rostov Road (M21), approximately 52 km. The rationale for selecting this option is that it might attract a very high proportion of transiting traffic around Volgograd at far lower total cost. This option should be evaluated with tolling and non-tolling sub-options.Option E: Build only the southern part of Option B. This facility would extend from the Rostov Road (M21) to the Astrakhan road (M 6), approximately 47 km. This option has been proposed since design work is well advanced and consequently could be constructed earlier than either Option B or Option C. This option should be evaluated with tolling and non-tolling sub-options.Option F: Construct the proposed southern extension of the 3rd Longitudinal. This option envisions the extension of the existing 3rd Longitudinal approximately 35 km southward from its current southern terminus to the Krasnoarmensk settlement in southern Volgograd city. This should include a bridge over the Don canal. The roadway should be 4 or 6 lanes with grade separations at the major road intersections. The more recently proposed alignments around difficult topography should be used. This option relies extensively on existing road infrastructure and may provide more traffic relief to southern Volgograd than Options B, C, or D.Option G: Upgrade and extend the 3rd Longitudinal. This option should include all of Option E plus the selective upgrading of the existing 3rd longitudinal over the 30 km length from the existing southern terminus to the main Saratov highway intersection north of Vodstroy. The upgrading should include widening of all road sections to 4 lanes where this is not currently the case, pavement rehabilitation if required, provision of a grade separation under the railway crossing north of Vodstroy (or overpass if this would be less costly), and an improved intersection at Ulitsa Mendeleva & Avtomgestralnaya (possibly grade separated if this is required to adequately maintain a good level of service). This option has been selected largely for the same reason as the selection of Option E and also provides a more realistic alternative to the preferred Option B.Option H: Construct by-pass Option D and the Southern Extension of the 3rd Longitudinal (Option F). Under this option only the Saratov to Rostov (Option D) sections (from P226 to M21) of the by-pass would be constructed along with Option F portion of the 3rd Longitudinal. This option may be less costly than Option B while possibly providing the most traffic relief to southern Volgograd. The portion of this option containing Option D should be tested with tolling and non-tolling options. 3.4Assessment of the By-pass in Conjunction with the Proposed Moscow to Volgograd MotorwayBeyond the by-pass options outlined above, the World Bank team has learned of a planned major upgrade to motorway standards of the M6 highway between Moscow and Volgograd (See Figure 3.1 below). More specifically, two sections of this motorway totaling 86 kilometers apparently have funding allocations. The Feasibility Study team should assess with Federal authorities the potential of extending this motorway to Volgograd in the near future and the likely timetable for this extension. It would appear that the case for the proposed Volgograd by-pass would be considerably enhanced if plans for upgrading most or all of the Moscow to Volgograd M-6 route to motorway standards were to be accelerated in the near future. The case might even be stronger if private sector financing will be sought for some or all sections of the M6 motorway. Figure 3.1Proposed Moscow to Volgograd Motorway & Other Motorways3.5Assessment of the OptionsThe World Bank team recommends a multi-criteria assessment of the by-pass options outlined above. The assessment of these options should include at least the following:Traffic Assignments and Traffic Impacts. As indicated in section 4 of this report, traffic assignments should be made for all these options reflecting near term and longer term traffic conditions. Solid traffic assignments based on a careful assessment of existing traffic conditions and a well-calibrated traffic model are particularly important. While traffic volume assignments are important, it is equally important to assess the actual impact of these by-pass investments on the quality of traffic operations. More specifically, the level of service (travel speed and delay indicators) afforded to motorists wishing to transit Volgograd should be assessed, as well as the potential improvement of traffic operations on city streets relieved from carrying by-passing traffic. Preliminary Design and Cost Estimates. Good estimates of the cost of constructing the proposed by-pass options (as well as associated maintenance costs) will be especially important both to assess the cost-benefit relationship of each option, as well as to determine the level of financial contribution required from potential government and private sector participants. A brief description of this assessment measure is provided below.Economic Rate of Return The economic feasibility of each option against the do-nothing option should be established. This assessment measure is particularly important to show where alternative solutions might generate more value per unit of investment. A description of this important assessment measure is provided below.Financial Rate of Return. The financial rate of return should be calculated for those options on which toll facilities are proposed.Sources of Finance. Possible sources of funding for each option should be assessed along with a candid assessment of the likelihood of receiving this funding. Special Requirements for Federal Financial Assistance. Beyond the above assessment measures there are additional special Federal Government requirements to qualify for this assistance. Each option should be assessed with regard to these specific measures. This includes both qualitative and quantitative measures. Safeguard Measures. The Russian Federation Government as well as the World Bank and other international financing organizations require addressing certain environmental, social, and cultural heritage measures to ensure the proposed by-pass does not cause significant adverse impacts. During the options evaluation stage it will be important to identify any significant adverse impacts that would affect the selection of the preferred by-pass option (or options). Once the preferred by-pass option is selected, mitigation measures, if needed, would need to be implemented to address any negative impacts. Other Evaluation Criteria. Additional evaluation criteria which the Volgograd Oblast may find to be significant, especially those related to the regional development plan, could be considered. 3.6Preliminary Design and Cost Estimates Needed for the Proposed OptionsWhile no more information is required to assess Option A (do nothing) and Option B (the Oblast recommended option), additional preliminary engineering design and corresponding cost estimate information may be required to assess the other options. This should not require a substantial amount of work given that a Feasibility Study has been undertaken for Option F (southern extension of the 3rd longitudinal) and given that some reasonable estimates could be made for Option G (modest upgrading of the existing portions of the 3rd longitudinal). However, at least the longitudinal section drawings for all proposed road options should be prepared showing the road alignments as well as typical road cross sections.3.7 Economic Evaluation of the Proposed Volgograd By-Pass OptionsThe current Feasibility Study (FS) made available to the World Bank team does not include an economic evaluation of the proposed Volgograd By-Pass. The FS section titled Economic Evaluation is in fact a Financial Evaluation, where expected revenues from tolls are taken into account.An economic evaluation uses costs and benefits for the society as a whole. Benefits may either be included as exogenous monetized values or may result from the difference between the costs associated with the “without” versus the “with” project scenarios. Costs and benefits are both ‘shadow priced’, or expressed in economic terms. By doing so, the economic evaluation uses ‘resource’ costs and thereby measures the cost savings to the country, as resources are considered scarce commodities. More specifically, the economic evaluation of proposed road improvements rests largely on vehicle operating cost savings and travel time savings. The World Bank team recommends that the economic return on each of the above listed by-pass options should be computed. This should include the economic internal rate of return (EIRR) and net present value (NPV) which is described in the box below.Description of Economic Internal Rate of Return (EIRR) and Net Present Value (NPV)The Economic Internal Rate of Return (EIRR) and Net Present Value (NPV) are economic indicators frequently used to provide the socio-economic justification (or not) of a proposed project, and are also helpful for priority rankings. The EIRR is independent of the discount rate used (unlike the NPV). By definition the EIRR is the discount rate at which the NPV is nil, i.e. discounted costs equal discounted benefits.The NPV provides a measure of the net worth of a proposed project and uses the appropriate discount rate. A discount rate commonly suggested by the World Bank for transition economies is 12 percent per year. All projects in the same country should use the same discount rate so that the estimated NPV of all projects are directly comparable. The optimal timing of projects can be assessed through the use of First Year Rate of Return which discounts the first year net benefits relative to the project cost.EIRR is calculated through an iterative mathematical procedure that automatically discounts the net benefits of a project over the life of the project. A discount rate is used irrespective of inflation (which is excluded from an economic analysis), since the time has an inherent value associated with it. Economic analysis uses constant base year prices which are called ‘real’ values. As the costs and benefits are in real values no inflation/price contingency is included.The base year is usually assumed to be the year in which the analysis is undertaken and in particular the year when the project cost estimates are made. These should always be the latest costs (original estimates or updated) available.The identification, quantification and valuation of costs and benefits are central to preparing an economic evaluation. The main objective is to determine whether a project is economically viable, that is, an effective and timely use of public money and resources.An important part of evaluating a project includes the need to address problems and constraints (such as congestion on roads) and considering possible alternative solutions. Project planning ensures that a project is not over-designed (for example, not building a 6 lane highway when a 4 lane highway would be adequate for a given first phase of say a 10-year horizon).Preliminary Estimates of EIRR and NPV for the Proposed Volgograd By-Pass (Option B). The World Bank team, based on some basic information provided in the currently available feasibility study, as well as some rough preliminary assumptions, made a first approximation estimate of the range of EIRR and NPV (at 12% discount rate) that might be expected for the Volgograd By-pass. The basic assumptions used are summarized in Annex 2. Based on these approximate assumptions, the following results were obtained, using the World Bank Roads Economic Decision Model (RED):Assuming a construction cost of the By-pass of US$20 million per km: EIRR, 3%; NPV, - US$822.5 million;Assuming a construction cost of the By-pass of US$10 million per km: EIRR, 11%; NPV, - US$59.6 million; andAssuming a construction cost of the By-pass of US$5 million per km: EIRR, 22%; NPV, - US$336.8 million.The First-Year Benefits per Economic Investment Cost (ratio) for the three options above are 0.06, 0.11, and 0.23, respectively.While very rough assumptions were made to assess the EIRR and NPV for the proposed By-pass, the results obtained seem to point out to the need to reduce costs to make the project more economically feasible. This can be achieved, for example, by significantly lowering design standards. To make it easier to eventually construct the by-pass to the high standards originally proposed, when traffic volumes will be higher, the Oblast could consider securing now the same right of way alignment and width that would be required later. Various design sub-options could be considered including the elimination of some if not all grade separated interchanges, reducing median and lane widths, and possibly reducing the number of travel lanes to only two in the least traveled sections. The World Bank team strongly recommends that the internal rate of return and net present value should be computed for all of the above listed by-pass options.3.8Assessment Summary and Selection of the Preferred Options (or Options)Based on the above assessments, the Feasibility Study team can establish the relative merits of the various by-pass options. The options assessments should first consider the merits of each option assuming the necessary funds could be made available (i.e. making assessments principally on the basis of the economic rate of return and other positive criteria). After this, another assessment should be undertaken taking into account the likelihood of alternative possible sources of public and private sector funding. The final step of this assessment should be a recommendation on the preferred by-pass option (or options). Follow-up ActivitiesThe above suggestions may require more work than anticipated. Some of our suggestions may also not be practical. We suggest that, once this section of the report has been reviewed and digested, the Volgograd Oblast and its principal consultant should discuss in detail the process for advancing this portion of the Feasibility Study.3.10Illustrative Multi-Criteria Assessment MatrixOption AOption BOption COption DOption EOption FOption GOption HEvaluation CriteriaTraffic Impact (which options provide best solution for transiting traffic and secondarily provide the most relief for city traffic)Capital Cost of ConstructionEconomic Rate of Return (internal rate of return and net present value)Financial Rate of Return (for those options proposed with tolling)Likely Availability of Potential Sources of Finance (Federal, Oblast, and private)Meeting Special Qualitative Requirements for Federal Financial Assistance (including substantiating that the project would be impossible without Investment fund budgetary assistance)Meeting Special Quantitative Federal Financial Assistance Criteria for Financial Assistance (financial efficiency, budgetary efficiency, and economic efficiency as defined)Addressing Safeguard Measures (environmental, social, cultural heritage)Other Proposed Evaluation Criteria (speed of implementation, etc.)4.Current Traffic Conditions, Traffic Forecasts, and Traffic assignmentsThe viability of a proposed by-pass around Volgograd critically rests on an assessment of current and projected traffic conditions. While a considerable amount of traffic information is provided in several documents, the presentation of this information in the main Feasibility Study document is disjointed and does not establish a firm foundation for assessing the viability of the proposed by-pass. What is required is a comprehensive description of the following:(a) Existing traffic conditions to establish the case for a by-pass, (b) Traffic projections, including well documented assumptions and description of the methodology used for preparing these projections, and (c) Traffic assignments to proposed by-pass options. This information needs to be presented in a full chapter (or chapters) of the Feasibility Study report. Since some of this information and analysis will be highly technical, parts of the documentation that are not critical to the flow of the Feasibility Study report should be provided in an annex or annexes. This section of the report describes the additional data requirements: (a) What information is required that is not presented in the current Feasibility Study report, (b) What additional traffic analysis will be required, and (c) How this information should be presented. 4.1Existing Traffic Conditions and Impact AssessmentThe current main Feasibility Study document does not present in any detail current traffic conditions in terms of flows on the principal roads under consideration, the amount of by-passable traffic, nor a detailed assessment of the adverse traffic conditions caused by the lack of a by-pass. This assessment should be presented in a separate chapter of the Feasibility Study. More specifically this is required to (a) establish the case for the proposed by-pass; and (b) establish a firm factual foundation for making future traffic estimates. The following information is essential in adequately documenting existing traffic conditions:The current average daily traffic on the principal road (national and oblast) approaches to Volgograd in the vicinity of the proposed by-pass. (This information should be made available in mapped and chart form.). The average daily traffic on the three longitudinal roads as they cross the center of Volgograd (just south of Ulitsa Nevskaya/Prospect Zukova) as well as traffic along Prospect Universitetsky and on the road crossing the dam over the Volga River (This information also should be made available in mapped and chart form).The percentage (and total volume) of traffic on each of these road links?which has neither an origin or destination in Volgograd (ie. by-passable traffic)The composition of traffic by vehicle type (trucks, passenger cars, other) on each of these road links. An hourly profile of traffic volumes on each of the road links to establish peak hour traffic volumesAverage moving operating speeds and stopped time for by-passing traffic on each of the major by-pass routes of the principal roads approaching Volgograd Recent growth in traffic volumes by approaching road links (the change in average daily traffic over the last 5 years)The above information should be obtained from adequate traffic surveys. Especially important should be the following surveys: 16 hour classified counts (by vehicle type) on the above listed road segments (preferably on three or more separate representative days) Surveys determining the percentage of traffic that is by-passing Volgograd on these road links (either at motorist checkpoints or license plate matching surveys)If surveys to this level of detail have not been undertaken, the possibility of undertaking these surveys should be seriously considered or reasonable alternatives should be proposed.Based on the above assembled information, an assessment of current traffic problems should be undertaken. This should include at least the following analysis:A summary of the volume of traffic that seeks to by-pass Volgograd that is presently using city streets (repeat from the above analysis)An estimate of time savings and vehicle operating cost reductions that could be accomplished with a by-pass accommodating this traffic at normal highway speeds.The current level of service (including average operating speeds) on those urban streets adversely impacted by the traffic that could be rerouted to a by-pass; also an assessment of possible improved traffic conditions on these city streets with a proposed by-pass.4.2Traffic Forecasts and Impact AssessmentBased on the assessment of current traffic conditions described above, forecasts of future traffic volumes and traffic conditions should be presented. Again this information has not been clearly and logically presented. It is important to demonstrate how the traffic projections were systematically developed starting with existing traffic volumes and patterns. What is lacking in the current Feasibility Study is a step by step presentation of the methodology of the traffic forecasting process, including the assumptions made. These traffic forecasts along with traffic assignments to selected by-pass options require a separate section or chapter of the Feasibility Study.Particularly important will be a description of the logic and methodology used in forecasting increases in traffic volumes. The World Bank team noticed, for example, that estimated traffic volumes where traffic estimates were made were increasing only about 3% or less per annum. This appears to be conservative on the low side, but valid reasons may exist for this estimate. Some discussion might be directed at suggesting a reasonable range of traffic growth that could be expected and the possible impact of this range of estimates. 