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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF US$220 MILLION AND RESTRUCTURING OF THE RAIL TRADE AND TRANSPORT FACILITATION PROJECT Transport Sector Unit Sustainable Development Department Europe and Central Asia Region IBRD MARCH 27, 2008 TO THE REPUBLIC OF AZERBAIJAN JUNE 27, 2013 Report No: AZ This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective May 28, 2013) Currency Unit = Azerbaijani New Manat AZNO.78 = US$1 US$1.28 = AZN1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADY Azerbaijan Railways CJSC IDA International Development Association AF Additional Financing AZN New Azerbaijan Manat IFI International Financial Institutions BP Bank Procedures IFR Interim Un-audited Financial Report CJSC Closed Joint Stock Company IP Implementation Progress CPS Country Partnership Strategy ISR Implementation Status Report DA Designated Account MED Ministry of Economic Development DO Development Objective MS Moderately Satisfactory EIA Environmental Impact Assessment MTR Mid-Term Review EMF Environmental Management Framework OP Operational Policy EMP Environmental Management Plan ORAF Operational Risk Assessment Framework ESIA Environmental and Social Impact PAD Project Appraisal Document Assessment PDO Project Development Objective EU European Union PTU Project Implementation Unit FEF Front End Fee PP Procurement Plan FM Financial Management RAP Resettlement Action Plan FY Fiscal Year RF Results Framework GDP Gross Domestic Product RPF Resettlement Policy Framework IBRD International Bank for Reconstruction and US$ United States Dollar Development VAT Value Added Tax Vice President: Country Director: Country Manager Sector Manager: Task Team Leader: Philippe H. Le Hou6rou Henry G. R. Kerali Larisa Leshchenko Juan Gaviria Jacques Bur6

3 AZERBAIJAN RAIL TRADE AND TRANSPORT FACILITATION PROJECT ADDITIONAL FINANCING AND RESTRUCTURING CONTENTS Project Paper Data Sheet Project Paper I. Introduction II. Background and Rationale for Additional Financing III. Proposed Changes... 8 IV. Appraisal Summary Annexes 1. Economic Analysis Revised Results Framework and Monitoring Indicators Operational Risk Assessment Framework Procurement Plan Implementation Plan Map... 29

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5 AZERBAIJAN RAIL TRADE AND TRANSPORT FACILITATION PROJECT ADDITIONAL FINANCING AND RESTRUCTURING DATA SHEET Basic Information - Additional Financing (AF) Country Director: Henry G. R. Kerali Sectors: Railways (90%) Sector Manager/Director: Juan Gaviria/ Other Domestic and International Laszlo Lovei Trade (10%) Team Leader: Jacques Bur6 Themes: Corporate governance (25%); Project ID: P Infrastructure services for private Expected Effectiveness Date: August sector development (50%); Trade 30, 2013 facilitation and market access (25%) Lending Instrument: Investment Environmental category: Partial Project Financing Assessment Additional Financing Type: Expected Closing Date: December 31, Restructuring, Scale-up, Cost Overrun 2017 Joint IFC: No Joint Level: No Basic Information - Original Project Project ID: P Environmental category: Partial Assessment Project Name: Rail Trade and Expected Closing Date: September 30, Transport Facilitation Project 2013 Lending Instrument: Specific Joint IFC: Investment Loan Joint Level: AF Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Proposed terms: IBRD Flexible Loan with variable-spread repayable in 17 years, including a grace period of 4 years. AF Financing Plan (US$ mln) Source Total Amount (US$ mln) Total Project Cost: Cofinancing: Borrower: 41.0 Total Bank Financing: IBRD IDA New Recommitted Client Information Borrower: Republic of Azerbaijan Responsible Agency: Azerbaijan Railways Closed Joint Stock Company, 230 Dilara Aliyeva street, Baku AZ1010, Republic of Azerbaijan Contact Person: Mr. Gurban Nazirov, Deputy Chairman, Azerbaijan Railways CJSC

6 Telephone No.: nq(&,railway. gov. az AF Estimated Disbursements (Bank FY/US$ mln) FY Annual Cumulative Project Development Objective and Description Original project development objective: The project development objective is to improve railway services in Azerbaijan, as well as the competitiveness, financial sustainability, operating and cost efficiency, and capacity of the Azerbaijan Railways in particular along the transport east-west corridor. Revised project development objective: Not applicable. Project description: The project finances some key elements of the Government's Rail Investment Program that will improve service on the East West mainline from Baku to the Georgian border, which carries most of Azerbaijan Railways CJSC (ADY) traffic. The Government's Rail Investment Program includes rehabilitation of track and replacement of signaling, electric power supply, and locomotives for the corridor. The project also supports railway sector reforms through financing technical assistance for modernization. The original loan collectively financed activities under four components described below. The restructured project and additional financing will continue financing components 1, 3 and 4. Component 2 under the original project will be financed by the Government. Component 1: Rehabilitation of East-West Main Line Provision of goods, works and services to: (a) rehabilitate about 240 km of mainline track; (b) convert power supply on the East-West Main Line; and (c) upgrade signaling, compatible with the new 25kV AC power supply system. Component 2: New Mainline Locomotives Provision of goods and services in order to provide mainline 25kV AC electric locomotives to operate on the east-west corridor. Component 3: Modernization of ADY Services Provision of works, goods, services and training in order to: (a) support the implementation of the restructuring and development of ADY, including, but not limited to, for the transition to the International Financial Reporting Standards and legal restructuring of the ADY; and (b) improve its oil spill prevention capacity. Component 4: Project Implementation Support of the PIU for effective implementation of the Project, through provision of goods, consultants' services and training.

7 Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Is approval of any policy waiver sought from the Board (or MD if RETF operation is RVP approved)? Has this been endorsed by Bank Management? (Only applies to Board approved operations) Does the project require any exception to Bank policy? Has this been approved by Bank Management? [X]Yes [ ] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [X]Yes [ ]No [X]Yes [ ]No [ ]Yes [X] No [ ]Yes [X] No Conditions and Legal Covenants: Loan Agreement Description of Condition/Covenant Date Due Reference Schedule 2, Section The Borrower shall ensure, or cause the ADY to Recurrent I.A. 1 ensure the maintenance of the PIU with staff and resources during the implementation of the Project, satisfactory to the Bank. Schedule 2, Section Subsidiary Agreement: Summary: Make Recurrent I.B. proceeds of the Loan available under a Subsidiary Agreement. And exercise its rights under the Subsidiary Agreement in such manner as to protect the interests of the Borrower and the Bank and to accomplish the purposes of the Loan. Except as the Bank shall otherwise agree, the Borrower shall not assign, amend, abrogate or waive the Subsidiary Agreement or any of its provisions Schedule 2, Section The Borrower shall ensure, and cause the ADY Recurrent I.C and the PIU to ensure, that all measures necessary for the carrying out of the EMP shall be taken in a timely manner.

