Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 27891

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 33.5 MILLION (US$50.00 MILL10

TO THE REPUBLIC OF ZAMBIA

J EQ JF ENT)

FOR A

ROAD REHABILITATION AND MAINTENANCE PROJECT

IN SUPPORT OF THE FIRST PHASE OF THE ROADSIP 11 PROGRAM

February 13,2004

AFTTR AFC03 Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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APL AG AfDB BD CAS CPAR C R N CFAA DANIDA DISS ERR EU E M P EMU EO1 FMR Project F M S I C B IDA

GDP GRZ GPN H M S HIPC HDM

IMT

JSU LIB

M C T M F N P MLGH M W S

CURRENCY EQUIVALENTS

(Exchange Rate Effective 02/04/2004)

Currency Unit = Zambia Kwacha 1 Kwacha = US$0.000210526

US$1 = 4750Kwacha

F ISCAL YEAR January 1 -- December 3 1

ABBREVIATIONS AND A C R O N Y M S

Adaptable Program Loan Auditor General African Development Bank Bankable Document Country Assistance Strategy Country Procurement Assessment Report Core Road Network Country Financial Accountability Assessment Danish International Development Agency Dept. o f Infrastructure and Support Services Economic Rate o f Return European Un ion Environmental Management Planning Environmental Management Unit Expressions o f Interest Financial Management Report

Financial Management System International Competitive Bidding International Development Association

Gross Domestic Product Government o f the Republic Zambia General Procurement Notice Highway Managment System Heavily Indebted Poor Countries Highway Design Mode l

Intermediate Means o f Transport

Joint Services Unit Limited International Bidding

Ministry o f Communications and Transport Ministry o f Finance and National Planning Ministry o f Local Government and Housing Ministry o f Works and Supply

N C B NCC NDF NORAD NRFA NRSC NRB

NTF PIP PRSP QCBS RDA RF RMI RRMP

RTTP RTSA SADC

SA

SPN SSA TA TETAP

UNCDF

UNDP ZAMSIF

ZAWA Z R A

National Competitive Bidding National Construction Council Nordic Development Fund Norway Development Agency National Road Fund Agency National Road Safety Council National Road Board

National Task Force Project Implementation Plan Poverty Reduction Strategy Paper Quality and Cost Based Selection Road Development Agency Road Fund Road Management Initiative Road Rehabilitation and Maintenance

Rural Travel and Transport Program Road Transport and Safety Agency Southern African Development Community Special Account

Specific Procurement Notice Sub-Saharan Africa Technical Assistance Technical Engineering and Technical Assistance United Nations Capital Development Fund United Nations Development Program Zambia Social Investment Fund

Zambia Wi ld l i fe Authority Zambia Revenue Authority

V ice President: Callisto Madavo Country Managermirector: Har twig Schafer

Sector Managermirector: Sanjivi C. Rajasingham Task Team Leader/Task Manager: Petrus Benjamin Gericke

FOR O F F I W USE ONLY

ZAMBIA ROAD REHABILITATION AND MAINTENANCE PROJECT

CONTENTS

A. Progam Purpose and Project Development Objective

1. Program purpose and program phasing 2. Project development objective 3. Key performance indicators

B. Strategic Context

1. Sector-related Counhy Assistance Strategy (CAS) goal supported by the project 2. M a i n sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices 4. Program description and performance triggers for subsequent loans

C. Program and Project Description Summary

1. Project components 2. Key pol icy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project altematives considered and reasons for rejection 2. Major related projects financed by the Bank and/or other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5. Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

Page

3 3 4

4 5

12 13

14 16 16 17

22 23 24 25 25

26 27 28 28 31 32 34

This document has a restricted distribution and may b e used by recipients only in the performance of their official duties. I t s contents may n o t b e otherwise disclosed without W o r l d Bank authorization.

F. Sustainability and Risks

1. Sustainability 2. Crit ical r isks 3. Possible controversial aspects

G. M a i n Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: (A) Procurement Arrangements

(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project F i le Annex 9: Statement o f Loans and Credits Annex 10: Country at a Glance Annex 1 1 : Current Institutional Reforms in the Road Sector

35 35 36

36 37

37

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38 40 45 46 5 1 58 66 76 77 78 80 82

ZAMBIA Road Rehabilitation and Maintenance Project

Project Appraisal Document Africa Regional Office

AFTTR

Date: February 10,2004 Sector ManagedDirector: C. Sanjivi Rajasingham Country ManagerDirector: Hartwig Schafer Project ID: PO71985 Lending Instrument: Adaptable Program Loan (APL)

Team Leader: Petrus Benjamin Gericke Sector(s): Roads and highways (70%), Sub-national government administration (1 O%), Central government administration (lo%), General transportation sector (10%) Theme(s): Infrastructure services for Private sector development (P), Export development and competitiveness (S), Public expenditure, fmancial management and procurement (S), Access to urban services for the poor (S), Rural services and infrastructure (S)

US$ m % US$ m US$ m Date Date- APL 1 50.00 13.1 330.90 380.90 07/01/2004 06/30/2007 Government of Zambia

Loanl Credit

Loanl Credit

Loanl Credit

APL 2 70.00 20.3 275.50 345.50 07/01/2007 06/30/2010 Government o f Zambia

APL 3 70.00 18.7 303.80 373.80 07/01/2010 06/30/2014 Government of Zambia

Total 190.00 910.20 1100.20 [ ]Loan [XI Credit [ ] Grant [ ]Guarantee [ ]Other:

For Loans/Credits/Others: Amount (US$m): 50.00

Proposed Terms (IDA): Standard Credit Years to maturity: 40

BORROWER IDA DENMARK: DANISH INTL. DEV. ASSISTANCE (DANIDA) EC: EUROPEAN DEVELOPMENT FUND (EDF) JAPAN: JAPAN INTERNATIONAL COOPERATION AGENCY

GERMANY: KREDITANSTALT FUR WIEDERAUFBAU

NORDIC DEVELOPMENT FUND NORWAY: NORWEGIAN AGENCY FOR DEV. COOP.

(KFW)

64.28 0.00 0.00 0.00 0.00

0.00

0.00 0.00

0.00 50.00 50.00 51.75 0.00

15.00

9.00 15.00

Total 64.28 50.00 50.00 5 1.75 0.00

15.00

9.00 15.00

VORAD) LOCAL SOURCES OF BORROWING COUNTRY

Borrower: REPUBLIC OF ZAMBIA Responsible agency: NATIONAL ROADS BOARD ON BEHALF OF GOVERNMENT National Roads Board Address: P. 0. Box 50695, Fairley Road, Zambia Contact Person: Mr. R Mabenga, Executive Secretary

Tel: 2601/255660 Fax: 26011253154 Email: nrb@zamnet.zm Other Agency(ies): Ministry o f Communications and Transport Contact Person: Mr.Ignatius Kashoka, Permanent Secretary

Tel: 2601/251444/254158 Fax: 2601/253260/251795 Email: Ministry o f Works and Supply Contact Person: Lt. Col. Nkunika, Permanent Secretary Tel: 2601/253447 Fax: 260 11254 108 Email: Estimated Disbursements ( Bank FY/US$m): -

Project implementation period: 01/01/2004 to 1213 112008 Expected effectiveness date: 07/3 1/2004 Expected closing date: 0613012007 I * P L ” D I y m l m Y p * ; ” 2 m o

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A. Program Purpose and Project Development Objective 1. Program purpose and program phasing:

The Government o f Zambia (GRZ) i s currently completing the first major Road Sector Investment Program, called ROADSIP. The Bank i s supporting this program through Credit No. 2993. As a next step and based on the successes o f ROADSIP I the GRZ prepared a second program, called RODSIP 11. This i s a focused ten-year program (2004-2013) to reach the point where the maintenance backlogs are generally removed and the road sector can focus mostly on routine and periodic maintenance activities. A major part o f this program i s to complete institutional changes that will result in both the development o f a road user charging system that will over the same time expand to generate the required finding for the road sector locally and a focused road infrastructure, traffic and safety management. The proposed Road Rehabilitation and Maintenance Program (RRMP) i s supporting the ROADSIP 11-program.

The overarching goal o f the program i s to stimulate economic growth, and contribute to poverty reduction through: appropriate investments in road infrastructure, adequate institutional and policy reforms, and enhanced road sector management. A specific program objective i s to bring the core/proclaimed road network o f 40 113 km into a maintainable condition. Others are to strengthen the technical and managerial capacity o f newly established road authorities; to create employment opportunities in the road sector and alleviate poverty through the creation o f new jobs in road maintenance; improve road safety; improve and generalize environmental management in the road sector through the establishment o f procedures and guidelines; provide an enabling environment for improved rural transport services and develop and implement a framework for the management o f community roads and promotion o f community participation in road management.

The GRZ acknowledges that the road sub-sector plays an important role in contributing to economic development, and has attached high priority to launching the ROADSIP I1 Project. The Bank wil l strongly support the program, Road Rehabilitation and Maintenance Project (RRMP), which will be implemented over the same ten years in three phases each having well defined specific objectives and scope. Phase one (APL 1, three years) will focus on carrying out systematic programmed periodic maintenance o f the maintainable network o f paved and unpaved roads and prioritized rehabilitation, implementing Government approved institutional and policy reforms, implemening routine road maintenance programs covering the core network and completing preparation for the works to be implemented during phase 2. A P L Phase 2 o f three years and Phase 3 o f four years will focus on periodic maintenance and rehabilitating priority roads and bridges; strengthening road management capacity; and putting into place a long-term program to improve road safety. The second and third phases will be contingent o n successful implementation o f phase one activities and satisfaction o f agreed triggers.

2. Project development objective: (see Annex 1)

The specific objectives o f the APL 1 are as follows: (a) The preservation o f the public core road network in support o f sustainable economic growth and diversification strategy, (b) The development and then maintaining o f institutional capacity for the efficient, equitable and financially sustainable management o f the public road infrastructure and road safety; (c) The

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extension o f urban and rural transport infrastructure and services for increased accessibility, and (d) The extension o f local community involvement in the management o f selective road infrastructure as well as in prioritization o f investments. The proposed IDA contribution to the project will address all four objectives, through a limited number o f sharply focused interventions.

3. K e y performance indicators: (see Annex 1)

The key performance indicators that measure the achievement o f the project development objectives focus on road improvements and completion o f the institutional changes. The most important are as follows;

1. The coverage o f core road network under sustainable routine maintenance program increased from 19.50% in 2004 to 40 % in 2006. 2. The quality o f core road network improved for paved roads from 58 % good in 2004 to 65 % good in 2006 and for unpaved roads from 7 % good in 2004 to 32 % good % fair in 2006. 3. Domestic funding for the total road budget increases from 27 % in 2004 to 40 % in 2006. 4. System for recording o f road accidents and i t s analysis in place by December 2005.

Annex 1 provides the complete l i s t o f the planned indicators per component. Many o f these indicators do not have baseline information yet. The proposed project will undertake a study to develop the baseline within the f i rst six months following efffectiveness.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1 ) Document number: IDNR99-156/1

The project i s consistent with the CAS discussed by the Board in November 1999. The overarching objective o f the CAS i s to sustain positive growth rates and show that the economic reforms are beginning to bring tangible, measurable benefits to the population. The project will support the CAS objective in a number o f ways notably: reducing transport costs through maintenance and rehabilitation of public roads to help increase international competitiveness and underpin growth in agriculture, tourism, manufacturing and mining; creating employment opportunities and generating incomes through the promotion o f labor based work methods and carrying out road maintenance using performance based contract procedures; improving all-weather access to rural communities and enhancing service provision to help improve the quality o f l i fe for Zambia’s poor. ROADSIP has already helped address the backlog o f road maintenance and helped implement institutional reforms, and the CAS underlined the need for the preparation o f the follow up program after the completion o f current ongoing operation scheduled for closing in March 2005.

Date of latest CAS discussion: October 7, 1999

A new CAS i s currently under preparation. The underlying economic objectives o f the CAS remain the same, with the specific direction o f reform being closely aligned with the newly adopted PRSP. The new CAS has a stronger emphasis on governance in order to address the declining performance o f government in implementing policy reform and undertaking key structural economic changes since the late 1990s. The CAS identifies three strategic areas for intervention in the period FY04-06 i.e.: improved governance and strengthened public sector

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management; sustained and diversified economic growth; and investment in human capital and protection o f vulnerable individuals and communities. Under the second strategic area, improved infrastructure service provision i s a designated final outcome, including but not l imited to the public road network. CAS outcomes and indicators for the road sector are consistent with the indicators for the project.

The project i s also consistent with the Poverty Reduction Strategy Paper (PRSP) and the Joint Staff Assessment report o f April 23, 2002 (Report No. 24035-ZA). Functioning transportation infrastructure i s seen as critical to Zambia's drive for export competitiveness in view o f the country's land-locked status as well as to linking poor rural areas to urban markets and social amenities. The f i rst priority will be on better maintaining the already existing infrastructure with very l imited new development in support o f planned economic activities. The second will be to deepen institutional reforms in order to improve implementation o f road programs for the poor. The third concerns facilitation o f increased rural access and mobil ity within a decentralized planning and implementation framework. The fourth concerns a direct contribution to government's poverty reduction efforts through increasing employment through expanded use o f labor-based road works methods. Support will be tendered to the relevant cross-cutting issues ( HIV/AIDS; gender and environment) through the following: (a) supporting activities to prevent the spread o f HIV/AIDS including distribution o f condoms and organizing pubic awareness campaign near the road works sites; (b) promoting gender equality by encouraging employment o f women at all levels and in all capacities; and (c) building on past improvements in environmental management in the planning and implementation o f the road work programs.

2. Ma in sector issues and Government strategy:

Sector overview:

The transport network in Zambia i s comprised o f f ive modes o f transportation, Le, rail, road, c iv i l aviation, inland water transport and pipeline. A recent overview o f the Zambia's major modes o f transport reveals that ra i l and road account for the movement o f three quarters o f total import and export movements with approximately 2.2 mi l l ion tons transported by road as compared to only 400,000 tons by rail. Road transport has been identified as a major factor within the Government's overall policy framework to enhance economic development and growth. Road transport covers the most extensive area in Zambia o f any transport mode - the railway network for example covers only a small portion o f the country. In the past poor performance o f the state owned enterprises held back transport. More recently, the freight industry performed fairly well with industry restructuring and the increased participation o f the private sector, although vehicle overloading i s an important issue to resolve. Reforms achieved in the rai l sector, including concessioning o f main freight and passenger services, are expected to start enhancing performance. Investment in the transport sector has been substantial in recent years. Annual road sector spending has averaged about US$80 mi l l ion per year during ROADSIP, somewhat over 2% o f GDP equivalent.

Road network:

Zambia has a gazetted road network o f approximately 37,000 kilometers. The currently ongoing

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institutional changes will, amongst others, lead to a well-defined road network. The current plan i s to include 40 11 3 km in the core network o f which 18% i s paved, 23% gravelled and 59% earth. Just over 20,000 kilometers are classified as trunk, main and district roads. The balance consist o f feeder (rural district), urban and parks (tourist) roads. Formal reclassification i s s t i l l to be completed to bring the priority network into l ine with what i s the gazetted network, i.e. a primary feeder road network o f about 15,900 kilometers, an urban road network o f 5,500 kilometers and a parks road network o f about 7,200 kilometers. There are in addition these tracks and paths which fall outside the purview o f the public network - but which may be managed by local communities - amounting to 25-30,000 kilometers. A large part o f the trunk, main and district road network was constructed between 1965 and 1975. I t was designed to support projected economic development at that time and does not fully respond to: (i) taking advantage o f the strategic location o f Zambia in the sub-region; (ii) assuring access to the isolated populations in the rural areas. The geography o f Zambia presents a number o f challenges to redressing this situation, given the large distances involved and the prevalence o f river and other water crossings st i l l needing to be addressed. A recent analysis showed that in Zambia the GDPkilometer o f road ratio was US$70,300 which i s about ha l f the average for the Southern African Development Community (SADC) countries, Le. Zambia's economy has to carry proportionally speaking a much larger road network than does i t s neighbours. Motorized traffic i s in any event heavily concentrated in the main urban areas and the interurban routes along the line o f rail. Non-motorized traffic i s significant in rural and in some urban areas. The needs o f these users are not always factored into the provision o f road infrastructure.

Road policy and management:

The Ministry o f Communications and Transport (MCT) i s responsible for overall policy formulation and monitoring o f the transport sector. In addition, MCT presently oversees the operation o f a number o f transport related corporate bodies and institutions, which, among others, include National Road Board (NRB) and National Road Safety Council (NRSC). The NRE3 manages the Road Fund (RF) that has not become the principal source o f financing for road maintenance as planned with direct budget support from the Ministry o f Finance and National Planning (MFNP) remaining important. The management o f the core network i s currently divided between the Roads Department (RD) under the Ministry o f Works and Supply (MWS) (trunk, main and district roads), the Ministry o f Local Government and Housing (MLGH) together with the designated local authorities (feeder and urban roads) and the Zambia Wildl i fe Authority (ZAWA) under the Ministry o f Tourism (tourist roads in national parks, game management areas, and cultural heritage sites). MLGH, through the local authorities, and communities manage the undesignated lower order feeder roads like, community roads, tracks and paths.

Sector coordination proved to be difficult, in spite o f the creation o f a Committee o f Ministers on the RMI for which the corresponding permanent secretaries act as the secretariat. GRZ decided with the recently approved Transport Policy to clarify the roles and responsibilities o f these ministries and agencies with the establishment o f three new road sector agencies that will form the future core road sector institutions. The enabling legislation i s in place and the establishment o f the three agencies i s currently ongoing with IDA-support. This will clarify the management and financing o f the core network. During th is program, the GRZ will also address the management o f

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the undesignated roads.

Achievements in the roads network and sector management since 1992:

Since 1992, assistance from the Bank and other donors in the roads sector have supported major achievements in institutional reforms and in improving road network condition. The Bank has made a contribution to these efforts, through the IDA financed Technical Engineering and Technical Assistance Project (TETAP), and the Project to Support ROADSIP as we l l as through the Road Management Initiative (RMI) and the Rural Travel and Transport Program (RTTP) Institutional and policy reforms in the road management and financing were initiated through the RMI, and particularly a workshop held in February 1993, which helped to develop a broad consensus for the creation o f RF and NRB under the overall policy guidance from MCT. Further institutional support has been rendered to bring rural and community roads into the mainstream o f the road management with RTTP playing an active role in promoting policies to encourage mobil ity and to enhance the sector's impact on poverty reduction in the rural areas. Through TETAP, which became effective in 1993 and closed in 1998, the Bank tendered support to a number o f preparatory activities required to launch a comprehensive investment program in the road sector including: strengthening management and financing o f roads; supporting feeder and urban road management in MLGH; establishing a highway management system (HMS) in the RD; and carrying out studies aimed at developing the local construction industry and at promoting improvements in plant and equipment management.

IDA support to ROADSIP, becoming effective in 1997 and due to complete in early 2004, has assisted the Government in policy reforms, institutional strengthening, and capacity building through: (a) Technical assistance (TA) to provide management support services to NRB; (b) continued TA support to strengthen management o f feeder roads and urban roads in MLGH; (c) developing RD institutional capacity in environmental analysis and monitoring, contract management, financial management, equipment management, and HMS; (d) strengthening the NRSC, developing a road safety action plan and improving axle load management; (e) streamlining management o f the RF and diversifying road user charges; (f) starting a pi lot intermediate means o f transport (IMT) program to improve rural transport mobility; (g) providing TA support in establishing the National Construction Council (NCC); (h) providing TA and grant support for implementing a community road management initiative. A number o f other institutional and policy reforms as agreed in the letter o f sector policy dated March 1997 were initiated, but implementation o f many elements was delayed by the fact that a comprehensive Transport Policy was only approved in April 2002. These include: restructuring o f road agencies, adjustment o f fuel levy to match maintenance needs, channeling al l road users charges through the RF, and direct and immediate transfer o f fue l l e v y collected by MFED to the RF account. These areas will need to be addressed as the implementation o f the Transport Policy moves forward. Also some o f the reforms implemented and institutions supported have yet to yield positive results on the ground, e.g. in regard to road safety performance improvement and to the highway management system.

Under ROADSIP, over 1,400 km o f trunk, main, district, urban and feeder roads have been rehabilitated, 6,400 km o f roads have received periodic maintenance, and 1,500 km o f community

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roads have received accessibility improvement. The project's positive impact has been registered with the percentage o f paved roads in good condition having r isen from 21% in 1995 to 46% by the end o f 200 1. This performance i s generally in line with agreed targets, with the exception o f feeder roads with a limited number o f improvements in Luapula and Northern provinces. 350 routine maintenance contractors have been trained and the intermediate ROADSIP target o f the creation o f 20,000 jobs by 2003 has been met. In the year 2001, RD started using performance based contract procedures for carrying out routine maintenance on pi lot basis. This now covers about 6,000 km o f the network after successful piloting o f the initiative. However in aggregate maintenance s t i l l lags behind target largely as funding objectives have not been completely met - only 60% o f target fuel levy collections under Phase I have been achieved, and o f that amount only 70% o f what has been collected has been remitted to the RF. Some interventions made on feeder roads accessibility improvement works do not seem to be appropriate due to lack o f technical and monitoring capacity and it will be necessary to consider different approaches under APL 1 To th is end a comprehensive technical audit exercise was commenced in 2003 with i ts recommendations to be implemented under APL 1.