4.3Traffic AssignmentsThe traffic assignment methodology has not been presented in convincing detail in the Feasibility Study. This discussion needs to be as clear and concise as possible. See the Box below which presents in detail the requested information about the traffic assignment model. Due to the technical nature of this request in this box, the response could be documented in an annex to the Feasibility Study. The current traffic assignments are based on a single by-pass option. While this option is desired by the Volgograd Oblast, and for which Federal Government and private sector funding is being sought, the World Bank team is proposing to consider alternative by-pass options (see Section 3 of this report). These alternatives would enhance the credibility of the Feasibility Study, as well as present fall back options should the higher cost preferred option be economically or financially unviable, especially in the current global financial situation. Given the proposed alternative by-pass options, it will be important to determine whether the current traffic assignment model can assess these proposed by-pass alternatives, and what additional traffic or other information may be required and incorporated into the model to permit reliable traffic assignments. Particularly important would be reliable origin-designation information to permit reliable assignments. The World Bank team notes, in particular, that the traffic assignment model should take into account the completion of the new bridge over the Volga River and the road connections to this bridge on the right (west) bank. Assuming that the traffic assignment model will be able to adequately assign traffic based on the alternative by-pass options, it will be important to systematically assess the impact of the traffic assignments on the alternatives. Besides assigning the respective traffic volumes, an assessment of traffic conditions (level of service) on the by-pass and principal Volgograd streets will be important as a major input to the overall Feasibility Study.4.4Follow-up ActivitiesThe World Bank team recognizes that the above suggestions may require substantial additional work and may not be practical for various reasons. We suggest that, once this section of the report has been reviewed, the Volgograd Oblast and its principal consultant discuss in detail the process for advancing this portion of the Feasibility Study.4.5Detailed Assessment of the Traffic Assignment ModelIt is important for the accuracy of the Feasibility Study to have a robust traffic model. The following information would allow the World Bank team to assess the adequacy of the traffic assignment model and the basic input data used by the model: (a) Provide the source of the base traffic data (clearly delineating the base year of the model); including details of survey dates, types of surveys and results of traffic surveys on the different road links. This should also include substantiation of origin-destination surveys used to determine network zoning options, and matrix trip-ends for use in the model. The results from the traffic model of the through traffic analysis, and the time periods modeled (whether AM peak, PM peak, off-peak) as necessary ought to be documented. (b) Describe the calibration process of the traffic model. It would be helpful if a calibration report was available. The details required include noting which road links have been modeled, and the zones that have been adopted. Then, information on demonstrating the robustness of the model; i.e. how well it reasonably replicates actual traffic conditions in Volgograd should be presented (for example a greater than 85% level of accuracy is considered sufficiently robust). A table of results comparing the actual traffic link counts versus modeled link flows for the major roads would be helpful. The validation exercise would then include matrix validation, network validation and assignment validation including comparisons between observed and modeled link flows, turning movements at major junctions, queues and journey times. The difference between the calibration and the validation is the fact that other independent traffic data is used to confirm the model robustness from that used at the calibration stage. Possible use of screen lines and cordon comparisons would be helpful. It would also be helpful if a validation report for the model actually in use is also available. The reproduction of model outputs (tables, figures) would be helpful in determining the robustness of the model calibration and validation exercises. (c)Present the methodology and results of the traffic forecasting exercise (model trip-ends for a reference year). This reference model will then be taken as the starting point for testing the proposed options for Volgograd by-pass.5. Technical Solution and Toll Rate Assessment5.1IntroductionThe proposed Volgograd By-Pass (with a total length of 98.3 km), has been divided in two main sections: Northern section, 51.5 km -- from the road 1Р 228 Syzran - Saratov – Volgograd, to the road M-21 "Volgograd - Kamensk-Shakhtinsky"; and Southern section, 46.8 km – from the road M-21 "Volgograd – Kamensk - Shakhtinsky" up to the sector Volgograd - Astrakhan of the road M-6 "Caspiy"), Volgograd to Astrakhan.This technical review is based on the Feasibility Study (FS) for Volgograd by-pass undertaken by LLC “Managing Company “RusTekhConsulting,” and their subcontractor, “Institute of Risks Management”, under a contract assignment from the Road Department of Volgograd Oblast. This study contains three Volumes: (i) Volume 1. - financial and economic part, the project realization scheme; (ii) Volume 2. Book 1 – technical part plus Volume 2. Book 2 – technical part (appendixes); (iii) Volume 3 – presentation materials.This technical review highlights the major points regarding the FS that need to be addressed to strengthen the FS; and make it more robust and consistent. The review also raises some issues that may need to be clarified or substantiated to ensure that the FS complies with international norms, while also meeting the requirements for federal funding.The main technical components of the Feasibility Study are provided in Volume 2 Book 1; and this forms the basis of much of the review work presented here. Volume 2 Book 2 (appendixes) presumably contains the main standard detail drawings and sections. The review stipulates that the information provided in the Technical Volume 2 Book 1 are aptly represented in the matching drawings in Book 2 for all inferences made on the design.The environmental conditions affecting the design of pavement and drainage structures (and consequently infrastructure costs), as well as vehicle performance, as presented in the FS, include: (a) volume of precipitation, 400 to 450 mm /year; (b) average elevation, 96 m; (c) border of IV and V road-climatic zones (Appendix I, СНиП 2.05.02-85) with moderate climatic conditions for road construction; (d) average temperature of the coldest month, January, -7.6°С.The FS confirms that the terrain in Volgograd is generally flat with some incidental uplands and lowlands, river valleys and unique lakes. This favorable terrain indicates minimal engineering cost implication options as opposed to a more challenging relief that would entail the construction of major embankments, tunnels and bridges.5.2Traffic Analysis and Geometric Design The Traffic forecast is given in Table 4.2, FS Volume 2, Book 1. The traffic volume ranges on the five (5) sections of the by-pass for the time period 2015 to 2030 respectively are as follows:For the section from the direction of Saratov towards Moscow, flows between 5,000 vpd and 8,000 vpd;For the section from the direction of Moscow towards Rostov, flows between 15,000 and 25,000 vpd;For the section Rostov to Oktyabrsky, flows between 15,00 and 25,000 vpd;For the section Oktyarbrsky to Elista, flows between 12,000 and 18,000 vpd;For the section Elista to Astrakhan, flows between 5,000 and 9,000 vpd.The Feasibility Study has determined that these levels of traffic under the prevailing guidelines indicate a design under Technical Category 1b. First, it is not clear whether these traffic volumes are given in terms of passenger car units (pcu) or if they are the total number of vehicles (i.e., cars, buses and trucks). The basis is made on the traffic volumes for a 20-year design period. Second, the traffic forecasts are said to be based on the “Manual on the forecasting of the traffic intensity on roads” approved by the Ministry of Transport of Russia, No. OC-555 of June 19, 2003. However, the actual forecast percentage growth numbers for the different years are not elaborated in the study, nor are the assumptions made. Further, the relevant tables or charts in the Design Standards used for determining the Technical Category are not presented. As such, it is not possible to verify the choice of Technical Category 1b.Notwithstanding the above, the variation in traffic volumes across the five sections raises some issues. The traffic forecasts indicate low projected volumes on the two end-sections and higher volumes on the three mid-sections. This would indicate that the whole road may not have to be designed to the same Technical Category. Lower technical categories may be justifiable for some sections or even for the whole road on both engineering and economic grounds. For international benchmarking, this review has compared the geometric characteristics presented in the design against two comparable design standards. The design standards used for comparative purposes are the Design Manual for Roads and Bridges (DMRB) Volume 6, of the United Kingdom, and the French Motorways Design Standards (ICTAAL) “National Instruction on Technical Design Requirements for Rural Motorways”. The results of this comparative analysis and the relevant comments are shown in Table 5.1 below. Table 5.1Comparative review of geometric design parametersParameterVolgograd By-PassDMRBICTAALRemarksDesign Speed120 km/hMax. 120 km/h; varies depending on alignment and layout constraints, can go to as low as 70 km/hMax. 130 km/h in plain terrain; 110 km/h in difficult terrain. If terrain is very difficult, as low as 90 km/h.Further analysis may find that a lower design speed may be desirable; if not for all, then for some sections.Carriageway width2 x 7.5m(predicating 4 lanes of 3.75m each)2 X 7.3m4 lanes of 3.65m each2 X 7.0m4 lanes of 3.5m eachLower parameters may be justifiable given traffic levels and economic considerations.ShoulderNot mentioned; perhaps in drawing details (not seen)2 X 3.3m2 X (2.5 to 3)m, absolute min. 2 X 2mNeeds further elaboration from design drawings.Traffic Strip Width (Central Median)6.0m4.5m (hard strip & central reserve)5.0m (2 X1.0 m strips and variable central reserve of about 3m)A reduced width would yield cost savings.VergeNot mentioned2 X 1.5mVerge part of safety zone which is 8.5-10m.Needs further elaboration from drawings.Minimum Curve Radius (Horizontal)1,500mBetween 510 and 2880 depending on design speed; 1,020 for a 5% super-elevation600m plain, 400m difficult; and 1000m plain and 650m difficult for non-super-elevated.Safe horizontal alignmentMinimum Curve Radius (Vertical)Concave (Sag)Convex (Crest)7,889m15,002mDepend on comfort criteriaDepend on visibility criteria4,200m plain, 3,000m difficult;12,500m plain, 6,000m difficultStated minimum radii appear reasonable. Actual radii on different sections must be confirmed by designers.Maximum longitudinal gradient 3.94%3% for motorways and 4% for dual carriageways; 8% is the maximum departure from standard5% plain6% difficultThe maximum longitudinal gradient of 3.94% is reasonable.Visibility oncoming vehicle450mStopping sight distance 295m (120km/h)Stopping Distance 280m (130km/h)Visibility parameter as stated is reasonable.The World Bank team did not receive the engineering drawings. However, it is expected that the requisite cross-section drawings, longitudinal profiles and road plans have been appropriately prepared for the chosen alignment. This should reflect the full roadway width extents and objects therein including buildings, existing accesses, other physical features, and any other objects that would affect the road construction.5.3Junctions, other structures and road safety featuresThere are a total of six junctions outlined in the FS Volume 2, Book 1. These are at km 0+000, 27+000, 51+535, 86+025, 89+775 and 96+125. Four of these junctions have been designed as a default “clover-leaf” type junction for a four-way interchange (27+000, 51+535, 89+775 and 96+125). While clover-leafs involve large land take, they offer a number of advantages, and their selection seems reasonable. The km 0+000 junction has been designed as a tube/ trumpet, which is the most traditional way of separating a 3-way junction. The drawing provided should include directional arrows to show that the bridge is two-way; and an explanation is lacking as to why/whether all movements have not been considered. For the junction at km 86+025, it is unclear as to what movements are being catered for in the design especially for two ramps. This means that it would be helpful to have a drawing indicating the traffic movements with arrows; not that the design itself would be inadequate.The other structures and road safety features, as described in FS Volume 2, Book 1, para 6.3, appear to be reasonable.5.4Pavement DesignA comparison of four selected pavement design alternatives was carried out in the FS. The FS notes that on taking into account the construction cost and engineering experience in the region, an option with the following design parameters was the most economic: 1. Surfacing: stone mastic asphalt concrete mixture ЩМА-20 thickness of 4 cm;2. Base course divided in three layers:Upper layer: hot porous coarse asphalt concrete (type I), 7 cm thick, with the reinforced geonet "Hatelit" C 40/17, with a 1cm thick protective fine aggregates layer; Medium layer: asphalt layer (referred to as black road metal- clarification on this terminology is needed since it is not clear if this is an open graded or close graded Bitumen Macadam or even a penetration macadam), 8 cm thick;Bottom layer: graded road metal (clarification on this terminology is needed since it is not clear if this refers to graded crushed stone or some other material), 38cm thick, laid out in three layers: H upper = 12cm, H medium= 13 cm, H bottom = 13 cm;3. Additional layer (Sub-base layer): has been proposed, comprised of light silty loam soil in the nonwoven synthetic material "Dornit-250", with a required module of elasticity of Etr=308 MPa. The FS notes that local recent experience has shown that it is possible to increase the service performance of the asphalt concrete with such reinforcement. The thickness noted in the adopted variant (variant 2) for this layer is 60cm, but is not reiterated in the final pavement profile; and this also needs to be reconciled.The pavement design proposal appears reasonable, given the projected traffic loadings but clarifications are needed on the salient points discussed above.6.CONSTRUCTION AND MAINTENANCE COST ESTIMATES6.1Analysis of Cost Estimates The Feasibility Study does not provide the requisite justification for the costs. The costs have been provided for the northern section without costing of major road items and breakdown of estimated quantities. The costs provided are wholesome in nature for items like earth road bed, road covering etc instead of breaking them by line items for different road elements like the pavement layers, with estimation of quantities required, and unit rates. Without the background information, and calculations, the road cost estimates appear arbitrary and cannot be justified.At the same time, inconsistencies have been noted in the construction cost estimates presented and used in different parts of the analyses. According to Chapter 9 of the document provided during the mission (presumably Volume 1 of FS) on Cost Effectiveness of the Project, the total construction cost of the By-pass is estimated at Rb 53.7 billion, to be implemented in 2009 (5 percent), 2010 (28 percent), 2011 (35 percent), and 2012 (32 percent). The study anticipates that the private sector would cover 25 percent (or Rb 13.6 billion) of the construction costs and all subsequent maintenance and rehabilitation costs, while the public sector would contribute 75 percent (or Rb 40.1 billion) of the construction cost through a grant (or subsidy). However, the construction cost of the Northern section of the By-pass, as indicated in paragraph 6.3, FS Volume 2, Book 1, is estimated at Rb 42.1 billion. No cost estimate for the Southern section is provided in FS Volume 2, Book 1. If the total construction cost of the By-pass is Rb 53.7 billion (as used in the analysis of Cost Effectiveness of the Project), the Southern section would cost Rb 11.6 billion, which does not appear realistic. Its cost should be closer to the cost of the Northern section, as the difference in length of the two sections is only about 9 percent. There also seems to be an inconsistency, within FS Volume 2, Book 1, between two cost estimates of the Northern section: while its cost estimate is Rb 42.1 billion in paragraph 6.3, the detailed calculations in Chapter 13, Table 13.1, show an estimated cost of Rb 40.6 billion.A comparative review of the cost breakdown for the Volgograd by-pass indicates the construction costs to be on the high side (See Figure 6.1 below). The construction cost estimates of Rb 53.7 billion is equivalent to some € 1.54 billion. For 98.3 km, this amounts to an average of €15,657,405 per km. From a sample of some international comparisons of motorway costs per km (at 2007 prices), only Romania and Slovenia show costs approaching these levels (both these averaging between €10 and €11 million per km). Given the discrepancies against international benchmarking, the only costs justification can be made on the basis of the FS contractor providing a reasonable backup of the validity of their estimates, e.g. from similar contracts completed in the region/ Russia in general. It is also worth noting that the international cost estimates in countries with high unit motorway costs are usually liked with projects that go through difficult mountainous terrain, which is not the case for Volgograd.Figure 6.1International Unit Cost km comparisons for motorway constructionSources: European Investment Bank, World Bank ROCKS database, Poland road agency data, Romania Association of Construction Entrepreneurs among other sources.The FS has detailed the required maintenance and operation requirements for the Volgograd by-pass and all associated elements in Section 9.2 of Volume 2 Book 1. The cost review presented here refers strictly to the repair costs. The repair costs, as estimated, would amount to a total of Rb 7.5 billion over the 2013 to 2043 period (see Cash flow statement Table 9.3, Chapter 9). Using the maintenance unit rates provided by the VOHD, the estimates appear reasonable given the assumptions of periodic maintenance every 4 years and a renewal after every 12 years. However, it is unclear how the expenditures presented in section 8.3.4 of the Financial Model report correspond with the expenditures presented in the Cash flow statement in Table 9.3, Chapter 9. Clarifications that reconcile these elements are necessary.Conclusion on cost estimates: Before further analysis, it would be important that the FS contractors provide a clear indication of the derivation of the construction and maintenance cost estimates (including quantities and unit cost breakdowns) for the Northern and Southern sections of the By-pass.6.2Toll Rates and Collection System Toll rates are discussed in Chapter 4 and toll collection systems in Chapter 7 of Volume 2. Book 1 – technical part, of the report on “Financial and Economic Substantiation (FS) for the Volgograd By-pass.” The recommended toll rates in the FS are: passenger cars: Rb 1.5/km or about US$0.06/kmmedium trucks (2 or 3 axles): Rb 2.6/km or about US$0.10/kmheavy trucks (more than 3 axles): Rb 3.7/km or about US$0.14/kmbuses: Rb 5.2/km or about US$0.20/km A comparison of toll rates in different countries worldwide is presented in Figure 6.2. The summary results are based on IMF data (reproduced in an assessment report by ECORYS) Figure 6.2Toll rates comparison (in EUR/km)Source: IMF data as quoted in ECORYS (2008)The toll rate for passenger cars is comparable with the rates in other medium income economies. Another data comparison also shows this rate to be about the same as that in use on the Rio de Janeiro to Sao Paulo toll road concession in Brazil. The toll rate for passenger cars per GDP (PPP) per capita also compares well with the other countries. However, the toll rate for heavy trucks, about US$0.15/km, is relatively low. In several countries, such rate is calculated by multiplying the truck number of axles by the rate for passenger cars (See for example the data for 13 countries available at the International Bridge, Tunnel and Turnpike Association (IBTTA) website). For a 4-axle truck, this rate would then be US$0.24/km. Subject to other parameters, such as affordability and willingness to pay, it is recommended to consider adopting a higher rate for heavy trucks than the one currently proposed. Given that the bus toll rate is also usually aligned to the rate adopted for lower-axled heavy vehicles, it is unclear why the bus toll rate is higher than that for heavy goods vehicles. In the countries where height or tonnage is the over-riding factor or where all vehicles with more than 2 axles are charged the same price, the rate for buses is the same price as the heavy trucks and not more (See for example Australia and USA case studies on IBTTA website). Clarification is needed as to this bus rate choice versus that for the heavy trucks.6.3Demand ProjectionsThe report indicates that the model used to estimate future traffic volumes on the proposed tolled by-pass has been applied in a number of previous projects in Russia. It also states that the differences between forecast volumes and actual traffic volumes (after the facility was opened to traffic) have been within 10 percent. It would be helpful if the report showed the data used in such comparisons. Perhaps as important would be the data for calibration and validation of the model for Volgograd. Traffic forecasting experience on toll facilities elsewhere have shown larger differences between actual and forecast data; usually with optimism bias for traffic. (See for example the Standard & Poor’s report on Traffic Risk in Start-up Toll Facilities). 