8 Project Agreement Description of Condition/Covenant Date Due Reference Schedule, Section The Azerbaijan Railways shall maintain the PIU Recurrent I.A. 1 during the implementation of the Project, with adequate staffing and resources, and which shall be responsible for procurement monitoring and reporting, disbursement and financial management, maintenance of Project accounts and preparation of Project reports and financial statements. Schedule, Section The Azerbaijan Railways shall implement the Recurrent I.A.2 Project in accordance with the Project Implementation Manual agreed upon between the Bank and the Borrower, as such manual may be amended from time to time upon the agreement between the Azerbaijan Railways and the Bank Schedule, Section I.B. The Azerbaijan Railways shall ensure that all Recurrent measures necessary for the carrying out of the EMP shall be taken in a timely manner Schedule, Section Except as the Bank shall otherwise agree, the Recurrent II.B.3 ADY shall not incur any debt unless a reasonable forecast of the revenues and expenditures of the ADY shows that the estimated net revenues of the ADY for each fiscal year during the term of the debt to be incurred shall be at least 1.1 times the estimated debt service requirements of the ADY in such year on all debt of the ADY including the debt to be incurred.

9 AZERBAIJAN RAIL TRADE AND TRANSPORT FACILITATION PROJECT ADDITIONAL FINANCING AND RESTRUCTURING I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an additional loan in the amount of US$220 million to the Republic of Azerbaijan and restructure the Rail Trade and Transport Facilitation Project (RTTFP; P083108, Loan 7509-AZ). The proposed Additional Financing (AF) will include a restructuring of the original project and an extension of its closing date to December 31, The restructuring was requested by the Government of Azerbaijan in a formal letter dated April 3, While the restructuring was finalized it became apparent to the Government that additional financing was needed to cover the costs of some of the foreseen investments and an Additional Financing was requested in a letter dated May 31, The proposed AF would finance costs associated with the increased cost of power conversion and signaling works along the East-West Main Line together with additional activities under the institutional modernization component. The AF would allow Government to cover a financing gap and complete the power conversion and installation of new signaling system at the East-West main line in support of track rehabilitation entirely financed by the Government. 3. The original Development Objective (DO) is not altered. The Results Framework (RF) is revised to reflect (i) the project extension until December 31, 2017; and (ii) refined performance indicators taking into account the extended period for implementation. The main outcome of the AF would be the full replacement of power supply and signaling systems on the East-West Main Line. 4. All additional costs under sub-components lb and Ic will be financed by the proposed AF loan at 100 percent net of VAT, which will be provided under government co-financing The track rehabilitation is financed by the Government via 6215 million Czech Export credit and budget financing. The Government confirmed its commitment to the financing of the locomotives (Component 2) and is exploring alternate sources of financing for that activity. II. Background and Rationale for Additional Financing in the amount of US$220.0 million Consistency with the Country Partnership Strategy (CPS) 5. The AF to the RTTFP is not specifically proposed in the Azerbaijan CPS Progress Report FYI 1-14 (Report Number: AZ) as initially the AF was expected to be delivered in FY15, beyond the time frame of the CPS. However, the CPS Progress Report proposes that An advance payment of 20% for the power conversion contract has been paid 85% net of VAT from the original Loan 1

10 the Bank's lending program will envisage providing additional financing to on-going projects that are fully consistent with the CPS Strategic Objectives: (i) building a competitive non-oil economy; and (ii) improving municipal and rural services (CPS FY11-14; Report Number: AZ). The Project contributes directly to Outcome 1 "Transport time and vehicle operating costs reduced" under the CPS Results Area 2 "Upgrading Key Growth Supporting Infrastructure". Country and Sector Context 6. Azerbaijan has experienced significant economic growth of on average 21 percent p.a. between , driven by the oil-economy. Since then growth has slowed down reaching just 2.2 percent of real Gross Domestic Product (GDP) growth in However, growth is expected to increase again and stabilize at a moderate level with projections of annual growth approximately 4.1 percent during To sustain this growth, Azerbaijan will need to diversify its economy, introduce market-based policies, and strengthen public services. 7. One of Azerbaijan's natural advantages is its location. Azerbaijan is located on the Western shore of the oil-rich Caspian Sea, between Russia to the North, Georgia to the West and Iran to the South. The country is part of the shortest land corridor (Azerbaijan-Georgia) from the Caspian Sea to the nearest open sea, making it attractive as a transit country. Baku is the only major city on the Caspian Sea. It has managed to capitalize on its location by attracting significant volumes of transit cargo by rail (about six million tons annually) from Kazakhstan and Turkmenistan and more recently by pipeline. 8. Rail transit services generate significant income for Azerbaijan. In 2012, rail transit services produced the equivalent of five percent of non-oil export of goods and of the service credit in the balance of payment. Demand for these transit services and for export of goods from Azerbaijan by railways has been sustained over the past three years. Based on a review of markets in the Caspian Basin, this railway traffic is expected to continue a gradual expansion over the next ten years. While most crude oil from the Caspian Sea is expected to continue using pipeline as a primary mode of transportation, the railway across the Caucasus is expected to remain an important alternative for shippers, and a small increase in rail transport of oil and oil products is foreseen over the period. The Government of Azerbaijan has been under-investing in infrastructure and rolling stock for an extended period of time and will be unable to continue serving its market without significant new investments. Original loan and project status 9. The original Loan in the amount of US$450 million was approved by the World Bank on March 27, 2008, and signed on December 18, The project launch workshop was held on March 17, 2010, after the loan became effective on March 15, The project development objective is to "improve railway services in Azerbaijan, as well as the competitiveness, financial sustainability, operating and cost efficiency, and capacity of 2 World Bank estimate 2

11 ADY in particular along the transport corridor toward Georgia (the East-West corridor)". The reform of ADY was an effectiveness condition, but the government went further and faster than anticipated by transforming ADY into a Joint Stock Company, thus requiring a project restructuring to adapt the project to the new institutional arrangements. The first restructuring of the project was therefore necessary before the project became effective in order to reflect the corporatization of the ADY and particularly its functional separation along business lines. The first restructuring was approved on December 3, 2009, before the project became effective, which extended the closing date to September 30, 2013 and introduced the following changes: (i) revisions in the choice of loan terms to variable spread, 23 year maturity with eight year grace period; (ii) changes in the project financing plan (addition of another financier for a non-world Bank funded component), and in the percentage of disbursement for locomotives (without changing the disbursement category allocation) reflecting evolving financial circumstances; (iii) postponement of all key dates by 15 months, reflecting the delay in signing; (iv) revision to legal documents to reflect the Presidential Decree of July 20, 2009 on corporatization of the railway and provide more flexibility for the second phase of restructuring along lines of business; (v) revision to the cutoff date for retroactive financing to December 21, 2008; (vi) new 2007 baseline for financial targets; and (vii) introduction of the approval by the Cabinet of Ministers of the new Charter for ADY as a condition of effectiveness. After significant delay at the start, project implementation has gained momentum, with solid implementation of reforms and the signing of a US$397 million power conversion contract in August Given the current status, circumstances and Closing Date, the achievement of the Development Objective is currently rated Moderately Unsatisfactory. However, the proposed restructuring and extension of the project's closing date (by four years and 3 months) will allow for the project objectives to be achievable because institutional modernization is progressing significantly faster than anticipated during the preparation of the project and comprehensive investment in the main freight corridor is being implemented. 10. The project finances some key elements of the Government's Rail Investment Program that will improve service on the East West mainline from Baku to the Georgian border, which carries most of ADY's traffic. The Government's Rail Investment Program includes rehabilitation of track and replacement of signaling, electric power supply, and locomotives for the corridor. The project also supports railway sector reforms through financing its modernization. Component 1: Rehabilitation ofeast West Mainline 11. (a) Track rehabilitation. The Investment Program originally included rehabilitation of 240 km of track, financed 100 percent by the Government of Azerbaijan. The track rehabilitation is ahead of schedule, with the 240 km of track already completed. ADY has identified an additional 298 km that needs rehabilitation, and this has been included in the ADY Investment Program. It is expected that ADY will continue to rehabilitate 100 to 120 km every year, concluding in (b) Electric Power Supply. The Investment Program includes upgrading the power supply on the East-West Mainline from 3 kv DC to 25 kv AC. The project is financing this investment. In August 2012, ADY signed a US$397 million lump sum contract for this work. This contract value resulted from a competitive tender and is US$90 million higher 3