What remains to be done to establish and strengthen the institutional changes:

Although the management o f the road sector has certainly improved since the IDA support to ROADSIP became effective, the institutional and policy reform process i s yet to be completed. In line with the provisions o f the recently approved Transport Policy, the following actions are now to be taken:

(a) Road Sector Financial Resources: GRZ i s currently busy with the establishment o f the National Road Fund Agency (NRFA) who will in future be responsible for the coordination and management o f the road financing functions. This means that al l resources allocated for the road sector from road user charges, Government, cooperating partners and private sector would be channeled to the National Road Fund (NRF). NRFA will be responsible for collection, disbursement, management, and accounting o f NRF, reporting through MFNP to the Committee o f Ministers on RMI. The NRB will eventually be taken over by the proposed NRFA. This i s intended to ensure effective coordination o f the road sector investment program and the correct prioritization o f resources. The NRFA will ensure that maintenance i s prioritized and road user charges and levies are dedicated to this end. The NRFA will thus need to operate under clear and appropriate operational and financial regulations which are being developed under the on-going institutional and fmancial studies.

(b) Road Infrastructure: The Government will transfer the management responsibility o f the public/proclaimed network from the different Ministries and Agencies to the newly established Road Development Agency (RDA). Mechanisms will also be devised to encourage private sector investment in the road sector through commercialization o f roads, build operate and transfer concepts, and other forms o f direct investment in road development such as the introduction o f tol l roads where appropriate. I t i s intended that there shall be two departments under the RDA's Chief Executive Officer, one responsible for primary and secondary roads and another for Urban and Feeder roads. RDA will undertake planning, programming, implementation, monitoring and overall supervision o f all road works in the country to be undertaken through contract account.

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Unproclaimed roads, tracks and paths will continue to be the principal responsibility o f the districts and communities. The planning, programming, implementation and monitoring o f these works will however be coordinated with the RDA to ensure that the latter has an overview o f the state o f the roads sector as a whole.

(c) Road Transport and Safety: The Department o f Road Transport in M C T and the NRSC will be merged to constitute a Road Transport and Safety Agency (RTSA). This Agency wil l be directly under MCT. The Agency will be responsible for implementation o f policy on road transport and traffic management, road safety and enforcement o f laws regulating road transport, traffic safety, and axle load control in the country. In addition the Agency will be responsible for planning, programming, implementation, monitoring and evaluation o f road transport regulations and safety programs approved by the Committee o f the Ministers on the RMI. One aspect that will require support i s the implementation o f the road saftey programs developed under ROADSIP. These will include systems to collect traffic statistics related to road safety.

(d) The three agencies (RDA, NRFA, and RTSA): These will each have their own Board o f Directors, comprising private and public sector representatives. The Committee o f the Ministers on the RMI will carry out periodic monitoring and evaluation in regard to the impact o f the reforms. The full administrative cost o f all agencies will be an agreed percentage o f the total program to be approved by the Committee o f the Ministers and financed from the NRF.

In support o f the successful implementation, o f the approved institutional reforms, the following actions already started under the current credit support will need to be completed under the new program:

preparation o f the financial strategy, which will address the generation o f adequate road fund revenues through road users charges and the adjustment o f fue l levy, as well as: modalities for collection o f the road user charges and i t s transfer to the RF; setting o f priorities for road hnd

allocations; criteria for road programs; financial and technical audits; and submission o f reports;

detailed arrangements for the creation o f the new three road agencies and the transfer o f functions in an orderly process from the existing structure (this also to incorporate downsizing implications for the current structures); and

agreement between the Government and donors to underpin future external contributions to the h d i n g o f the program. In this regard discussions were initiated on a pi lot project for the pooling o f funds for some periodic road maintenance works. These discussions are supported. Implementation o f any pooling arrangement will only take place within the current set guidelines o f the Bank.

(e) Rural access and mobility: Achievement o f targets with regard to rural access has lagged despite the efforts made under ROADSIP to prepare the necessary environment for change through studies on institutional arrangements for feeder roads management. This was partly due to the delay o f government's approval o f the decentralization policy. This policy has now been approved and provides a clear basis for the transport sector institutional development to be supported by moves towards decentralization and empowerment o f local authorities and

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communities to increase the output o f road improvement and maintenance, taking into account the results o f the above-mentioned technical audit. Furthermore, the establishment o f the new road agencies creates an opportunity to redefine responsibilities, promote joint service units between local authorities, and also to set new targets which would be more explicit with direct measures o f improvements in both access and mobility. Actions to improve rural mobil ity was one o f the areas o f relative success under ROADSIP with activities now on-going in four districts. The planned expansion into a national program under the Road Rehabilitation and Maintenance Project (RRMP) will require: (i) establishment o f an implementation framework for promoting use o f IMTs that i s national and district focused and private sector driven based on the proposals drafted under ROADSIP; and (ii) implementation arrangements that promote greater linkage between efforts at improvements o f rural transport infrastructure and services. Inadequate arrangements for the maintenance o f canal and waterways impedes travel, especially in rural areas where communities are often captive to water transport. Existing legislative and institutional arrangements in this respect will be reviewed under RRMP.

In addition: (i) Private sector participation in road construction can be further enhanced by facilitating access to equipment and credit, and putting in place fiscal measures to support local firms. NCC i s developing an action plan to strengthen the implementation capacity o f the local road construction industry; (ii) Road accidents and consequent deaths, injuries and property damage impose important costs to the country. Action to enhance road safety measures will need to be accelerated; (iii) Maintenance strategies will be more effective when axle load control measures are in place. With the recent agreement to put in place a comprehensive axle load program, more attention i s to be given to the technical, financial, and the legal issues underlying overloading; (iv) Finally, it i s now well understood that improved roads contribute to the spread o f HIV/AIDS and result in high r isks for road workers, truckers, and for people living nearby or using roads. The rapid spread o f HIV/AIDS in Southern African countries means that roads program in this region must now include measures to prevent HIV/AIDS among workers and people living nearby and using roads; and (v) Zambia i s one o f the most urbanized countries in Africa and this i s a trend that can be expected to continue. Meeting the transport needs o f cities, especially o f their poor inhabitants, i s a challenge that the country needs to place increasing attention to. In this regard, studies need to be carried out to gain a better understanding o f these transport demands and to develop strategies for dealing with them.

The main issues to be addressed in the APL Phase 1 can thus be summarized as follows:

Strengthening management capacity o f the road sector through creating new road agencies (RDA, NRFA, and RTSA).

Improving efficiency o f the sector institutions in the areas o f financial management, environment, technical audit, reducing contract let time, contract management, and simplifying payment procedures.

Filling the financing gap and increasing road user financing through adjustment o f fuel l e v y and adding other road user charges to address the current inadequacy o f the resource base for the RF.

Coordinating funding from al l resources including Government budget, development partners, and road user charges by channeling direct into the RF and set up priorities to avoid

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maintenance slippage.

interventions backed up with appropriate institutional structures and stakeholder participation.

framework to support the use o f IMT and community infrastructure.

construction industry, and the promotion o f labor based work methods.

implementation o f an enhanced road safety action plan.

Increasing rural access through appropriate technical, cost effective maintenance

Promoting mobil ity by developing an appropriate, legal, institutional and regulatory

Designing short, medium and long term strategies for the development o f road

Generating financial resources and involving the private sector in the planning and

Addressing vehicle overloading and implementing axle load control. Addressing the cross-cutting social issues HIV/AIDS, gender, and environment, identified

Defining the transport needs o f the urban poor and design strategies to address these. by the PRSP.

Government Strategy:

The Government strategy i s to support the early implementation o f the provisions o f the April 2002 Transport Policy, so as to ensure the realization o f all objectives for ROADSIP, as suitably modified by the experience o f the f i rst five years o f implementation. A Bankable Document (BD) detailing the objectives, scope, costing and proposed financing for the 10-year program has been developed with the help o f a National Task Force. This document was distributed to the Bank and other financing partners during appraisal. The BD used a substantial amount o f analysis o f inputs and outcomes to date o f each o f the components o f ROADSIP carried out after the Mid Term Review which took place December 2000.

Establishment and sustainability o f an appropriate institutional framework for management o f the road network remains the f i rs t priority. I t i s the Government's strategy that the three new road agencies will be fully operational by end 2005. Boards o f Directors will be appointed before the end o f 2003 and these wil l work with a consultancy team, recruited under IDA financing, to draw up operational and financial plans for the new Agencies. An init ial budget provision has been made for 2004 and the process o f hiring the Chief Executives and other key staff i s in process.

The new arrangements for road sector finding are intended to go into effect from the beginning o f the 2004 fiscal year. RF resources will be allocated as follows: (i) as a f i rst charge routine and periodic maintenance; and (ii) as a second charge counterpart funding o f donor financed rehabilitation programs. The Government's goal i s to over time fully fund the road sector, firstly aiming for full funding o f al l routine and periodic maintenance, from road user charges. During A P L Phase 1, it will ensure that: (a) a l l annual routine maintenance programs presented for consideration are fully fimded not later than 2005; (b) domestic funding i s raised to cover at least 40% o f the funding requirements o f the road sector by 2006; (c) not less then 40% o f these resources will be directed to the needs o f the rural districts. Up to 5% o f RF resources from road user charges may be used to cover the administrative costs for NRFA, RDA, and RTSA. The Zambia Revenue Authority (ZRA) currently deposits the proceeds from the fue l l e v y into the MFNP, who in turn remit into an RF account in a commercial bank. The Government decided in principle that ZRA shall directly deposit fuel levy proceeds into the RF accounts.

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Addressing the backlog o f deferred periodic maintenance, the Government has developed a road program to ensure that scarce financial resources are applied to highest priority programs. During the next three years, the Government generally aims at reducing the roads in poor condition from 40% in 2002 to 20% for paved roads, and 70% to 50% for the unpaved roads. The long term goal i s to reduce the percentage o f the network in poor condition to not more than 10% in total, as per the original ROADSIP program goal. The Government established in the BD three broad levels o f priorities .for interventions on this network - (i) minimal network connecting the major international crossings with provincial centers, with a limited urban network within each center; (ii) all other roads whose maintenance could be justified on traditional economic grounds alone; (iii) the rest o f the core network focusing directly on those l i n k s having the strongest poverty reduction focus.

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

The proposed RRMP i s designed to support ROADSIP I1 over the next 10 years, so it will address al l the road sector related issues stated above (although the specific IDA contributions wil l be more sharply focused). Based on the experience gained in ROADSIP, the proposed project wil l provide particular attention to the following key issues in priority order:

(1) Filling the financing gap: The proposed A P L Phase 1 would support the development o f al l potential road user charges resources as set out in the Road Rehabilitation and Maintenance Project. Experience in other countries showed that the development o f road user charging instruments take time. There i s a need to establish the new Agencies first and thereafter to develop and implement these revenue instruments transparently.

The program therefore revised, after appraising the ROADSIP I1 Project estimated to cost about US$1,600 million, the total program from the original $160 mi l l ion to a more realistic cost o f US$ 1,100 mil l ion over the 10 years and a program o f US$ 380 mi l l ion for the APL Phase 1. There i s need to ensure that the appropriate measures are taken, and the commitment secured, so that these financing targets can be met.

The current information shows a financing gap o f US$ 11 mill ion. This i s small relative to the project size (about 3 %). Experience with the current credit showed that this financing gap will be filled as other donors that are currently supporting the road sector in Zambia (African Development Bank, the Development Bank o f Southern Afr ica and JICA) are committing their funds. Should the additional external funding not be sufficient to fill the financing gap, the GRZ will have the additional option to raise the levels o f domestic road user charges once the institutional changes are completed in 2004.

(2) Strengthening institutional capacity: The current organizational structure o f functioning RD, DISS and NRSC under different ministries and, in addition, the loss o f experienced technical staff employed in the road agencies, failed to enhance technical capacity and increase efficiency in the management o f road sector as expected. As a result the implementation performance o f the road sector management in terms o f integrated planning, setting up priorities for funds allocation, and maximum use o f the available resources remained weak. The proposed project would ensure

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that as agreed in the transport policy, three autonomous road agencies are established during 2004 for full operations by 2005 and would support the transitional arrangement for transformation o f the existing institutions to the new road agencies. These measures do not however in themselves guarantee improvement, and attention will need to be paid to staffing, incentives and establishing clear reporting arrangements, possibly through performance based contracts, with the government ministries in the sector.

(3) Improving rural access: The impact to date o f ROADSIP on rural livelihoods has been very limited. However the program has an important role to play in addressing poverty reduction in Zambia, provided that: planned improvements in the institutional arrangements for local authority roads are carried through (development o f joint service units); distribution o f RF resources matches what it has always been intended to be (40% o f the total); appropriate choices are made as to how these limited resources are to be distributed; and opportunities to reduce unit costs and employ robust l ow cost technologies are taken. In this regard the project will support the establishment and support o f Joint Services Units.

(4) Promoting rural transport mobility: The experience in Zambia and other countries has shown that IMTs can effectively contribute to poverty reduction through enhanced mobil i ty o f the rural people. This includes promotion o f awareness o f IMT devices in order to enhance their understanding and utilization. The project will support the development o f an appropriate policy, legal and institutional framework to promote the use o f IMT. Based on the ongoing successful pi lot experience, the IMT activities will be replicated in other provinces and will be better integrated with efforts to improve both feeder road and community road infrastructure. The role o f the local authorities i s cardinal to the success and sustainability o f the project as envisaged in the decentralisation process.

(5) Addressing (cross-cutting) social impacts: Based o n recommendations made in the PRSP, APL Phase 1 will address the social issues including HIV/AIDS, gender and the environment. The project will review how these cross-cutting issues can be effectively mainstreamed by supporting expanded implementation o f the already existing HIV/AIDS sector strategy. The project will support the development o f a more detailed policy agenda to address these issues, and will identify the activities which will secure i t s implementation. These include but are not l imited to distribution o f condoms on road work sites, employment o f women on routine maintenance contracts and monitoring o f environmental standards while supervising contracts.

4. Program description and performance triggers for subsequent loans :

The APL will be implemented over ten years in three phases. The f i rst phase will last three years, the second phase will last three years and the third phase will last four years. A P L 1 will focus on (a) routine and periodic maintenance, and rehabilitation o f roads and bridges as defined under the road priority program; (b) implementing institutional and policy reforms needed for sustainable and effective road sector management, (c) a phased maintenance program for all the roads in the core network.; (d) implementing a road safety program, (e) intensifying HIV/AIDS prevention activities and (e) carrying out the analytical and preparatory work necessary for A P L 2 o f the program including the national urban transport strategy.

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APL 2 activities will focus on maintenance and rehabilitating the country’s major roads and bridges, upgrading rural roads, strengthening institutions, continuing with implementation o f the road safety program and the HIV/AIDS prevention program, and conducting the analytical and preparatory work for APL 3 investments.

APL 3 activities will be similar to those o f APL 2 but they will have a focus on managing the road network after the maintenance backlog has been removed. They wil l be defined in detail during A P L 2, and will be based on lessons derived from the earlier phases o f the program.

The second phase will be contingent on satisfaction o f the following triggers:

The three agencies NRFA, RDA, and RTSA having their own Board o f Directors, comprising private and public sector representatives, are established and fully functional one year before APL 1 closing. NRFA i s able to meet 40% o f total road expenditures incurred on routine and periodic maintenance and rehabilitation from domestic resources by 2006. Satisfactory implementation o f the road safety plan. The annual administrative costs for all these agencies shall be less than the 5% maximum funding limit o f the NRF. Satisfactory completion o f all preparatory activities (engineering designs, and tender documents including environmental impact assessment and social impact assessment) for the planned phase two investments.

Phase three will be contingent on implementation performance, institutional performance, financial performance, and completion o f al l preparatory activities. Specific triggers are:

Agreed phase two road works have been substantially completed and performance indicators satisfactorily achieved.

NRFA i s able to meet 80% o f total road expenditures incurred o n routine and periodic maintenance and rehabilitation from domestic resources by 2009.

Satisfactory implementation o f the road safety plan. Satisfactory completion o f all preparatory activities(engineering designs, and tender

documents including environmental impact assessment and the planned phase three investments.

social impact assessment) for

During the three phases o f program implementation, the Bank wil l gradually sh i f t i t s support from periodic maintenance to rehabilitation, as the NRFA’s finances improve and it takes over responsibility for periodic maintenance. By the end o f phase three o f the program, the NRFA will cover 100 percent o f periodic maintenance in addition to al l routine maintenance. IDA help will support this sh i f t with Technical Assistance and training concentrated in APL 1; gradually falling as the capacity in the three Agencies and Government grows.

C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

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Road Rehabilitation and Maintenance Project has the following components the costs o f which include contingencies:

1. Component 1, Civil Works for Road Maintenance, Upgrading and Rehabilitation (US$ 283.78 million, I D A Financing 43.50 million): The c iv i l works component wil l focus on the priority needs for road maintenance and rehabilitation for the period o f 2004-07 within the core road network. The program i s inclusive o f ongoing works, and will include inter-territorial trunk, territorial main, district roads, primary feeder roads, urban roads, and tourist roads in al l provinces o f the country.

The c iv i l works program i s divided into the following functional sub-components

Routine Maintenance, Category Works 1 (a). Periodic Maintenance, Category Works 1 (a). Rehabilitation, Category Works 1 (b). Upgrading, Category Works 1 (b). Road Safety Improvements, Category Works 1 (d). Accessibility Improvements, Category Works 1 (c).

2. Component 2: Engineering and other Technical Services (US$ 34.98 million, I D A Financing US$ 2.00 million): Technical assistance for carrying out feasibility studies, engineering design and supervision o f maintenance and rehabilitation works for Component 1 and to provide support to complete the preparatory activities for the next phase.

3. Component 3: Institutional Development and Capacity Building ( US$ 48.49 million, IDA Financing 3.40 million): Technical assistance and training in the areas o f policy support, implementation support, and institutional development. The strong focus o f this project i s to provide support to the Government in implementation o f the Transport Policy and the new institutional fi-amework including the creation o f three new agencies in the road sector. The main elements o f the component will include:

Policy Support Implementation Support Institutional Development Monitoring and Evaluation

4. Component 4: Accessibility and Mobility Improvement: (US$ 13.61 million, I D A Financing US$ 1.lOmillion) improving physical access for the poor in order to promote their economic and social development. The main sub-components are as follows:

This component i s aimed at providing continued support for

Community Transport Infrastructure Intermediate Means o f Transport Canals and Waterways

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The Table below summarises the costs per component.

Component Indicative Bank- % of

costs YO of financing Bank- (US$M) Total (US$M) financing

1. C iv i l Works 2. Engineering and Technical Services 3. Institutional Development and Capacity Building

283.78 34.98 48.49

74.5 43.50 87.0 9.2 2.00 4.0

12.7 3.40 6.8

4. Accessibility and Mobi l i ty Improvement

Total Financing Required I 380.86 I 100.0 I 50.00 I 100.0 I 13.61 I 3.6 I 1.10 I 2.2

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

In line with the Transport Policy, a number o f reforms will be implemented under the project focusing on strengthening management capacity, increasing efficiency in the road sector, and promoting sustainable financing for maintenance. Key elements include:

Strengthening technical and managerial capacity by restructuring existing road institutions and by establishing three autonomous road agencies: RDA, RTSA, and NRFA answerable to mixed private/public sector Board o f Directors.

streamlining the provisions o f fue l l e v y and other resources to fimd road sector expenditures, preventing fuel levy arrears, and mobilizing additional RF revenues.

supporting the conversion o f N C C into a statutory body and helping to provide adequate domestic resources for i t s operations.

roads, enhancing community participation in road

supporting regulatory framework.

management.

Confirming the legal status o f NRF, putting to an end parallel financing o f road programs,

Creating an enabling environment for strengthening o f the local construction industry by

Developing the institutional and policy framework for the management o f community

Building institutional capacity to enforce existing legislation on axle load control and the

Reviewing existing legislation and institutional framework for canal and inland waterways

management, and promoting use o f IMT.

3. Benefits and target population:

Benefits:

Road Rehabilitation and Maintenance Project will contribute to economic growth and diversification, and simultaneously improve access for the poor to the economy at large. These beneficial impacts will include principally the following:

(a) The project will increase the proportion o f the network in good condition, and improve sector management and financing. The direct benefits to the road users for improvement in the road conditions are considerable and will outweigh any additional financial cost occasioned by

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higher road user charges to' finance road maintenance.

(b) Some transport cost savings are l ikely to be passed on to the consumer in terms o f lower final product prices. Implementation o f activities to improve rural accessibility are intended to ensure that savings are equitably distributed to the poor.

(c) A major benefit will be the job creation through the development o f increased opportunities for the local contracting and consulting industry. It i s expected that by 2007 about 6900 new jobs will be created through the project activities.