6.4Toll Collection SystemManual, automatic and telepayment toll collection technologies are proposed to be included in the By-pass toll collection systems (TCS). Three toll plazas are proposed. Regarding the telepayment system, the report (paragraph 7.2) states that “no stopping of the vehicle is required, the driver should only reduce the speed at an entrance to TCS to 5-10 km/h and wait for a barrier to open.”While the proposed telepayment system is widely used, more modern systems do not require any speed reduction by vehicles paying toll with a “tag.” The consultants clarified that such system has not been considered at this stage as its installation would required defining the permanent users of the road. The issue of installation will be reviewed after commissioning of the facility without requiring substantial investments.Toll plaza design used the following hourly carrying capacity (paragraph 7.4): - payment by cash - 160 vehicles/hour,- use of magnetic cards - 250 vehicles/hour- telepayment (no stop) - 600 vehicles/hour- coupon delivery station - 200 vehicles/hour- Peak hour traffic volume was taken as 8 percent of the daily volume. The selected parameters seem reasonable.6.5Conclusion and Toll Parameters The toll collection parameters adopted seem reasonable. It would be useful to include an explanation as to why a free-flowing electronic toll collection system for “tagged” vehicles has not been considered.7.Introducing PPP and Implication for the Oblast7.1Overview of PPPWhat is a PPP?There is no widely agreed, single definition or model of a PPP but all models have common characteristics. The term “public private partnerships” has been used since the 1990s as a form of private sector participation (PSP) in infrastructure financing. All definitions, however, are based on the common principle that PPP is a ‘procurement process’ to provide services or deliver assets through joint public and private cooperation. Concessions, BOT, leases, etc… are all forms of PPP, although some are more applied based on the type of project and public sector objectives. PPP is based on the recognition that the private sector can contribute to reducing the overall cost of delivering infrastructure services through increased efficiency and better management of some risks (such as construction). At the same time, it means that the private sector’s higher cost of financing and need for a return on its investment must be overcome by the benefits it provides.Why embark on a PPP?The main benefit of PPP is to provide better value-for-money to public authorities, which means cheaper/better services over the long-term. A review of construction projects by the UK National Audit Office showed that PPP in the UK on average had only 22% of cost overrun for the public sector, as opposed to 73% under traditional procurement. This is, however, was possible only with an optimal risk allocation between the public and private sector. Some risks, such as construction, can be better managed by the private sector: for example, traditional procurement often leads to costs being over budget or delays in construction, which are better managed by the private partner. If the same is applied to operations and maintenance and is well designed, a PPP project can ensure that proper maintenance is done, extending the life of the assets and reducing its overall management cost. This results in more “value-for-money” for Government (or the Oblast or City) than if it was undertaken as a traditional project.The other reason why PPP has been used is to bring additional financing, although there is often a misconception about this contribution. PPP can potentially bring financing from the private sector, as investors typically contribute to the cost of the infrastructure. However, as this is done through borrowing and equity participation, the private partner needs to repay its debt and generate a reasonable profit. In practice, sources of revenue are often limited to user charges and public sector contribution, which are available regardless of the project being a PPP or not. When looking at PPP as a way to bridge the infrastructure financing gap, public authorities should also ensure that the PPP option is cheaper than traditional procurement and public sector borrowing. What are the risks associated with PPP?The main risks associated with PPP are fiscal, with one being its direct fiscal impact. Although the public sector is usually asked to contribute to capital expenditure, part of its contribution is often phased during the life of the concession. The risk implication is that the public authorities might decide to implement a project that is not affordable, simply because the initial contribution is relatively small. However, future payments over a long period of time (often 30 years) are not usually accounted for in the budget planning, but will likely restrict the Oblast/City ability to finance other much needed projects. As a result, public authorities must implement only projects that are absolutely needed and take into consideration the long-term financial commitment associated with PPP. The other fiscal risk is linked to the contingent liabilities associated with PPP. Some risks, such as traffic for a highway project are difficult to completely transfer to the private sector. As the traffic is impacted by many events not in its control, including policy decisions by the public authorities, the private sector is not willing to fully take on this risk. As a result, the public sector often provides minimum revenue guarantees that are used if traffic is below a certain level. From a risk management perspective, this means that the public authorities make realistic projections on required budget outlays during project life, considering the possibility of revenue support for the private party in case of insufficient traffic demand.. In practice, however, as these payments are often contingent on the occurrence of an event, they are usually not accounted for by the public authorities. Experience has shown that traffic forecasts are often very optimistic, and it is not uncommon that actual traffic is 30% lower than the estimates. The implication is that the public sector can end up paying more than initially foreseen and take on significant liabilities should the demand be much lower than expected. Although it depends on the project, it is in practice difficult to avoid providing some form of guarantees to the private sector. Again, the associated risk must be accounted for in future budget provision or reporting.7.2International Best Practice in relation to Project PreparationInternational experience over the last 15 years has shown that several of the issues facing PPP projects can be linked to specific weaknesses in a PPP program. A PPP project is very complex and different from traditional procurement. Several failures of PPP projects in the world can be attributed to a weak Feasibility Study and absence of comprehensive planning. Over-ambitious agenda often leads to lack of preparation and common mistakes in a Feasibility Study include un-realistic demand forecast, poor risk allocation and undefined public sector contribution. Other identified important factors for successful PPP include clear contractual rules, competitive procurement and credible contract enforcement.Successful PPP projects were often relatively modest in size and the public official showed realism in implementation/planning. Experience has shown that, especially for Oblasts/Cities with limited PPP experience, a recommended approach is to carefully select the projects that would be considered as PPP. As much as possible, initial projects should not be smaller than US$ 1 billion and significant investments should be implemented in phases whenever possible. One example can be to phase a four-lane highway in a first phase, corresponding to a 2 lane highway or a section of the highway, and then complete the project in a second phase. By doing do, the private sector will view the project as less risky, and can for example, test the traffic forecasts with a lower level of investment. In addition, by borrowing less, the private partner will be able to obtain better financial terms than what would have been obtained for a bigger project.Careful preparation, with a detailed Feasibility Study, is one of the most important factors contributing to the success of a PPP project. The objective of the Feasibility Study goes beyond obtaining the necessary approvals and Federal funding. It will enable the project to be better prepared in the best interest of the Oblast/Cities and the users. As a result, sufficient time and resources should be allocated to the Feasibility Study, and the use of good consultants with international experience is absolutely necessary. A good Feasibility Study can easily take 6 months to be completed, but ultimately saves time and money during procurement and operations. Projects should move into procurement phase only if they demonstrate value-for-money, appropriate risk transfer and affordability. As explained earlier, PPP is not the solution for all infrastructure projects, even when Federal Funds are available. Oblasts/City officials should have a clear understanding of the value brought by the PPP option, and when to consider instead a traditional project. Such information ultimately saves money for the Oblast/City and if proposals from the private sector are too expensive, it will be easier/faster to revert to traditional procurement. Risk allocation between the private and public sector is project-specific but should be based on international best practice, as some risks cannot be borne by the private sector, and can lead to limited response during procurement. Finally, PPP projects are long-term contracts, sometimes resulting in significant financial commitments (direct or contingent) that should be taken into consideration, in the light of available petitive bidding remains the best procurement option for the public sector, being more transparent and reducing the cost for Government and users. There is a belief that directly negotiated contract are faster and lead to the same result as competitive bidding. Experience shows that absence of competitive bidding often leads to long delays during negotiations and the public sector end up paying more than with competition. The services under a PPP project are often provided in a non-competitive environment so procurement is often the only time competition can be introduced. In addition, lack of competition often leads to perception of corruption, resulting in strong opposition from the public to the project. The concession law in Russia also requires competitive bidding.Finally, appropriate mechanisms and resources should be placed on the PPP contract monitoring and regulation following contract award and financial close. PPP projects are long-term contracts (a 30 year contract or more is quite common for concessions or BOT types of projects). Attention is often focused on the transaction without taking into consideration that close contract monitoring and supervision will guarantee that services are delivered according to the agreement to the users. Absence of solid contract monitoring can lead to additional costs or missing revenue for the public authorities, as well as poor services received by the users. The design of a contract monitoring system starts during preparation and having the right institutional arrangement and resources is essential.If PPP is going to play an important role in financing projects in Volgograd, more needs to be done. The points raised above are essentially related to project preparation. Particularly, a solid legal, regulation and institutional Framework should be put into place. Moreover, significant effort in capacity building and use of international consultants with expertise in PPP is highly recommended. Overview of PPP investment and potential impact of current crisisAlthough PPP Investment has been significant in the world, is it very likely that such investment will reduce in the context of the current economic crisis. PPP investment in the world has been the highest since 1990, driven by positive economic growth and need for investment in the transport sector. At the same time, several countries have matured and there are more regions now attracting PPP investment. At the same time, as shown by Chart 7.1, PPP Investment has been very much impacted by economic cycles: the decrease and low level of investment from 1998 to 2003 correspond to the various economic crises (Asian Crisis, Argentina and Russia Crisis, tech-bubble, etc…). Based on this historical trend, there is a high possibility that PPP investment will significantly decrease in 2009 and this will also be felt in Russia.Figure 7.1PPP Investment in Transport (1990-2007) by regionSource: PPI Database (World Bank) - Russia is considered as part of Europe and Central Asia in this analysisWhile it is too early to determine the exact impact of the current crisis, there is an understanding that the private sector will find it more difficult to finance PPP projects in Russia. It is expected that the current liquidity crisis will have negative effect on the availability and cost of private sources of capital. In practice this might result in potential PPP projects facing lower risk tolerance by creditors, shorter debt maturity, wider spread and a flight to quality by investors. This situation could lead in projects not finding any serious bidder able to raise long-term debt but will certainly result in more expensive cost of capital. The implication will be a more expensive project for the Oblast or simply no serious proposal from the private sector.Given the size of the proposed by-pass, the Oblast might be better off waiting for the market conditions to improve or consider alternative financing means. The timing might be better to strengthen the current legal and institutional framework for PPP and strengthen project preparation. In the current situation (November 2008) there is limited scope for the private sector to be attracted in such a huge project in a region with no previous experience in PPP. The market could improve in the future but there is no agreement on how long the crisis will last. As a result, in addition to carefully assess the viability of the proposed project as a PPP, the Oblast should give serious attention to the current market situation and carefully assess the options of (i) waiting for the market situation to improve, or (ii) considering alternatives options to PPP. In any case, this is an additional argument for seriously considering less expensive options to the proposed by-pass. 8.Review of PPP Models applicable to the by-pass8.1Model Options under Concession LawThe Feasibility Study (Financial and Economic Substantiation, hereinafter referred to as FS) first presented a diagnostic review of a wide range of possible ways in which a Public-Private-Partnership (PPP) project could be designed. Among these, it includes Privatization, Concession, Build Own Transfer (BOT), Build Transfer Operate (BTO), Build Own Operate Transfer (BOOT), Build Own Operate (BOO); Reconstruct Operate Transfer (ROT) and Lease, Develop, Operate (LDO) among others. Many other variations exist in the literature including Design Build (DB), Design Build Finance Maintain (DBFM), Design Build Finance Operate (DBFO), Design Build Finance Maintain Operate (DBFMO) with some variations in roles and payments (including use of shadow tolls instead of actual tolls).However, given the premises of the Concessions Law, the FS notes that only two options are worthy of discussion: presented as the Concession type, and the BTO model. All other options would face possible legal hurdles; with the only few contracts operating in Russia outside the concession law being small contracts that rely on the civil code, or being implemented under the St Petersburg PPP law (such as Nadzemny Express). In some parts of the literature, the BTO model is actually not in any way de-linked from a concession; and is one of many types of concession options possible.The FS recommends moving the Volgograd PPP forward as a BTO project, which is in line with what is prescribed in the Concession Law. The reasoning is that transfer of the assets is made into the title of the State at the end of the construction period; making this type of model acceptable within the Concession Law. The choice of a BTO model option for Volgograd by-pass seems reasonable given the constraints posed by the Concessions Law. Moreover, whatever is the model option chosen under the framework of the Concessions Law, the fact that only Russian courts have exclusive jurisdiction with no recourse to foreign arbitration makes the case for private sector interest constrained or raises the possibility for high priced offers.In summary, although the feasibility study goes into a very descriptive review of all possible options, when essentially a few are only allowed under the Concession Law, the recommendation of implementing the project under a BTO scheme appears reasonable.8.2Demand Risk Considerations in the Feasibility StudyThe assumption that the private sector will bear the traffic risk is unrealistic. One of the main considerations for a PPP arrangement is the allocation of demand risk. The FS does not state explicitly how the demand risk is apportioned. However, all indications point to the fact that an assumption has been made that the private sector will bear this risk. This inference is made from the fact that the FS does not discuss the two commonly used traffic mitigation options of Minimum Revenue Guarantees (MRG) or Availability Payments (AP) for the proposed PPP model option. Three points need to be borne in mind when considering traffic risk allocation for this project:First, the fact that there is no prior PPP experience in Volgograd is suggestive of heightened conservatism on the part of investors (lenders, equity investors/sponsors). In fact, very few transport PPP projects of similar size, which already reached financial close, exist anywhere in Russia. The closest project is the Western High Speed Diameter (WHSD) toll road in St. Petersburg (currently in bidding phase). Moreover, the prior lack of PPP experience raises the issue of the likely public response to tolling; and possibilities for traffic using alternative routes or Government authority backtracking on tolling.Second, given the fickleness of demand forecasting, it is unlikely that potential concessionaires will regard the traffic forecasts for Volgograd by-pass without skepticism. This is an internationally recognized weakness with many PPP projects that have failed to deliver on projected forecasts making lenders and equity holders very cautious. In 2004, Standard and Poor’s found that toll road forecasts have on average overestimated traffic by between 20 and 30 percent. With limited confidence in forecasts, the private sector will need a measure of reassurance in the form of a MRG or AP to participate in a PPP arrangement.Third, the Volgograd by-pass project in its entirety at some Rb 53.7 billion rubles (€ 1.54 billion) is a very large project. Securing the private contribution required (25% of total capital cost, based on the Feasibility Study) will not be easy for any investors especially in the environment of hardening credit terms, and freezes in credit under the financial crisis; or in its aftermath. Even internationally, the Volgograd by-pass ranks among the largest PPP projects in financial terms. Failure to incorporate a revenue guarantee mechanism will all but leave the potential for securing private financing very slim or potentially even non-existent.8.3Demand Risk Mitigation (Guarantee Options)Given the above concerns, it is clear that the issue of demand risk is one that the Volgograd authorities will have to take or share if the project is to be viable for private sector participation. There are essentially two traffic risk mitigation options: (i) use of Minimum Revenue Guarantees (MRG) or (ii) Availability Payments (AP). The review finds that strengthening the FS to consider and evaluate the option of an AP mechanism would make Volgograd By-pass more attractive to the private sector. The MRG option is not considered an appropriate one for Volgograd by-pass because the residual traffic risk is still likely to be unattractive to the developers and those developers that bid are likely to charge a high risk premium.How the AP will be structured or funded, and the payment profile are issues that will need further investigation. Contributions from the Investment Fund, the Federal Targeted Program for Transport, use of Oblast budget money, tolls, land transactions, taxes and other fees, Volgograd city contributions or other sources all remain possible options. In addition, the payment profile (including initial capital grant contribution) and profile of availability payments are all important considerations that will have to be determined.8.4Most Viable PPP Model OptionThe most viable model scenario for Volgograd by-pass is for the proposed BTO model with an availability payment, an initial capital grant contribution and tolls. The initial capital contribution would go towards meeting some of the costs at the construction stage, linked to the attainment of construction milestones by the private developer. The availability payments must be structured to be available for the duration of the concession (31 years as per FS). Under an AP arrangement, the developer would generally be compensated with a periodic payment (eg quarterly) given that the contracted or agreed lanes are available at the determined level of service and/or other factors. These payments can be calibrated to include incentives for the private party to construct, operate and maintain the road in the most optimal manner. These payments provide a level of predictability and transparency with greater confidence from the private developer. Moreover, the payments are agreed to in the contract and can only be adjusted downwards if the private developer fails to perform to standards.The setup for this model scenario is as shown in Figure 8.1 below. The financing of a PPP project like the proposed by-pass will likely be based on project finance. The implication is that the private sector will create a dedicated legal entity, the concession, which will raise financing (debt and equity). Debt and equity holders will be paid with revenue from the project and not from the balance sheet of the companies. The concession is expected to include construction and maintenance contractors, toll operators, investors and banks to form what is known as a Special Purpose Vehicle (SPV). Multilateral organizations will play an important role, by providing financing to the concessionaire, following selection of preferred bidder, or directly to the Oblast (with or without sovereign guarantee).Figure 8.1Possible viable PPP model structureSub-nationallendingMultilateral organizationsMultilateral organizationsOblastConcession rightsAvailability PaymentsGuaranteesCo-investingTollsEquity/ DebtVolgograd By-pass ConcessionaireLenders and Equity HoldersUsersTollsDividends/ InterestCAPEXOPEXOperationsMaintenanceConstruction Source: adopted from ECORYS (2008) Under this arrangement, all tolls collected would be State revenue; and hence help in offsetting the availability payment obligations as much as is possible. Depending on the approach taken, the toll collection can be collected by the operator and handed over to the Government, which can then earmark the funds as availability payments or part of the availability payments. As a rare option, the Government could organize the toll collection itself.The use of AP would also benefit the Oblast by increasing the number of bidders and potentially lowering the financing contribution. Even with the use of AP, the private sector will need to raise long-term limited recourse financing. However, the use of AP will reduce the perceived risk, resulting in better financing terms or lower expected return on equity, thus reducing the total project cost. The Oblast would benefit from the lower financing cost, as Volgograd will ultimately need to finance a portion of the project cost. Moreover, the reduction in traffic risk will increase the potential number of bidders and the associated competition during procurement. This competition will result in more aggressive bids, which would also contribute to a lower contribution from the Oblast.9.REVIEW OF