12 than originally estimated. The design works are underway and expected to be completed by mid-2013, after which construction works will start. The performance of the contractor so far is highly satisfactory. (c) Signaling. Originally, the Investment Program included only an allocation of US$17 million for the repair and immunization of the existing signaling system taking into consideration higher voltage tension created by the change in power supply. This decision reflected the due diligence carried out during project preparation. The recommendations at appraisal were to prioritize track repair and power conversion investments and to consider the least-cost option of repair and immunization of the existing signaling system based on the data and assessments available at the time of project preparation. The viability of immunization was contingent to confirmation including a detailed technical assessment of the exact condition of the entire signaling system during implementation. During implementation, ADY engaged international experts to carry out the assessment and after a detailed due diligence concluded that the existing signaling system was obsolete. Spare parts were also found to be a problem as they were becoming scarce and, in some cases, not available. The technical assessment concluded that replacing the signaling system was a safer and more economic long term option than immunization considering also the other aspects of the capital expenditure program undertaken by ADY. The estimated cost of the new signaling system is US$340 million. The procurement of the signaling system based on the latest technology has consumed enormous efforts from Government, specialists and the Bank and is now very advanced. The outlook of the procurement process appears very solid. The tendering for the signaling upgrade contract was launched in February 2013 using World Bank procurement processes and is being completed. Component 2: New Mainline Locomotives 12. Originally, the ADY Investment Program included purchase of new 25 kv mainline locomotives, and the Bank project included financing for this component. However, the procurement of locomotives was progressing more rapidly than the power conversion, creating a risk that locomotives would be delivered before the electrification was in place to power them. In addition, ADY decided to purchase dual power (3 kv DC and 25 kv AC) locomotives rather than single power (25 kv AC) to facilitate the power conversion process and be able to operate in the DC supplied branch tracks. Therefore, the Government and ADY decided, in agreement with the Bank, to finance the locomotives directly from the Government budget and to request that Bank financing be reallocated from locomotives (Component 2) to rehabilitation of the East-West mainline (Component 1). The procurement of the mainline locomotives would be delayed until the power conversion is more advanced. The Government provided assurance to the Bank that the locomotives would be purchased with Government financing. In procuring the locomotives, the Government is drawing on the technical specification of the locomotives prepared with Bank support, and has provided assurance that the locomotives procured will be of satisfactory quality, delivered in a timely fashion and appropriately priced. Component 3: Modernization ofazerbaijan Railway Services 13. The project includes US$20 million for technical assistance for modernization of ADY and supervision of the power conversion and signaling contracts. The Project has facilitated a 4

13 significant reform of the rail sector. Modernization of ADY's corporate structure and reorganization into lines of business is a major achievement under the project, which has been very successful albeit delayed. The ADY was successfully transformed from a government railway department into a self-accounting Joint Stock Company with separate lines of business under four key subsidiaries: freight, infrastructure, passenger services and capital construction. Other institutional reforms include: (i) implementation of International Financial Reporting Standards (IFRS), including the introduction of a computerized accounting system; (ii) revaluation of ADY's assets, which was completed in mid-february 2013; (iii) completion of the first international entity audit of ADY, which was found acceptable to the Bank-a major step in the reform process; and (iv) strengthening capacity for environmental protection with implementation of an Oil Spill Response Plan. The current status of implementation of the various activities implemented under this component is as follows: (i) (ii) (iii) (iv) (v) (vi) Reform of ADY. The reform of ADY supported under the project has been successful to date with transformation from a Government state department into a Joint Stock Company. This has also been followed with a further split into the separate lines of business represented by four key subsidiaries: Freight, Infrastructure, Passenger services and Capital Construction. IFRS Implementation. Good progress has been achieved with the implementation of the computerized IFRS-system, particularly the successful transfer of the ADY's manual accounting system to the IFRS-based chart of accounts. The procurement of computer software and rollout services has also been completed. Revaluation of assets. The revaluation of ADY's assets has been completed in mid-february, The new IFRS based asset registry has contributed to the recently completed first international audit of ADY and on-going IFRS introduction in ADY. Oil Spill Response. The Oil Spill Response Plan has been completed and made effective for ADY country wide. The plan has been followed by a wide range of new oil spill equipment and specialized trainings which have been procured under the project. The procurement of works for construction of offices and facilities for the oil spill response system has been completed. Once the last contract is implemented, ADY's capacity to respond to oil spill event or other emergency caused by derailment will be substantially strengthened. Study of Legal Reform. This study was split into two activities: translation and legal correction of railway regulations, and review and strengthening of the organizational framework of ADY. The selection of consultants for the first activity has been completed. Management Training Program. The training program includes: (i) study tours to expose mid-level managers and operational staff to international operational practices, and (ii) the development of management training program to strengthen the commercial management skills of ADY staff. These activities help ADY to fully transform into a commercial entity following its incorporation as a Closed Joint Stock Company. The trainings are underway. 5