(d) The project will contribute to improved access to markets and services (both administrative and social) for a broad cross-section o f the population, and will thus provide for increased opportunities for poverty reduction and economic growth.

(e) Road sector improvements will contribute to better farm gate prices for farmers, lower input and consumer prices for the population at large and greater connectivity between and within regions, districts, leading to fresher produce and more on time deliveries, making Zambian products and services more competitive in local and regional markets.

Target population:

The benefits o f the improved road network will be spread across al l provinces in the country, since the program has identified works and activities in every province. Both commercial and social road users will benefit from improved road conditions and the introduction of a more sustainable approach to maintenance o f the core road network including primary, secondary and tertiary roads.

Isolated areas will be targeted by the feeder road accessibility improvement program, community transport infrastructure, and IMT. This will improve the linkage between rural communities and the core network and will promote the involvement o f local authorities in the planning and management o f the project activities. Improved tourist road maintenance will promote investments and improve economic viability o f tourist facilities in and around the national parks. Improvement o f urban roads will reduce freight rates and increase productivity o f the industries, providing additional benefits to the urban poor.

The benefits o f improved road safety programs will be translated to the whole population. The poor will benefit more since they, as the bulk o f the pedestrians in both rural and urban areas, suffer disproportionately more f rom road accidents.

4. Institutional and implementation arrangements:

Implementation period: (Phase one o f the program) will take place over three years, July 2004 to June 2007.

The program will take place over ten years, 2004-13. The project

Implementing Agencies: The project will be implemented in l ine with the arrangements pertaining to ROADSIP, until such time as the new institutional structure i s fully operational.

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Thus the NRB will continue to coordinate and manage the program with the various Ministries and agencies involved in i t s implementation, such as MCT, MWS, MLGH, N C C and NRSC. NRB i s expected to play a critical part in the transitional period prior to the full establishment o f the new institutional structure, essentially a continuation o f the role they have played under ROADSIP. The timeframe for the completion o f the new institutional framework was agreed during appraisal, and the precise roles and responsibilities o f each ministry and agency will follow from this.

Project Coordination and Oversight: M C T will be responsible for policy guidance, and overall program oversight, and will ensure coordination and cooperation among the Ministries, government agencies and the corporate bodies. Currently and until hr ther notice, NRB will be responsible for coordinating implementation o f the project, financial management, and assembling all technical and financial reports. NRB will approve the annual road program on the basis o f the submissions made by the various road authorities. The secretariat o f the Board i s headed by an Executive Secretary, and organized in technical and financial services, each serving the Board as a whole and also the corresponding committee. Future implementation arrangements will be finalized once the new agencies are established.

Implementation Arrangements: A detailed project implementation plan (PIP) was prepared for the Road Rehabilitation and Maintenance Project. The draft PIP for the APL Phase 1 was presented to the Bank prior to negotiations. The PIP will be finalized and formally adopted not later than credit effectiveness. The practice adopted under ROADSIP will continue. It calls for agreement on prepared annual work plans not less than 3 months prior to the start o f the year under discussion.

Financing Arrangements: As with ROADSIP, many development partners are interested in supporting the Road Rehabilitation and Maintenance Project. Known commitments from development partners total about US$141 mil l ion o f which the largest part will be made largely through parallel financing. The Nordic Development Fund (NDF) i s working with the Bank on a co-financing arrangement for the project. Opportunities to harmonize assistance strategies and provide more fhding to localhational procurement through the Road Fund are being looked into and will be reviewed and determined not later than by Credit negotiations. Some o f the donors, including the Bank, have expressed interest in fhding the maintenance backlog in th i s fashion. During implementation, the Donor Forum based in Lusaka will meet quarterly with the Government to discuss implementation status and outstanding issues. This represents a continuation o f a practice in place since April 2000 to ensure a more effective coordination o f external support and advice to the government on the road sector.

There i s a requirement for retroactive financing to ensure that a l l project preparation continues as planned.

Procurement Arrangements: Works, consultants’ services, and equipment to be financed under the IDA credit wil l be procured according to the Bank procurement guidelines. Procurement under other parallel financing will follow the relevant donor procedures. The procurement plan for use o f IDA resources was reviewed at appraisal and completed by negotiations. As for A P L

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Phase 1, NRB will act in a coordinating role as far as procurement monitoring and reporting i s concerned, with the responsible Ministr ies and agencies carrying out procurement implementation through their respective procurement units.

Accounting, Financial Reporting and Auditing Arrangements:

The Road Rehabilitation and Maintenance Project i s a follow-on project to ROADSIP project which i s due to close on 31 March 2005. While there are many implementing agencies, NRB i s the PIU that will control all the funds under the program. NRB i s a statutory body that was established in 1994 to take charge o f the road fbnd that was created through the fuel levy paid by fuel users. NRB under ROADSIP controlled all the funds which included those from donors and IDA Credit. NRB coordinated and managed the program with the various Ministries and Agencies involved in the implementation: MCT, MWS, MLGH, N C C and NRSC. In M a y 2002, the Government approved the Transport Policy Document, which will have a strong impact on the management o f the road sub-sector by the creation o f the Road Authorities: RDA, NRFA and RTSA. The three bills establishing the Agencies were passed by Parliament in December 2002. The National Road Fund Agency (NRFA) a statutory body established but yet to be operational will replace the National Road Board (NRB) which was responsible for the implementation o f ROADSIP. The NRFA will ‘coordinate all resources for the fbnding o f the road sector, whether from the Government, cooperating partners or the private sector. I t will be responsible for the collection, disbursement, management and accounting o f the National road Fund and will report through the MoFNP to the Committee o f Ministers’. Nevertheless, implementation arrangements existing under ROADSIP will continue until the new institutions are fully operational. Therefore, NRB will continue with the overall responsibility for program coordination and their role i s critical for a smooth transition.

NRB, under the direction o f the Executive Secretary, will be the project implementer for the project and will assume the overall responsibility for accounting for the project funds. The Project Accountant will assume full responsibility for project financial management and reporting, ensuring that the financial management and reporting procedures for NRB are carried out in a manner acceptable to the Government, the Bank, and other donors. The principal goal o f the Financial Management System (FMS) i s to support management in their deployment o f l imited resources with the objective o f ensuring economy, efficiency and effectiveness in the delivery o f project outputs. Specifically, the FMS must be capable o f producing timely, understandable, relevant, and reliable financial information that will enable management to plan, implement, monitor, and appraise the project’s overall progress report towards the achievement o f i t s objectives. A demonstration that Road Rehabilitation and Maintenance Project financial management and accounting system will meet these criteria will be a condition o f credit effectiveness.

The main strengths o f the program financial management system (FMS) are: NRB has reliably complied with both i t s statutory and donors financial accountability requirements under ROADSIP; NRB has a proven S U N accounting package that has worked very well; the key accounting staff at NRB are adequately qualified and well experienced with the Bank procedures having implemented the ROADSIP with a highly satisfactory financial management rating.;

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unqualified audit reports have consistently been submitted and within the due dates; Road Rehabilitation and Maintenance Project i s a follow on project that will utilize the existing FMS and staff who have experience with the Bank procedures and requirements. On the other hand, the F M S i s weakened by: the non existence o f an internal audit function; lack o f budgetlplan f igures to compare the actual figures with; the inability to generate FMRs directly from the system and the link o f financial information with the programs physical progress. Even though the S U N accounting package has the capability to handle this we understand there was an oversight at init ial installation. This has been discussed with NRB to ensure that these weaknesses are addressed in the Road Rehabilitation and Maintenance Project from inception.

The overall conclusion i s that the existing financial management arrangements at NRB satisfy the Bank’s OP/BP 10.02 minimum requirements. However, the identified weaknesses need to be addressed to mitigate the financial management r isks as indicated in the financial management action plan in annex 6B.

Funds Flow IDA will transfer an init ial advance from the proceeds o f the Credit to a new Special Account (SA) to be opened at a commercial banks acceptable to IDA in United States dollars, to be managed by NRB. The SA will be used to pay for IDA’S share o f eligible expenditures. Actual expenditure will be replenished to the SA through the submission o f form 1903 withdrawal applications to the Bank. The borrowers agreed counterpart fund contribution would be deposited in a separate Project Account at commercial banks acceptable to IDA and replenished at agreed intervals that will be detailed in the Credit Agreement. Road user charges and funds from other cooperating partners will al l be identified accordingly and deposited in dedicated bank accounts.

Disbursement procedures as outlined in the Bank’s Disbursement Handbook will be followed. After credit effectiveness IDA will at the borrower’s request, by submission o f Form 1903 withdrawal application, advance the borrower f rom the proceeds o f the Credit a predetermined amount (usually an amount to cover 6 months worth o f procurement) as init ial advance to the NRB operated SA. The SA will be used to finance the IDA’S share o f the program’s eligible expenditures. Init ially after credit effectiveness, disbursements from the SA will use the traditional transaction method i.e. replenishments to the SA are made on the basis o f incurred IDA’S share o f eligible expenditures. Other transaction based disbursement mechanisms will include direct payment, special commitments, reimbursements and use o f SOE. Direct payments involves full documentation payment request by the borrower to a third party for works, goods and services. Payments can also be made to a Commercial bank against expenditures under a letter o f credit by IDA giving a special commitment to pay after satisfying agreed conditions. This method stops commercial banks from getting SA knds as collateral to issue the LC because the Bank’s rules do not allow credit proceeds to be used as collateral. For the direct payment and special commitment to qualify the minimum application size should not be below 20 % o f the init ial advance from the credit transferred to the Special Account. In situations where the borrower pays IDA’S share of the eligible expenditure, the borrower qualifies to seek for reimbursement o f such expenditure incurred.

Replenishment to the SA for expenditures incurred will be made on client request. This involves

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filling in a withdrawal application on a prescribed Form 1903 to be signed by designated signatories at the MoFNP before submission to the Bank. The application i s to be supported by documentation evidencing the expenditure, except for expenditure under SOE which are exempt from the submission o f the supporting documents with the application. The use o f SOEs will be allowed for expenditures below the procurement prior review thresholds for each contract as follows: Civ i l Works US $500,000; Goods US $ 250,000; Consulting Firms U S $ 100,000 and individual Consultants US $50,000. The borrower retains the SOE documentation but the Bank reserves the right to examine these during supervision and SOE reviews when considered necessary.

Report based disbursements The borrower will have the option o f using report (FMR) based disbursements instead o f the traditional transaction based method. Report-based disbursement offers more flexibility. Under report-based disbursement arrangements, a forecast o f project expenditures i s agreed between the Borrower and the Bank, covering the current and next FMR reporting period. Thereafter, aggregate disbursement requests not exceeding this forecast amount are payable by the Bank upon demand by the Borrower. Supporting documentation for these disbursements i s submitted with the subsequent FMR and reviewed by the Bank to confirm eligible expenditures during the period covered by the FMR. The FMR also gives a new forecast for the next two FMR reporting periods. Nonetheless, for NRB to benefit from this flexible method o f disbursement, the accounting and financial management capacity needs to be strengthened, particularly on the ability for FMRs to be produced directly by the system.

Disbursement and withdrawal procedures are detailed in the Bank's Disbursement Handbook. All disbursements will be governed by the conditions in the Development Credit Agreement and the procedures defined in the Disbursement Letter from the LOA, that i s sent to the borrower after effectiveness. This will include the remedies available to IDA in cases o f ineligible expenditures made from the SA, the SA account remaining inactive, and when the reporting requirements are not complied with.

Audit Arrangements

Internal Audit NRB does not have an internal audit function and the lack o f it poses a high fiduciary risk. I t i s recommended that NRB and i t s forerunner NRFA, seriously consider the establishment o f an internal audit function. This i s particularly so because o f the relatively small accounts department ( total o f 4 staff) which may not allow for adequate segregation o f duties and operation o f an effective internal control system.

External audit will be carried out annually by the Auditor General (AG), who as outlined in the Constitution o f Zambia Ac t 1996, i s responsible for the external auditing o f al l Government Funds. In practice, because o f capacity constraints, the AG frequently appoints private sector auditors acceptable to IDA on approved terms o f reference . In such cases, the private sector auditor reports directly to the AG who retains the overall signing responsibility for the audit opinion. The auditor will conduct the audit according to International Standards on Auditing and agreed TOR acceptable to IDA. The auditor will express an opinion on the NRB consolidated entity financial statements with disclosures for donor funding based on the Bank's new audit

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policy. Guidelines: Annual Financial reporting And auditing For the Bank - Financed Activities, June 30, 2003. Attachment 2 &3, pages 14 & 15. The requirement i s for the financial statements to be prepared using IAS and the audit reports thereon to be submitted to IDA no later than six months after the end o f the fiscal year. The auditor for the project should be appointed shortly after credit effectiveness, on TOR agreed with IDA. Reasonable audit costs can be financed from the Credit on request from the borrower. In addition to the audit report, the auditor wil l be required to prepare a separate report to Management, giving significant weaknesses that the auditor came across during the course o f the audit that are not reflected in the audit opinion. These may include weaknesses in the internal control systems, inappropriate accounting policies and practices, issues regarding general compliance with broad covenants such as implementing the project with economy and efficiency, and any other matters the auditor considers should be brought to the attention o f the borrower, and providing recommendations for improvements.

Financial Covenants to be part o f the Development Credit Agreement under Article IV will require NRB to maintain an adequate financial management system, keep adequate records and prepare using IAS financial statements to show the operations, resources and expenditures o f the program; submit to IDA audited financial statements not later than 6 months after the end o f each fiscal year; furnish to IDA any other information concerning such records, accounts and financial statements, and the audit as may reasonably be requested; and furnish FMRs not later than 45 days after the end o f each calendar quarter. The f i rst FMR shall be furnished to IDA within 45 days after the end o f the f i rs t calendar quarter after Credit effectiveness date and shall cover the period from the f i rst expenditure under the program. The agreed formats o f these reports will be included in the Accounting and Financial Procedures Manual which will be part o f the PIP, to be adopted not later than Credit effectiveness.

Monitoring and Evaluation Arrangements: Continuous monitoring, periodic reviews, and mid-term evaluation will be based on pre-determined indicators which will measure inputs, process, outputs and outcomes. Performance and monitoring indicators are as defined in Annex 1. Additional baseline surveys and monitoring arrangements will be developed in the course o f the project, particularly to assess impact in the poverty areas. The overall project monitoring and evaluation system will be guided by the Project Design Summary given in Annex 1 and the PIP. Mid-term review will be conducted by March 2006.

D. Project Rationale 1. Project alternatives considered and reasons for rejection:

Three options were considered for IDA support to the Road Rehabilitation and Maintenance Project : (i) Sector Investment Lending (SIL), (ii) Adaptable Lending Program (APL) based on programmatic approach; and (iii) splitting the program into two elements - a rural accessibility improvement program (linked to a PRSC); and a road sector program focusing on support to growth, diversification and policy reform. The option o f the APL i s proposed on account o f the following reasons:

(a) The overarching objective o f the IDA proposed project i s to support the Government’s 1 0-year Road Rehabilitation and Maintenance Project (2004- 13) which i s aimed at achieving

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financial sustainability in ten years. At that time all fimding for the road sector would be met from domestic road fund revenues without any support from the government budget. An A P L would be an appropriate instrument for a programmatic approach for this long term implementation plan. The phased approach o f the A P L will provide support for critical institutional and policy reforms while the priority investment program i s being carried out. The Government has recently defined specific targets for the financial and institutional sustainability o f the sector, which can be used as triggers for phase two and three o f an APL.

(b) Under ROADSIP were the preparation and promulgation o f Bills to reform the road sector. APL phase I would provide an excellent opportunity for supporting the implementation o f the institutional and policy reforms including setting up o f RDA, NRFA, RTSA. A P L 2 and 3 would then be utilized to provide continued policy and knowledge support while these institutions are strengthened.

(c) The suggested split o f the project into two elements does have some attraction. But in view o f the fact that the PRSC has yet to be developed, it might result in delays in launching any support to the critical areas o f rural accessibility and mobil ity improvement. The split approach also carries the risk o f understating the importance o f connectivity and coherent planning and implementation in the sector, as well as o f the interaction between measures to improve capacity and responsibility for the road sector at community and local district level and those at national level.

2. M a j o r related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Sector Issue

Ban k-f i nanced (1) Road pol icy and management

enhancement

management

(2) Implementation capacity

(3) Road financing and expenditure

(4) Road maintenance improvement; (5) Construction industry development (6) Road safety and traffic

management

(1) Project preparation (2) Policy studies

Project

Project to Support a Road Sector Investment Project - Phase 1 ((21-2993)

Transport Engineering and Technical Assistance Project Credit 25 15-ZA Railway Restructuring Project Credit 2725-ZA Highway Project Loan

Water Supply & Sanitation 3563-ZA

Latest Supervision (PSR)

(Bank-finance Implementation

Progress (IP)

S

HS

S

atings xojects only)

Development Objective (DO)

S

S

S

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Other development agencies EU, Norway, Denmark, UNDP/UNCDF, Japan, Germany, Kuwait, AfDB

3. Lessons learned and reflected in the project design:

The following lessons from the on-going project, as well as from the experiences o f the implementation o f RMI and RTTP inspired reforms in other countries, are incorporated in the design o f the proposed A P L Phase 1 :

Credit 3386-ZA

As above, Support to ROADSIP

(a) Design and implementation o f institutional reforms for the overall sustainability o f the road sector i s a lengthy process and demands a sustained dialogue among al l stake holders including public institutions, donors, private sector and c iv i l societies. More time needs to be allocated for this process to be completed.

(b) For the Road Fund to achieve i t s objective o f sustainable road financing for road maintenance, i t i s essential to develop and implement a sound financial strategy clearly specifying the resources for the generation o f road fund revenues and a priority for allocation o f i t s fhding. Slippage in th is area in the f i rs t five years has highlighted the need for a comprehensive and realistic approach to bridging the financing gap, backed by clear and implementable agreements with government and by more effective mobilization o f road user interest in improved road maintenance.

(c) To enhance the impact o f improving mobil ity and accessibility on poverty reduction in the rural areas, it i s important to ensure active local community participation at a l l project stages including priority setting, site selection, planning, design, implementation, quality control, and measuring impact o f the completed projects. Some o f the pi lot experiences during the last five years have been successful in this regard. This should now be extended and the lessons generalized.

(d) Capacity and financing constraints will always limit what can realistically be achieved in terms o f addressing the maintenance and rehabilitation backlog. More attention has thus to be given to seeking a cost effective and appropriate solution to unpaved access; and more generally revisiting standards that should be applied to different levels o f the road network.

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4. Indications o f borrower commitment and ownership:

ROADSIP enjoys strong support from the Borrower as it i s essentially the principal vehicle for implementing the Government's strategy for the maintenance and development o f the roads sector. The BD provides a detailed description o f all the project components I t was prepared by the National Task Force (NTF) using participatory input from all the stakeholders. NTF i s comprised o f 30 members; including representatives from six Government ministries, and four other public agencies and institutions together with: private sector, national academia, and c iv i l society representatives, who are interested in the development o f road infrastructure and transport services. This document has been finalised and disseminated to stakeholders.

In M a y 2002, Government adopted a Transport Policy for al l modes o f transport. For the road sub-sector, the transport policy provides comprehensive guidelines for the implementation o f policy actions aimed at improving roads to deliver safe, efficient and quality transport services for the benefit o f people in the urban and m a l areas. In the Transport Policy paper, Government has expressed i ts commitment to introduce a coordinated approach in the road sector and will pursue, amongst others, the following: (a) integrated road development in order to enable the movement o f goods and services cost effectively from the farm to market and vice versa; (b) mobilization o f the required resources for the road sector from the Government, cooperating partners or private sector should be channeled to the National Road Fund; and (c) implementation o f policy on traffic management, and enforcement o f laws regulating road safety and axle load control. To create the institutional structure to support implementation o f the Transport Policy, the Government has prepared bills, now approved by Parliament, to underpin the establishment o f three new road sector agencies. Government has prepared a detailed financial strategy for the realization o f ROADSIP goals which were integrated in the BD.

The Letter o f Sector Policy issued by Government in December 2003 (See Annex 12) confirms this commitment and underpins the external support for APL Phase 1 and the conditions under which this will be provided.

All these actions confirm the Government's ownership and strong commitment for promoting an advancement in the institutional agenda aimed at strengthening the management o f the road sector.

5. Value added of Bank support in this project:

Since the Bank's involvement in roads sector in 1991, i t s contribution have been regarded as a major catalyst to the formulation and implementation o f reforms in the road sector, both through the direct support to the sector work program and capacity building as well as by i t s assistance in implementing institutional and policy reforms, including the support tendered through the RMI. The Bank has developed extensive knowledge o f the transport sector in Zambia and has helped finance two operations in the road sector. Continued Bank support to the sector will: (i) play a critical role in realizing and sustaining the benefit o f ROADSIP as some o f the institutional reforms and capacity building programs are now on track and will be continued under A P L Phase 1; (ii) catalyze a large amount o f external investment resources by other donors; (iii) assist Government in the restructuring o f road agencies to introduce a coordinated approach to strengthen the management and financing o f the road sub-sector; and (iv) provide advice to the

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Government o n creating an appropriate environment to attract the private sector to engage on a long-term basis.