FINANCIAL ANALYSIS9.1The Review ApproachThe review of the financial analysis was based on the information given in the feasibility study. The financial model used for the analysis in the Feasibility Study was not available to the World Bank team at the time of preparing this report. For intellectual property reasons, the consultants responsible for the financial model agreed to show it only in their premises. The review thus centered on the assumptions and conclusions of the analysis as described in the Feasibility Study. To test the methodology and analysis and confirm their consistency with the results, the Bank team did a preliminary financial simulation. If the model is made available in a timely manner, the report would be updated with the detailed review of the financial model. However, the financial analysis will need to be redone given that this section recommends changing several assumptions and analysis.9.2The Role of Financial AnalysisFinancial analysis is an essential component in the preparation of any PPP project. It allows assessing the attractiveness of a potential project to private participation and allows the Oblast to test the financial implications of different policy decisions. More precisely, financial analysis will determine the financial contribution needed from the public sector to make the project bankable for lenders and attractive for equity investors. The financial model is the central tool in performing financial analysis. It should be sufficiently flexible to test various options and scenarios, and to support the Oblast during the various stages of the project cycle. For example, the financial model can be used to support negotiations with the preferred bidder by assessing the financial impact of any risk allocation proposal.The quality of financial analysis depends on the quality of assumptions. It is understood that official figures have been used to support the application to Federal Funds. However, bidders will assess the risk associated with the project and will use market prices (such as construction costs) when making a proposal. This is why financial analysis which does not use current market data will generate results that are different from what the Oblast will receive from bidders. The subsequent analysis is based on market prices and assumptions that the private sector is likely to make.Performing sensitivity analysis (testing changes in assumptions) with the financial model is necessary to give a range of likely results. Some preliminary assumptions can have a significant impact on the final results. For example, the capital cost of the project directly impacts the total amount of capital grant required to make the project attractive to investors.9.3Review of Feasibility Study Assumptions.As mentioned earlier, the results of the financial analysis greatly depend on the quality of assumptions used in the model. The analysis should be based on assumptions that correctly estimate the costs and revenues of the project and reflect the current situation in the market. Confirmation of the financing assumptions used in the model with financial experts (eg international banks), is important.Chapters 8 and 9 of the Volume I of the Feasibility Study contain the description of the assumptions used in the model. However, all assumptions are not explicitly described, and the team had to derive some assumptions from the financial statements, which also appear to be incomplete. The Feasibility Study would benefit from a more detailed description of all the assumptions and their sources (incl. when official sources have been used). Standard practice would be to include the list of assumptions as a separate Annex to the Feasibility Study.While many assumptions described in the Feasibility Study are reasonable, some key assumptions appear unrealistic. Correcting the unrealistic assumptions, or undertaking sensitivity analysis, will likely result in different conclusions about the feasibility of the project. The current market situation has significantly impacted the financial assumptions that were presented in the existing feasibility study. Debt maturities are shorter and private investors and lenders may demand higher levels of equity IRR and DSCR. However, the scope of the current review is focused on reviewing the financial analysis, which was completed before the crisis. Therefore the recommendations for financial and economic assumptions are based on the market situation before the crisis. The discussion of the key assumptions is provided below.Operating AssumptionsRevenues. The Feasibility Study would need to specify in more detail the assumptions on the growth of tolls and traffic, and whether different growth rates are expected for different groups/categories of vehicles. Another important issue in relation to revenue assumptions is that there has not been any analysis of sources of revenue in addition to tolls and wayside development. These potential additional revenues will ultimately reduce the amount required from Federal Funds and the Oblast (capital and recurrent expenditures). Even at a preliminary stage, the Feasibility Study could have identified the potential revenue from each available source. Two key factors will determine the total toll revenue – traffic projections and toll rates. The Feasibility Study does not explicitly mention the assumptions of toll growth rates, but it appears from the tables in Chapter 9 that toll rates are expected to grow about 3.2% per year. This growth level is smaller than the inflation rates seen in Russia in the past few years. As mentioned in previous sections, the traffic growth forecast should be strengthened. In addition to impacting the choice of road option and technical solution, the quality of traffic forecast directly impacts the financial viability of a PPP project. This issue is not specific to Volgograd or Russia. The majority of PPP projects suffer from over-optimistic traffic demand forecasts, in many cases overestimated by as much as 30-40%. A study by Standard & Poor’s examined the accuracy of estimates of first-year traffic on 87 toll roads and found that the average forecast was about 24 percent too high. Unsupported or over-optimistic traffic forecasts can have significant negative impact for the Oblast. If traffic forecasts are not strongly supported by analysis, potential private investors will see it as a high risk for the project and will either not bid, request a higher return (risk pricing) or ask for the Oblast to take traffic risk. This is even more of a concern when a country/region does not have past experience in PPP projects. If actual traffic levels end up being lower than forecast and if the concessionaire is taking traffic risk (as proposed in the feasibility study), it will result in lower than expected revenue. In practice, the concessionaire could become bankrupt or seek contract renegotiations. The extreme case is bankruptcy, which could leave the Oblast with no other option than to take over the debt of the concessionaire, with the associated fiscal implication. The private sector tends to be very conservative in their traffic projections, and might discount the provided forecast as much as 30 percent if it does not feel comfortable with the analysis. This will directly result in higher public sector contribution requested by investors when they will submit their proposal.An important point mentioned later in the report is that revenue used in the financial model does not seem in line with the rest of the feasibility study. Such revenue appears overestimated and might have resulted in underestimation of public sector contribution. This comment is further detailed in the review of the methodology (financial model).Capital Expenditures (CAPEX). The Feasibility Study provided the estimated capital costs of the project as 40.590 billion Rubles. This estimate has been used in the financial analysis and the current review is assuming this as given. It is however essential to understand the financial implication of under-estimated CAPEX, as even a slight variation can lead to a higher financial contribution from the Oblast. As a result, it is strongly recommended to add in the financial analysis sensitivity analysis of the total financial contribution from the Oblast based on variation in CAPEX.Operating Expenditures (OPEX). Based on the review of the tables provided in the financial analysis section, it appears that maintenance and rehabilitation costs are in line with what was presented in earlier sections. Moreover, inflation has been applied to these costs, but there are concerns expressed in the following section on the value of inflation being applied.Macroeconomic assumptionsInflation. Assumptions about the inflation are critical for accurate assessment of the feasibility of the project. Bidders will use market rates when making their proposal and should inflation be underestimated, the Oblast will likely pay the difference. The issue for Volgograd comes from the fact that official inflation figures might be required when applying for Federal funding, and such inflation rates might be lower than the market forecasts that bidders would use. One possible solution is to use up to date official inflation forecasts. Inflation estimates used in the Feasibility Study appear to be largely underestimated, even compared to official figures. The inflation estimates are based on the Ministry of Economic Development (MED) prognosis done in 2005, three years ago. These forecast numbers differ substantially from the actual figures and estimates available in 2008. For example, the estimates used in the Feasibility Study are almost half the estimated inflation by the International Monetary Fund (IMF) (as of Oct. 2008) and almost 1.5 times lower than the updated forecast by MED (for 2009-2011) (see the Table 9.1 below). Table 9.1 Inflation (at the end of period) ???????200520062007200820092010201120122013??MED* as of 200512.7%9.7%7.7%6.3%5.2%5.0%4.8%4.5%4.2%MED** (as of Oct. 2008)10.9%9.0%11.9%10.5%- 11.8%7.0%- 8.5%5.5%- 7%5.0%- 6.8%?IMF*** (as of Oct. 2008)10.9%9.0%11.9%13.8%10.5%10.0%8.5%8.0%7.5%??????????* Ministry of Economic Development of the RF, data used in the Feasibility Study, prognosis at 2005.** Ministry of Economic Development of the RF, The prognosis of Social and economic development of Russia for 2009 and planned 2010-2011. (actuals for 2005-2007)*** International Monetary Fund, World Economic Outlook Database, October 2008 (actuals for 2005-2007)Potential concessionaires are also very likely to use more conservative estimates of the inflation in their financial analysis. It should be noted also, that the inflation in the construction sector is higher than overall inflation, and is estimated to be in double digits in Russia. The bidders are likely to take that into account as well, which would result in a higher amount of public sector contribution from the Oblast.Foreign Exchange Assumptions (FX). The Feasibility Study did not mention whether FX assumptions have been incorporated into the model. It is likely that in the current market situation some part of debt financing might be denominated in foreign currency. The model should have the flexibility to account for that scenario.Financial AssumptionsDebt Equity Ratio. The assumption of debt/equity ratio is reasonable. While bidders will likely prefer a bigger ratio, because the cost of equity is usually higher than the cost of debt, the lenders would require sufficient equity, and the assumption of 30% equity requirement is realistic.The Debt Service Cover Ratio (DSCR). The DSCR is one of the most important ratios dealing with project bankability and creditworthiness. The ratio shows the number of times the funds from operations before interest cover the annual repayment of principal and interest payments on the debt. The Feasibility Study established the target of the minimum DSCR at 1.2. A DSCR above 1.3-1.4 would be a more realistic expectation of the required ratio by the banks. The riskier the project becomes, the larger the DSCR required by lenders. In practice potential lenders should be contacted at a later stage to better estimate the required DSCR.The Return on Equity (ROE). The assumption for the return on equity that will be required by investors (at least 17%) is reasonable. As in the case for the DSCR, potential investors should be contacted at a later stage to fine-tune this Present Value (NPV) and Internal Rate of Return (IRR). The Feasibility Study established the target of positive NPV and the IRR higher than the discounted rate of return. Both targets are reasonable.Cost of Government Funds. Assumption of 6.74% would need to be confirmed at the time of revision and update of the Feasibility Study to reflect the most recent data.Debt Assumptions. While the Feasibility Study provides some description of the loans available on the market and used for financial simulation, the description is quite limited, and it is not clear on what sources it is based. It is also not clear what debt assumptions were actually used in the model, what was assumed base rate, margin, grace period, and maturity of the loans, front-end fees and commitment fees. All of these assumptions are very important for projection of debt servicing costs.The debt assumptions are believed to be slightly overoptimistic. The Feasibility Study assumes interest rates of 9.5%, 8.5% and 8.0%, which appear to be too low, and it is not clear whether any preliminary market testing has been done for the project potential financing and whether these quotes were the result of discussions with prospective lenders, or rather hypothetical assumptions. The standard assumption in the Russian capital market is to use the Moscow Prime Offered Rate (MosPrime) as the base rate, to which the banks would add their margins. The MosPrime rate in 2006 and 2007 was about 10.5 – 10.8, and in the first two quarters of 2008 was about 11.3. Once the margins are added, this would significantly increase the cost of financing for the project and will change the conclusions of the analysis.In addition, the assumptions about refinancing arrangements appear to be unrealistic. As apparent from the financial statements the Feasibility Study assumes that after an initial loan for construction, the concessionaires would be able to refinance it to a loan for which no principal payments are made until its maturity in 14 years, which will then be refinanced again until the end of the concession period. It is unlikely that any lender would agree to provide this financing without explicit government guarantees (more on this issue in the section 1.4).Depreciation Assumptions. It is standard practice to match the period of depreciation to the economic, or operating, life of an asset. The analysis in the Feasibility Study treats depreciation only for the first 20 years of the operating period as required by the relevant regulations and legal rules in the Russian Federation. However, it is unclear what the economic rationale is behind such regulations and is unlikely to be used by the private sector.Distribution of Dividends. It is not clear from the financial analysis how the distribution of dividends is calculated. Such calculation has a direct implication on the return on equity for investors.It should be noted that the table in Annex 1 to Volume I on Risks Matrix does mention measures of mitigating certain risks like creation of reserve accounts for maintenance, debt service, contingencies, insurance, etc, however, it is not clear how this has been treated in the model and whether any related assumptions have been made.Review of Conclusions of the Financial Model (Methodology) The first review of the financial model was limited by the fact that the model could not be released by the consultants who undertook the financial analysis. There was no model book (document describing how the model was designed) which is usually standard practice in relation to financial modelling. In order to at least confirm that the financial model’s calculation would be adequate, the World Bank team created a very preliminary financial model based on the provided revenue, cost and financing assumptions. The expectation was to reach similar (although not exactly the same) results, should the same assumptions be used. This “base case” model is useful in showing the financial impact of changing some key assumptions. A subsequent meeting took place in February to discuss the assumptions used and clarified that most of them have been official assumptions, as opposed to “real/market” assumptions. This clarification explains why such figures have been used but the opinion of the team remains that the implication for the Oblast should have been assessed using real assumptions.The conclusion of the review is that using the same assumptions (including revenue) as those used in the consultants’ financial model produced the same results as those in the feasibility study. This indicates that there are unlikely to be major errors in the logic of the consultant’s financial model. However, when the Bank team used revised and more up to date inflation assumptions, the cost of construction indexed to inflation increased almost 30%, which would require significantly bigger capital grant for construction (from 40 billion to about 47 billion Rubles). In addition, the Bank team could not reconcile the very high revenue projected in the feasibility study with tolls and traffic estimates. Correcting the traffic, tolls and more realistic economic and financial assumptions resulted in a need for additional financial support from the Oblast during the life of the concession. This means that the project cannot be implemented as a PPP without significant additional resources from the Oblast, including during operations. These conclusions would be confirmed if/when the Bank team will have full access to the financial model used in the feasibility study.9.5Presentation of the Base Case and AnalysisIn the base case model it is assumed that total CAPEX requirement is about Rbl 53.0bn. The investment fund contributes about Rbl 39bn to the total cost, while the remaining funding comes as debt and equity of Rbl 9.8bn and Rbl 4.1bn respectively. These assumptions are similar to the results provided in the feasibility study. Running the base case simulation gives an equity return of 17.8% with a minimum debt service cover ratio of 1.2 and total cumulative tariff revenue of Rbl 121.5bn (net of VAT). On the surface, the project appears attractive to both investors and the government with its “bankable” equity return and high revenue projection. Figure 9.1Main project revenues and costs based on the feasibility study (Rbl million)Note: the revenue line includes also Oblast contribution during debt servicing to maintain DSCR above 1.2Figure 9.1 shows the revenue and cost projections given in the feasibility study. Operating costs fluctuate due to maintenance and repair work required at regular intervals. The net change in cash (the cash available for dividends) fluctuates in response to the changes in operating costs (which includes maintenance costs). It should be noted however that the revenue line includes government support of Rbl 2.3bn which will be needed in order to satisfy a DSCR of 1.2 during debt. This difference from the conclusions of the feasibility study stems from the difference in treatment of the debt financing. The refinancing arrangement proposed in the feasibility study was considered unrealistic, and in the simulated model it was assumed that debt financing comes as a single tranche from the start of construction with a 15 year maturity, 5 year grace period and 9.5% total interest rate. Figure 9.2Debt service requirement and net operating revenues in the base caseFigure 9.2 demonstrates that the revenue after operating costs alone is insufficient to cover total debt payments. Unlike in figure 1, no government support was assumed in this case. Given that revenues fall short of covering debt repayments, it can be understood why a 14 year grace for the second refinancing would be convenient for the project. However, as indicated above, this assumption is infeasible in light of international practice and should not hide the conclusion that the Oblast’s financial support would be required during debt service. It is not clear in the feasibility study where the projected revenues come from. A large gap exists between the traffic assumptions provided in the study and the projected annual revenue given in the financial statements. Over the project life, the financial statement projects an annual average revenue of Rbl 3.9bn, which increases to Rbl 10.7million per day. Given that the average daily traffic over project life is about 14660, the tariff per trip would have to be approximately 729 Rub. This tariff rate exceeds the toll rate assumed in the Feasibility Study, weighted average for which is about 250 Rub per trip. As a result, the revenue projection appears not only overly optimistic but also contradicts the traffic estimation provided in the same study.9.6Presentation of the revised case and analysisIn the revised case, the World Bank team ran the model with different assumptions to illustrate how much the financial output can change as in response to a new set of inputs. Please note that these alternative scenarios are for illustration only and do not serve as firm recommendations by the World Bank on how the financing plan should be revised.The first revised assumption was that of inflation. The provided inflation assumptions differ from the updated figures released by the Ministry of Economic Development of the Russian Federation (MED) and the International Monetary Fund (IMF) (see table 9.2 below). The source of the inflation assumptions used in the feasibility study is the MED estimates done in 2005. It appears that forecast inflation rates from 2005 were used for 2005-2007 while actual inflation figures for those years are readily available. Another revision was made to the debt repayment profile, which currently assumes that the debt required for construction can be refinanced at the start of operations with a 13 year grace period and a “bullet repayment” of principal at the end of its 14 year loan period. This long a grace period is practically never seen in project financing. It would increase the credit risk of the lenders to unacceptable levels. A third party debt guarantee can sometimes be used to extend the grace period of a loan, but the feasibility study provides no indication that this would have been envisaged. In the base and revised case models, it was assumed that debt financing comes with a 15 year