14 14. The Bank and ADY agreed that the successful results of ADY's modernization achieved under the Project should be extended. The contribution of the Bank to this component will thus be increased from US$ 14 million to US$21.5 million to allow for additional activities such as the roll out of IFRS, the procurement of IT hardware and software to computerize IFRS. Component 4: Project Implementation 15. The component includes support to the project implementation agency at ADY, which would continue as originally planned. Rationale for Restructuring and Additional Financing 16. One of the first activities financed by the Project following effectiveness in March 2010 was a technical assessment of the signaling system. That was the first time a detailed assessment of the signaling infrastructure was conducted by ADY. The study concluded that the originally planned rehabilitation and adaptation of the existing signaling system to the new power system was no longer sufficient. The study also highlighted flaws in the original assessment. In addition, the original system had become outdated in the intervening period. The technical assessment concluded that replacing the signaling system would be a safer and more economic long-term option than rehabilitation, especially considering the need to ensure consistency with the upgraded power system. Updating the design however created a large financing gap due to the significant cost increase (from US$ 17 million to US$ 340 million) for the supply and installation of a new signaling and communications system. The Government, therefore, requested the Bank to finance the supply and installation of a new signaling system from the funds allocated for the supply of locomotives. This was a logical request given the fact that improvements to the track, power system and signaling need to be completed before the new locomotives can be used. 17. The Bank and the Government, therefore, agreed to restructure the project to address the financing gap and carried out a comprehensive re-assessment of the project and full due diligence of all technical aspects. As part of this process, the Government proposed that it would fully finance the locomotives component (which will happen only after the rail system has been modernized) and that the Bank would finance, with existing and additional funds, the costs of power conversion and the increased signaling costs. This would have the additional benefit of allowing faster implementation of the overall project under Bank supervision with faster disbursement of the Bank loan. The Minister of Finance has requested additional financing to secure full funding for the signaling contract. The additional financing would support a technically coherent solution as the signaling and power conversion components must be implemented in parallel to maximize project benefits. 18. The signaling component is a critical element of the project design. The additional financing will help the authorities cover the additional costs of the signaling replacement and the reallocation of components between the Government and the Bank will have the added benefit of improving disbursement of loan funds. Providing the proposed additional financing to this ongoing project is a more efficient solution than to prepare a new project as it would avoid further implementation delays (signing of the large signaling contract: US$ 6

15 340 million). All proceeds under the current project Loan would be 100 percent committed during the summer of 2013 together with the bulk of the additional financing. The additional financing is also a technically superior solution than preparing a new project as the signaling and power conversion components must be implemented in parallel to maximize project benefits. Following the signing of the signaling contracts, the project implementation is expected to be satisfactory. 19. Without the additional financing to close the financing gap, the project cannot meet its project development objectives. The unsatisfactory rating of the project can only be resolved once the full financing is in place. 20. The estimate of project costs has increased since the original estimate in The financing approach supported by the Government and proposed by the Bank team is twofold: (i) to reallocate the US$ 202 million loan proceeds initially allocated for the procurement of locomotives to finance the power conversion, signaling, and communications system upgrading, and institutional modernization; (ii) to complement this amount with US$ million additional financing so that the loan proceeds can cover 100 percent of financing (except VAT) for those two contracts. This will bring the total loan amount for these contracts up to about US$ 647 million. The remaining US$ 7.5 million additional financing will be used for institutional modernization and project implementation support, bringing the total amount for that purpose to US$ 21.5 million. The Government will continue financing the entire amount related to track renewal and the supply of locomotives. Note regarding the table below: For the rehabilitation of the East West Corridor, the World Bank will finance only the Power Supply Conversion and Signaling Upgrade activities. The financing of track rehabilitation will be financed solely by Government. Component Name Current Cost (US$M) Proposed Cost (US$M) Rehab of E-W corridor Locomotives Modernization Project Implementation Front end fee Total Request for a waiver of OP0. 00 Investment Project Financing 21. According to Operational Policy 10.00, the Bank may provide additional financing to an ongoing, well-performing project for completion of project activities when there is a financing gap or cost overrun, for scaling up the development effectiveness of the Project, and/or when the original financing is insufficient for the modified or additional activities in cases of project restructuring. A waiver of the provision of OP requiring project performance to be satisfactory is requested because the project is currently rated as unsatisfactory and disbursement is low. The waiver was endorsed by the Managing Director on June 3, The additional financing and restructuring are expected to allow for an immediate upgrade of the rating as the project could then meet its development objectives by the extended closing date. 7

16 III. Proposed Changes 22. The Ministry of Finance in a letter dated April 3, 2012, requested changes in the allocation between categories of expenditure and in the loan Closing Date. Subsequently in a letter dated May 31, 2013, the Government requested an additional financing to cover a larger portion of the financing required for the two main contracts (power conversion and signaling). The additional financing will finance 100 percent of expenditures net of VAT for the referenced contracts (formerly 85 percent). The Ministry of Finance was informed that additional financing would be approved as part of the restructuring process. The disbursement ratio will be adjusted to 100 percent of expenditures net of VAT for components lb and Ic. This will not result in changing the description of the project or adjusting the Project Development Objectives. No changes are proposed with regard to implementation agencies, there are no outstanding audits, and financial management reports are satisfactory. The Project's objectives are considered to be achievable within the extended closing date period. The Project has been rated as Moderately Unsatisfactory towards achieving the PDO as the above-mentioned activities, and the project development objectives, cannot be reasonably achieved within the time left until the current closing date. The performance of the project implementing agency continues to be satisfactory. 23. The IBRD original financing of US$ 450 million will be increased up to US$ 670 million. The percentage of disbursement for Component lb and Ic (signaling and power conversion) will be set to 100 percent excluding VAT, with the amount allocated for the component at US$ million. The higher contribution from the Bank proceeds reduces the amount of government financing needed in the period. The total amount of counterpart funding would be determined precisely once the signaling contract is finalized. After the restructuring and additional financing are approved and secured, the total Government's counterpart financing would be US$ million (see below table) Source(s) At Approval Current (from AUS) Proposed BORR 345,000, ,000, ,400, EBRD 450,000, ,000, ,000, Total 795,000, ,000, ,400, The changes reflect the Borrower's request to transfer funds from Category 2 (US$ 202 million for locomotives) to Category 1 (for financing the signaling and power conversion contracts) and to provide additional financing to cover 100 percent of the costs net of VAT for component lb and Ic. The rehabilitation of track and the supply of locomotives will continue to be fully financed by Government funds. 8

17 Category of Expenditure Allocation IBRD (US$) Disbursement % (net of VAT) Original Revised Additional Total Current Proposed Original Financing (1) Goods, works, , ,875, ,950, ,825, consultants' services (including audits), training and incremental operating costs for Components 1(b) and 1(c) of the Project (2) Goods for Component 202,000, of the Project (3) Goods, works, 14,000,000 14,000,000 7,500,000 21,500, consultants' services (including audits), training and incremental operating costs for Components 3 and 4 of the Project Premium for Caps/Collars Front End Fee Amount due under Section c) of this Agreement 1,125,000 1,125, ,000 1,675,000 Amount payable pursuant to Section 2.03 of the Loan agreement in accordance with Section 2.07 (b) of the General Conditions Total: 450,000, ,000, ,000, ,000, Results indicators. The project development objective, which focuses on improving railway services and the competitiveness, capacity, sustainability, efficiency and capacity of ADY is framed broadly enough that the changes proposed in the restructuring do not necessitate a change in PDO or indicator definitions. It is expected that the modernization component, which will be expanded, together with project support for an overall ADY Investment Program along the East - West corridor, will achieve the desired outcomes. Achievement of the outcome indicators, however, is expected to be delayed by four years as shown in Annex Funds allocation. The overall amount of AF is US$ million. The majority of funds would be allocated to Component I to finance the 100 percent cost of power conversion and signaling contracts while the VAT portion (or 18 percent of contract value) for power conversion and signaling contracts will be covered by Government's co-financing. Additional funds would also be made available to Component 3 for institutional modernization to cover additional expenses required by the ADY to complete its transformation into a financially self-sustainable commercial entity in freight transportation, while improving its operational efficiency and transparency by introducing computerized 9