Through RMI, o f which Zambia i s a founder member, the policy reform process has been informed by the experiences o f a large number o f Sub Saharan Africa (SSA) countries. In particular, Zambia has benefited and continues to benefit from these experiences in terms of: structure and operation o f the RF; tools for maintenance management and works prioritization; management o f the policy reforms process to improve road management including establishment o f road agencies; and improving rural access and mobil ity and related institutional arrangements. The RMI i s also helping to provide advocacy tools and a support network to help reforming countries l ike Zambia present their case better to stakeholders and decision makers.

Bank involvement will also be critical in coordinating donor assistance and ensuring a coherent approach to the sector. The Bank has actively participated in the Donor Forum for the sector since i t s inception in April 2000. The Bank will also help Zambia incorporate newer concerns in i ts transport sector activities, particularly gender and HIV/AIDS prevention issues, and implement appropriate sector strategies. The project will support the PRSP and CAS recommendations relating to the roads sector, and this will further add value to the Bank support.

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

1. Economic (see Annex 4): 0 Cost benefit 0 Cost effectiveness 0 Other (specify) Standard and widely accepted methodologies will be employed to evaluate interventions on high volume roads in general and on trunk, main, district and urban roads specifically. For those first year roads for which IDA financing has been requested, cost benefit analyses acceptable to the Bank have been carried out as part o f the preparation o f appropriate engineering design interventions.

NPV=US$ million; ERR = % (see Annex 4)

(a) For the Chingola-Kasumbalesa link, the ERR has been calculated at 25%, although this i s subject to some downward sensitivity in view o f uncertainties about future growth in the copper industry. (b) For Kafulafuta-Luanshya and Ndola-Mwambeshi, the ERRs are in the range 20.5-27.7% and respectively 18.0-28.3% respectively. One small section (Mufulira to Mokambo) falls well below the 12% threshold however and will not be considered for support. (c) For Kafue-Chimndu and Zimba-Livingstone the init ial calculations show ERRs in excess o f 22%.

A specific (multi-criteria) methodology was developed under ROADSIP to evaluate interventions on feeder roads. This i s to be retained under A P L Phase 1 and to be generalized to other l ow volume interventions including tourist roads. The methodology will be reviewed and updated where necessary - after consultation with the Bank - taking into account the relevant findings o f a technical audit study; the final report o f which i s to be delivered by April 2004.

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2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = YO (see Annex 4) During ROADSIP, at best uneven progress has been made towards program financial goals. The RF received only $51.9 mi l l ion from a budgeted total funding o f $130.7 mi l l ion for the period 1997-2002, al l from fuel levy proceeds. In 2002 it had been estimated that $35.4 mi l l ion would be required to meet the above-mentioned priority allocations. In reality only $9.8 mi l l ion was released by the GRZ.

The existing Road Fund, which i s under NRB’s management, will be managed by one o f the new agencies, the National Road Fund Agency (NRFA), to be established under APL-Phase 1 o f the Road Rehabilitation and Maintenance Project as an autonomous and independent agency. This will clearly separate the financing function for the road sector from the execution or operation functions by the Road Development Agency (RDA) and the Road Transport and Safety Agency (RTSA). The Road Fund will be dedicated to financing 100% o f routine maintenance and an increasing share o f periodic maintenance o f the Core Road Network (CRN). Simultaneously, the government will introduce a sustainable road maintenance financing system based on: (a) road maintenance user charges set at levels expected to generate sufficient resources to cover full routine maintenance, and gradually full periodic maintenance (by end o f APL-Phase 3); (b) prompt and timely payment to the Road Fund (during APL-Phase 1) and direct payment f rom the ZRA to the Road Fund, without passing through the Ministry o f Finance and National Planning (MFNP) by the beginning o f Phase 2. An allocation which will include the HIPC reflow funds from the national budget will be channeled through the Road Fund, to cover counterpart funding for rehabilitation o f roads. The program will also assist with establishing separate accounting and financial management systems for the Road Fund, under RTSA, and the new agencies.

Fiscal Impact:

The Financial Strategy adopted by the government estimates fuel l e v y to contribute $18.90 mln in 2004, $21.5 mln in 2005 and $24.6 mln in 2006 to the Road Fund while Road user fees and charges will contribute $13.0 mln, $16.4 mln and $20.4 mln including 3% annual increases in 2004, 2005 and 2006 respectively. By the end o f A P L Phase 1, the Road Fund i s expected to cover 100% o f the routine maintenance and periodic maintenance (over $70 mln) and 10% o f road rehabilitation (about $98 mln). The Transport Policy Paper (2002) and the subsequent Acts that followed clearly shows GRZ’s desire to pass the responsibility o f funding roads more and more to the road user. When the institutional changes, currently ongoing, are completed, the need for GRZ to allocate large resources to the road sector will decrease in l ine with the NRFA’s capacity to implement more realistic levels for road user charges. In the short t e rm (Phase l), the fiscal impact o f expenditures on roads rehabilitation and periodic roads maintenance will be negative (there are funding gaps o f $28 mi l l ion and $62 mi l l ion for Phases 1 and 2 respectively). However, once construction under the rehabilitation and upgrading programs i s complete, these investments are expected to result in higher economic activity, which will generate increased user fees, tax revenues and fuel levies, all o f which should result in positive fiscal impacts. In addition, as already indicated, Zambia i s benefiting from HIPC debt relief and the economy i s expected to experience strong economic growth and higher tax revenues. As a result, the GRZ i s expected to have capacity to meet i t s growing obligations for the road sector.

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An important issue i s that from 2005 onwards the current allocations for roads spread over three Ministr ies can be combined as one line item in the National Budget. This line item need only be used when additional funds are required for a project that carries a specific GRZ interest. As already agreed, the line item for the RF would be removed completely from the budget year 2005 onwards.

3. Technical: Appropriate and well established road construction and maintenance methodologies will be employed under the project. All designs follow the official standard specifications for Zambia which were employed under ROADSIP and found to be acceptable. Standard reference designs and drawings for bridges, roads, culverts and (transport) infrastructure were developed by ZAMSIF for use in community transport infrastructure under ROADSIP. These have been found acceptable. Labor based approaches first developed in Eastern Province under a UNDP supported project are now accepted for national practice. Specific attention will be given under the A P L Phase 1 to: (a) develop additional technical instructions and standard drawings for feeder road design and associated structure, in the light o f specific problems encountered in difficult terrain (such as in Western and Luapula provinces); (b) exploitation o f new and appropriate road technologies, with particular regard to low volume roads, in view o f the need to reduce unit costs and maximize access improvements within the resource constraints. A number o f these technologies are known to Zambia (and have been demonstrated recently such as the Otta Seal) and are otherwise widely practised in the sub-region.

4. Institutional: (See Annex 11 forfurther information)

4.1 Executing agencies:

The current institutional structure has emerged as an amalgam o f the new style institutions encouraged by the RMI (such as NRB) and o f the pre-existing structures (such as RD). Some parts o f th is structure have gone through significant restructuring in the 1990s inspired by the Public Sector Reform Program (PSRP) (such as RD and DISS), while others have not (such as MCT). The whole i s neither ideal nor particularly efficient, but it has been effective enough at delivering ROADSIP for which implementation progress has always been rated "satisfactory". A substantial effort at training and capacity building under ROADSIP has helped in this regard. NRB has benefited from a small, highly productive staff (6 professionals in total), for which turnover has been quite limited. Problems have come largely from: discontinuities in the reappointment o f the Board (on two occasions) which has weakened stakeholder input into prioritization; consequent loss o f momentum on maintenance and i ts fkding, and dissipation o f effort across a multitude o f priority tasks not al l o f which were central to i t s mandate. RD has also generally performed well. After the PSRP, there was some redundancy o f experienced, but under-qualified staff, but the new structures seem to have improved productivity and the losses o f professional staff to the private sector and overseas have recently been less than in the past. R D ' s capability to meet i t s ROADSIP targets has been hampered by the impact o f the parallel programs and the erratic release o f government funding for the same as well as for counterpart funding. The performance o f DISS has suffered from never managing to reach intended staffing levels for professional engineers, together with difficulties in retaining trained staff. Inevitably, feeder road improvement and maintenance have been seriously underachieved - a change in th is situation i s

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one o f the main intended benefits o f the new institutional structure. That structure depends not only on there being in place a professionally run RDA at the center, but also more effective, decentralized management at the district level.

During the current project, with the assistance o f RTTP, studies were conducted on the existing institutional arrangements for feeder roads (urban and rural) management. The weaknesses and strengths identified led to a consensus on the need to strengthen the capacity o f local authorities to discharge their responsibilities. To do this cost effectively, the study recommended an approach in which a group o f local authorities would joint ly and voluntarily come together in a partnership to create a technical unit (Joint Services Unit - JSU) to which they would delegate responsibility for the management (planning, programming and implementation) o f their road network. The JSU would be answerable to an oversight body representing the participating local authorities. The framework for implementing th is proposal have been discussed with the local authorities some o f whom had agreed to participate in a pilot. Implementation did not go ahead due financial constraints. Implementation o f this proposal i s planned under A P L Phase 1 and would complement the institutional capacity building at the central level. Suitably implemented, the JSU could come to be the agents o f the RDA at the local level for works supervision purposes. In the short term, and nationally implemented, i t will also reduce the number o f agencies with which RDA and NRFA would need to interact for planning and decision-making in compiling the national road program.

An institutional study was commissioned as part o f the preparation process and will be carried out over the first year o f the project's l i fe. This study will assist the government in establishing the organizational and governance structures, policies and procedures for the three new road agencies which are expected to assume full responsibility for project implementation by June 2004. The new structure i s intended to capture operational efficiencies, be responsive to demand and improve on the use o f financial resources compared to ROADSIP. The establishment o f an efficient operating environment, including the selection o f personnel, will be undertaken in a number o f sequenced steps to be determined and agreed as an output o f the study. This i s not expected to be completed much before end o f 2005. As a critical interim measure however, all three agencies should have in place before the end o f 2004 performance agreements with their respective Ministr ies as well as the commensurate budget allocations and financial resources to cany them out. The judgement on the new structure will come when it can be determined if it wil l have made a real and irreversible impact on sustainable maintenance financing.

4.2 Project management:

The arrangements will be as stated in the PIP, to be improved and updated as necessary by credit effectiveness. Current responsibility centers on the NRB secretariat which manages reporting and monitoring (quarterly progress reports, annual work program preparation and review). NRB provides the secretariat to the ROADSIP Steering Committee, with representation from a l l affected agencies and ministries. This committee makes, amongst others, all decisions concerning the use o f IDA credit proceeds under ROADSIP. These arrangements will continue up to such time as the adoption o f recommendations i s made relating to the roles and responsibilities within the new institutional structure.

4.3 Procurement issues:

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Procurement capacity has been built in the sector during ROADSIP. Appropriate arrangements for coordination and monitoring exist in NRE3 and all executing agencies have functioning procurement units. These arrangements will be updated and improved as necessary in the PIP. This will include a review o f procurement thresholds for the executing agencies [point to check in procurement assessment] and specific attention will have to be given under the project to the use of performance-based contracting to reduce costs and increase efficiency o f maintenance. Standard procurement documentation along with the procurement plan were agreed on at credit negotiations. The CPAR identified some weaknesses in the procurement policies and practices in Zambia and made appropriate short-term, medium-term and long-term recommendations. A procurement assessment o f the implementing agencies was carried out and an action plan to mitigate the procurement risk agreed (see Annex 6 A). The functions currently carried out by NRE3 will revert to either M C T or to the NRFA. The RDA will develop in-house procurement capacity in order to absorb delegated responsibility from MWS to which ministry it will report.

A major issue that the Bank raised during appraisal concerns the recently promulgated National Construction Council Act, Act No. 13 o f 2003. This Act provides for the establishment o f the N C C who will, amongst others, promote the interests o f the construction industry in Zambia. The Act requires foreign companies to register in Zambia, to form joint ventures with Zambian firm in order to be eligible to bid. These provisions are contradicting Bank Guidelines and the GRZ was requested to come up with proposals to resolve the problem areas.

During negotiations it was agreed that the specific Clauses (7,8,22,23) that are contrary to the Bank Guidelines, will be waived for all Bank-funded projects. Such waiver shall be in the form o f a Statutory Instrument to be published before credit effectiveness.

4.4 Financial management issues:

The joint CFAA led by the Bank in conjunction with other donors in November 2003 concluded that, there remain substantial weaknesses and risks within the Public Financial Management System (PFMS) o f Zambia. Some o f the problems identified by the CFAA included among others the lack o f compliance or enforcement o f existing accounting rules and finance regulations; weak institutions o f accountability: the office o f the Auditor General and Parliament are ill-equipped to provide adequate oversight because o f lack o f funding, low technical capacity, and insufficient authority to ensure follow up; and the poor information management and reporting o f the PFMS. This background translates into the Country risk being assessed as high. The weaknesses in the PFMS have contributed to the unpredictable f low o f counterpart funding and the non remittance o f feu1 levies by the Government to NRB. The lack o f counterpart funds and the non remittance o f Road user charges posed a big risk to project implementation under ROADSIP and i s l ikely to affect Road Rehabilitation and Maintenance Project.

However, the Government o f the Republic o f Zambia in conjunction with the Wor ld Bank and donor community in Zambia are in the process o f developing a Bankable document - Public Expenditure Management and Financial Accountability Reform (PEMFAR), to strengthen government's public financial management system.

Nevertheless, even though the inherent Country risk i s high, the project financial management risk

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i s assessed as l ow for the following reasons. Firstly, NRB i s an independent statutory body created outside the public service for results with the mandate to competitively hire personnel with relevant qualifications. Therefore, the work culture in NRB i s different from that o f the c iv i l service. Secondly, the FMS at NRE3 i s independently operated and founded on meeting the financial obligations under the Act. Moreover, the project i s a follow on to ROADSIP which performed well, with a highly satisfactory rating for financial management. The same accounting staff from ROADSIP are continuing with the Road Rehabilitation and Maintenance Project. I t i s for these reasons that the FM assessment conclusion i s that the project's financial management arrangements satisfy the Bank's OP/BP 10.02 minimum requirements, while the proposed improvements ( see annex 6B, financial management action plan) should be implemented as indicated.

In order to finance preparatory studies for the project, the Project will include retro-active financing to a value o f US$ 500 000. This instrument will be used to fund engineering studies for the planning and design o f works envisaged under this project (Components 1 and 2) as well as the support for the institutional changes defined as Component 3 o f the project.

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and E M P preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

Environmental management in the road sector i s functioning effectively under ROADSIP through the creation o f an environmental management unit (EMU) in the Roads Department. The unit has already established: policies and procedures for environmental impact assessment; environmental guidelines, including those for contract clauses; and a staff training program in environmental management. An environmental monitoring system i s in place and an environmental information system i s under development. All required Environment Assessments (EAs) and EMPs have had the benefit o f these management functions. Likewise, work has been carried out on a resettlement policy framework. This constitutes the basis for the preparation and implementation o f resettlement action plans for investment packages when required. The resettlement policy framework was disclosed in December 2003. 5.2 What are the main features of the EMP and are they adequate?

Overall environmental management has been established in the Roads Department. The EMU will continue to manage the implementation o f all EMPs for the Road Rehabilitation and Maintenance Project. As a f i rst cut under the EMU, environmental assessments for the f i rst year's road program have been cleared and disclosed in December 2003. 5.3 For Category A and B projects, timeline and status o f EA:

Environmental assessments for those road segments to be financed under the f i rs t year's program have been prepared by an independent consultant with supervision by the EMU. These EAs have addressed environmental issues (considered minor) and detailed appropriate mitigation measures and have been cleared and disclosed. The f i rst year's road program will not entail any involuntary resettlement. The resettlement policy framework was also cleared and disclosed. 5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

Environmental Category: B (Partial Assessment)

Date o f receipt o f f inal draft: 09/30/2003

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Prioritization o f interventions and overarching environmental safeguards under the project have been reviewed and agreed by stakeholder representatives on the national task force that helped prepare the Bankable Document. In keeping with the treatment o f the f i rst year's program, consultation processes with affected communities will be built into consultant terms o f reference for subsequent investment packages. The EA reports will be widely disseminated and discussed as part o f the process o f launching the Road Rehabilitation and Maintenance Project program. As was the case for ROADSIP, this i s expected to involve one national and up to nine provincial level workshops. The Environmental Council o f Zambia will continue to be intimately involved in project preparation and implementation.

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

One o f the EMU'S hnctions i s to monitor environmental mitigation and provide a longer-term perspective on the impacts o f the project on the environment. The practical operational experience gained under ROADSIP will allow the EMU to update and improve the environmental management process in the road sector and provide the basis for analysis o f the longer-term impacts o f road projects on the environment at sectoral and project levels.

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

Improved access and poverty reduction. The program will contribute to the reduction o f poverty by improving access to goods and services throughout the country. Direct benefits will arise from: (a) improved access o f remote rural and urban areas to social services and employment opportunities; (b) easier access to productive inputs such as fertilizers, pesticides, extension services and credit facilities; and (c) developing pedestrian-only facilities in urban areas to increase mobil ity as well as lower road accident rates. Indirect benefits on poverty levels will arise from the reduced cost o f transporting goods and personnel on improved road networks by improved transport services. In certain areas marketing o f surplus production will become more feasible, while in others, roads will result in lower transport costs through increased competition and/or better prices through access to more lucrative markets. A significant amount o f employment, both direct and indirect, will also be generated through the use o f labor intensive methods in c iv i l works for all network development including the national priority program, the feeder roads program and the urban roads program. A poverty assessment framework i s under preparation and would be completed during the f i rs t year o f A P L 1. This work will include the development o f agreed baseline data on the poverty impact o f the program which will serve as the basis for subsequent annual monitoring.

Improved mobility and the gender dimension. The program has recognized the particular importance o f the gender dimension in improving access and mobility. The program, in coordination wi th the complementary inputs o f the RTTP, will facilitate and permit better use o f improved road infrastructure by rural women through: (i) increased motorized services and use o f IMTs thus decreasing the need for head-loading; (ii) promotion o f employment opportunities through labor-based methods and improved mechanisms for dissemination o f information concerning employment opportunities for women; and (iii) introduction o f gender-sensitive

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terminology in relevant legislation and regulation.

Incorporating social criteria into selection process. To ensure that social development factors are incorporated into the road selection process, increasing use o f multi-criteria analyses i s envisioned. This methodology, which has recently been applied to the rural road network considers traffic, economic factors (types and sizes o f markets) and social factors (access to health, education, postal and communication services) in the ranking and selection o f investments.

HIV/AIDS. As truckers and migrant construction workers represent an important vector for transmission o f the AIDS virus, the project will assist in the prevention o f new HIV infections among these target groups. (i) undertaking an Information, Education and Communication (IEC) campaign and training program that will highlight the r isks and ways to protect oneself and one's partner(s) from infection, and (ii) distributing condoms. Support for these activities should eventually be available from the Zambia National AIDS Response Fund. In the interim, the work started under ROADSIP to develop a sector strategy for HIV/AIDS will be continued, with implementation o f priority actions started at the end o f 2003. M C T i s the lead ministry in this effort.

Two strategies are envisaged:

Redundancy. Institutional reform will lead to downsizing and reorganization in at least MCT, M W S and MLGH - although it i s expected to create compensatory increases in the new road agencies and the private sector (contracting and consulting). Studies to complete the assessment and provide recommendations will not be completed until 2004. This will be taken care o f within the larger discussions o f civi l service reforms within the context o f Public Sector Capacity Building Program (PSCAP).

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

Opportunities will be given for stakeholder feedback at the time o f the national and provincial launch o f the program. Also it should be recognized that: (i) key stakeholder organizations will be represented on the boards o f each o f the new road agencies, as indeed they already are in the case o f the NRJ3; (ii) community accessibility and mobility interventions are very specifically developed on the basis o f demand form local groups and stakeholders. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations?

Key stakeholders will be identified and women particularly included in all decision-making bodies, from project design, through implementation, monitoring/supervision and evaluation. NGOs will also be included in the design and implementation o f various aspects o f the project as relevant, with particular regard to community accessibility and mobil ity where models o f collaboration have already been tested out under ROADSIP. 6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

The purview o f the EMU has been expanded to encompass environmental and social assessment o f all roads (see above). This situation will need to be reviewed when the institutional study i s completed and the organizational structures and role allocation in the new road sector agencies i s clarified however.

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6.5 H o w will the project monitor performance in terms of social development outcomes?

These will be developed by the EMU on an interim basis. The performance monitoring tools will be updated on the basis o f the poverty assessment framework exercise mentioned above, and the revised system will be agreed and finalised during the first year o f operations.

Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)"

7. Safeguard Policies:

0 Yes 0 N o

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

For environmental assessment, natural habitats and cultural property the process to identify the extent o f the trigger and the development o f precautionary measures are described under section 5 above. In terms o f the first year projects, all issues were addressed in the respective Environmental Assessment Reports. All projects earmaked for later execution will be managed as per the guidelines o f the finalised resettlement policy framework.