maturity and 5 year grace period. The total interest on the debt was held at 9.5% as given in the study.Changes were also made to the inflation assumptions for toll revenue and CAPEX projections. As stated above, the revenue projection appears too optimistic. In the revised case, toll revenues were calculated based on the toll rates and traffic projections were used in the other sections of the Feasibility Study. These annual revenue figures were then assumed to grow at an inflation rate forecast by the World Bank team from the first year of operations. For CAPEX, the construction costs were similarly increased by a new set of inflation figures.Table 9.2 Inflation assumptions used in the revised model 200720082009201020112012201320142015201611.9%13.8%10.5%10.0%8.5%8.0%7.5%7.5%7.5%6.0%20172018201920202021202220232024202520266.0%6.0%5.0%5.0%5.0%4.0%4.0%4.0%4.0%4.0%20272028202920302031203220332034203520364.0%4.0%4.0%4.0%4.0%4.0%4.0%4.0%4.0%4.0%20372038203920402041204220434.0%4.0%4.0%4.0%4.0%4.0%4.0%???Note that these inflation assumptions are not official World Bank projections.Figure 9.3Main project revenues and costs based on revised assumptions (Rbl million)In the revised case, the CAPEX requirement rises to about Rbl 62.8bn. Out of this total cost, the Investment Fund contributes about Rbl 47.5bn, while debt covers Rbl 12.3bn and equity accounts for Rbl 3.7bn. The new equity return is 15.6% and total cumulative toll revenue of Rbl 85.1bn (net of VAT), which falls significantly from the projected revenue of Rbl 120 billion in the Feasibility Study. The shape of operating costs and net change in cash is similar to the base case, while the level of annual net cash available has fallen together with revenues. To satisfy the DSCR of 1.2, an extra Rbl 19.3 bn of revenue is required during debt service. The main conclusion of the revised model is that in addition to capital grant contribution of Rbl47.5 billion to CAPEX , additional government support of Rbl 19.3bn is required during the operating period.Figure 9.4Debt service requirement and net operating revenues in the revised caseIn the revised case, as illustrated in figure 9.3, net revenues are much lower than in the base case, while total debt payments are higher. Lower net revenues result from using the revised revenue scenario, which applies new inflation estimates to the toll revenue projection given in the study. The revised case projects an annual average revenue of Rbl 2.7bn, which becomes Rbl 7.5bn per day. This is about 42.7% lower than the base case assumption but can be considered more realistic. The higher total debt payments result from the higher CAPEX estimate and the consequent need for more financing. In figure 9.4, no government support during debt service was assumed. However, to attract private debt financing, the gap between debt service and net revenues has to be closed by additional revenues – most likely public money.There are several measures that can be further investigated to make the project feasible as a PPP:Reduction of Costs. Careful review of construction and operating costs is needed to determine if any cost savings are possible. This would also include review of different technical solutions and alternative routes for the project and their cost implications. The reduction of costs could be also in form of providing materials, land, completing part of the project worksIncrease in Revenue. Another way to improve the project indicators and make it attractive for the bidders is to increase the revenue base during the operating period so that it is sufficient to service the debt and provide the necessary profits. Increase in toll rates might be considered, especially for the heavy vehicles and trucks. The proposed tolls for the heavy trucks appear to be rather low in comparison with benchmarked countries (see section “Technical Solution and Toll Rate Assessment” of this report). More analysis is needed, including the assessment of the users’ willingness to pay. Allocating some land for development and use by concessionaire along the corridor and at major junctions might be another source of revenue and might look appealing to the potential bidders. Some additional analysis would need to be done to assess this option.Reduction in the Amount of Private Financing. In order for this project to maintain appealing ratios of DSCR, ROE, IRR, etc., the share of private sector funding would need to be decreased. This means that public sector contribution towards capital costs would need to be significantly bigger than suggested in the Feasibility Study, possibly up to 85% of the construction costs. However, in this case the project would not be able to meet the requirement of the Investment Fund for 25% contribution of the private sector. Phasing the project, starting with the section of the motorway with the most traffic for a PPP: Phasing the project could potentially attract the private sector interested in a smaller project with a very solid traffic. The Oblast could then implement the other phase(s) at a later either as PPP or traditional procurement. The phasing might generate sufficient financial benefit to the Oblast to allow it to increase its financial contribution in the future.” 9.7Demand risk management in the financial analysis sectionOptions analysis should be part of the financial analysis. Financial simulation should allow testing policy options, look at other possible sources of revenues, consider availability payments and minimum revenue guaranties and present a comprehensive picture that will help in the decision making process. The financial analysis of the Feasibility study is not complete and does not include project pricing based on different options. The Feasibility Study concentrated entirely on the option with capital grant from the public sector towards construction and all revenues coming from direct tolling and disregarded other possible choices and combinations thereof.There are several additional policy choices and payment mechanisms that can be considered for the project:Availability PaymentsIf toll rates cannot be increased to fully pay for the project, the government might consider periodic payments to the concessionaire. Such payments can either complement toll revenues that will be collected by the concessionaire, or offer fixed periodic compensation to the concessionaire for availability of the road and maintaining it to prescribed standards, with the Oblast collecting the tolls (the VAT implication of the Oblast collecting tolls or the private sector collecting and then transferring the amount to the Oblast should be carefully assessed). Provision of availability payments might allow a reduction in the contribution of the public sector towards construction costs, and thus to maintain the required minimum of 25% for the Investment Fund. However, they represent a fiscal commitment for the Oblast over the life of the project and need to be carefully considered in view of affordability for the government.Minimum Revenue GuaranteeThe guarantee is an option of providing public support to a PPP project and a way to share the traffic risk with the private party. The guarantee would kick in when the toll revenue is below the defined minimum and is often combined with a revenue sharing mechanism in which a certain level of revenues will be specified after which the revenues will be shared with the government in a proportion defined in the PPP agreement.9.8Review of Financial Statements The Chapter 9 of the Feasibility Study contains the financial statements for the project that were supposedly derived as a result of financial simulation, However, they appear to be incomplete. Below are a few comments on the statements in the Feasibility Study.Income Statement (Profit and Loss)The submitted income statement contains the key items required in presenting revenue, expenses and net income. Its informational value could, however, be increased by providing more details on each line item. The first line “Profit (net)” could be broken down into the component revenue sources, for example by type of vehicle. A line should be added for possible government support payment, which can come in the form of minimum revenue guarantee or availability payment. After revenues, it would be helpful to classify the “operational expenses” into variable and fixed costs. Combining all operating, maintenance, overhead and project development costs into one line makes it difficult to analyze the cost assumptions with regard to other similar projects. While revenues will not flow in until operations start, it may not be possible under Russian law to capitalize all project costs during construction. A local accounting expert can advise whether some project development costs should be expensed during construction.Usually, amortization of grant (or “acknowledgement of a grant”) and depreciation expenses are listed separately after EBITDA (earnings before interest, tax, depreciation and amortization). In the submitted profit and loss statement, it is not clear why amortization of the capital grant should end in year 2032 while operations continue until 2043. Amortization of the capital grant and depreciation of the capitalized costs should cover the whole period during which economic benefit is derived from the project, in this case from 2013-2043.EBIT (earnings before interest and tax) follows from adjusting EBITDA for amortization and depreciation. Financing costs and taxes, which are given in the table provided, should then be deducted from EBIT to arrive at net earnings. Cash Flow StatementThe provided cash flow statement correctly includes a breakdown of cash flows into operating, investing and financing activities. Similar to our comments on the income statement, it would be helpful to have more detailed revenue and expense information also for cash flows. Under operating cash flows, the treatment of taxes is inconsistent with the income statement. Why are taxes being paid (on a cash basis) from year 2013 when they are not expensed in the income statement until 2019? These timing differences between paid and expensed income taxes should be disclosed and reported on the balance sheet as deferred tax assets (or liabilities). As to the financing activities, it should be explained why no debt principal is repaid from 2014-2024. It is unusual for lenders to agree on a “bullet repayment profile” with a grace period until maturity for large-scale project finance lending as seems to be the assumption in the cash flow statement. Not receiving any principal repayment until the debt matures dramatically increases the credit risk for the lenders and would require them to “price” this risk into their loan margin – for them to even consider this type of repayment profile. The cash flow statement should also include the free cash flow available to equity (FCFE) as a net balance after cash flows to operations, investing activities and debt service. At the moment, dividends to equity holders are missing from the cash flow statement. The amount and timing of dividends is fundamentally what determines the basis for the equity return calculation and thus project attractiveness to private investors. The cash flow statement should be concluded with a line for “cash balance” which indicates the net change in cash assets for each year (this would naturally also have to be reflected on the balance sheet). Balance SheetThe attached balance sheet should be revised according to international accounting standards. The three financial statements should feed into each other and be easily reconcilable. In this case, some inconsistencies exist between the income and cash flow statements and the balance sheet. It is not obvious where in the income or cash flow statement the asset “VAT on purchases”, or the liabilities “undistributed profit”, “stocks” and “incomes or future periods” are reflected. Furthermore, explanation should be provided on why free cash flow from operating and investing activities is not used to repay debt or distribute dividends. Instead, cash is being hoarded in the balance sheet under “monetary funds”. To better assess the financial position of the project (such as liquidity and solvency), the balance sheet should distinguish between current and noncurrent assets and liabilities and provide a section for owners’ equity, which should include items such as retained earnings, distributed dividends and committed share capital. Overall, the asset and liability balances fluctuate widely over project life and peak at the last year of operations. These large balances are driven by the accumulating “monetary funds” and “undistributed profit” line items. Typically in project finance, the assets and liabilities peak at the start of operations and gradually wind down over project life as capital assets are depreciated and lenders and equity investors are paid back. To reiterate, information is required on why free cash flow is not distributed to lenders and equity investors during project life.9.9Review of Sensitivity AnalysisThe sensitivity analysis allows testing the resilience of the model to changes in the assumptions. Sensitivity of key variables should be tested, in particular for project term, inflation rate, demand and revenue, financing terms, construction costs and operating and maintenance costs.Over-estimation of revenues and under-estimation of costs are the most common shortcomings of many feasibility studies. The sensitivity analysis allows checking what would happen to the project in the worst case scenarios, and provides an estimate of the impact that a change in variable might have on a likely contribution of the government to the project. This will help the Oblast to plan and take into consideration the uncertainty in any projection and budget for it appropriately.The sensitivity analysis identified most of the variables that are usually tested, inflation being one of the key variables missed in the analysis. Testing of variations of 10 – 20 –30% is also appropriate. At the same time the sensitivity analysis had one major shortcoming, it looked at what would be the impact of changed variables on the project after the concession agreement is signed, while the entire focus of the sensitivity analysis is to estimate how changes might affect the cost of the project on which the investors will bid, and what would be the implications for the required contribution from the public sector.As explained earlier, the team understands that the objective of the financial model was to make a case for Federal Funding. As a result, it has used official assumptions as opposed to market assumptions. The purpose of this review is not to assess the quality of the work done by the individual consultants but rather the overall quality of the feasibility study. 10Financing options and affordability of proposed option Sources of FundingThe Feasibility Study needs to investigate all possible sources of funding for the project, their requirements and implications on the structure and feasibility of the project. The reviewed Feasibility Study centered its review on only two sources – funding from the Investment Fund and private sector financing through a concession, in which part of funding will come from equity and part from debt raised in the market.The review of funding sources would need to be expanded to include a wider range of options, some of which are mentioned below:Investment Fund – In addition to funding available for the projects of federal importance, some allocations are also available to regional investment projects.Federal Targeted Program for Transport. There is some indication of support by the program of the development transport hubs in major cities, including Volgograd; it also appears that roads M-6 and M-21 are included in the program for reconstruction and rehabilitation. It is necessary to investigate the possibility of getting funding from the Program.Project prioritization in the Oblast Budget– It is important to review public expenditures of the Oblast and look at investment priorities and allocation of funds to determine what funding from the Oblast might be available either as a contribution towards construction costs, or as potential periodic availability payments, or allocations for minimum revenue guarantees. City of Volgograd contribution: This option should be discussed with the City but there could be opportunity for the Oblast to co-finance the project with the City of Volgograd. The rationale could be that the City would also benefit from less congestion as a result of the by-pass being constructed. However, the Bank team is cautious in recommending this option given the complexity of the policy implication, budget allocation process and lack of knowledge about the feasibility of this potential solution.Sub-national loan to the Oblast administration. The Feasibility Study needs to identify the borrowing capacity of the Oblast to determine if taking a loan by the Oblast might be an option, and if re-prioritization of investment could allow borrowing. Our understanding is that there is currently limited capacity but a public expenditure review could determine areas to improve borrowing capacity.Land transaction: The land around the proposed by-pass is expected to increase in value should the road be built and additional development be implemented. Part of the land is currently under public ownership and the increase in value could potentially be captured to finance the project. The Oblast could either retain ownership and sell the land after completion of the project or incorporate it as contribution to the concessionaire. Under the second option, the concessionaire could develop further the land received and generate additional value. However, it is not possible to assess in advance the potential future value without a realistic and detailed development plan and market testing. It is also recommended to refrain from selling the land now as the Oblast will not be able to capture the potential future increase in value. Levies and other user charging: one identified source of revenue is tolls to be paid by users of the road. It is understood that the initial toll rate was determined through a methodology that includes a survey of drivers’ willingness to pay. However, given the lack of affordability of the project, the Oblast could reconsider the current level and investigate how much more could be charged to the various groups (transit, residents, cars, trucks, buses) without significantly reducing the benefit of the road. It is however important to incorporate this survey with analysis of its impact on overall traffic and regional development.Taxes on residents and companies (not based on use of the by-pass): in this case, the Oblast could charge companies and residents in the area close to the proposed by-pass. This solution has important policy implications, which should be properly assessed, as the taxation policy could have a negative impact on the Oblast development plans.In the current economic crisis, it is not clear if and how much of Federal grants will be available. It is therefore not recommended to assume in advance that a project would receive a significant amount of Federal money. In addition, the private sector is currently struggling to provide financing and would consider the proposed by-pass as a very risky project. As a result, the current potential for any project to be financed without significant contribution from the Oblast might be limited. The Bank team believes that even if all alternative sources of funding are investigated, there is a solid probability that contribution from the Oblast budget will be needed for the proposed by-pass. The Oblast should therefore undertake a public expenditure review for at least the transport sector and consider reprioritizing its investment projects in this sector. The potential for land contribution should not be underestimated but investigated further before committing to any transaction that might prevent the Oblast (or potential concessionaire) from capturing the increase in land value. Considering alternative options would more likely increase the chance that the solution could be affordable, even if not implemented as a PPP.10.2Affordability AnalysisOne of the tests that any PPP project should pass is affordability. A project is affordable if the Oblast can fulfil its financial obligation to the project over the life of the concession. This means in practice calculating the capital and operating financial contributions and comparing them with the budget over the life of the concession. As the budget cycle is often limited to a few years, a convenient way to assess the affordability is to determine the budget envelope likely to be available based on a series of economic assumptions (such as growth, share of capital expenditure in total budget, share of transport expenditure etc).Once a PPP/Concession Agreement is signed with the concessionaire, the Oblast would have contractual obligations to make payments and these payments will have a higher priority than planned investment. The Oblast should therefore be very careful in assessing if implementing a PPP project now would not reduce its capacity to undertake projects in the future and ensure essential maintenance and rehabilitation of existing transport assets.In addition to direct payments, the Oblast should account for the financial implication of any guarantees given (such as Minimum Revenue Guarantees for traffic risk). There are various ways to manage these risks but at the minimum the Oblast should carefully assess the potential for these guarantees being called and report them in future budget. The feasibility study has not done a proper analysis to determine if the proposed project is affordable to the Oblast. In fact, the analysis was limited to determining the amount of public funding that would be needed to implement the project as a PPP. It has not determined if the Oblast could afford such payment. Even if potential contribution could be expected from Federal sources of funding, the feasibility study could have undertaken some scenario analysis (such as 50% of total public sector funding available from the Investment Fund) and determine if under these assumptions, the Oblast could afford such payments.In addition the feasibility study did not consider such choices in structuring PPPs as availability payments during the operating period or minimum revenues guarantees and did not assess if the Oblast budget could bear paying this and what would be the maximum contribution that that Oblast can afford.Under the assumptions used in the feasibility study (CAPEX, traffic, tolls, etc…), it