18 IFRS accounting system and profit centers (passenger/freight) via established business oriented subsidiaries. The specific costs and financing allocation by component for the original project and the proposed AF are presented in a table below: Table: Revised cost estimates and funds allocation by component (US$ million) Current allocation Additional financing needs Total Total estimate IBRD Total estimate IBRD IBRD (incl. VAT) loan 3 (incl. VAT) loan 1. Rehabilitation of East-West Main Line 2. New Mainline Locomotives Modernization of ADY Project Implementation Front end fee TOTAL Extension of Closing Date. 27. The closing date of the project will be extended by four years and three months, from September 30, 2013, until December 31, This will be the second extension of the project closing date. The first extension - as noted in paragraph 9 - occurred before the Project was effective and is discussed in the Project Paper on Restructuring the Rail Trade and Transport Facilitation Project dated December 2, The second extension is necessary to conclude the contract to complete the installation of the new signaling system. The extension is also required to develop and implement more fully the institutional modernization activities. IV. Appraisal Summary 28. Implementation arrangements. The AF and project restructuring does not require any changes to the implementation arrangements in place. The ADY has the overall responsibility for project implementation. A Project Management Unit (PIU) has been established within the ADY to manage day-to-day project management responsibilities. The PIU has been staffed adequately and functions well. The existing structures have proven to be very effective and the PIU at ADY will remain the implementation unit in charge. The activities financed by this AF do not require additional capacity at the PIU. 29. Technical appraisal. The Bank team, ADY and the Ministry of Finance agreed on how to carry out the restructuring for the project. Meanwhile, the bidding for the signaling contract is over and ADY is carrying the evaluation. The institutional development activities remain ahead of schedule and are being implemented satisfactorily. 3 IBRD financing excludes VAT which is financed under the Government contribution 4 Front End Fee (FEF) has been rounded. 10

19 30. The Government is organizing the procurement of AC locomotives to ensure that at least a first set of 15 freight locomotives will be delivered to Azerbaijan by the time the power conversion and signaling works are completed at first section (Boyuk Kesik-Ganja), which is tentatively scheduled to happen by end of This should allow ADY to test the new infrastructure and locomotives and provide timely payment to power conversion and signaling contractors. The track rehabilitation is advancing ahead of the initial schedule and ADY plans to continue to rehabilitate about km every year with a plan to complete the track rehabilitation in The Government has ensured the financing for track rehabilitation for the program through ADY received rails, sleepers and other materials which allow ADY to continue with the track rehabilitation program for ADY will need to mobilize more financing in 2015 to ensure that all planned 548km of track are rehabilitated in order to secure the design speed of 100km/h. 31. ADY has so far disbursed about 15 percent of the total loan proceeds. The next peak in disbursement is expected to take place in July 2013 with the next payment to the power contractor once the detailed design of first section is ready. It is expected that once the signaling contract is awarded and advance payment is disbursed to the winning contractor (expected before the end of July 2013) disbursement will reach about 30 percent. 32. The Bank team has undertaken a reassessment of the project, including reanalyzing the financial return of the changed components (signaling and electric power supply) and confirms that with this request, the Loan and additional financing continues to be used for approved purposes. In addition, the Bank team confirms that the Project, as proposed to be modified, remains justified in accordance with the project documents, the requirements of relevant Bank policies are met, and the implementing arrangements are satisfactory. 33. The Bank team has also concluded that this request will not modify the project's development objective nor affect the achievement of the objective. It also does not involve a change in the safeguard category, and it will not trigger a new safeguard category. The Bank team has confirmed that there are neither outstanding financial management issues nor other outstanding, significant project related issues. Financial reports and statements required by the Loan Agreement have been received by the Bank and deemed acceptable. 34. Economic analysis. An economic analysis of the signaling and power conversion investments was based on comparing two scenarios: (a) continuing to repair and use the existing signaling and electric power supply system, with (b) replacing the two systems with new. The benefits to the new systems compared to the old are: reduced accidents, lower maintenance cost, increased capacity which allows growth in traffic, reduced operational cost, and reduced energy use. The Base Case scenario has a net present value (at 12 percent discount rate) of US$ 85.9 million and an internal rate of return of 14.4 percent. 35. Sensitivity analysis shows that the results are robust to changes in the maintenance cost savings and traffic growth. A scenario of 25 percent less maintenance cost savings has a net present value (at 12 percent discount rate) of US$ 13.5 million and an internal rate of return of 12.4 percent. A scenario of 25 percent less traffic growth has a net present value (at 12 percent discount rate) of US$ 37.9 million and an internal rate of return of 13.1 percent. Additional information is included in Annex Procurement. Procurement functions under the project are assigned to the PIU under the ADY. The PIU has a qualified and experienced procurement specialist with access to 11

20 appropriate tools and knowledge to enable the entity to carry out its functions effectively. The last procurement review was carried out during the December 2012 mission, and the rating was satisfactory. The last procurement post review was carried out during the June 2012 supervision mission. A Procurement Risk Assessment using 'PRAMS' was carried out and no major risks have been identified. Procurement under the AF shall follow the Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011, and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011 and Guidelines On Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants dated October 15, 2006, and revised in January The PIU has prepared a draft Procurement Plan (PP) incorporating the AF, which is attached in the Annex 3. All procurement activities are on schedule. ADY is focusing on the requesting the bidders for the signaling tender with necessary clarifications on the technical and financial substance of their bids and plans to conclude the evaluation process during July Financial Management. The proposed AF would not require changes in the financial management arrangements. Financial Management (FM) functions under the proposed AF, including flow of funds, staffing, accounting, reporting and auditing, will remain under the responsibility of the PIU at the ADY, as under the original Project. FM arrangements of the original Project have been reviewed periodically and as part of the last fiduciary review carried out in April 2012, the Bank recommended to further strengthen an internal control within the PIU modifying an existing IC accounting software to include the contract monitoring module for monitoring of overall disbursement and remaining amount under each individual contract. The team's fiduciary expert plans to hold the next fiduciary review in June The overall FM risk for the Project remains: Moderate. 38. ADY's assets revaluation and entity audit. The ADY has completed the comprehensive evaluation of its fixed assets which was delayed due to complexity of ADY's organizational structure and variety of regional assets with no proper registration documentation available to the consultant. Currently the asset revaluation is completed and followed up by the ADY's entity audit for the year ended December 31, After considerable delay in the submission of the first entity audit report, which is one of the key legal covenants in the Project Agreement, the entity audit report was finally submitted to the Bank and found to be acceptable. Because of the focus on the 2011 entity audit, the project audit for 2012 is expected to be delayed about one month. As for the 2012 entity audit, ADY will request a waiver for late submission. 39. Disbursement. During the last implementation support mission dated April, 2012, the team has agreed with the counterparts on a specific Action Plan to complete the Project within the extended timeframe. Based on this agreement the team and ADY have updated an implementation schedule, which describes how the project will be completed prior to the requested loan Closing Date of December 31, This implementation schedule is attached as Annex Environmental safeguards. As envisaged by the project EMP, a separate environmental assessment will need to be carried out for the power conversion contract, once the design for the power conversion is completed (June 2013). The assessment may lead to modifications to the design where necessary. The timing of the environmental assessment will be tightened to the implementation of the design. 12