For example, precautions are stipulated in design Package 1: Zimbabwe border to Livingstone-link passes alongside the Mosi-oa-Tunya National Park and near some archaeological sites around the Victoria Falls. In the same package the Chirundu-Kafue-link passes close to a Natural Heritage Site and i s likewise protected under the EMP. Although no disturbance i s foreseen, the EMP's have stipulated precautionary measures for adoption by contractors upgrading the roads. Monitoring will be undertaken by the EMU, the Environmental Council o f Zambia and the ZWA.

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F. Sustainability and Risks 1. Sustainability:

Clarified institutional roles, improved organizational structures, and adequate funding for the road maintenance are the key factors for sustainability o f the Road Rehabilitation and Maintenance Project program. The project i s expected to enhance sustainability by addressing these factors in a coherent and effective manner. The project will support the government in the implementation o f the Transport Policy that provides the basis for sustainable financing for road maintenance and for strengthening management o f the road sector by setting up three autonomous road agencies, (RDA, RTSA, NRFA). RDA will address the sustainability o f coordinated planning, programming, improved implementation and enhanced efficiency by bringing the responsibility o f the whole core road network under one management. RTSA will address the sustainability o f traffic management, road safety and enforcement o f road regulations. NRFA will address the sustainability o f road funding by enforcing greater regularity and predictability o f financial flows to the sector based on a pre-determined financial strategy. The financial strategy provides guidance on: (a) generation o f additional Road Fund revenues; (b) modalities for fixing road user charges, adjustment o f fuel levy, and transfer to the Road Fund; (c) setting o f road priorities and criteria for the fund allocations; and (d) transparency in use o f Road Fund by carrying out financial and technical audits.

I t i s critical for the sustainability o f A P L Phase 1 that the three new agencies be in place and the respective Boards appointed by 2004 - although it i s not expected that they will be fully operational much before end 2005. The Government committed itself and passed the enabling legislation prior to project appraisal. The Government prepared the first draft o f the Letter o f Sector Policy (LOSP), which was reviewed by the Donor Forum in Zambia, and comments made. The final Letter of Sector Policy was addressed to al l donors and clearly provide the benchmarks for interim performance o f the road sector. The benefits o f the program will be sustained through effective, transparent, and accountable road management and stable, and sufficient funding for road maintenance.

An HIV/AIDS strategy for the transport sector will be an essential element o f the program to mitigate loss or disability o f key sector personnel to HIV related infections. For the sustainability o f the implementation capacity in the private sector, the project will continue to support the development o f the local construction industry and will strengthen the capacity o f NCC.

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

Risk I Risk Rating I Risk Mitigation Measure From Outputs to Objective Govemment does not hold to undertakings in the pol icy statement.

Effective implementation o f the new

M

M

Obtain commitment and supportive actions f rom the highest level o f govemment - LOSP. Annual and mid-term reviews will examine progress on implementing agreed institutional reforms. Restructuring or downsizing the project fol lowing the mid term review may be considered if progress i s inadequate. Early action already obtained through passage

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legislation i s delayed.

M

S

Delays thus occur in setting up new agencies .

o f the three acts and Presidential assent. Agreement needs to be reached on promulgation o f financial and operational regulations and Boards to be put in place. Early action on a timeline for setting up the agencies, recruiting staff, implmentation plan agreed with suport coming from IDA funded consultants. Redundancy implications to be identified early and handled in line with government policy. Performance agreements to be concluded between agencies and responsible ministries. Targets must be set consistent with ROADSIP program objectives. Technical assistance may be considered to fill gaps, provided commitment i s there to move on completing the institutional reforms.

Technical and managerial constraints thus are not addressed.

From Components to Outputs Appropriate financial strategy i s not adopted.

Maintenance funding gap i s thus not closed.

Government continues to fund non-Road sector activities.

Overall Risk Rating

i isk Rating - H (High Risk), S (Substantial Ri:

S

S

M

Any adjustments if considered necessary will be made on the basis o f annual reviews. Letter o f Sector Policy will contain commitments o n minimum funding required for maintenance. Continued dialogue with the government, and adjustment o f plans as necessary on basis o f annual reviews, if the maintenance funding gap i s not closed. Adjustment o f fuel levy and other road user charges in line with economic rationale and financial requirements Annual performance reviews and financing estimates will be comprehensive. All funding wil l be channeled through the Road Fund. Procedures agreements to ensure equitable distribution o f Road Fund resources

S , M (Modest Risk), N(Negligib1e or Low Risk)

3. Possible Controversial Aspects:

None

G. Main Credit Conditions 1. Effectiveness Condition

1. substance satisfactory to the Association; 2. accounts, and proposals from auditors, in a form and substance satisfactory to the Association;

The Borrower has adopted and furnished to the Association the PIP, in form and

The Borrower has furnished to the Association the terms o f reference for audit o f Project

- 36 -

3. The Project Account referred to in Section 3.04 o f this Agreement has been opened and an initial deposit o f the ZMK equivalent o f $150,000 has been made therein; 4. The Borrower has adopted and furnished to the Association the Procurement Manual, in form and substance satisfactory to the Association; and 5. The Borrower has issued a Statutory Instrument pursuant to i t s National Council for Construction Act No. 13 o f 2003, exempting al l Bank financed projects from the application o f Sections 7, 8, 22,23 and 24 o f the said Act.

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

A. Board conditions

H. Readiness for Implementation [XI 1. a) The engineering design documents for the f i rs t year's activities are complete and ready for the start

o f project implementation. 0 1. b) Not applicable.

LX 2. The procurement documents for the first year's activities are complete and ready for the start o f

iXi 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory

0 4. The fol lowing items are lacking and are discussed under loan conditions (Section G):

project implementation.

quality.

1. Compliance with Bank Policies ixI 1. This project complies with a l l applicable Bank policies. 0 2. The fol lowing exceptions to Bank policies are recommended fo r approval. The project complies with

al l other applicable Bank policies.

Hartwig Schafer Sector ManagerlDirector Country ManagerlDirector

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Annex 1: Project Design Summary ZAMBIA: Road Rehabilitation and Maintenance Project

Sector-related CAS Goal: To stimulate sustained and jivessified economic growtk :hrough improved coverage quality and distribution o f services such as roads.

'rogram Purpose:

'roject Development Ibjective: Preservation o f the public ,oad network; building and naintaining institutional :apacity; selective extension If infrastructure and transport iervices for the poor, :xtension o f local community )articipation

lutput from each :omponent: , C iv i l Works including ehabilitation, upgrading, and leriodic maintenance o f elected roads. Routine naintenance o f the core road etwork, and

Sector Indicators: 1 90% o f road network in fairigood condition. 2. Average VOC reduced by at least x%. 3. xx new jobs created,

(These will be refined during a baseline study to be completed within six months after credit effectiveness)

End-of-Program Indicators:

Outcome / Impact Indicators: (a). The coverage o f core road network under sustainable routine maintenance program increased from 19% in 2004 to 40% in 2006.

(b) The quality o f core road network improved for paved roads from 58 % good in 2004 to 65 % good in 2006 and for unpaved roads from 7 % good in 2004 to 32 % good % fair in 2006.

(c) Domestic funding for the total road budget increases from 27 % in 2004 to 40 % in 2006.

(d) System for recording o f road accidents and i t s analysis in place by December 2005.

Output Indicators:

(a) xx km o f core roads rehabilitated.

(b) xx km o f core roads received periodic maintenance.

Data Collection Strategy

Sector/ country reports: Critical Assumptions

I (from Goal to Bank Mission) Impact studies. Continued improvement in 3aseline surveys the environment for economic h n u a l project reports growth, including defining

the role o f the state and private sector participation

I

'rogram reports: I (from Purpose to Goal)

Jroject reports:

I. Technical audits

!. Annual road condition iurveys (b) Financial strategy i s

i. Quarterly and annual road igency reports.

(from Objective to Purpose)

(a) Transport policy i s implemented in full.

approved and implemented .

(c) Increased efficiency and transparency in procurement, Road Fund management and local contract management achieved.

(d) Timely availability o f domestic resources from Govemment counterpart funding and Road Fund revenues are assured.

(e) Institutional study completed and no delay in implementation o f its recommendations.

Jroject reports: (from Outputs to Objective)

'roject Management Reports. (a) Generation o f road hnd revenues enhanced to match

h n u a l road condition survey maintenance needs.

2uarterly and annual road (b) N o delay in transfer o f fuel igency reports levy and other road user

- 38 -

?. Engineering and other echnical services.

i. Institutional development md capacity building.

I. Accessibility and mobil ity mprovement.

'roject Components I Su b-components:

(c) xx km routine maintenance o f core roads completed.

(d) xx km o f core roads upgraded.

(e) xxx km o f non-core roads received accessibility improvements.

(a) Restructuring o f road agencies completed by 2005.

@) x number o f transport related staff trained.

(a) x% o f non core road network rehabilitated.

(b) Travel time o f farm produce to markets has been cut by x%.

(These will be refined during a baseline study to be completed within six months after credit effectiveness)

Inputs: (budget for each component)

hnnual donor conference eports

did-term review report.

Juarterly and annual road rgency reports

innual donor conference eports

did-term review report.

Juarterly and annual road rgency reports

hnnual donor conference eports

did-term review report.

'roject reports:

charges collected by the MFNP to Road Fund.

(c) Government resources not diverted into non-RRMP activities.

(d) Donor coordination continues to function and extemal support follows priorities

Three road agencies RDA, RTSA, and NRFA are established.

(a) Agreed staffing level maintained.

(b) Accounting and reporting arrangements for the program are functioning as planned.

(from Components to Outputs)

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Annex 2: Detailed Project Description ZAMBIA: Road Rehabilitation and Maintenance Project

By Component:

Project Component 1 - US$283.78 million

Civil Works (IDA-funding US$43.50 million): The c iv i l works component will focus on the priority needs for road maintenance and rehabilitation for the period o f 2004-07 within the core road network. The program i s inclusive o f ongoing works, and will include al l roads in the core raod network o f the country.

The c iv i l works program i s based on an optimum balance of: (a) carrying out routine and periodic maintenance on all good and fair roads in order to avoid a further increase in the maintenance backlog; (b) rehabilitation o f poor roads based on priority ranking on the basis o f economic rate o f return for most main and urban roads, and on multi-criteria selection for feeder roads and for some low volume main roads, and the roads after rehabilitation would be placed under a regular annual routine maintenance and pluri-annual periodic maintenance program; (c) upgrading o f some selected non-engineered roads based on the above agreed selection criteria; and (d) increasing the tonnage capacity o f selected pontoons or their replacement with bridges to provide al l weather accessibility to the strategic locations on the core road network.

The strategy does not provide for any new road construction, but rather places emphasis on gradually reducing the proportion o f road network that i s poor by the end o f project period. Comprising the f i rst year program o f works are the following: the Chingola-Kasumbalesa road ( 44.5 km) connecting the Copperbelt town to the border with the Democratic Republic o f Congo (DRC); Design Package 1 (235,7 km) which includes Chirundu to Lusaka road (T2) [135 km] and Zimbabwe border - Livingstone- Zimba road (Tl) [100.7 km], with a total length o f 235.7 km and Design Package 2 (148 km)2, Ndola-Mufilira-Mwambashi road, Mufblira-Mokambo and Kafblafbta to Luanshya. Designs and bid documentation on these roads are nearly complete. Advertisement o f the bids for the f i rs t year works to be funded by IDA will be achieved by credit effectiveness.

The civi l works program i s divided into the following functional sub-components

a. The annual routine maintenance would cover only roads in good and fair condition, the volume o f which will increase over the course o f the program. The program will include routine maintenance o f 9 606 km in 2004, and i s expected to rise to 20 000 km in 2006.

Routine Maintenance (US$ 32.66 million, Category Works 1 (a).

b. Periodic Maintenance (US$ 37,65 million, Category Works 1 (a): The program will support periodic maintenance o f 824 km (370 km paved and 454 km unpaved). The program i s intended to fully address the backlog o f maintenance as wel l as to assure all scheduled periodic maintenance falling due in 2003-2007 i s attended to. This sub-component would also be used for a pi lot project to pool funds. As mentioned in the main text, such a pilot project will only go ahead once the Bank has cleared the financial

- 40 -

and procurement arrangements.

c. The project will support rehabilitation o f 1 868 km ( 560 km paved and 167 km unpaved primary and secondary roads, 675 km urban roads, 69 km primary feeder roads and 217 km park roads) with a view to assuring that the target reduction o f roads in poor condition can be met.

Rehabilitation (US$ 97.50 million, Category Works 1 (3):

d. Upgrading (7.JS$110.30 million, Category Works 1 (b): The project will support a l imited amount o f upgrading o f 669 km o f primary and secondary roads where the economic viability has been demonstrated and 1 379 km o f primary feeder roads to be upgraded to tertiary road engineering standard. The project i s aimed at improving the condition mix o f the primary feeder roads by 2007 to 50% good (to an acceptable engineering standard) so that i t could be covered under a regular maintenance program.

e. Road Safety Improvements (US$2.10 million, Category Works 1 (d): This project developed under the current IDA-credit and w i l l aim to implement the road safety program

wi l l strengthen the newly established RTSA.

J: Accessibility Improvements, including pontoons and bridges ('US$ 3.58 million, Category Works 1 (c): The remaining 50% o f the primary feeder roads will receive accessibility improvements works. To enhance connectivity at strategic locations on the core road network, e.g. sub-standard crossings o f major rivers, the program will include replacement o f pontoons with higher tonnage or new bridges o f adequate capacity provided the investments in pontoon and bridges are economically viable.

Project Component 2 - US$34.98 million Engineering and other Technical Sewices (IDA-funding US$ 2.00 million): Technical

assistance for carrying out feasibility studies, engineering design and supervision o f maintenance and rehabilitation works for Component I and to provide support to complete the preparatory activities for the next phase.

Project Component 3 - US$48.49 million Institutional Development and Capacity Building (IDA-funding US$ 3.40 million): Technical assistance and training in the areas o f policy support, implementation support, and institutional development. The strong focus o f th is project i s to provide support to the Government in implementation o f the Transport Policy and the new institutional framework including the creation o f three new agencies in the road sector. The main elements o f the component will include:

(a) Policy support: This will include technical assistance and training with regard to: financial strategy and instruments, poverty assessment ( monitoring and evaluation), road safety, axle load control.

(b) Implementation Support: regard to: environmental and social assessment, audit and financial management services.

This will include technical assistance and training with

- 4 1 -

(c) Institutional Development: This will include technical assistance and training in regard to: institutional management (operating procedures, financial requirements), contract management including out-sourcing and performance based maintenance contracting, institutional planning and the provision o f new management systems required for the efficient operation o f the three new Agencies.

(d) Monitoring and Evaluation: (US$ 0.42 million) This project will aim to establish an independent Monitoring and Evaluation Unit within the MCT. This i s required as the data collection required for the efficient management o f the program will be collected from the three new Agencies and Ministries.

Project Component 4 - US$13.61 million Accessibility and Mobility Improvement (IDA-funding US$ 1.1 million): This component i s aimed at providing continued support for improving physical access for the poor in order to promote their economic and social development. In recognition o f the positive impact on the country’s development.of increasing the access o f the poor to markets and essential services, the ongoing community accessibility program will be expanded through: (i) identification o f the accessibility problems in line with RTTP program; (ii) financing construction and rehabilitation o f transport infrastructure in rural areas through cost sharing arrangements with beneficiary community based on demand; and (iii) a review o f the legal framework to ensure local community contributions are recognized. The main sub-components are as follows:

(a) Community Transport Infrastructure: (US$ 6,93 million) Support to the scaling up o f the current program to include al l districts by 2007. The sub-component will continue to support the provision o f grants on a cost sharing basis to communities for construction and rehabilitation (maintenance support to come through the RF) as well as training and capacity building at community and district level. Total expenditures i s expected to reach US$ 6,93 mil l ion by 2007

(b) Intermediate Means of Transport: (US$ 2,63 million): Provision o f IMT support will be scaled up on the basis o f the init ial work carried out under ROADSIP including the successfkl ongoing pilot program, with the f i rst priority given to addressing needs in these pi lot districts.

(c) Canals and Waterways: (US$2,55 million): Inland water transport i s a very important component o f rural access and mobility, especially in Western province (Zambezi river and flood plain) and Luapula province (Luapula flood plain and inland lake transport). The Road Rehabilitation and Maintenance Project will include studies to review the infrastructure and service needs and will support pi lot rehabilitation projects in each o f the two provinces.

(d) Management and Coordination: (US$ 1,50 million): Support will be given to the creation o f an effective focal point for implementation o f policy and institutional support to access and mobil ity improvement, to be located in MLGH. This will also cover legal reforms to promote local community ownership and management o f transport infrastructure assets and creating a

~ 42 -

monitoring and evaluation system that informs on the state o f the sub-sector and i t s contribution to economic and social development objectives o f the country.

Trigger

Triggers for Phases two and three of the Second Project to Support Road Rehabilitation and Maintenance Project

Specific action Date

Phases two and three o f the program will be appraised to evaluate their technical, economic, financial, environmental and social feasibility, following criteria satisfactory to IDA and reflecting experience gained during implementation o f the previous phase. This approach o f learning by doing will allow for continuous adjustment as the government's reform program advances.

Phase 1 The three agencies NRFA, RDA, and RTSA having their own Board o f Directors, comprising private and public sector representatives, are established and fully functional one year before APL 1 closing NRFA i s able to meet 40% o f total road expenditures incurred on routine and periodic maintenance and rehabilitation f rom domestic resources by 2006

In order to help incorporate adjustments in project design, facilitate the appraisal process o f each new phase, and determine i ts readiness for integration into the program, triggers have been identified. They will be measured and assessed as part o f the program's monitoring and evaluation system. They will be reviewed during appraisal o f each phase to confirm their validity. Specific triggers, actions by which to measure satisfaction, target dates and responsible agencies are listed in the table below.

(a) Board members and CEO appointed; (b) Staff member appointed; (c) Agencies regulations approved; and (d) redundancy plan satisfactorily implemented.

NRFA adopts a three-year June 07 NRFA financial strategy for road maintenance and RDA implements i t s satisfactorily. Targeted improvement o f roads to be verified through carrying out road condition survevs.

(a) Dec 04 (b) Jun 05 (c) Dec 05 (d) Dec 05

Satisfactory implementation o f the road safety plan. The annual administrative costs for a l l these agencies shall be less than the 5% maximum funding limit o f the NRF

Satisfactory completion o f a l l preparatory activities for the

Responsible i agency

Activities defined in the PIP June 07 R T S A substantially completed. To carry out an audit for the administrative cost o f a l l R T S A agencies and their total expenditure.

June 07 NRFA, RDA,

Engineering designs, and tender June 07 RDA documents including

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planned phase 2 investments

Phase 2

environmental impact assessment and social impact assessment have been completed.

Agreed phase two road works have been substantially completed and performance indicators satisfactorily achieved NRFA i s able to meet 80% o f total road expenditures incurred on routine and periodic maintenance and rehabilitation f rom domestic resources by

Activities defined in the credit June 10 RDA agreement substantially completed

NRFA adopts a financial June 10 NRFA strategy for road maintenance and RDA implements i t s satisfactorily. Targeted

2009.improvement of roads to be verified through canying

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Satisfactory implementation o f the road safety plan. Satisfactory completion o f al l

out road condition surveys Activities defined in the PIP June 10 R T S A substantially completed. Engineering designs, and June 10 RDA

preparatory activities for the planned phase 3 investments

tender documents including environmental impact assessment and social impact assessment have been completed.

Annex 3: Estimated Project Costs ZAMBIA: Road Rehabilitation and Maintenance Project

Indicative Component (Contingencies costs

YO o f Bank Bank Total Support Support

included) 1. Civil Works

(US$ M) (US$M) Yo 283.78 74.50 43.50 87.00

(a) Routine Maintenance (b) Periodic Maintenance (c) Rehabilitation

32.66 8.60 0.00 37.65 9.90 1 .oo 97.50 25.60 23 .OO

(d) Upgrading (e) Road Safety Improvements (f) Accessibility Improvements

110.30 29.00 18.00 2.10 0.60 0.50 3.58 0.90 0.50

2.Engineering and Technical Services 3.Institutional Development and Capacity Bui lding (a) Policy Support

34.98 9.20 2.00 4.00 48.49 12.70 3.40 6.80 4.79 1.30 1.20

(b) Implementation Support (Agency Establishment) (c) Institutional Development (Capacity Building) (d) Monitoring & Evaluation

- 45 -

21.89 5.70 0.80 21.39 5.60 0.40 0.42 0.10 0.80

4. Accessibility and Mobi l i ty Improvement (a) Community transport infrastructure

13.61 3.60 1.10 2.20 6.93 1.80 0.20

~~

(c) Canals and waterways (d) Management, Coordination and JSU-establishment

2.55 0.70 0.30 1.50 0.40 0.30

Total Project Costs Total Financing Required

380.86 100.00 50.00 100.00 380.86 100.00 - 50.00 100.00

Annex 4: Cost Benefit Analysis Summary ZAMBIA: Road Rehabilitation and Maintenance Project

1. Overview

This Annexure deals with the three road projects included in the A P L 1. O f the three, two are nearly ready for advertisement while the third project i s currently under final design. These three projects are dealt with in more detail below.