is unlikely that the Oblast can afford a solution as expensive as the proposed by-pass even with contribution of the Investment Fund towards capital costs. Implementing a project as PPP will still require significant financial contribution and the feasibility should be complemented to include (i) a review and assessment of additional sources of revenue, and (ii) a proper affordability analysis.11.Review of Risk Allocation.Chapter 7 of Volume I on Risks and Risk Matrix table in Annex 1 of the Feasibility Study tried to identify project risks at different stages of the project. This is a good attempt, which however misses a critical component – allocation of the responsibility for the identified risks.As PPP are legally long-term contractual agreements, responsibilities are clearly defined and determine the price that the Oblast will ultimately pay. For example, construction risk is usually transferred to the private sector, which means that it will be responsible (and won’t be able to claim additional compensation) for delays and cost-overruns in completing the works. The approach is not to transfer all risks to the private sector, as it will then result in less interest (or no interest at all) or a much higher cost to the Oblast. As a result, the risk allocation is a very important exercise and component of the PPP assessment.Given that the feasibility study’s approach to risk management was to focus on how to mitigate specific risks rather than the best allocation, this section does not review individual allocation but rather explains (i) what is risk allocation and (ii) how to undertake a proper risk allocation exercise.11.1Best Practices in relation to risk allocation and recommendationA good practice with the preparation of risk matrices is to have the following structure (divided by the stages of the project): Description of the riskProposed allocation of the risk (usually two columns – ‘Grantor’ and Concessionaire’- and one of them gets checked for a particular risk)CommentsThe general rule is that risks need to be allocated to the party that is best capable to manage them. This means that the government would need to take some risks that it can manage better or because the costs of the private sector assuming these risks would be too high. The private sector will price the risk of the project based on how individual risks are allocated, their likelihood of occurrence, and impact. If the private sector is transferred a risk that it cannot control (for example inflation being higher than forecast) it will either take a very conservative scenario (in this example, take a very high inflation rate) or simply not accept it (and therefore will not make any proposal). The risk allocation exercise requires a very good understanding of the market and project finance principles in order to allocate the risk in a way that balances the Oblast and private sector requirements.The preparation of a Risk Matrix would allow the government to decide which risk should be allocated to which party. Risk framework is a useful tool that provides the basis for discussions on potential structuring of the transaction and relevant policy choices, and allows the government team preparing the project to discuss with the decision makers the proposed risk allocation and obtain approvals for moving ahead with the transaction. The risk matrix should be prepared with a legal perspective in mind because it should provide the basis for drafting the PPP legal agreement/ concession agreement.Potential bidders will carefully examine the risks and proposed risk allocation and will prepare their bids based on their perceived risks and how comfortable they are with taking some of the risks. Given the big scale of the proposed project, very limited experience with PPPs in Russia and the current volatility of the market the investors would be uncomfortable with assuming many risks that are usually borne by the private sector in established economies with good track record of PPPs.The risk allocation matrix is not a one-off exercise. It is prepared with the support of transaction experts and in consultation with potential bidders. Ultimately the risk allocation will determine if a PPP project is financeable (ie. lenders will not finance it if they believe the risk allocation is not appropriate), so the Oblast should remain flexible when designing such a matrix. The recommendation of the World Bank team is that the risk allocation matrix in feasibility study is revised to reflect the proposed structure and focus on risk allocation.12.Environmental Assessment12.1Summary of FindingsKey issues identified during the review of the Feasibility Study are summarized below:Safeguards schedule versus design schedule: Environmental information needs to be consistent with and have the same level of detail as the engineering design. Proper information flow between the designer and the environmental consultant should also be ensuredAnalysis of policy, legal and regulatory framework: The project developer needs to clarify which safeguards framework will be used for the project. Roles and responsibilities of agencies and stakeholders involved in the assessment, mitigation, and supervision of environmental issues should be clearly defined. Public awareness and participation in the decision-making process should be significantly increased not only to meet Russian standards, but also to conform to standard approaches of international financial institutions. The developer needs to be more proactive in the public consultation process to mitigate the significant risk of public resistance against the project. Efforts should go beyond current national practice and comply with international good practice. The connection between by-pass project, city development master plan and environmental mitigation measures should be made. Some of the induced impacts of the by-pass (e.g. residential and infrastructure developments triggered by improved traffic connectivity) may have impacts of significant scale. Under good international practice the project developer would establish a project safeguards team which would responsibly deal with environmental and social issues, coordinate studies, coordinate and manage consultants, and conduct and/or facilitates the dialogue between various stakeholders on environmental and social issues. Environmental Management Plan and monitoring plans are a direct link between the environmental assessment and actual implementation during the construction and operational phases. The Feasibility Study needs to recognize and promote this important safeguards instrument and prepare for its practical and effective implementation. 12.2Significance of Environmental Assessment and ManagementEnvironmental and social considerations today are an integral part of all large scale transport infrastructure projects and are demanded and critically reviewed by the affected population as well as national and international non-governmental organizations (NGOs). Major international financial institutions are in their lending operations committed to the Equator Principles, which lay out good environmental and social conduct in project financing. The existence of an environmental due diligence process according to international good practice is viewed by many investors as a quality criterion for diligent project preparation and a substantial contribution to overall project risk mitigation. The latter is relevant especially in the context of public attitudes towards a project and regulatory reliability from the side of environmental authorities. This in turn has implications on the processing of project permits and licenses, most importantly the construction permit and operational license.12.3Review of Environmental and Social Aspects of the Feasibility StudyThe observations are based on a review of available documentation. Conclusions presented below should be viewed as preliminary due to limited time available for review and complexity of the documentation. Overall the reviewing World Bank team was impressed with the large amount of data generated and the high level of diligence the project developer has employed in analyzing, interpreting and presenting the information. Below, the environmental sections of the Feasibility Study are (i) reviewed and commented and (ii) recommendations are made for improving the Feasibility Study quality and aligning it with international good practice.Documentation reviewedFeasibility Study of Volgograd By-Pass Highway project in Volgograd Oblast, volume 2 Book 1, Section 2. Environmental Conditions, Section 10. Proposals on Environmental Protection;Volgograd By-Pass Highway Project: Engineering Design Document, Volume 7 “Environmental Protection” (2007);Volgograd By-Pass Highway Project: Engineering Design Document, Report on Public Hearings (2006);The Project Conception of the Area Borders for Future Location of the Capital Construction Sites within the Range of the Highway “Volgograd By-Pass highway” in the Volgograd Region (2008); Opinion of the State Expertise (April, 2008);Illustrative maps on functional zoning, complex assessment, basic plan of the areaA range of common environmental risks and potential impacts exist for a project of such large scale and complexity. The consultants performed well in undertaking the environmental assessment of the project for the southern part of the proposed by-pass highway in the framework of preparation of the Engineering Design Documentation. In this regard, the environmental baseline conditions before construction were assessed and key environmental impacts of the project were identified. Furthermore, baseline data were collected from the locations likely to be impacted by the by-pass project, project layout was documented with maps and drawings, the potential environmental impacts were evaluated and alternatives were considered. In addition, appropriate remediation and mitigation measures were proposed, including estimation of the economical feasibility of such measures. Calculation of ecological damage was also undertaken related to air pollution and waste disposal during by-pass construction and operational stages. Environmental considerations were taken into account at the early stages of the design phase of the project: specific technical solutions and routing choices were often based on environmental considerations. Environmental assessment (EA) began at an early stage of project planning and already completed several stages. In 2005 JSC “GiprodorNII” prepared OVOS required under Russian national legislation. The OVOS completed the process of ecological expertise with positive opinion issued on October 18, 2005. In 2007, a separate Volume 7 “Environmental Protection” became a part of the Engineering Design document prepared for the Southern section of the by-pass highway. The same exercise will be done when the design documentation and engineering solutions for the Northern section of the by-pass will be developed. Environmental monitoring and evaluation procedures are built into the construction and operation stages. The Environmental Assessment was undertaken in full compliance with Russian national legislation. The project consultant submitted the Engineering Design documents for the southern section of the by-pass to the State Expertise. So far the documents have not been approved by the State Expertise which provided the necessary comments to improve the particular parts of the materials submitted (in April 2008). The project consultant is currently addressing these comments. The State Ecological Expertise requested to see the exact locations of the waste disposed of by the construction and operation of the by-pass. Also, the State Ecological Expertise requested to include in the design document a calculation of the level of noise on the territory of the settlements, including horticultural association, during day and night time.Overall environmental impact on the Volgograd city level is positive. The Project would help to improve communication between settlements in the oblast area, relieve available roads and direct transit traffic around Volgograd city, thus reducing travel time and improving environmental situation in the city. Local ecologists estimate that concentrations of toxic exhaust components alone would drop by a factor of 2 or 3. While project implementation would reduce the harmful influence of transport on the city environment, temporary and permanent negative impacts would be expected at the construction and operation stages in the areas adjacent to the road. These impacts should be mitigated. Three groups of potential impact exist on the environment: operational (connected with the by-pass as engineering structure as well as transport activities), construction (connected with the technical process of construction and envisaged as a temporary one during the by-pass construction period) as well as indirect and induced impacts connected to temporary works, borrow pits and dump areas during construction, and impacts caused by, for example, better accessibility and resulting accelerated development.No areas on the proposed by-pass route are considered sensitive habitats or areas of particular biodiversity, or otherwise protected areas. Those by-pass segments which would cross forest areas were agreed with the Forest Agency of Volgograd Oblast (two alternatives were considered). The necessary activities of the forest land transferring to the transport land are envisaged in the engineering design documents, including compensation measures such as planting new trees in available areas.12.4Identification of Key IssuesThe most important environmental risks are associated with excessive noise from construction and high speed traffic, increased emissions from traffic, and risks of potential spills/emissions from the hazardous materials transported on the road. The set of mitigation measures are planned by the project consultants and designers focus on these issues. Where the road passes by settlements, appropriate mitigation measures will be implemented (e.g. noise protection screens, which are also reducing the concentration of polluting substances, 4-row noise-gas-dust protection belt of bushes). Runoff from the road will be managed by constructive measures, such as gabions and filtering plants, before discharging to reservoirs fit, for example, for. fisheries. The project consultant has also designed waste handling and disposal measures (particularly at the construction phase).While a special volume is devoted to environmental protection measures as part of the engineering design document for the southern part of the by-pass, the main part of the Feasibility Study has a very short and generic description of environmental impacts and mitigation measures. The substance in this section can be developed further on the basis of the materials that were collected during the preparation of the engineering design. The construction of the by-pass would lead to the land acquisition and conversion of agricultural and forest lands into transport infrastructure. The proposed route of the by-pass highway runs on the territory of Svetloyarsk, Gorodishensk districts of the Volgograd Region and Sovetskiy district of Volgograd City. Over 80 percent of the road traverses Svetloyarsk and Gorodishensk districts, which are known for their intense agricultural land use. The by-pass corridor is mainly located on the agricultural land (around 65% of the surface), most of it state property with a minor part in private ownership. Land use in some impacted areas is diverse, including settlements designed for part-time farming, house construction, private housing construction, gardens and plantations. Some areas are also used as flood relief zones (basins and canals). The density of physical cultural resources (PCR), such as historical monuments is very high in the Volgograd region according to the information provided to the project consultant by the Science and Industrial Center for Protection of Historical and Cultural Heritage of the Volgograd Oblast (that is a regional agency attached to the administration). Major objects of historical heritage/PCR exist in the World War II battlefields and the Volga-Don navigation canal, which is the object of the cultural heritage of year 1952. A thorough, continuous archeological survey of the by-pass corridor has never been carried out. In this connection, any change of the by-pass route could potentially destroy hitherto undiscovered archeological items. This is further developed in the section on “Cultural Heritage Assessment”.The project consultants and designers are planning to examine in detail the zone of the proposed construction activities (by-pass corridor plus all sites of accessory and temporary works) to define an exact number of historical and cultural heritage objects. That will be done in full accordance with the national legislation, namely the Federal Law “On Protection of the Cultural Heritage Objects” and the RF City Planning Code. Beside the territory of the road, as the experience of supervision over construction of roads showed, it is necessary to survey territories of access roads or construction, places of excavation and storage of soil, borrow pits, work camp facilities and parking of heavy machinery. The cost for such examination was calculated on the basis of the national standards and norms by the Oblast Center for Protection of Historical and Cultural Heritage and submitted to the project proponent on December 5, 2006. The project consultant includes the cost for the said examination into the overall project costs. The public consultation process is organized in accordance with provisions of the national legislation – specifically, City Planning Code and Land Codes of the Russian Federation (RF), Law on Environmental Protection of the RF. In this regard, the population was informed about the planned by-pass construction via local mass-media and public hearings were held in 2006. The report on the public hearings is an integral part of the Engineering Design document prepared for the Southern section of the by-pass highway. At that time most technical solutions and even routings were preliminary and unspecified. No evidence of complaints has yet been provided. However, in the worst case scenario, protests and conflicts with local citizens can become a major concern or even block construction. 12.5RecommendationsListed below are recommendations which can be made after a review of the available documentation. The comparative standard applied is international good practice in environmental due diligence, which is reflected in international criteria such as the “Equator Principles” as well as the World Bank’s environmental and social operational policies (“safeguards policies”). The following gaps were identified between current environmental due diligence documentation and procedures applied to the Volgograd By-pass Project, and good international practice:Safeguards schedule versus design schedule: Environmental information should be as detailed as on the corresponding design stage. To integrate environmental criteria into project design, the project developer needs to hire environmental consultants to work with technical designers. The flow of information between the technical designer and the environmental consultant has to be well-managed. Also, a clear plan is required on how environmental information will be used by the design engineers to improve the project’s environmental performance. Analysis of policy, legal and regulatory framework: The project developer needs to clarify which safeguards framework will be used for the project. Is the Russian environmental regulatory framework currently in a condition to be applicable to a project which shall comply with international good practice? If not, where does it need to be supplemented? Will it be necessary to improve the institutional, legal and regulatory framework with respect to environmental and social safeguards?In this context, the Oblast should clearly define the roles and responsibilities of agencies and stakeholders involved in the assessment, mitigation, and supervision of environmental issues. The following questions should be addressed in particular:How are environmental permits and licenses integrated with construction permits?Who issues these environmental permits?Who monitors?Who analyzes?Who prepares reports with recommendations?Who receives reports?Who has authority to act (e.g. withhold or authorize payments, impose fines, fire or ban from site access contractors or individuals)?Moreover, the Feasibility Study needs to clearly explain how information is transferred from OBOC / other environmental studies into design documents, and into environmental permits or environmental clauses in construction and operation permits. Is the process clear and realizable, or a mere paper exercise?Public awareness and participation in the decision-making process should be significantly increased not only to meet Russian standards but also to conform to standard approaches of IFIs. This would as a minimum entail public information meetings on (i) the TOR for the environmental and social assessments, (ii) the findings on impacts and the recommended mitigation measures as described in the draft EA reports (and social assessment reports). Additionally, public participation should be encouraged through regular outreach meetings, and public sharing of draft documentation of EA and also of construction permit decisions. Response should be given to major comments and inquiries from the public, and sound recommendations from the environmental expertise review should be incorporated into mitigation and monitoring approaches. The Volgograd Oblast road department and design consultants should be more proactive and develop a consultation process and/or public campaign aimed to mitigate the significant risk of public resistance against the project. They should do this, even if it would require going beyond current national legislation, to comply with the international good practice. Early, informed, meaningful and responsive public participation in the environmental assessment and other processes should be an integral part of project design. Public participation should be maintained throughout the design and planning process and not be restricted to a few public hearings. Instruments such as information bureaus and web-based public information should be extensively used.The connection between by-pass project, city development master plan and environmental mitigation measures should be made. Some of the induced impacts of the by-pass (e.g. residential and infrastructure developments triggered by improved traffic connectivity) may have impacts of significant scale and need to be recognized and described in the environmental sections of the Feasibility Study. A cultural heritage survey of the complete by-pass corridor, including all areas temporarily and permanently affected by construction activities (access and haulage roads, borrow areas, dump areas, camp and storage sites, construction infrastructure and facilities) has to be carried out. Clear chance find procedures have to be established and their readiness for implementation ensured at the construction sites. These should be presented in a compact, practical manner in a PCR management plan, which would, as the environmental management plan, become a fixed item of the construction contracts. Under good international practice the project developer would establish a project safeguards team which responsibly deals with environmental and social issues, coordinates studies, manages consultants, and facilitates the dialogue between various stakeholders on environmental and social issues. The EA report does not require a particular format, but contains components which present key information in a structured and systematic way. This structure would also be recommended for the environmental sections of the Volgograd by-pass FS:executive summarydescription of environmental (and social) baseline conditionsproject description (including all variants and options considered under the FS)description of impacts and the corresponding mitigation measures (known at this preliminary planning stage, many of them, both impacts and mitigation measures, will still be generic) environmental management framework (EMF) for roads projects orenvironmental management plans (EMP) which form the basis for updates during subsequent more detailed planning stages, including monitoring plans.The Environmental Management Plan and monitoring plans link the environmental assessment to the design of appropriate mitigation measures, and actual implementation during the construction and operational phases. In the current version of the Feasibility Study, this important safeguards instrument has not been fully explored. For this reason, environmental management during construction and operation has been developed with insufficient practical content. Induced development: Overall plans for the Volgograd Oblast development envisage that the by-pass would better connect the districts of Gorodishensk and Svetloyarsk to the City of Volgograd. This is expected to lead to significant economic impacts (such as rising commercial activities, construction and industrial production, demand for commercial land, demand for housing space). Large scale land conversion might be expected as an induced impact of the project. This should be carefully analyzed and managed. In this context the connection to any existing Urban Master Plan of Volgograd should be investigated. The by-pass area should be reviewed from the perspective of urban planning, and the existing schemes should be integrated into the Feasibility Study and subsequent design steps. 