21 41. As envisaged by the project EMP, a separate EMP for the replacing of the entire signaling system will be prepared as part of the design supply and install contract. Once drafted, this specific EMP will undergo public consultations and is subject to Bank review and approval prior to the commencement of civil works; 42. The updated TOR for the construction supervision of power conversion and signaling works should clearly specify the responsibility to undertake environmental supervision, which will contribute to the improvement of project's overall environmental compliance. Therefore, the ADY will prepare and get Bank's clearance on the updated TOR for the construction supervision of power conversion and signaling works. 13

22 AZERBAIJAN: Rail Trade and Transport Facilitation Project - Additional Financing and Restructuring A. Introduction Annex 1: Economic Analysis The Azerbaijan Railway (ADY) signaling system on the Baku - Boyuk Kesik lines was installed in the late 1960's and early 1970's. It is a Soviet system, lacking automatic gates for level crossings. ADY is experiencing increased maintenance costs and difficulties with obtaining parts. The railway signaling system controls the flow of trains over the railway track to ensure that only one train is on a track section at a time, so that trains do not run into one another. Modern signaling systems also include gates at places where roads cross the railway track, which lower when a train is approaching. This prevents cars from driving on the track and being hit by the train. The railway cannot operate without a signaling system. The electric power supply system provides electricity to the electric locomotives on the railway and is necessary for the locomotives to move. ADY's electric power supply system on the East West corridor based on 3 kv DC power, is between 37 and 43 years old and is near collapse. There have been numerous fires in several of the substations, with many substations not properly protected from the environment or from malfunctions in the electrical system, and much of the catenary and supporting structure has rusted or decayed to the point where it must be replaced. The project comprises a set of investments that, together, will allow ADY to provide safe, high quality transport services on the East-West corridor, including for its oil and oil products business. These investments are necessary for ADY to attract and serve this traffic. Project Development Impact. The investments will improve the railway services in Azerbaijan (the main project objective) by upgrading/replacing infrastructure, which is in a deteriorated condition. The investments are necessary for ADY to sustain and grow its profitable freight business and will lower ADY's energy and track maintenance costs, which-together with reforms implemented under the project-will increase the competitiveness, financial sustainability, operating and cost efficiency and capacity of the corridor. Public Sector Provisioning/Financing. Railway infrastructure is part of the basic transport infrastructure that a country needs to support its economy. In the case of Azerbaijan, the railway also acts as a transit link between Central Asia and Europe, helping the economy of Azerbaijan to diversify away from oil extraction. Because of the monopoly and public goods nature of railway infrastructure, it is almost always owned and provided by government. World Bank Value Added. The electric power supply and signaling investment included in the project are the first major investments of their kind over 25 years in Azerbaijan. (After the collapse of the former Soviet Union, no major infrastructure investment or rehabilitation was carried out.) Consequently, the ADY staff has little experience with modern signaling and electric power supply technology and with managing investment projects of the size and scope of It is analogous to traffic lights on a road. 6 Over 90 percent of the railway traffic in the world is carried on vertically integrated, publically owned railways. 14

23 this project. The Bank has provided substantial technical support to ADY for the procurement and management of the investments financed by the project. In addition, the Bank, as a leader in railway reform, has supported important commercialization steps for ADY through the project. B. Economic Evaluation Assumptions The project investments include track rehabilitation, power supply and signaling. No change is made to the track component, so its economic analysis is not reproduced here. The analysis below covers the electric power supply system, whose cost has increased since the original evaluation, and the new signaling system. To ensure that the project generates sufficient economic benefits that warrant investment, a costbenefit analysis was conducted. In particular, the analysis compares two scenarios: (a) "do nothing scenario", which would be to continue to repair and use the existing signaling and electric power supply system, with (b) "do something scenario" replacing the signaling and electric power supply systems with new systems. The following assumptions were applied to the cost-benefit analysis: * The discount rate is 12 percent and the evaluation period is 25 years; * The electrification contract is underway in 2013; the signaling contract is expected to be signed in July 2013; * All the costs and benefits are estimated in US$, with an exchange rate of US$1 for AZN. * Fatalities in the "do something" scenario go to zero, from nine in the "do nothing scenario" and likewise the injuries at level crossings decline from 33 to zero. * Fatalities are costed at US$1.5 million and injuries at five times less, at US$300,000. * Rail traffic capacity is modeled as rising from 21 million tons currently to 26 million tons after year 5, whereas in the "do nothing " scenario traffic is held flat due to constrained capacity. The benefits to the new system compared to the old are: * Reduced accidents. In 2012, level crossing accidents caused nine fatalities and 33 injuries. The rate of fatalities and injuries has increased significantly in the last three years, as automobile ownership in Azerbaijan has increased. The new signaling system would include automatic gates at level crossings, preventing such accidents. The new system would also reduce the probability of crashes between trains, which increases exponentially as an old system becomes obsolete. The calculation understates the benefits to the new system because it does not quantify the value of avoiding potential catastrophic accidents. * Reduced maintenance costs of the signaling system. The cost of maintaining ADY's old signaling system is high and can be expected to increase, as components fail and parts are not available, so workarounds have to be devised. The new signaling system would be maintained under the contract for the first years, after which it can be expected to have lower overall maintenance costs than the old system. However, as shown in Figure 1, because the pattern of maintenance costs for the old system vs. the new system are different, in some years, the new system is more expensive to maintain. 15

24 Figure 1: Economic Benefits from Electric Power Supply & Signaling Investments IlJ h.j NJ N.J NJ N.J NJ N.J NJ 1j N) N1j hi F F Ili j N NJ hj Ili W W W W W ; O) 00 0 hi -r O Ili 4- O) 00 0 m Accidents avoided a Signaling Electrification a Traffic growth * Reduced maintenance, renewal and energy costs of the electric power supply. The cost of maintaining ADY's old electric power supply system is high and can be expected to increase as more and more sections fail and must be replaced. The new system would have lower maintenance, fewer substations to maintain and operate, and lower energy costs (because of lower power loss). * Increased rail traffic capacity. The current signaling and electric power supply systems restrict ADY to one train every 35 to 40 minutes, which limits its traffic to the current level. The new system will have the capacity to allow trains to operate at 8 minute intervals, effectively quadrupling the capacity of the network. ADY is expecting traffic growth from the opening of the Baku-Tbilisi-Kars railway link of 5 million tons by 2016 and 10 million by To be conservative, we have modeled a slower build-up of this traffic (5 million tons reached in 2020 and capped at 5 million). Incremental revenue is based on current freight rates, and incremental costs are based on expected increases in staff, materials, fuel and other operational costs. * Reduced operational cost. A modem signaling system allows trains to be controlled centrally, eliminating the need for signal controllers in every railway station. Since ADY plans only a gradual reduction of such staff, the cost savings are not quantified in this analysis. * Reduced fuel use. A modem signaling system allows trains to operate with less acceleration and deceleration, which results in significant fuel savings (on the order of 16