The approach follows the standard cost-benefit analysis, with a comparison o f “with” project case with the “without” project case. The without project case i s defined as the situation in which the project road i s not rehabilitated but maintained at a certain minimum standard. The project costs include investment and reinvestment costs and routine and periodic maintenance costs with respect to the “with project” case road. The main quantifiable benefits considered are: (i) vehicle operating cost savings; (ii) maintenance cost savings with respect to the “without” project case; and (iii) residual benefits o f the proposed project. The project i s also expected to result in a number o f other benefits, particularly related to passenger and cargo time savings, reduction in road accidents and additional generated traffic, which have not been quantified.

2. Chingola-Kasumbalesa Road

General.

This section presents economic evaluation o f the planned rehabilitation o f the Road T3 between Chingola and Kasumbalesa, Zambia, with a total length o f 44.5 kilometer. The study uses HDM 3 for economic analysis.

Methodology

Two scenarios are developed:

Scenario 1. the pavement i s designed for the same level o f traffic throughout the project life. In addition, a dense bitumen macadam (DBM) binder course and asphalt surfacing overlay i s designed for up to KM 12+500;

Scenario 2, pavement i s designed for heavier traffic volumes up to Chililabombwe. The binder course i s designed for up to KM30+700 (Chililabombwe).

For each o f the scenarios, three forms o f construction were developed: Realistic-overlay for most o f the urban section o f road up to Km 12+500 Optimistic-complete new construction o f the road along a new alignment between Km

Conservative-reprocessing o f the existing pavement, together with new pavement layer 7+648 and Km 9+950

construction from Km 12+500 to the end o f the road

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The pavement designs were developed in consideration o f the cumulative traffic loading forecast to be carried on the road for design lives o f 15 and 20 years. The analysis i s reported here for a design l i fe o f 20 years. The details on different scenarios are available in the project fi les. The traffic volumes were estimated on the basis o f qualified cross-sectional counts undertaken on the project road during 2002

ERR NPV US$m FYRR

Assumptions

Scenario 1

25.1 28.8 22.2 13.2 19.4 9.3 18.3 22.4 16.6

Financial contingencies, Le., inflation, cost increase do not constitute a consumption o f

The foreign exchange contents o f al l relevant cost components i s converted to economic

Taxes and duties are eliminated from the economic analysis Financials costs for unskilled and skilled labor are multiplied by conversion factors o f 0.50

economic resources and are therefore eliminated

costs by applying a conversion factor o f 1 .O

and 0.75 to obtain economic costs

ERR

Economic Analysis

Realistic Optimistic Conservative 29.1 31.9 26.9

The total economic project investment costs for scenario 1 and 2 are US$9.4 mil l ion and US$11.6 million, respectively (about 77.5% o f the corresponding financial costs). The EIRRs are higher for scenario 2 as compared to scenario 1, even with higher investment costs (Table 1).

Table 1. Economic Internal Rate o f Return, Altemate Scenarios

I Realistic 1 Optimistic I Conservative

I I I Scenario2 I I NPV US$m 124.5 I 31.5 I 19.9 FYRR I 16.2 I 19.6 I 14.8

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Sensitivity Analysis. The results o f sensitivity analysis, assuming a 20% increase in investment costs or/and a 20% decrease in realized benefits are presented in Table 2. The switching value analysis suggests that in realistic scenario 1, investment costs will have to increase by 176% and benefits decrease by 64% for net present value to even out.

Table 2. Results of Sensitivity Analysis

IC: investment cost; B: benefits; SV: switching value analysis

2. DESIGN PACKAGE 11: Kakulafuta-Luanshya Road (M6)

General.

This section presents economic evaluation o f the planned rehabilitation o f the Road M 6 between Kafulafuta and Luanshya, Zambia, with a total length o f 43.4 kilometer. The M 6 i s bitumen road and commences north o f Kafulafuta on the T3 (Lusaka to Ndola Road) and heads in a north-westerly direction for 32.4 km before turning south-west to Luanshya. It includes a short urban section in Luanshya. The study uses HDM 4 for economic analysis.

Methodology

Three scenarios are developed:

Scenario 1. Pessimistic assuming a 3% growth Scenario 2, Base Case-assuming a 5% growth rate Scenario 3, Optimistic-assuming a 6.25% growth rate

For each o f the scenarios, two options are developed Option l - o v e r l a y with 40" Asphalt Concrete (AC) Option 2-over lay with Double Surface Dressing (DSD)

The analysis i s reported here for a design l i f e o f 20 years. The details on different scenarios are

- 48 -

available in the project fi les. The traffic volumes were estimated on the basis o f qualified cross-sectional counts undertaken on the project road during 2003

Road Pessimistic Section 3% growth

For purposes o f economic calculation using HDM4, each road i s divided into sections o f broadly similar conditions. Existing traffic volumes, mix and proportion o f heavy goods vehicles have been used as a basis for estimating future traffic volumes for the 20 year design l i fe o f the road. The M 6 road i s divided into four sections:

Base Case Optimistic 5% growth 6.25% growth

M 6 Section 1 (km0 -32.5) rural section with carriageway width o f 6.5 km M 6 Section 2 (km 32.5 - 40.8) rural section with carriageway width o f 6.8m M 6 Section 3 (km 40.8-42.8) urban section in Luanshya M 6 Section 4 (at km 32.5) roundabout junction and spur roads, linking three roads

M6S 1 M6S2 M6S3 M6S4

Assumptions

Option Option Option 14.9 15.4 15.0 15.5 15.1 15.6 9.9 10.4 13.6 14.0 15.7 16.2 16.2 16.2 16.4 16.4 16.6 16.6 25.7 25.6 26.1 26.0 26.3 26.2

Financial contingencies, i.e., inflation, cost increase do not constitute a consumption o f

The foreign exchange contents o f al l relevant cost components i s converted to economic

Taxes and duties are eliminated from the economic analysis Financials costs for unskilled and skilled labor are multiplied by conversion factors o f

economic resources and are therefore eliminated

costs by applying a factor o f 0.64-0.85

0.6-0.7 to obtain economic costs

Economic Analysis

Analysis has been carried out for the. base case and pessimistic and optimistic scenarios.

Table1 . Economic Internal Rate o f Return, Alternate Scenarios

Sensitivity Analysis. The results o f sensitivity analysis, assuming a +/- 20% change in investment costs from the base case i s presented below.

Table 2. Results o f Sensitivity Analysis

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3. Design Package I: Lusaka-Chirundu and Victoria Falls-Zimba Roads

The initial economic analysis shows an ERR in excess o f 22%. The economic assessment will be made on submission of the final draft report.

Summary of Benefits and Costs: This subject was dealt with for each individual project above.

Main Assumptions:

This subject was dealt with for each individual project above.

Sensitivity analysis / Switching values of critical items:

This subject was dealt with for each individual project above.

= 50 -

Annex 5: Financial Summary ZAMBIA: Road Rehabilitation and Maintenance Project

Financing IBRD/IDA Government

Table A5-1: Summarised Budget for the Implementation Period

10.00 15.00 25.00 50.00 19.00 20.00 25.28 64.28

Central Provincial

Other donors (see below) User Fees/Fuel Levy Other

Total Project Financing

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

36.00 50.00 54.75 140.75 31.92 37.8% 45.01 114.80 25.35 15.48 (29.80) 11.03

122.26 138.36 138.23 380.86

Other Donors Denmark (DANIDA) 50.00 EU 5 1.75 Germany (Kfw) 15.00 Norway (NORAD) 15.00 NORDIC Development Fund 9.00 Total 140.75

Amount in US$ mil l ion equivalent

T h e Letter o f Sector Policy contains the main policy objectives of the government, under the Road Rehabilitation and Maintenance Project, regarding road sector financing; that i s to: raise local financing to cover a progressively increasing share o f the costs o f maintenance and rehabilitation; channel all road user charges through the Road Fund; review the amount o f fuel levy required on an annual basis; streamline the procedures for depositing fuel levy proceeds into the Road Fund; continue to provide direct budgetary resources for counterpart funding obligations on donor supported projects; and allocate available Road Fund resources according to the following criteria - firstly to routine and periodic maintenance o f core network roads in good and fair condition; secondly the counterpart funding requirement and then the costs o f managing the Road Fund

During (1997 - 2003), uneven progress was made towards the program financial goals. Out o f the expected total fimding o f $130.7 million, to the Road Fund, that was required, only $51.9 mi l l ion was received; and only from fue l l e v y proceeds - nothing was contributed from the Road user fees and charges. For example, for 2002 it had been estimated that $35.4 mi l l ion would be required to

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meet the maintenance priority allocations but only $9.8 mil l ion was realized. In terms o f the specific policy objectives for ROADSIP, they can be summarised as follows:

(i) Local funding was indeed increased - amounting to $168.8 mi l l ion over the 1998-2002 period with $32.6 mil l ion obtained in 2002 alone - due to a substantially larger amount o f direct government funding than expected. However, most o f the funding resources - about two thirds o f the total, including HIPC reflows since 2001, did not go through the Road Fund.

(ii) In general, Road Fund resources were prioritized to routine maintenance financing amounting to $52 mil l ion over the ROADSIP period; i.e. about 45% o f the expected amount with $9.8 mi l l ion in 2002 (about 34% o f the estimated amount). Actual funds contracted have been insufficient (only about $18 mil l ion over 1998 - 2002) to make more than a marginal contribution to periodic maintenance. However, counterpart h d i n g requirements have generally been met, though often with serious delays and resources not being utilized correctly for the cost o f management o f the Road Fund.

(iii) Fuel levy has not been adjusted on a regular basis, as i t s calculation as a fixed percentage o f 15% o f the wholesale price o f fue l limits discretion for adjustment to road sector expenditure needs. In most years, fuel l e v y funds failed to achieve the target rate equivalent in U S centdliter set out under ROADSIP I. For example, in 2002, i t was equivalent to US$O.OS per/liter as opposed to the target o f US$O.O93/liter.

(iv) Road user charges other than fuel levy have not been channeled into the Road Fund during ROADSIP but the situation i s expected to be improved with the institutional development and implementation support under the new agencies to be established during APL-Phase 1 o f the Road Rehabilitation and Maintenance Project.

(v) Under ROADSIP, l i t t le progress was made on streamlining the administration and management o f the Road Fund and this created a situation in which funds were released to the Road Fund in an erratic and unpredictable manner to the extent that arrears estimated to amount to over $10 mi l l ion by the end o f 2002 had built up. Nevertheless there has been some progress achieved towards the end o f ROADSIP - when releases have been more consistent with little delays especially in 2002 and 2003 compared to earlier years o f the program. Following a study funded by the IDA credit, the methods o f assessment o f the amounts o f fuel l e v y collected and due to the Road Fund substantially improved and it has been agreed with al l parties that amounts due (including outstanding arrears) should be based on actual collections not the nominal estimate of th is amount which i s contained in the Yellow Book.

The current situation required a revision to the financial strategy, a restatement o f the objectives to be achieved by the end o f APL-Phase 1 o f Road Rehabilitation and Maintenance Project and the specification o f the different measures that need to be taken by the end o f 2007. This process started from the production o f the Bankable Document (BD) which contains the estimated road sector expenditure up to the end o f the Road Rehabilitation and Maintenance Project (2014), identified, inter alia, the estimated needs for routine and periodic maintenance o f the core road network consistent with the targets for network quality improvement. The GRZ presented a very

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ambitious program (with a total cost o f over $1,60Omillion) which were scaled down to $1 100 mi l l ion allowing for slower than anticipated revenue flows during the f i rst two years. The estimated fimding requirements for routine and periodic maintenance are $144 mi l l ion and $146 mil l ion respectively while Rehabilitation and upgrading were estimated to require over $370 mil l ion and $366 mill ion respectively.

2004 2005

Main assumptions:

All the prevailing issues have been addressed. The key measures to be taken are to provide greater assurance - and to mitigate the associated risks - concerning: adequacy o f funding made available for total road sector needs; common management o f the funding to ensure accountability and transparency; prioritization o f funding in favor o f maintenance; equitable allocation to ensure that the needs o f rural areas are not neglected. The financial strategy specifically addressed possible scenarios for raising road user charges in order to secure: full funding o f routine maintenance not later than 2005; progressively increasing funding o f periodic maintenance and accessibility improvement requirements. Fuel levy i s to be increased to about US10 cents per liter, although this may require both: some restructuring o f fue l taxation in view o f the constraints posed to further retail fuel prices (Zambia's prices are relatively high compared to other countries in the sub-region); a revision in the way in which levy i s calculated so that th is can be adjusted in relation to maintenance funding needs. Other road user charges will also be channeled into the Road Fund. The financial strategy has identified the scope to substantially increase these charges to better reflect the economic cost o f access to the road network, especially for heavy vehicles. Further stakeholder consultation i s envisaged prior to determining the extent that these charges could be increased over the l i fe o f the Road Rehabilitation and Maintenance Project and thus the proportion o f total maintenance costs that could be funded through this method. The use o f HIPC resources made available to the road sector through the budget will be more explicitly tied to projects to improve rural accessibility and mobility.

2006 Total APL-1

Table A5-2. Financial Analysis o f the Road Fund Revenues for the Project Duration

Fuel Levy User Fees & Charges GRZ (Incl. counterpart and HIPC funds)

18.90 21.47 24.61 64.98 13.02 16.41 20.40 49.82 19.00 20.00 25.28 64.28

Total Road Fund 50.92 57.87 70.29 179.08

Overview and Key Assumptions

Financial appraisals have been carried out to assess the financial sustainability o f the Road Fund for the project and the program as a whole. Cost recovery in the road sector i s assessed, taking into account the already established user-charge systems.

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The financial analysis i s based on two key assumptions: (a) that reform o f the road sector and i t s further development will operate increasingly on the user pays principle; and (b) the private sector will perform a l l o f the rehabilitation and maintenance works, and therefore prices will be set by supply and demand. (c) Fuel levy wil l be, gradually, increased from the current average o f US$O.OS/ltr to approx. US$O. lO/ltr) and to be applied uniformly (to transport and non-transport fuel) except kerosene, jet fuel and fuel oil. (d) Fuel levy and other user charges assumed to grow by 3% per year, (in dollar terms) plus increases o f $5 mil l ion and $6 mil l ion in 2005 and 2006 respectively to account for one time adjustments to align user fees with increased road maintenance requirements.

Good (Km)

Paved 4,133 Unpaved 2,300 Total 6,433

Road network and condition

Fair (km) Poor Total Good Fair Poor

1,595 1,522 7,250 57.1% 22.0% 18.9% 6,244 24,319 32,863 7.0% 19.0% 74.0% 7,839 25,842 40,113 16.0% 19.6% 64.4%

fkm) fkm)

The structure and condition o f the road network in Zambia as at end o f 2002 i s presented in Table A5-3. The road network comprised about 67,116 kilometers o f roads. The classified network consists o f about 40,113 kilometers (60 percent o f the total network); Some 7,250 kilometers are paved roads and 32,863 kilometers are unpaved (gravel and earth) roads.

(7250 km)

Table A5-3: Structure and condition o f Zambia's road Classified Network (2002)

(32,863 km)

2002 2004 2005 2006

Source: GRZ Bankable Document

4,133 1,595 1,523 2,300 6,244 24,319 4,227 1,653 1,370 4,371 6,605 21,887 4,321 1,711 1,218 6,441 6,967 19,455 4.415 1.769 1.066 8.512 7.328 17.023

Table A5-4 summarizes the expected development o f condition o f classified road network under APL- 1 o f Road Rehabilitation and Maintenance Project.

Table AS-4: Road Network - Expected Development o f Condition o f Classified Core Road Network (in Km).

~~ r- I Paved Road Network I Unpaved Road Network I

Source: GFZ Bankable Document

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Key issues

The key issues o f road infrastructure in Zambia remain to: (a) establish financing mechanisms based on the user pays principles to ensure a sufficient, timely, stable and secure flows o f funds for routine, periodic maintenance, and counterpart funds for rehabilitation and upgrading o f roads; (b) establish the three agencies (RDA, NRFA, RTSA) and implement an independent financial management system for the Road Fund; (c) base resource allocation on clear priorities identified during the road sector strategy process and/or on economic evaluation; (d) reduce the maintenance cost unit o f the network throughout the country by introducing systematic competitive bidding process; and (e) improve road safety.

in Kms Maintainable CRN (Good & Fair condition) Routine maintenance Periodic maintenance

Proposed reforms

2004 2005 2006 16,856 19,440 22,024

9,606 10,544 11,070 1,929 2,060 2,333

I t i s proposed to restructure the existing Road Fund, which i s s t i l l managed by the NRB, and create an independent Road Fund, autonomous entity from NRB, clearly separating the financing functions (Road Fund) from the execution function (NRE3). The Road Fund, in a f i rs t phase, will be mainly dedicated to financing o f road maintenance. The financing o f the maintenance o f the urban streets will be introduced at a later stage. Simultaneously, it i s proposed to introduce a sustainable road maintenance financing system based on: (a) road maintenance user charges set at levels to generate sufficient resources to cover full routine maintenance, and gradually full periodic maintenance (by end o f Phase 3); (b) prompt and timely payment to the Road Fund (during Phase 1) and direct payment from the petroleum companies to the Road Fund, without transiting through the ministry o f finance by the beginning o f Phase 2. A contribution from the investment budget will be channeled through the Road Fund, for counterpart h d s for rehabilitation o f roads.

% Minimum maintenance o f CRN Required I 6 8 . 4 ~ ~

Future road sector financial requirements for maintenance

6 4 . 8 ~ ~ 6 0 . 9 ~ ~

Table A5-7 summarizes the estimated annual requirements for routine and periodic maintenance and government's needs for counterpart funds. The maintenance needs are based on ROADSIP achievements and the planned rehabilitation component for APL-Phase 1. The figures are summarized in kilometers in Table A5-5 below.

Table A5-5. Roads Maintenance minimum requirements in kilometers

Based on NRB's unit costs data base, the estimated amount o f funding required to adequately cover the requirements for routine and periodic maintenance o f roads are presented in table A5.6 below.

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Table A5-6. Roads Maintenance requirements funding requirements for project period (US$ Million)

Routine maintenance (US$ mln) 2004 2005 2006

8.84 11.08 12.74 Periodic maintenance (US$ mln) Total CUSS mln eauiv.)

I Routine maintenance Ckms) I 9.606 110.544 I 11.070 I 12.21 12.21 13.22 21.05 23.29 25.96

I Periodic maintenance Ckms) I 1,929 I 2,060 I 2,333 I

SOURCES OF DOMESTIC

On the basis o f the proposed reforms, indicative financial cash f low projections have been developed in line with the proposed financial adjustments (see Table A5-7. Financial forecasts were built on demand projections and assumptions for road maintenance user charges, contributions from the investment budget and financing plans from the funding agencies contributing to periodic maintenance and rehabilitation. Road maintenance user charges have been calculated on the basis o f the actual network to reach a sustainable yearly financial equilibrium between sources and uses o f funds for road maintenance by 2006. They have also been computed to reach levels to fully meet road maintenance needs (full routine needs, and gradually increasing contributions for periodic maintenance and rehabilitation until user charges fully finance the road budget by the end o f APL-Phase 3 Le. 2013). This wil l allow the gradual reduction o f external financing o f periodic maintenance during phases 2 and 3.

2004 2005 2006 TOTAL,

Any inability to introduce, recover and properly manage required road maintenance user fees during implementation o f Phase 1 would lead to reconsideration o f the size o f the proposed road rehabilitation component o f Phase 2 and 3, and would induce a process to prioritize the allocation o f the now limited financial resources between rehabilitation and periodic maintenance.

FUNDING F u e l L e v y User Charges and Fees

Subtotal GRZ budget (id. Counterpart and HIPC funds) TOTAL DOMESTIC FUNDING SOURCES (1)

The government plans to introduce the new road financing system and user charges by end 2004. By the end o f A P L Phase 2 (2010), the new system i s expected to generate sufficient revenues to cover roads maintenance needs.

18.92 21.47 24.61 64.98 13.02 16.41 20.40 49.82 31.92 37.88 45.01 114.80 19.00 20.00 25.28 64.28 50.92 57.87 70.29 179.08

Based on the proposed rehabilitation program for A P L Phase 1, the financial allocation to the road sector for the period 2004-2006 can be summarized as follows:

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Annual financing gap I (25.35) I (15.48) 1 29.801 CUMULATIVE PROTECT FINANCING GAP I (25.35) 1 (40.83) I (11.0311 (11.031

Main Assumptions: Financial appraisals have been carried out to assess the financial sustainability o f the Road Fund for the project and the program as a whole. Cost recovery in the road sector i s assessed, taking into account the already established user-charge systems.