13.Social AssessmentThe World Bank team has reviewed the materials in the Feasibility Study and the background materials pertaining to the social assessment and the resettlement aspects of the Volgogorad by-pass project. This section contains a review of the provided materials as well as recommendations on how to adjust the social assessment and resettlement issues for the project to meet international standards. In addition, advice is provided on how to make investments appear less risky and more transparent to international financial institutions and other investors adhering to world standards on environmental and social issues. For the administration of the city of Volgograd the rationale for enhancing social safeguards to meet international standards is two-fold:enhanced social standards will increase sustainability of the project, decrease its long-term social costs, and, ultimately, make it more viable;enhancing social standards to the international level will increase the likelihood of funding from international finance institutions (IFIs), which adhere to higher social and environmental standards than are prescribed by law and practiced in the Russian Federation. Heightened attention to social aspects of the project (in this case, specifically, involuntary resettlement) reduces social risks to the creditor, increases likelihood of obtaining funding, and improves the terms of financing.In the case of the Volgograd by-pass project, the following social performance standards are the most pertinent and require further action:Social Assessment/public hearings;Land acquisition and involuntary resettlement;Public hearing frameworkThese are also the issues covered, to a varying degree, in the Feasibility Study and the background documents. The section will assess the work done under the Feasibility Study against the international standards. It will also provide recommendations on possible improvements to the social review, resettlement, and economic displacement framework suggesting more consistent and appropriate analysis, presentation and staffing. Attached annexes describe the actions necessary to meet the standards for safeguards 3a and 3b above. The administration of Volgograd can refer to this framework when subcontracting preparation for other infrastructure projects. Reviewed documents include:Rostekhconsulting report on public hearings, 2006;Engineering project, DorProektServis, Volume 7, 2007;Feasibility Study of Volgograd Highway Project in Volgograd Oblast, Volumes 1 and 2.Current version of the Feasibility Study contains references to social issues addressed by the project. The risk assessment matrix recommends an information campaign among the population and relevant agencies (p. 122, v.1); The cost tables assess the level of compensatory payments (pp. 108, 109, v. 2).Provided background materials (Engineering Design, Volume 7) list both public and private land owners who are most likely to be affected by the road construction. Payments are calculated for compensation made on the basis of decreed norms for the value of particular types of land as well as for the likely loss of revenue from agricultural production. The same source also lists the private and public buildings, private dwellings, businesses, utilities, and public buildings/communications that expected to be destroyed druing. The need for “appropriate compensation” and/or for the provision of adequate replacement dwelling is acknowledged. However, no calculations of payments or replacement costs are provided. Finally, the same document outlines the process of consultations and information campaigns conducted in the affected areas. Such campaigns started with announcements about the forthcoming road construction in local media and completed through the process of public hearings in affected districts. The description of public hearings is complemented by a volume of more detailed description of public hearings that were held in particular localities, complete with the protocols of the meetings, the newspaper announcement informing about the project in general and the meeting in particular, and background materials on the project presented at the meeting. This is important background work, demonstrating attention of the project team to the social safeguard issues. Furthermore, consideration for resettlement and public hearing issues appears to comply with Russian legislation on land valuation, compensations, and information and disclosure requirements. The main shortcoming of this work with respect to national legislation and project cost calculation is lack of clarity on the cost of compensation and value of property in case of resettlement or economic displacement. While the rationale is presented for valuation of agricultural land, cost assessment of other property is not recorded in the background documents presented to the WB. If the Volgograd government wants to raise the quality of social review and framework to the level of international best practices (for reasons for such an upgrade see paragraph 2 of this section), some additional steps need to be taken. These steps will build on the significant work already done. So provided that the expected trajectory of the road construction does not change, additional costs are expected to be marginal and could be justified, considering the benefits of the perceived lower risk of the project. The risk would be lower from the point of view of potential international investors and with regard to the diminished social risk of complaints, legal and public actions by discontented resettled or compensated owners, or local interest groups dissatisfied with the impact of road construction on their lives and livelihoods. From the point of view of international standards the main shortcomings of the information campaign/resettlement/compensation calculations are as follows:addressing resettlement/compensation/information campaign/consultations issues in separate chapters of an Engineering review does not amount to a contiguous social framework. A social framework would establish (1) a frame of reference for addressing social issues; (2) a benchmark analysis on the basis of which a particular and finite list of affected communities/households/indigenous groups would be drawn; importantly (3) a plan for addressing social issues throughout the life of the project if mitigation/correction intervention is needed (4) identify a consultant/administrator (a company or an individual) responsible for overseeing the implementation of the plan and for interaction with the affected individuals/households/communities. Resettlement/compensation plan should have a framework witch is to be updated and monitored throughout the life of the project. Such a framework needs to have (1) a clearly defined compensation mechanism. Again, the international standard would not be based on land valuation (usually outdated and made unsatisfactory for the recipient because of undervaluation, inflationary effects, etc.), but on the resale value of property and current value of business losses. These principles should be stated clearly and clearly presented to the recipients. (2) There also should be a grievance mechanism, which could save costs and aggravation of court procedures in the future. Public hearings/information campaign from the international standards’ perspective should not be short-lived, conducted at the beginning of the project. Rather, a feedback mechanism should operate throughout the life of the project. As with the resettlement issues, a framework and a plan should exist, together with a responsible entity to provide information on the district-specific progress of the project, and pass complaints and suggestions for improvement to the overall project management. This way the community will feel empowered and engaged and its potential hostility towards the project because of temporary inconveniences or permanent relocation will be diminished. To summarize, the Feasibility Study makes a good effort to comply with the national legislation on resettlement/compensation/land valuation/public hearings. However, it falls short of international standards for (a) social assessment in general and (b) resettlement/economic/physical displacement and (c) public disclosure plans/consultations in particular. Social assessment and the related (b) and (c) issues are not treated as contiguous stand –alone issues deserving of (a) a separate stock taking, (b) an action, plan, (c) a monitoring and reporting mechanism, and (d) grievance mechanism. The Feasibility Study could be brought to international standard on social issues if it contained a separate section and a background document providing a social review of the project, specifically (1) identifying various social impacts that are expected to be triggered by the project; (2) risks and impacts of the project in the context of each concrete stage of construction.Social Action Plan (AP) (could be prepared as part of an environmental action plan). An AP needs to concentrate on disclosure and consultations with the impacted communities (identified on the basis of a completed social assessment), basis for compensation cost calculation, follow up, mitigation/grievance mechanisms;physical/economic displacement action plana detailed section on physical/economic displacement and measures taken by the project to address these issues.clearly identified firm/individuals/officials to be a focal point of social standard issues and responsible for the follow up actions (correction of the plans, mitigation, conflict resolution)The AP, in addition to a consultation timetable, needs to provide for an actionable feedback mechanism. Such a mechanism would includea grievance mechanismmonitoring reporting14.Cultural Heritage Assessment Chapter 11 of the Feasibility Study notes that the density of monuments in [the] territory of Volgograd region is very high. Thus while it recognizes that the project area is rich in both visible and invisible cultural heritage, it nevertheless provides no targeted documentation, suggestions and/or framework for addressing the potential risks of harming such heritage that could arise during project implementation. The following is a recommendation, substantiated by an objective rationale, to further investigate the presence and potential threats to cultural heritage in the context of the proposed Volgograd By-Pass project through the presentation of a framework for addressing cultural heritage issues as part of project preparation.14.1ContextVolgograd has been engraved in world history and the memory of Russian citizens as the theater of the Battle of Stalingrad, which was one of the longest and bloodiest sieges of Second World War. Due to the extensive topographical area and duration of the armed conflict, available maps indicate that the Volgograd By-Pass project is likely to overlap terrain that was formerly a battle stage. As such the probability of encountering chance archaeological finds during construction is relatively high and in view of the wide range of stakeholders in the project, be they investors or beneficiaries, it is therefore important to establish a framework for addressing such events should they occur.The irrefutable historical significance of the site is rendered more complex by the recent nature of the events that took place in and around it. This implies that sub-soil discoveries in addition to products of human cultural activity including utilitarian objects and weapons, are also likely to include human remains as well. Whereas the debate on the control, treatment and disposition of human remains for scientific research purposes has been of an anthropological nature and has led to the Native American Graves Protection and Repatriation Act (NAGPRA) in 1990 that has become the most recognized reference for such cases, there are no international conventions for the exhumation and re-burial of skeletal remains that are not considered as belonging to indigenous populations. Thus, while arguably such remains could be classified as archeological finds, nevertheless as manifest evidence of recent hostilities they further raise an entirely different set of ethical and political issues pertaining to re-burial. Lastly, there is also a possibility of safety risks to site workmen in the event of finding undetonated explosives. 14.2Rationale In view of the costs of the project, the consolidation of investments necessary for its realization is likely to involve stakeholders from International Financial Institutions (IFIs) as well as from the public and private sectors. Since IFIs often have specific policies for safeguarding and managing cultural heritage in the context of development projects, it will be necessary to ensure that implementation procedures adopted by the project are aligned with such policies. In this regard, IFIs and multilateral institutions have a “do no harm” policy that often corresponds to the recommendations expressed by international conventions. In order to avoid or reduce potential adverse impacts of a given project, the required procedures usually include the identification of risks and measures to mitigate them. This in turn, entails the elaboration of a management plan that describes the process in detail including the variety of impacts, relevant procedures for each case, as well as institutional and financial responsibilities.By the same token, the public sector also possesses a legal and regulatory framework often articulated through the listing of sites and the rules and regulations governing urban planning, land management and zoning. Finally some private sector enterprises abide by tenets of Corporate Social Responsibility (CSR) that may also affect investment conditionalities.As previously mentioned the possibility of finding human remains could lead to political tensions and, in a worse case scenario, it could provoke polemics as was the case in Estonia in 2007. Such controversial issues in turn may be a deterrent to private investments as public opinion plays an important role in legitimizing development interventions. It is therefore critical to anticipate potential risks and establish an environment that strives to take every precaution to protect investments. 14.3Framework guidelines and elementsIn anticipation of potential risks to project implementation a series of steps ranging from identification to planning are recommended.a) Identification of physical cultural resources. This section of the identification process includes the presence of visible and invisible heritage assets at the proposed site and its vicinity. Whereas visible cultural resources can be identified through mere observation during field surveys, the presence of sub-soil artifacts necessitates different surveying tools. To the extent possible, it is preferable to use non-invasive documentation techniques such as aerial (satellite picture analysis) and low impact walkover ground surveys and geophysical prospecting including sampling and laboratory analysis of transects.b) Establishment of baseline Data. A direct output the baseline data is used to i) establish the conditions of the site prior to interventions, ii) assess the significance of heritage and how it relates to the local legal and institutional framework, iii) identify the additional types of expertise needed, iv) assess potential impacts and v) verify the conditions of the sites after the intervention.c) Identification of the applicable laws, regulations and policies. First and foremost this pertains to national and local provisions. However in view of the range of investors foreseen, it is recommended to review all relevant policies and procedures pertaining to the protection of cultural heritage that may apply to ensure that there are no gaps between various requirements.d) Identification of the institutional framework. This is will enable project implementers to establish the specific roles of the relevant authorities and agencies responsible for cultural heritage protection. This identification should be accompanied by an institutional capacity assessment to determine whether there is a need for specific expertise such as forensic archeologists, for example, or for targeted training. In the case of this project it is very important to review the national procedures for chance finds including notification, study/waiting period, preservation, storage, restitution and general administration. e) Elaboration of a Management Plan. The management plan is developed based on the research undertaken (see above points a to d) with an emphasis on which measures should be taken to mitigate potential adverse impacts to the cultural heritage and resources. An integral management plan implies undertaking stakeholder consultation prior to its elaboration. Therefore it is recommended that stakeholder identification and consultation methodology to be included in the preamble to the plan. The plan should include inter alia: the inventory of the areas likely to be subject to impact, the nature of the activity likely to have an impact (installation of cables, drainage, temporary structures, etc.), the type of impact (short term, medium term), measures taken to mitigate such impacts, reasons for mitigation, implementation responsibilities, financial responsibilities and monitoring procedures.15.AnnexesANNEX 1: Investment Fund of the Russian FederationThe Investment Fund (IF) of the Russian Federation was formed by the RF Government Regulation #694 of November 23, 2005. The IF took action on January 1, 2006. Currently the Fund is managed by the Ministry of Regional Development (in accordance with RF Government Regulation of October 25, 2007) which took over these functions from the Ministry of Economic Development. Rules for Allocation of the IF funds are stipulated in the RF Government Regulation #134 of March 1, 2008. All projects for the IF’s budgetary allocations shall (i) have equal conditions for access to the procedure for granting the Fund's budgetary allocations, (ii) comply with the criteria established by these IF Rules, (iii) operate without loss, (iv) have risks allocated between public and private investors, and (v) take into account public and private interests. The size of the IF is approved on the annual basis. All the projects that could claim for getting support from the IF may be divided into 2 categories: investment projects (including complex investment projects) and concession projects of federal significance andprojects of regional/interregional significance. Projects of regional significance are defined as projects implemented within the territory of one region, and interregional projects are defined as projects implemented at the territories of 2 and more regions. The IF's budgetary allocations may be provided for implementation of a project within a time period of 5 years at most. Both projects of federal and regional significance claiming to get the IF financing shall be implemented as PPP projects. The projects of federal and regional significance are differ by the minimum size of the requested IF allocations (5 bln. rubles and 500 mln. rubles respectively), as well as by some diversity in the required eligibility criteria and selection procedure. In particular, the cost of the project financed by the investors participating in the implementation of a complex investment project of the federal significance shall constitute at least 25% of the total project cost. For the projects of regional significance the share of investor’s money shall be not less