25 20-25 percent). Because of the difficulty of the simulation needed to quantify these cost savings, they have not been included in this analysis. * Improved service reliability (signaling and electric power supply). The current signaling and power supply systems have frequent breakdowns, which cause service to be unreliable. This makes rail service less competitive with road, and causes customers to carry more inventory to protect against service disruptions. This benefit has not been included in the analysis. * Avoid dangerous chemical releases (electric power supply). The transformer installations in Azerbaijan use transformer oil that contains PCBs. In the current system, these are subject to uncontrolled releases-this benefit has not been quantified. C. To summarize, the benefits that have been modeled include (a) reduced accidents; (b) reduced maintenance costs of the signaling system; (c) reduced maintenance, renewal and energy costs of the electric power supply; and (d) increased rail traffic capacity. The benefits of reduced fuel use from smoother operation, improved service reliability and the avoidance of PCB releases, would be realized but have not been quantified because of the complexity of modeling them. D. Economic Evaluation Results The overall Economic Rate of Return of the proposed investments in signaling and power supply systems is 14.4 percent and the Net Present Value is US$85.9 million. The main benefits of the new investments are the electrification, maintenance and capital repair costs avoided, followed by increased train capacity, and reduced accidents (Table 1). Sensitivity analysis shows that the results are relatively robust to potential events that could reduce the benefits such as less cost maintenance cost savings realized or lower traffic growth (Table 2). 17

26 Table 1: Discounted Benefits Discounted benefits (US$ millions) Cost of accidents 182 Signaling maintenance cost avoided 26 Train capacity 213 Electrification, maintenance, and capital repair cost avoided 298 TOTAL 719 Table 2: ERR Sensitivity Analysis Scenario NPV Base case % 25 % less maintenance cost % savings 25% less traffic growth % 18

27 AZERBAIJAN: Rail Trade and Transport Facilitation Project - Additional Financing and Restructuring Annex 2: Revised Results Framework and Monitoring Indicators Note: The table below contains revised and updated monitoring indicators reflecting the requested project extension to December 31, Actual Target Values Data Collection and Reporting Outcome Indicators Frequen Data Weight cy and Reports Collection Instrumen ts Client Satisfaction survey for freight services (index ) % Volume of transport (million tons) - oil and oil products on east-west corridor % - east-west corridor*** Azerbaian Railways 5% information Operational cash flow/revenues 13% -28% 21% 19% 20% 10% 10% 10% 10% 10% 10% Annual system and 10% financial Working ratio 75% 74% 83% 7 0 S o 87% 870omanagemen 85% 74% 74% 74% 75% 80% 87%m tsystem 50 5% Net ton-km per locomotive used on , ,0 110, % E-Wline (in million per year) Train transit time E- W (new loco) 22h 24h 24h 24h 23h 23h 23h 23h 22h 18h 12h 5% % reduction in operating cost/net ton-km 0-30% -43% -40% -40% -40% -40% -40% 1.0% % % increase in operating 0 11% 56% 21% 21% 21% 21% 21% 10% 10% 5% 5% revenues/net ton-km Electric consumption per transport unit (KWh per ton or % passenger-km) Locomotive availability 45% 39% 45% 59% 60% 60% 60% 60% 60% 60% 80% 10% Component One: 19

28 Actual Target Values Data Collection and Reporting Outcome Indicators Frequen Data Weight cy and Collection Reports Instrumen ts Percentage of track in critical condition on east west corridor as measured through condition surveys Track with speed restriction 61% 65% 65% 67% 64% 60% 50% 40% 30% 20% 10% Annual Azerbaian 5% Railways Annual review Track in need of renewal 36% 37% 37% 37% 36% 35% 33% 30% 26% 25% 20% 5% Component Two : Number of locomotives able to Annual Azerbaian 5% cross Azerbaijan reliably() Railways Annual review Locomotive reliability2) 17,000 16,208 14,996 16,074 18,704 18,000 18,000 18,000 40,000 80, ,000 5% Component Three: Follow up ofaudit qualifications. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Annual Azerbaijan 5% Railways Annual Review Implementation of modernization Audit JSC Oil Asset Rollou Busine IFRS IFRS Annual Azerbailan 5% measures Spiils Respon Revalu ation t of new ss relatio based accoun based accoun Railways Annual se and hardw nships ting ting Review Plan, IFRS are betwee started operati IFRS based and n onal based audit softwa railway account refor main ing IFRS units Manual based accou nting (1) Number of locomotives able to cross 502 km (i.e. E-Wcorridor) non-stop (2) Mean distance in kilometers between operational failures I 20

29 AZERBAIJAN: Rail Trade and Transport Facilitation Project - Additional Financing and Restructuring Annex 3: Operation Risk Assessment Framework 1.1 Stakeholder Risk Rating Low Description: Risk Management: The project is not supported by all The Government will develop a State Program for the Development of Azerbaijan Railways stakeholders Resp: Stage: Recu Due Frequency: Status: Completed Client Impleme rrent Date: ntation : 2.1 Capacity Rating Low Description: Limited experience in management of IFI-financed projects Risk Management: 2.2 Governance Rating Low Description: Institutional resistance to change A PIU with experienced consultants will be established within ADY to ensure that implementation proceeds at a sustained pace and external assistance will be hired for large contracts. Resp: Stage: Recu X Due Frequency: Status: Completed Client Impleme rrent Date: Annual ntation Risk Management: 2.3 Fraud and Corruption Rating Low Description: Lack of transparency in financial reporting and contracting Technical support will be provided to Railways (ADY) and MoT in implementing the restructuring program. This program has been discussed and supported by MoF, MED, MoT and ADDY. Labor unions are interested in participating in discussions regarding the modernization of ADY. Resp: Stage: Recu Due Frequency: Status: In Progress Both Impleme rrent Date: ntation Risk Management: TA to be provided during project implementation to strengthen financial management capacity of ADY in the transition to IFRS. Post reviews and assessments of continued adequacy of systems and controls. Training in financial management and procurement, and best practices. 21

30 Resp: Stage: Recu Due Frequency: Status: In Progress Both Impleme rrent Date: ntation : 3.1 Design Rating Low Description: Difficulty in implementing conversion of power supply from direct current to alternating current Risk Management: 3.2 Social and Environmental Rating Low Description: Specific technical services will be available through the project to optimize the construction planning and assure proper monitoring. The use of a design, supply and install contract for this assignment will enable ADDY to build on the experience of a supplier with proper track record. Resp: Stage: Recu idue Frequency: Status: In Progress Both Impleme rrent Date: ntation : Risk Management: Since the projects is targeting the rehabilitation of existing alignment, RD there are threar no o adverse dvrs social ocalo or Resp: Stage: Recu Due Frequency: Status: LJlmeret ae environments impacts.impleme rrent Date: expected within ntation he project. 3.3 Program and Donor Rating Low Description: Risk Management: There are no any program or other donors involved in the project Resp: Stage: Recu idue Frequency: Status: rrent Date: 3.4 Delivery Monitoring and Rating Moderate Sustainability Description: Low transit tariff to gain market share prevent sustainability Risk Management: A review of markets was prepared by an independent consultant during project preparation indicating sustained growth in traffic in future years. Increasing transparency through suitable IFRS accounting will provide management with suitable data for tariff policies for the first time. Commercialization of ADY will provide stronger incentive to seek profitability as opposed to traffic volumes only. 22