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Annex 6(A): Procurement Arrangements ZAMBIA: Road Rehabilitation and Maintenance Project

Procure men t

1. The procurement system in Zambia i s in the process o f being reformed. The Government Procurement Reform program was fashioned in l ine with the recommendations o f the year 2002 Zambia Country Procurement Assessment Report (CPAR). The CPAR identified some weaknesses in the procurement policies and practices in Zambia and made appropriate short-term, medium-term and long-term recommendations. The following are the main recommendations o f the CPAR for implementation o f the procurement reforms; (a)revision o f the procurement legal framework based on the UNCITRAL model law and current international best practices; (b)decentralisation o f the procurement function; (c)change o f role o f the Zambia National Tender Board from carrying out procurement to a supervisory and regulatory role;(d) establishment o f independent appeals body; (e)establishment and development o f the capcity o f the procurement cadre; and (qrevision o f procurement guidelines.

Use o f Bank Guidelines

2. All goods, works and services financed under the IDA credit will be procured in accordance with the appropriate IDA Guidelines (Guidelines: Procurement under IBRD Loans and IDA Credits, January 1995 and as revised in January and August 1996, September 1997, and January 1999; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers, January 1997 and as revised in September 1997, January 1999 and M a y 2002). To the extent practicable Bank's standard bidding documents for goods and works, and Standard Requests for Proposals for consultants as well as al l Bank's standard evaluation forms will be used throughout project implementation. The Bidding Document for use for procurement o f goods and works under National Competitive Bidding (NCB) shall be reviewed and approved by the Bank therefore should be in a form satisfactory to IDA. However, N C B procedures will ensure that (i) bids will be advertised in national newspapers with wide circulation; (ii) the bid documents clearly explain the bid evaluation and award criteria; (iii) bidders are given adequate response time (minimum four weeks) to prepare and submit bids; (iv) bids will be awarded to the lowest evaluated bidder and not arbitrarily; (v) eligible bidders, including foreign bidders, will not be precluded from participating; and (vi) no domestic preference margins are applicable to domestic manufacturers or suppliers.

Advertising

3. A General Procurement Notice (GPN) i s mandatory and will be published in the UN Development Business , Development Gateway's dgmarket and in a national newspaper o f wide circulation as provided under the Guidelines. The GPN will be updated on a yearly basis and will show all outstanding International Competitive Bidding (ICB) for goods and works contracts and al l large consulting services. The related bidding documents for goods and

works will not be released, and the short l i s t for consultant services will not be prepared before eight weeks after the GPN has been published. Sufficient time will be allowed to obtain the bidding documents. In addition, a Specific Procurement Notice (SPN) for al l goods and works to be procured under I C B in the national newspapers the UN Development Business and Development Gateway. The date o f the SPN should conincide with the date that the bidding documents are made available for purchse to the interested bidders. The advertisement could be advertised on the UN Develpoment Business on-line version to save on time. Requests for Expressions o f Interest (EOI) for consultancy services will be published on the UN devlopment Business on l ine version , Development Gateways dgmarket. technical journal and newspaper. Copy o f the advertisement should be sent to to those f i r m s which GPN. A minimun o f two weeks should be allowed for submission o f Expression o f Interest. All N C B procurement packages for goods and works will be advertised in the national dailies.

Action Responsibilities Indicative Deadline 1. Setting or upgrading o f procurement record keeping and filing systems at NRB, Roads Department (RD), ZAMSIF, MLGH and M C T 2. Development o f training plan for Bank First quarter o f program procurement training for all implementing implementation agencies. 3, Revision and update o f Procurement NFU3 By negotiations vlanual (draft) 4. Preparation o f Procurement Plan for the NRB By negotiations i rs t 18 months.

NRB, MCT, RD and MLGH Second Quarter o f program implementation.

NRB, MCT, RD, MLGH

Procurement Capacity Assessment

4. A formal assessment o f the procurement capacity for al l project implementing agencies, has been conducted in accordance with Procurement Services Policy Group (OCSPR) guidelines dated August 1 1, 1998. The previous procurement arrangement in ROADSIP where al l the implementing agencies were undertaking procurement will continue until the proposed new institutional arrangements are in place. Capacity assessments have been undertaken for the following implementing agencies; Ministry o f Communications and Transport (MCT), Ministry o f Works and Supply Roads Department (RD), National Roads Board (NRB) and Ministry o f Local Government and Housing (MLGH).

The procurement management under the on-going project Road Rehabilitation and Maintenance Project has been found satisfactory and there has been no major issue in handling o f the procurement functions. However, the assessment outlines the following main recommendations that have been included in the following action plan agreed with the Borrower:

5. Risk Mit igation Procurement Action Plan

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Procurement Planning

6. The Borrower prepared a detailed procurement plan for the f i rst year activities that was discussed during appraisal with the Bank and finalized at Negotiations. The plans will be updated yearly, sent to IDA for clearance not later than three months before the end o f each fiscal year. A project launch workshop will be organized before effectiveness to familiarize implementing agencies and other institutions that shall be involved in the execution o f the project, with Bank procedures. The workshop will cover procurement policy and procedures and their applications to the procurement arrangement planned for project implementation, disbursement, reporting and auditing requirements.

Procurement Implementation Arrangements

7 . The overall coordination and implementation of the project procurement activities will be the responsibility of NRB. NRB has one procurement specialist and will recruit one qualified and experienced staff who will assist the Procurement Specialist. The Procurement officer will be recruited using competitive process acceptable to IDA. The Program will provide relevant staff, rigorous procurement training as part o f i t s capacity building initiative for al l the implementing agencies. A procurement training plan for al l the the implementing shall be prepared by NRB and submitted to IDA for approval. NRB will however engage an experienced Consultant for the design, supervision and or preparation o f appropriate Bidding documents, evaluation reports etc as deemed necessary. NRB will be responsible for the overall procurement planning and management with support from the implementing agencies including MCT, MOWS, and MLGH. M C T will be responsible for the institutional development component (US$ 3.4 m), MOWS will be responsible for c iv i l works and engineering services (US$ 45.5 m), and MLGH will be responsible for the accessibility and mobil ity improvement (US$ 1.1 m).

8. A major issue that the Bank raised during appraisal concerns the recently promulgated National Construction Council Act, Ac t No. 13 o f 2003. This Ac t provides for the establishment of the NCC who will, amongst others, promote the interests o f the construction industry in Zambia. The Act requires foreign companies to register in Zambia, to form joint ventures with Zambian firm in order to be eligible to bid. These provisions are contradicting Bank Guidelines and the GRZ was requested to come up with proposals to resolve the problem areas.During negotiations it was agreed that the specific Clauses (7,8,22,23) that are contrary to the Bank Guidelines, will be waived for al l Bank-funded projects. Such waiver shall be in the form of a Statutory Instrument to be published before credit effectiveness.

Procurement Methods.

Goods (US$2.00 million)

9. The project will finance items such as vehicles, computers and accessories, communication equipment and other supplies. To the extent possible and practicable, goods and equipment to

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be purchased by implementing agencies will be grouped into bid packages to take advantage o f bulk purchases. Each contract estimated to cost the equivalent o f US$250,000 or more will be procured under I C B procedures using IDA Standard Bidding Documents. Each contract for goods estimated to cost less than US$250,000 will be procured through National Competitive Bidding (NCB) using procedures acceptable to IDA. Procurement for readily available off-the-shelf goods that cannot be grouped or standard specification commodities for individual contracts o f less than US$30,000 will be procured using shopping procedures as detailed in paragraph 3.5 and 3.6 o f the Guidelines. Procurement o f goods and hiring o f facilities for training purposes, such as workshops, will also be carried out using Bank shopping procedures.

9. Procurement from United Nations Agencies: Notwithstanding the above provisions, vehicles and equipment estimated to cost less than $ 100 000 equivalent may be procured from IAPSO.

Civil W o r k s (US$43.50 million)

10. The project will finance Civil works contracts, mostly road works for rehabilitation, periodic maintenance and improve road safety for vehicle and pedestrians in Zambia. Pre-qualification will be required for large contracts estimated to cost more than US$ 10 000 000 equivalent. Individual c iv i l works contract, estimated to cost equivalent o f US$l ,000,000 or more, will be procured under I C B procedures using IDA Standard Bidding Documents. Each contract for civi l works, estimated to cost less than equivalent o f US$ 500,000 will be procured through National Competitive Bidding (NCB) using procedures acceptable to IDA. In the cases where c iv i l works contracts are estimated to cost less than US$ 50,000 equivalent may be procured under lump-sum fixed price contracts awarded on the basis o f quotations obtained from at least three qualified domestic contractors in response to a written invitation. The invitation shall among other things include a detailed description o f the works, including basic specifications, relevant drawings and bill o f quantities where applicable, the required completion date and a basic form o f agreement acceptable to the Bank. A sufficient bid submission period will be allowed and the bids will be opened in public. Before the f irst bidding package i s solicited, the draft solicitation letter and other relevant document to be used, will be reviewed and cleared by the Bank. The award shall be made to the lowest evaluated responsive contractor who has appropriate experience and resources to successfully complete the contract.

1 1. To ensure that these limits are observed, each quarterly progress report o f the project will include a table setting out the number and value (in US$ equivalent) o f contracts issued through Local, International Shopping, LIB, N C B , Direct Contracting, and Force Account, during the quarter as well as the cumulative total value (in US$ equivalent) o f contract under each o f these two procedures from the date o f the project start-up.

Consulting Services (US$4.00 million)

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12. These services include (i) engineering services for the preparation o f feasibility studies, detailed design, tender documents, supervision o f works, and data collection; (ii) technical assistance for advisory services in procurement, audit, accounting, and financial management; (iii) strengthening institutional capacity through the establishment o f adequate policy regulatory and institutional framework; (iv) short-term consultant services on specific technical matters including road safety audits, (v) (a) engineering services for the preparation o f feasibility studies, detailed design, tender documents, supervision o f works, and data collection; (b) technical assistance for advisory services in procurement, audit, accounting, and financial management; (c) strengthening institutional capacity through the establishment o f adequate policy regulatory and institutional framework; As a rule, consultant services will be procured through Quality and Cost Based Selection (QCBS) methodology. All consultancy assignments estimated to cost US$lOO,OOO or more wil l be procured through QCBS and will be advertised in Development Business and in at least two national newspapers. In addition, the scope o f the service may be advertised in an international newspaper o r magazine seeking "expressions o f interest." In the case o f assignments estimated to cost less than US$200,000, the assignment may be advertised nationally and the shortlist may be made up entirely o f national consultants in accordance with section 2.7 o f the Consultant Guidelines (ie that at least three qualified national f i r m s are available in the country and foreign consultants who wish to participate are not excluded from consideration). Consultant services estimated to cost less than the equivalent o f US$ 50,000 may be contracted by comparing the qualifications o f consultants, who have expressed an interest in the j ob or who have been identified. All consulting services o f individual consultants will be procured under individual contracts in accordance with the provisions o f paragraphs 5.1 to 5.3 o f the Guidelines. Consultants for assignments o f a standard routine nature such as audits and engineering design o f simple works, may be selected on the basis o f Least-Cost method.

Training ( US$0.50 million)

13. At the beginning o f each year, NRB will submit their proposed staff development plans for that twelve month period. The plans would indicate the persons or groups to be trained, the type o f training to be provided, the level o f competency that each participant would be expected to achieve through this training, the provider or location o f the training, and i t s estimated cost. Some training would take place in-country, either at registered training institutions or by contracting national, regional or international experts to provide specialized training. Training and workshops will be carried out on the basis o f approved annual programs, to be review by IDA.

Prior Review Threshold (Table B)

IDA Prior Review

14. Table B provides the prior review thresholds. Each contract for goods estimated to cost US$250,000 equivalent or more will be subject to IDA prior review as per paragraph 2 o f appendix I o f the Guidelines. Also each c iv i l works contract estimated to cost US$500,000 equivalent will be subject to IDA prior review. The f i rst three National Competitive Bidding

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packages for c iv i l works and the f i rst three civi l works contract using shopping procedures shall also be subject to IDA prior review. All Pre-qualification packages will be subject to IDA prior review. Other contracts will be subject to post review in accordance with paragraph 4 o f Appendix I o f the Guidelines. All consulting contracts costing US$lOO,OOO equivalent or more for f i r m s and US$50,000 and more for individuals will be subject to IDA prior review. Any exceptional extensions to non-prior review contracts raising their values to levels equivalent o r above the prior review thresholds will be subject to IDA clearance. All training contracts costing US$15,000 equivalent or more per contract, will be subject to IDA prior review. The prior review thresholds will be considered for revision on an annual basis based on the assessment o f the performance o f the coordinating and implementing agencies responsible for handling procurement functions.

Expenditure Category

Procurement methods (Table A)

I Procurement Method

ICB NCB Othei N.B.F. Total Cost

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

_ _ _ _ _ _ _ _ _ _ ~

1. Works

2. Goods

3. Services

4. Training

5. Others (Operating Cost)

Total

42.50 5.10 0.60 242.58 290.78 (42.50) (0.50) (0.50) (0.00) (43.50)

0.00 0.90 1.10 0.50 2.50

0.00 0.00 7.00 76.47 83.47 (0.00) (0.00) (4.10) (0.00) (4.10) 0.00 0.00 1.61 0.00 1.61

(0.00) (0.00) (0.40) (0.00) (0.40) 0.00 0.00 0.00 2.50 2.50

42.50 6.00 10.31 322.05 380.86 (42.50) (1.40) (6.10) (0.00) (5 0 .OO)

(0.00) (0.90) (1.10) (0.00) (2.00)

(0.00) (0.00) (0.00) (0.00) (0.00)

I' Figures in parentheses are the amounts to be financed by the IDA Credit. All costs include contingencies.

2/ Includes civi l works and goods to be procured through national shopping, consulting services, services o f contracted staff o f the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

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

I (6.90) I (0.00) I (0.00) I (0.00) I (0.10) I (0.00) I (0.00) I (7.00) I I \

Including contingencies

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Credit.

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Prior review thresholds (Table 6)

>250,000 < 250,000 < 30,000 < 100,000

> 100,000 < 100,000 > 50,000 < 50,000

Table B: Thresholds for Procurement Methods and Prior Review'

First three contracts none

ICB NCB Shopping UN Agencies

QCBS CQI L C

I C I C

2. Goods

3. Services Firms

Individuals

All First three Contracts None- Post Review

none

ALL None- Post Review

ALL None- Post Review

4. Miscellaneous I I I 5. Miscellaneous I I I 6. Miscellaneous I I I

Total value of contracts subject to prior review: US$42 million (84% o f the Credit amount)

Frequency o f procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits)

Overall Procurement Risk Assessment: Average

. .. ~~ . - I

Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.

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Annex 6(B): Financial Management and Disbursement Arrangements ZAMBIA: Road Rehabilitation and Maintenance Project

Financial Management

1. Summary of the Financial Management Assessment 1.1 Country Issues Recent studies by the Bank have concluded that “the challenges faced by

Zambia in public expenditure management have been longstanding and will require targeted efforts as well as a strong degree o f political will to address”. Furthermore, the overall conclusion o f the joint CFAA led by the Bank in conjunction with other donors i s that “there remain substantial weaknesses and risks within the public financial management system o f Zambia” The CFAA specifically identified problems o f lack o f compliance or enforcement o f existing accounting rules and finance regulations; weak institutions o f accountability: the office o f the Auditor General and Parliament are ill-equipped to provide adequate oversight because o f lack o f funding, low technical capacity, and insufficient authority to ensure follow up; excessive discretion given to the Minister o f Finance to change the budget and the agreed spending priorities without further recourse to parliament or timely accounting for it; poor information management and reporting: reports on government commitments and expenditures are usually late and incomplete; and lack o f transparency concerning the cost o f public sector activities: because the annual budget under-estimates the cost o f functions, i t presents a misleading picture o f the economic trade-offs. With the help o f the Bank and other cooperating partners Government i s trying to address al l these problems o f public finance management and accountability.

1.2 Strengths and Weaknesses Weaknesses The main strengths o f the program financial management system (FMS) are: NRB has reliably complied with both i t ’s statutory and donors financial accountability requirements under ROADSIP; NRB has a proven S U N accounting package that has worked very well; the key accounting staff are adequately experienced and qualified; unqualified audit reports have consistently been submitted and within the due dates; Road Rehabilitation and Maintenance Project i s a follow on project that will utilize the existing FMS and staff who have experience with the Bank procedures and requirements. On the other hand the FMS i s weakened by: lack o f an internal audit function; lack o f budgevplan figures to compare the actual figures with, the inability to generate FMRs directly from the system and the link o f financial information with the project’s physical progress. Even though the S U N accounting package has the capability to handle this we understand there was an oversight at initial installation. This has been discussed with NRB to ensure that these weaknesses are addressed in the Road Rehabilitation and Maintenance Project.

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1.3 Implementing Entity Whi le there are many implementing agencies, NRB i s the P I U that will control al l the funds under the program. NRB i s a statutory body that was established in 1994 to take charge o f the road fund that was created through the fuel l evy paid by fue l users. NRB under ROADSIP controlled all the funds which included those from Road fund, donors and IDA Credit. NRB coordinated and managed the program with the various Ministries and Agencies involved in the implementation: MCT, MWS, MLGH, ZAMSIF, N C C and NRSC. In May 2002, the Government approved the Transport Policy Document, which will have a strong impact o n the management o f the road sub-sector by the creation o f the Road Authorities, RDA, NRFA and RTSA. Nevertheless, implementation arrangements existing under ROADSIP will continue until the new institutions are fully operational. Therefore, NRB will continue with the overall responsibility for program coordination and their role i s critical for a smooth transition to NRFA

1.4 Staffing NRB has a 3 staff accounts department. Two accountants are professionally qualified, assisted by an accounts assistant with an accounts diploma. There i s an Accountant each responsible for, donor funds (ROADSIP) and the Road Fund. The three accounts staff are conversant with the Bank’s financial management requirements through their involvement in ROADSIP implementation and attendance at various training courses in FM and disbursements organized by the Bank. The staff are capable o f carrying out the accounting and reporting needs o f the project as has been demonstrated under ROADSIP. However, the department i s under staffed at accounts assistant level. Ideally each accountant should have an assistant. Therefore, under the Road Rehabilitation and Maintenance Project, the requirement to recruit an accounts assistant to ease the pressure in the deparhnent will be assessed as part o f the Institutional Study.

1.5 Accounting Policies and Procedures The principal goal o f the Financial Management System (FMS) i s to support management in their deployment o f limited resources with the objective o f ensuring economy, efficiency and effectiveness in the delivery o f project outputs. Specifically, the FMS must be capable o f producing timely, understandable, relevant, and reliable financial information that will enable management to plan, implement, monitor, and appraise the project’s overall progress report towards the achievement o f i t s objectives.

1.5.1 NRB applies the International Accounting Standards(1AS) adopted by ZICA as Zambia Accounting Standards. NRB accounts for al l transactions on a cash basis even though this i s not in compliance with the Zambia Accounting Standards, i s considered adequate because the Project operates on a reimbursement basis after the expenditure i s incurred.

1.5.2 Information Systems NRB has a computerized accounting system based on the Sun Systems Software. Currently, i t has three modules only: the General Ledger, Multi currency and the Vision executive. The general ledger module includes all the conventional accounting: Cash Book and Bank reconciliations; budgeting; and financial reporting. The multi currency module allows the financial reports to be produced in more than one currency, which includes the local currency, the Kwacha. The vision module incorporates the report writer, which allows for the automatic production o f FMRs as required, directly by the system. The same accounting system wil l be used for Road Rehabilitation and Maintenance Project. The chart o f accounts i s adequate but i t will have to be reworked and a new database created, based on the activities for Road

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Rehabilitation and Maintenance Project. Learning from the ROADSIP experience, every care must be taken from the start to ensure that the budget/plan data and al l the other information needed to allow for the automatic production o f FMRs directly by the system, and proper design to link financial information with the programs physical progress, are thought o f and programmed from inception. Furthermore, NRB should check the S U N Systems Software capacity or flexibility to have customized reports. Above all, NRB needs to develop the FM system that will be able to serve al l the Donors, have uniform reporting formats and produce Consolidated FMRs which include al l funds received under the program. While the Sun accounting software has a fixed assets module that would allow for fixed assets to be recorded electronically, NRB does not have th is model and maintains manual fixed assets registers. In order to enhance the control and safeguard over fixed assets it i s recommended that NRB considers adding the fixed assets module to i ts FMS.

1.5.3 Budgeting NRB have procedures in place to ensure that the budgets are properly prepared and compiled. However, the budget are mainly financial and lack any physical targets. The budgeting process features include: actual expenditures are compared with budget on a quarterly basis and explanations are sought for significant variances and prior approval for variations from budget are required; al l budgets have to be approved by the Board. Nevertheless, improvements are needed in the details provided for the budget. Sufficient activity details need to be provided to allow for meaningful monitoring o f subsequent performance.