than 50% of the total project cost.Before June 2008, IF dealt with the projects of federal significance only. A definition of a project of regional significance was provided in the RF Government Regulation #486 of June 23, 2008 which introduced amendments to the IF Rules. Up to now – i.e. since 2006 - 20 federal projects of the total volume of 342 bln rubles were approved to receive financing from the IF. The IF also envisages 80 bln rubles for implementation of regional projects in 2008. At the moment there is a list of 20 regional projects claiming to get IF financing, but no one regional project was approved to get financing from the IF so far.The ultimate size of the IF's budgetary allocations which could be granted for implementation of the regional projects is determined for every subject of the RF and is available at the official site of the Ministry of Regional Development. Also, the regional budgets shall provide a certain share of co-financing for implementation of the regional projects supported by the IF. For Volgograd oblast the Ministry of Regional Development put this share as 24%. The applications to claim the IF money for implementation of the regional projects shall be submitted to the Ministry of Regional Development no later than on September 1 of the corresponding financial year.The Rules for Allocation of the IF funds defines project eligibility criteria as qualitative and quantitative criteria which are very similar for the projects of federal and regional significance.The qualitative criteria that may be relevant for any project submitted for financing are as followings:availability of the investor who confirmed the commitment to participate in a project (except for a concession project) – both for the projects of federal and regional significance;potential project’s impact on the economy's innovation development in connection with implementation of innovation projects – both for the projects of federal and regional significance;compliance of the project with the RF economic development goals and governmental investing for an intermediate term, as well as with the economic sectors development strategies endorsed by the RF Government (the judgment on the project’s conformity with this criteria shall be provided by the RF Ministry for Economic Development) – for the projects of federal significance. In case of regional projects the compliance with the respective regional strategy for economic and social development and/or priority directions of the regional development is also required;attainment of positive social results connected with a project's implementation – both for projects of federal significance and regional projects. These results shall be confirmed by provision of due calculations and justifications provided;substantiation of the impossibility of a project's implementation without the Investment Fund's budgetary allocations – both for projects of federal significance and regional projects.The following showings are considered to prove the positive social effects generated as a result of the project implementation:Generating employment;Improving the provision and access to the comfortable housing;Improving of environmental conditions;Developing and upgrading transport infrastructure, improving public healthcare, Improving quality and access to education, developing of social infrastructure, housing and communal services The projects selected on the basis of the qualitative criteria cited above are subject to selection on the basis the quantitative criteria, namely financial, budgetary and economic effectiveness which are similar for the projects of federal and regional significance, plus additional requirements as detailed below. Financial Efficiency is measured by calculating the project Net Present Value (NPV) and Internal Rate of return (IRR) with and without the financial support from the IF. The project meets the Financial Effectiveness criterion if NPV is negative without IF support and becomes positive with IF support. In other words, the IRR is lower and then higher than the Weighted Average Cost of Capital (WACC). The calculations will have to result from the use of a robust financial model which should include the following elements: balance sheet, income statement, and cash flow forecasts, sensitivity analysis for assessing the project risks, and foreign exchange and inflation effects.Budgetary Efficiency is calculated as the ratio of discounted sum of the direct and indirect tax payments to the Federal budget over a period of ten years to the amount of IF support and/or savings of the federal budget outlays caused by a project's implementation to the total amount of the planned budgetary allocations from the IF. The project meets the criterion if the ration is equal to or higher than one. Economic Efficiency is calculated as the ratio of direct and indirect contribution of the project to the GDP (or contribution to the Gross Regional Product in case of regional projects) over a period of ten years. The project is considered to meet this criterion if the ratio is higher than 0.01%. Additional requirements Any project (both of federal and regional significance) claiming for IF financing shall be supported a positive opinion of an investment consultant reflecting the projects' compliance with the qualitative and quantitative eligibility criteria.One more additional requirement which applies for the regional projects is correspondence of the volume of the project’s financing at the expense of the RF budget funds to the minimum level of co-financing, defined in conformity with the methodology for the calculation of indices and for an application of the criteria of the efficiency of regional investment projects.The IF Rules also suggest that the benefits arising from the project should be quantified and agreed upon with a respective Federal Ministry (in case of road project it is the RF Ministry of Transport). In case of the regional project, the project shall be agreed with the authorities of the respective region.Financing from other Federal Budgetary FundsThe Rules for examining investment projects for efficient use of federal budgetary funds allocated for capital expenditures has been established by the RF Government Regulation #590 of August 12, 2008. The said Rules do not apply to the investment projects financed from RF Investment Fund, the projects carried out as per concession agreements and the projects which obtained the support from the federal budgetary funds before January 1, 2009. The Rules determine the procedure to examine investment projects involving construction, reconstruction or technical modernization of capital construction objects and/or other investment in fixed capital financed - fully or partially - from the federal budget for efficient use of federal budgetary funds allocated for capital expenditures. The examinations shall be conducted by the RF Ministry of Economic Development to be able to make a decision on allocation of funds from the federal budget. The examination is performed on the basis of evaluation of qualitative and quantitative criteria, as well as the minimum integral efficiency criterion set for the use of federal budgetary funds allocated for capital expenditures in order to implement the project in question.The qualitative criteria include:expressly stated goal of the investment project, with a quantitative project outcome indicator (indicators) determined; compliance of the investment project’s goal with the priorities and objectives set forth in the projections and programs for socio-economic development of the Russian Federation;comprehensive approach towards solving a specific problem under the investment project in conjunction with the activities planned and carried out under long-term federal or regional targeted programs;justification of a need for the construction, reconstruction or technical modernization of a capital construction object under the investment project;substantial lack of substitute products, work or/and services which are already produced or performed by other organizations;justification of the need to attract the federal budgetary funds to project implementation;availability of long-term regional and municipal targeted programs that envision construction, reconstruction and/or technical modernization of capital construction objects;appropriateness to use expensive construction materials, artworks for interior décor and fa?ade finishing (if any), as well as machinery and equipment (the examination of this criteria is conducted by comparing the investment project in question with the called “analogue” projects);favourable conclusion of the State Expertise on the design and project documentation and on the results of site investigations for capital construction objects.The investment projects which met the above qualitative criteria are subject to further examination based on the following quantitative criteria:quantitative indicators of the outcome of the investment project implementation;ratio of the estimated cost of the investment project to the quantitative indicators of the outcome of the investment project (the examination of this criteria is conducted by comparing the investment project in question with the called “analogue” projects);availability of consumers for the products or services created as a result of the investment project in numbers sufficient to provide for the planned (standard) capacity utilization rate for the capital construction object; ratio of the planned capacity of the created or reconstructed capital construction object to the capacity required to produce products or services in amounts sufficient to meet the federal government needs; provision of the planned capital construction object with utility and transportation infrastructure in volumes sufficient for implementing the investment project.The investment projects that have passed the examination based on the above qualitative and quantitative criteria shall be further examined based on the integral evaluation criterion set forth in a special Methodology for estimating the efficiency of the use of federal budgetary funds allocated for capital expenditures which is differ from the Methodology developed for the Investment Fund projects. This Methodology to estimate the efficiency of the use of the federal budgetary funds shall be developed by the Ministry of Economic Development. However, by the moment the Ministry still did not issue the methodology. According to the MOED’s Department in charge of Federal Targeted Programs, the delay is caused by the fact that currently the RF Government is considering a possibility to amend the Regulation #540 in order to simplify the procedure of the project’s examination. In particular, it is possible that the RF Government would somehow shorten the scope of projects which will have to go through such examination, but the final decision on such amending the Regulation #540 has not been done yet.ANNEX 2:Basic Assumptions for Economic AnalysisThis attachment summarizes the basic assumptions used in the preliminary estimates of EIRR and NPV for the proposed Volgograd by-pass:Construction costs: US$20 million/km, US$10 million/km, and US$5 million/kmInitial (normal) daily traffic on the new by-pass: 13,000 vpdTraffic composition: Car Medium, 65%; Goods Vehicle, 8%; Bus Medium, 1%; Bus Heavy, 1%; Truck Heavy, 21%; Truck Articulated, 4%Generated Traffic Due to Decrease in Transport Costs: 60% of normal trafficTraffic growth: 3% per yearTerrain: flat; Altitude: 100 m; Rise and Fall, 10 m/km; Horizontal curvature, 40 deg/kmDistances traversed by an average vehicle: On the by-pass, 98.3 km; on the existing roads and streets, 85.0 kmAverage roughness levels (IRI): On the more expensive by-pass, 2.5 m/km; On the medium cost by-pass, 3.0 m/km; On the lower cost by-pass, 3.2 m/kmAverage vehicle fleet speeds: For cars and goods vehicles, 100 km/h and 25 km/h, respectively on the by-pass and the existing roads and streets; for all other vehicles, 90 km/h and 20 km/h, respectively on the by-pass and the existing roads and streetsRoad Agency Economic Costs Factor: 0.85Evaluation period: 20 yearsAverage Cost per Accident: US$10,000; With fatalities: US$120,000; With injuries: US$13,000; With material damage only: US$2,000New Vehicle Cost (US$/vehicle): from 10,000 for cars to 89,000 for articulated trucksVehicle utilization: from 18,000 for cars to 80,000 for articulated trucks, kilometers driven per yearANNEX 3:Framework for Social AssessmentSocial assessment considers social risks and impacts of the project. For the sake of assessment of social risks and impacts it would be important toidentify the project’s area of influenceanalyze risks and impacts in the context of concrete stages of project cycle (pre-construction, construction, operations, operations and decommissioning/closure).Social assessment and consultations with affected communities will constitute the basis of the social section of the management program. Social sections need to identify the main social risks and outline the mitigation/compensation plan. These specific measures would constitute an Action Plan (AP). In the case of the Volgograd by-pass program social sections of the AP should include sections on (1) Community Engagement and (2) Resettlement/other land compensation issues.The AP will (a) describe the actions necessary to implement various mitigation measures to be undertaken; (b) prioritize these actions; (c) include timeline for implementation; (d) be disclosed to the affected communities; (e) describe the schedule and mechanism for internal reporting on the implementation of the munity Engagement consists of two primary activities –(1) disclosure of information and (2)consultations on issues of direct communal interest. Disclosure of relevant project information helps community understand the project and its impact. Communities that will be affected by the road directly have to be informed about project activities and impact in the fullest and most direct manner possible. Consultation. Consultations need to be carried out with the communities that are directly affected by road construction. Consultations need to provide members of the affected communities with a feedback mechanism, i.e. be carried out in a format that (a) is based on the prior disclosure of the relevant and adequate information; (b) is carried out early in the Social Assessment process; (c) is focused on adverse impacts and efforts to address those; (d) is responsive to new risks and impacts as they arise; (e) community members need to be included into the decision making process as to the appropriateness of mitigation mechanisms. Grievance Mechanism. Grievance mechanism needs to be established to promptly and adequately address the concerns of the affected community members. This process is an addition, not a substitute to a legally or administrative available recourse.Monitoring. Early on in the project preparation a monitoring system needs to be established to track the implementation of the social AP. Monitoring should also include any necessary adjustments to the AP necessitated by changes in construction/other project-related plans. Reporting. Mechanisms for internal reporting on social issues needs to be established early in the process. External reporting should include the disclosure of Action Plan to the affected communities as well as progress updates as applicable and necessary. Format of the reporting should be clear and easy to understand for the members of the affected communities. ANNEX 4: Framework for Resettlement and CompensationThis note is to outline the needs for an involuntary resettlement plan to be developed in the context of the Volgograd by-pass project. The note will specify the steps that are to be taken by the municipal government and the sub-contracted firms to ensure lawful and just procedures in compensating local families and firms for the loss of property/and or livelihood. The resettlement plan is to be prepared at the stage of Feasibility Study to adequately prepare for the costs and procedures associated with resettlement and loss of property compensation accomplished in compliance with the national legislation and to the satisfaction of international financial institutions involved in the project. Content of a Resettlement PlanThe Resettlement Plan (the RP) has to be based on the current and reliable information about (a) the proposed resettlement and its impacts on the displaced people and legal entities; (b) the legal issues involved in resettlement. Potential impacts. Identification of a. project activities that would give rise to resettlement;b.the zone of impact of such component or activities c.the mechanisms established to minimize resettlementObjectives. Objectives of the RPSocioeconomic assessments describingcurrent occupants of the affected areas to establish the basis for the design of the resettlement program and to exclude subsequent flow of people from eligibility for compensation and resettlement assistance;standard characteristics of displaced households and businesses, including baseline information on livelihoods and standards of living;the magnitude of the expected loss – total or partial – of assets, and the extent of physical and economic displacement;provisions to update information on the status of displaced households and businesses (livelihoods/income source) so that the latest information is available at the time of the displacement.Other studies describing land tenure and an inventory of natural resources from which the population/firms derive their livelihoods;public infrastructure and social services that will be affected by the project;Legal framework coveringthe scope of the power of eminent domain and the nature of compensation associated with it in terms of both valuation methods and the timing of payment;the applicable legal and administrative procedures, including the description of remedies available to displaced persons in the judicial process and timeframe for such procedures; any alternative dispute resolution mechanism that may be relevant to resettlement under project;Institutional Framework. The findings of the analysis of the institutional framework coveringthe identification of agencies responsible for resettlement activities an identification of capacity of such agenciesany steps proposed to enhance the institutional capacity of agencies responsible for resettlement implementationEligibility. Definition of displaced persons and criteria for determining their eligibility for compensation and other resettlement assistance including relevant cutoff date. Valuation and compensation for losses. Methodology to be used in valuing losses to determine their replacement cost (standard used for compensation); and a description of the proposed types and levels of compensation under local law and such supplementary measures as are necessary to achieve replacement costs for lost assets. Resettlement measures. A description of packages of compensation and other resettlement measures that will assist each category of eligible displaced persons to achieve compensation under the national laws and the adopted standards for the Project. In addition to being technically and economically feasible the resettlement package should be prepared in consultation with the displaced persons. Site selection, site preparation, and relocation a.relevant law governing land tenure, valuation of assets and losses, compensation, and natural resource user rights; environmental laws and social welfare legislation;b.laws and regulations relating to the agencies responsible for the implementation of resettlement activities;c.gaps between national laws and regulations covering eminent domain and accepted international practices; mechanisms to bridge these gapsany legal steps necessary to ensure the effective implementation of resettlement activities under the Project, including a process for recognizing claims to legal rights to land, including claims that derive from traditional usage. Housing, infrastructure, and social services. Plans to provide (or to finance resettler’s provision of) housing, infrastructure, and social service; if applicable, any necessary site development engineering, and architectural designs for these facilities.Resettlement plan (RP) is to be coordinated with the Environmental Protection and Management plan (EMP)Community participation a description of the strategy for consultation with and participation of resettlers in the design and implementation of the compensation/resettlement activities;a summary of the views expressed and how these views were taken into account;a review of alternatives presented and the choices made by the displaced persons, including choices related to forms of compensation and resettlement assistance, to sustaining existing patterns of group organization and retaining access to cultural property (e.g. places of worship, cemeteries);institutional arrangements by which displaced people can communicate their concerns to project authorities throughout planning and implementation;Grievance procedures. Affordable and accessible procedures for third party settlement of disputes arising from resettlement; Organizational responsibilities. The organizational framework for implementing resettlement, including identification of agencies responsible for delivery of resettlement measures; arrangements to ensure appropriate coordination between the agencies and jurisdictions involved in implementation; any measures needed to strengthen the implementing agencies’ capacity to design and carry out resettlement activities. Implementation schedule. A schedule covering all resettlement/compensation activities, including target dates for the achievement of expected benefits to resettlers/compensated population. The schedule should indicate how the resettlement/compensation activities are linked to the implementation of the overall project. Costs and budget. Tables showing itemized costs estimates for all resettlement activities including allowances for inflation, population growth, and other contingencies; timetable for expenditures; sources of funds; and arrangements for timely flow of funds.Monitoring and evaluation. Arrangements for monitoring of the resettlement/compensation activities by the implementing agency supplemented by independent monitors to ensure complete and objective information; performance monitoring indicators to measure inputs, outputs, and outcomes of resettlement activities; involvement of the resettlement/compensated population in monitoring activities. ................
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