31 3.5 Other (Optional) Rating Moderate Description: Continued deferred maintenance 3.6 Other (Optional) Rating Description: Resp: Stage: Recu Due Frequency: Status: In Progress Both Impleme rrent Date: ntation Risk Management: ADY used most of its profits in recent years strengthening its balance sheet by increasing its working capital (paying its payable, increasing its receivables). By the time of mid-term review, substantial cash flow from operations will become available to ADY to invest in maintenance of rolling stock and infrastructure in areas not supported by the project. Resp: Stage: Recu w Due Frequency: Status: In Progress Both Impleme rrent Date: ntation : Risk Management: Resp: Stage: Recu idue Frequency: Status: rrent Date: 4.1 Overall Implementation Risk Rating Moderate Description: 23

32 AZERBAIJAN: Rail Trade and Transport Facilitation Projeet - Additional Financing and Restructuring Annex 4: Procurement Plan A2ERAIJAN RAIL trade AND TRANPORT ACILrITAI PROJECT ID: P08310S I.AN:7509.AZ PROCUREMNT PLAN Goods and Works nnus ci1r. 0? Oecemb.r 0,2012 PhOJECT COMPONEN11I Mah ek 2014 I N0 W/A 1 TR~ACHkiIARE.TATI0N 2keri Cre4; t Su<p I 0lual D?c S.ndO A Dean, andinls ki05n 0!0a'er pa D PQ c.42t $4' ovrrnrcleenbkbylmm G e0need/0si I 0C US404 $2 -r -. s0lir1gnlneqmn 1 pr COMPONNNT I OTAL 2, 1 15,D COMPONENT1IACTUJAL TOTAL FORGOOOSAND WcRKS A 370 comronrt2 Col*lPCOMN3Fr~Ol0!OosAN0WOAKS CANCÉLI0f IT of1vr- 1 r rgir0n1rdvifarr,i1 I ß04ß0 24 G ITRollGulotADYFJnaalSysertprapsed 1.0, 0A ,0 NrA0 N/A N NA ICB,8<4ln 083 i5 G G 20o1 G0, I,G,I i-rdrrl- o..e tao Financial plan G û G3 IT di4 kl*rr I., LCala 007. Gå G 0, , G 1 1 _G1, , 11, ICO 0 par plar} 1.1 0, , S!rOOi 7 04 <IiiiihIl0iOT1Iorihe0mosute pf.ý 1.G i I,I 2 Ogl Ili1, o/yk} G,k, CI,I<l G LLC,1 1 $OlCa riinraonnw121l01gad D $v~o~s~s!io 0<~d<44aclus l4ii12j 4d 00v [112 OSREquprier tsofelyondpp,cessilo1 Olan 0.0 0, Aviluet d Otobe G4-5nd h0adoiacan1ra# Ri~rF-G4-02 AZM I I 0Iso G atlul Q is04osrgquspmert-h.lediequerretcon1ratg 10~~~~G 00n ITG,40awreiAlaespcz G 3 Auipum2011 D7icembe.2DU l11 GI 2$ G pi c r3 r ta[gll ßl0537! G fi114! 5G0 AZM Ifl G4 G,G,0 11 OS Eu0mr1geecn0e l pB fel40 er janua,y po. C2entnRNP.33 lardg-,gyr. I 7 1 Gerws"1C1ertheainnuniorZ4330 sus 0,04 0,02 0,0021?$ 092$ cerrplged 02 Olaro Cecernlier2011 ~ Januy.20l t d I 3 $ CSOIp0!n ero01eemeur N a,ui 0,70 0,27 0X

33 OSEipeteeaosnlihigytmplan Dø3 0,0! 0O1 096 Oecembe,2011 Jnar Ž201! S Contracto -0aaTe10Tho-,zane- I paa4 cornplted 2011"LLCrorthejorno.3rAZN a300 oemel 0Åß 00! 0,00I175 0, op el'p~rieoo'at~ orlsle ~~erplan 0 I 030 OJJ Decembler 2011 Januar Conirw I G4.07 awardedi TechnO-Bi2ries 1 9 $ G ps os 201L oieriodz1.0 du,al , , plan , »0 T'D0B TBD T 02 Irripr lvenï(.m ok$ I IC locomoivi;vikshop$ I C n! 8 [38 1T,3r IC wtedg pierlhol plan 2.2 1, TBD T[BD TBD TO COMPONENT3 TOTAL ORl CInODsAND11fI<S i?0 G C0OMPONENY 0ACTUJAL 'OTAL FOR OCODOANODWOlRM( 350 1: CoMPONENIT 4 FOR GCODS MID wcfrks ITproOur!rent~l iorp1conac AZR11:F135 plan Oß3 fßi Om I7 05 awairdedto I 4 8 G pre _,,. _... c ehicles ort PIU ~ama, ,2010 [2 CarS plan ) Oh AZ PflP50Imaarded1 Diameris ' r... c Motors MMC(M hubihmolartsar heumd c aw oßl 0ß , StioppuIOOfW,dO{epairto*1n6stIr olan > GG, eorunts) Conscr#AÅZ ATTFP.G$.02 4G pe 02 di$[3j"m(oiesm A2 ml 0Dß2 0ß0! S¾ïopprag0fd(dg,,rreOrPIU]> plan J ,2010 GS. Con,IrIe4et# 03 AZRTWtA030s vrdedtø -CNBAlACOO G pstcmpe MM Mor&Ihsumek2N awau ) COMPONIN14TOTAL ['ORG30OD3ANlOWORIKS 0, >3 I,1 omponia.ti Atf1UAL 1OTALFrOR OOOSANO WOPJ4$ 0, >23 0,17 plan IS53ßS Ial r o d ridw rks ,17 a 25

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36 AZERBAIJAN: Rail Trade and Transport Facilitation Project - Additional Financing and Restructuring Annex 5: Implementation Plan Note: The table below represents the current project implementation plan IV IV IV IV IV IV IV Power Conversion Detailed design Boyuk-Kesik-Ganja Ganja-Ujar Ujar-Hajiqabul (122 km) Hajjqabul-Baku (contract to be signed in Bidding process (12 months) section (138 km) (112 km) (12 months) (131 km) 10 months July 2012) (12 months) (9 months) Detailed design Boyuk-Kesik-Ganja Ganja-Ujar Ujar-Hajicialbul (122 km) Hajiqabul-Baku (131 Signalling Bidding process (12 months) section (138 km) (112 km) (12 months) km) 10 months (12 months) (8 months) Locomotives locomotives 10 locomotives 10 locomotives 10locomotives 10locomotives Track Rehabilitation ( km 94 km 94 km 94 km km) East-West Line by sections 138 km 112 krn 122 krn 131 krn lboyuk Kesik Ganja Udjar SHajigabul Bak.A 28

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