1.5.4 As part o f the PIM, an Accounting and Financial Procedures Manual(AFPM) exists which documents, the sources o f funds; IDA Special Accounts, disbursement & replenishments requirements; payment procedures; budget guidelines; financial reporting and auditing arrangements employed by NRB. The manual which was produced in 1998 needs to be updated in view o f any shortcomings experienced under ROADSIP. In addition the manual should incorporate the changes envisaged under Road Rehabilitation and Maintenance Project. The manual should include major accounting policies and procedures, accounting and internal control system including description o f functional responsibilities o f the accounting staff, a brief description o f the computerized (SUN) accounting system; reporting requirements; filing procedures; and specimen o f the various forms in use and the samples o f the agreed reporting (FMR) formats. The updating o f the procedures manual i s an important factor in determining the adequacy o f Road Rehabilitation and Maintenance Project financial management system. In th is regard, updating o f the manual should be included as a condition o f effectiveness.

1.6 Reporting and Monitoring Program monitoring wil l take the following forms: Committee o f Ministers oversight o f NRB; NRB Board Oversight o f NRB Management; the Bank Supervision Missions; and the Annual external audit o f the Program finances. The following quarterly FMRs, to be generated from the FMS, will be produced for the Committee o f Ministers, NRB Board, the Bank and other Donors:

Financial Reports: 0 Sources and Uses o f Funds (by funding source and expenditures by Credit Category and Component) 0 Uses o f Funds by program Component/Activity

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0

0 Procurement Monitoring Reports Physical Progress Report linked to financial information (Output Monitoring)

The formats for the above reports to be agreed [ proposed sample II of Annex A - Financial Monitoring Reports For Bank-Financed Projects: Guidelines For Borrowers - OPCS, November 30, 2001 by negotiations.] NRB will be required to demonstrate ability to produce these reports by credit effectiveness.

1.6.1 Project Financial Statements In addition to the periodic quarterly monitoring reports, the Project will produce annual Project Financial Statements for analytical and audit purposes. These Financial Statements (outline o f the expected contents was agreed during negotiations) will under the Cash Basis o f Accounting comprise at the minimum o f the following:

a) A Consolidated Statement o f Receipts and Payments, which recognizes al l cash receipts, cash payments and cash balances controlled by the entity; and separately identifies payments made on behalf o f the entity by third parties; b) Additional disclosure note o f amounts received in Development Assistance ( Attachment 2 on page 14 - Guidelines: Annual Financial Reporting And auditing For the Bank - Financed Activities); c) Significant Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement of Cash Receipts and Payments being cross referenced to any related information in the notes. Examples o f th is information include:

5 A summary o f fixed assets by category o f assets 5 A summary o f accounts receivable and accounts payable;

the intended purposes as specified in the Development Credit Agreement; and

e) Any supplementary information or explanations that may be deemed appropriate by management to enhance the presentation o f a "true and fair view."

d) A Management Assertion that Bank hnds have been expended in accordance with

1.7 Supervision Plan Financial management supervision will be carried out regularly by the project FMS at least twice a year. The FMS will also review the, h l f i l lment o f any Financial Management effectiveness/disbursement conditions; financial component o f the quarterly FMRs as soon as they are submitted to the Bank; and the annual Audit Reports and Management letters from the external auditors and follow-up on material accountability issues by engaging with the TTL, Client, andor Auditors.

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1.8 Overall Finacial Management Assessment Conclusion From th is analysis and evaluation, the conclusion i s that despite some identified weaknesses, the financial management system as a whole satisfies the Bank's OP/BP 10.02 minimum requirements. The significant weaknesses and how these will be addressed are summarized below:

1.

2.

3.

The F M S does not incorporate planhudget figures

The FMRs are not directly generated from the F M S

There i s n o Internal Audit function

Addressed in thefinancial management action plan.

Addressed in thefinancial management action plan.

m

management action plan. To be addressed in thefinancial

Audit Report Consolidated Entity Financial Statements o f NRE3 with

2. Audit Arrangements

Due Date

!

2.1 NRB does not have an internal audit fbnction and the lack o f it poses a high fiduciary risk. I t i s recommended that NRB and the to be established NRFA, seriously consider the establishment o f an internal audit function. This i s particularly so because o f the relatively small accounts department ( total o f 4 staff) which may not allow for adequate segregation o f duties and operation o f an effective internal control system.

Internal Audit

2.2 External Audit An external audit will be carried out annually by the Auditor General (AG), who has outlined in the Constitution o f Zambia Ac t 1996, i s responsible for the external auditing o f al l Government Funds, though in practice, because o f capacity constraints, the AG frequently appoints private sector auditors acceptable to IDA on approved terms o f reference . In such cases, the private sector auditor reports directly to the AG who retains the overall signing responsibility for the audit opinion.. The auditor will conduct the audit according to International Standards on Auditing and agreed TOR acceptable to IDA. The auditor will express an opinion on the consolidated financial statements based on the Bank's new audit policy. The auditor for the project should be appointed shortly after effectiveness. Reasonable audit costs can be financed from the Credit on request from the borrower. Financial audit reports will be submitted to IDA no later than six months after the end o f the fiscal year.

2.2.1 Management Letter In addition to the audit report, the auditor wil l be required to prepare a separate report to Management, giving significant weaknesses that the auditor came across during the course o f the audit that are not reflected in the audit opinion. These may include weaknesses in the internal control systems, inappropriate accounting policies and practices, issues regarding general compliance with broad covenants such as implementing the project with economy and efficiency, and any other matters the auditor considers should be brought to the attention o f the borrower, and providing recommendations for improvements.

2.2.2 Audit reports required The following audit reports would be required

I I I

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disclosures for donor fimding as per new audit pol icy [Attachment 2- Guidelines: Annual Financial Reporting And Auditing For the Bank - Financed Activities -June 30,2003 page 14.)

3. Disbursement Arrangements

30 June 2005

3.1 Disbursements from IDA will initially be transaction based. This means disbursements will be made on the basis o f documented expenditures. After credit effectiveness IDA will at the borrower’s request ( by submitting Withdrawal Application on Form 1903), advance the borrower from the proceeds o f the Credit a predetermined amount (usually an amount to cover 4 months average estimated expenditure) as Init ial Advance to the NRB operated Special Account (Account No.1 referred to under the h d s f low chart above). The Special Account (SA) will be used to finance the IDA’s share o f the program eligible expenditures. This method o f disbursing funds facilitates the implementation o f the program as the funds are readily available with the borrower. The Transaction based disbursement mechanisms will include direct payment, special commitments, reimbursements and use o f SOE. Direct payments involves full documentation payment request by the borrower to a third party for works, goods and services. Payments can also be made to a Commercial bank against expenditures under a letter o f credit by IDA giving a special commitment to pay after satisfying agreed conditions. This method stops commercial banks from getting SA funds as collateral to issue the LC because the Bank’s rules do not allow Credit proceeds to be held as collateral. The direct payment and special commitment to qualify the minimum application size should not be below 20 % o f the advance in the Special Account. When the borrower pays IDA’s share o f eligible expenditure, the borrower qualifies to seek reimbursement o f th is expenditure from the Bank.

3.2 The following table outlines the supporting documentation required for Transaction-based disbursement.

Reimbursement 1. For contracts above the pr ior review threshold:

0 Summary Sheet and full supporting documentation Invoice f rom the supplier Evidence o f payment to the supplier Proof o f shipment o f goods or delivery o f services

2. For contracts below the prior review threshold: 0 Statement o f Expenditure (supporting documentation as noted above i s retained by the PIU for inspection by the Bank and extemal auditors, upon request)

For goods: Invoice f rom the supplier and proo f o f shipment o f goods For services: Payment certificate and proo f o f delivery o f services

Direct Payment 3. 4. Special Account (SA) Replenishment 5. SA reconciliation statement 6. SA bank statement

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7. Replenishment documentation (as noted above)

3.3 The borrower will have the option o f using Report-based (FMR) disbursements instead o f the Transaction-based method. Report-based disbursement offers more flexibility. Under Report-based disbursement arrangements, a forecast o f project expenditures i s agreed between the Borrower and the Bank, covering the current and next FMR reporting period. Thereafter and upon effectiveness, aggregate disbursement requests not exceeding this forecast amount are payable by the Bank upon demand by the Borrower. Supporting documentation for these disbursements i s submitted with the subsequent FMR and reviewed by the Bank to confirm eligible expenditures during the period covered by the FMR. The FMR also gives a new forecast for the next two FMR reporting periods.

3.4 The following i s the documentation required for the Report based disbursements.

a) Required minimum FMR content on financial, procurement and physical progress, plus: b) Statements containing Institutional Information. c) Summary Statement o f Special Account Expenditures for contracts subject to Prior Review. d) Summary Statement of Special Account Expenditures not subject to Prior Review. e) Special Account Activity statement. f ) Special Account bank statement. g) Forecast of expenditures for the next two FMR reporting periods.

3.5 NRB will benefit from the adoption o f Report based disbursements because o f the high value civil works contracts expected under the program. Report-based disbursement arrangements among other reasons are intended to facilitate disbursements o f the size and frequency needed by Borrowers for smooth project implementation and speed disbursements by reducing the processing time for most withdrawal applications and avoiding disbursement interruptions while FMRs are being reviewed by the Bank. Nonetheless, for NRl3 to benefit from t h i s flexible method of disbursement, the accounting and financial management capacity needs to be strengthened, particularly on the ability for FMRs to be produced directly by the system. Therefore, i t i s in the best interest o f NRB to work towards graduating to report based disbursement to be able to access adequate h d s for smooth implementation. Consequently, it i s proposed that NRB graduation to Report based disbursements be included as a dated covenant o f say 90 days after credit effectiveness.

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3.6 Disbursement and withdrwal procedures are detailed in the Bank Disbursement Handbook. All disbursements will be governed by the conditions in the Development Credit Agreement and the procedures defined in the Disbursement Letter that will be sent to the borrower after effectiveness. This will include the remedies available to IDA in cases o f ineligible expenditures made from the SA, the SA account remaining inactive, and when the reporting requirements are not complied with.

Expenditure Category Civ i l Works routine maintenance

Civi l Works Periodic maintenance C iv i l Works Rehabilitation

3.7 In order to finance preparatory studies for the project, the Project will include retro-active financing to a value o f US$ 500 000. This instrument will be used to fund engineering studies for the planning and design o f works envisaged under this project (Components 1 and 2) as well as the support for the institutional changes defined as Component 3 o f the project.

Amount in US$million Financing Percentage 0.00

1 .oo 90% o f expenditure 90% o f expenditure 4 1 .OO

3.8 Pooling o f Funds IDA and the other cooperating partners involved in the Road sector in Zambia have shown interest in having a common pooling o f funds arrangement, to finance a portion o f the periodic maintenance component. The donors have come up with a draft paper on the proposal for pooling o f funds to one Road Fund account. On finalization a l l stakeholders are expected to s ign a Memorandum o f Understanding to bring the pooling arrangements into effect. However, these arrangements are not expected to come into effect immediately because the Government has to meet certain conditions. These conditions include: the establishment o f the three Road agencies, NRDA, NRFA and RTSA; setting up o f new arrangements for a Road Fund in which GRZ, IDA , Donors and other road user charges, direct funds solely to the Road Fund, thereby avoiding the current fragmentation o f the funds flow.

C iv i l Works Rural Roads C iv i l Works Road Safety Goods

Allocation of credit proceeds (Table C)

0.50 90% o f expenditure 0.50 90% o f expenditure 2.00 100% o f foreign expenditure and 90%of

local exnenditure

Table C: Allocation of Credit Proceeds

Consultants' services for design and supervision Consultants' services for Institutional study Consultants' services (Technical Assistance)

1 S O 100% o f expenditure

2.00 100% of expenditure

1 .oo 100% o f expenditure

Total Project Costs with Bank Financing

Total

Use of statements of expenditures (SOEs):

Replenishment to the SA for expenditures incurred wil l be made on the borrower's request. This involves submitting a withdrawal application on a prescribed Form 1903 to be signed by designated signatories at the MoFNP. The application i s to be supported by documentation evidencing the expenditure, except for contracts, each costing less than ( i ) US $500,000 for c iv i l works; ( ii ) US $250,000 for goods; ( iii ) U S $100,000 for consulting firms; and ( iv ) US $50,000 for individual consultants which may be claimed on the basis o f SOE. NRB will retain the documentation surporting expenditures claimed under SOEs and the IDA reserves the right to examine these documents during supervision missions and SOE reviews when considered necessary.

50.00

50.00

Special account: For the purposes o f IDA funds, NRB will maintain a Special account at a Commercial Bank acceptable to IDA. After credit effectiveness IDA will at the borrower's request ( by submitting in Application For Withdrawal on Form 1903), advance the borrower from the proceeds o f the Credit a predetermined amount (usually an amount to cover not more than 4 months' average projected expenditures from the Special Account.). The Special Account (SA) will be used to finance the IDA's share o f the program expenditures. This method o f disbursing fbnds facilitates the implementation of the program as the hnds are readily available with the borrower. Withdrawal applications to replenish the SA should be submitted at regular intervals, preferably monthly or any shorter period should the circumstances dictate. SA withdrawal applications should be supported by a SA reconciliation statement, SA bank statement, summary sheets and SOEs (see details on documentation requirements above under disbursement arrangements). As far as it i s practicable all IDA's share o f eligible expenditures that are below the minimum application size ( this i s stipulated by the Bank but usually 20 YO o f the total advanced to the SA) should be paid through the SA.

The following two documents, which are distributed by the Loans Disbursement section o f the Bank, should enable NRB to keep i t s records up-to-date, in relation to the SA and the Credit ledger account. The Payment Advice when the Bank executes a payment will be sent to NRB promptly giving all the payment details; A Monthly Disbursement Summary produced in two parts will give the following informamtion: Part I: Opening balance and l i s t o f all transactions under the Credit during the previous month, including al l applications paid or refunds processed, along with value dates, currencies and amounts charged to the Credit; and Part 2: End-of-month balances for each category and for the Credit as a whole, as well as amounts set aside to cover Special Commitments.

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Financial Management Action Plan [ Agreed with NRB]

NFU3 has agreed to take the following measures to address the identified weaknesses.

Ac t ion Reinstate S U N accounting software package maintenance contract with Next Technology Ltd

Develop new chart o f accounts

Agree financial monitoring reports formats Input budget data/Create new data base

Demonstrate readiness o f the FMS to produce reports (FMRs, financial statements) Update the financial procedures manual

Develop and agree with IDA the terms o f reference for the conduct o f external audit. Prepare a request for proposals (rQ) for the external audit consultancy Establish an internal audit fimction

Open Special and Project Bank Accounts; transfer the agreed init ial amount to the Proiect account

Completion Date

27 February 200.

30 April 2004

29 January 2004

30 April 2004

31 M a y 2004

31 M a y 2004

Ongoing

Ongoing

Comment To assist with the rework ing o f the char t o f accounts/create new database. Ongoing. wil l be completed before effectiveness Completed

Ongoing. wil l be completed before effectiveness Will fol low immediately after stel, 4 Ongoing. will be completed before effectiveness Effectiveness Condi t ion

Effectiveness Condi t ion

Will be reviewed and implemented as )a r t o f current inst i tut ional changes

condit ion

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Annex 7: Project Processing Schedule ZAMBIA: Road Rehabilitation and Maintenance Project

Project Schedule Planned Actual Time taken to prepare the project (months)

First Bank mission (identification)

IAppraisal mission departure I 10/20/2003 I 12/20/2003 I

9 41 09/27/2000 09/27/2000

I Negotiations I 01/27/2004 I 02/02/2004 I Planned Date of Effectiveness 0713 112004

Prepared by: Stephen Brushett

I Name

Preparation assistance:

Stephen Brushett Benjamin Gericke George Banjo Subhash Seth Ntombie Siwale Ajay Kumar Bwalya Mumba Fenwick Chitalu

avies Makasa ~D Frederick Kalema-Musoke ~Colin Rees I Edith Mwenda Modupe Adebowale

Bank staff who worked on the Droiect included: Speciality

Senior Transport Specialist Team Leader Senior Transport Specialist Operations Officer Program Assistant Senior Transport Economist Procurement Officer Financial Management Specialist Highway Engineer Consultant Environmental Specialist Senior Legal Counsel Senior Disbursement Officer

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Annex 8: Documents in the Project File* ZAMBIA: Road Rehabilitation and Maintenance Project

A. Project Implementation Plan

B. Bank Staff Assessments

C. Other

1. Draft report on the Financial Strategy and Finalization o f the Road Rehabilitation and Maintenance Project Bankable Document;

2. Bankable Document; 3. Final Study report (Volumes I, 11, IIa) on the Rehabilitation o f Road T3 between

Chingola-Kasumbalesa - Phase I, and Design Packages 1 and 2; 4. Technical Audit o f Feeder Roads Full and Accessibility Improvement Works: Draft Final

Report, Volume 1 and 2.

*Including electronic files

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Annex 9: Statement of Loans and Credits ZAMBIA: Road Rehabilitation and Maintenance Project

03-Feb-2004 Difference between expected

and actual disbursements' Original Amount in US$ Millions

Project ID FY Purpose iBRD IDA Cancel. Undisb. Orig Frm Rev'd PO70962 2003 Copperbelt Environment 0.00 19.00 0.00 40.56 .0.61 0.00 PO03248 2003 HlViAlDS (ZANARA) 0.00 0.00 0.00 48.11 -2.11 -1.67 PO80612 2003 Emergency Drought Recovery Project 0.00 30.00 0.00 28.16 30.07 0.00 PO70122 2001 Regional Trade Fac. Proj. .Zambia 0.00 15.00 0.00 11.75 5.75 0.00 PO57167 2001 TEVET 0.00 25.00 0.00 24.74 -1.69 0.00 PO03227 2001 ZAMBIA RAILWAYS RESTRUCTURING PROJEC 0.00 27.00 0.00 4.78 3.87 0.00 PO50400 2000 PUB SVC CAP (PSCAP) 0.00 28.00 0.00 9.68 9.16 0.00 PO63584 2000 Social Investment Fund (ZAMSIF) 0.00 64.70 0.00 37.34 12.89 0.00 PO64064 2000 MINE TOWNSHIP SERVICES PROJECT 0.00 37.70 0.00 22.45 19.02 0.00 P 0 0 3 2 4 9 1999 Basic Ed. Subsect. Inv. Pgr 0.00 40.00 0.00 16.63 16.97 3.05 PO03236 1998 ZM NATIONAL ROAD 0.00 70.00 0.00 10.89 10.91 0.68 PO35076 1998 Zambia POWER REHAB 0.00 75.00 0.00 25.45 25.47 10.83 PO40642 1996 ERIPTA 0.00 23.00 0.00 12.51 -5.09 -5.09

Total: 0.00 454.40 0.00 293.03 124.63 7.80

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ZAMBIA STATEMENT OF IFC’s

Held and Disbursed Portfolio June 30 - 2003

In Mil l ions US Dollars

Committed Disbursed

FY Approval 1998 2001 1998 1999 1991 200 1 2000 1912113 2000 1998 1999100

Company AEF Amaka Cotton AEF Chingola Htl AEF Drilltech AEF Esquire AEF JY Estates AEF Michelangelo APC Ltd. Bata Shoe ZA Marasa Holdings NICOZAM Zamcell

IFC Loan Equity Quasi 1.30 0.00 0.00 0.91 0.00 0.00 0.12 0.00 0.15 0.23 0.00 0.00 0.89 0.00 0.00 0.20 0.00 0.00 1.14 0.00 0.00 0.00 0.00 0.00 4.05 0.00 0.00 0.00 0.18 0.00 1.98 0.44 0.00

Partic 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

IFC Loan Equity Quasi 1.30 0.00 0.00 0.91 0.00 0.00 0.12 0.00 0.15 0.23 0.00 0.00 0.89 0.00 0.00 0.20 0.00 0.00 1.14 0.00 0.00 0.00 0.00 0.00 4.05 0.00 0.00 0.00 0.18 0.00 1.98 0.44 0.00

Partic 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 10.82 0.62 0.15 0.00 10.82 0.62 0.15 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

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Annex I O : Country at a Glance ZAMBIA: Road Rehabilitation and Maintenance Project

POVERTY and SOCIAL

2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (At/as method, US$ billions)

Average annual growth, 1996-02

Population (%) Labor force (%)

Most recent estimate (latest year available, 1996-02) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Chiid malnutrition (% of chi/dmn under 5) Access to an improved water source (% of population) illiteracy (% ofpopulation age 75+) Gross primary enrollment I% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

GDP (US$ billions) Gross domestic investmentlGDP Exports of goods and services/GDP Gross domestic savingslGDP Gross national savings/GDP

Current account balance/GDP Interest paymentdGDP Total debffGDP Total debt service/exports Present value of debtlGDP Present value of debtlexports

1982

3.9 16.8 27.7 8.0 1.1

-14.5 2.2

94.7 32.0

1982-92 1992-02

GDP 1.1 1.5 (average annual growth)

Zambia

10.5

2.1 2.6

73 40 37

112 24 64 20 78 80 76

1992

3.2 11.9 36.4

0.3 -10.6

3.1 210.8 28.9

2001

4.9

Sub- Saharan

Africa

688 450 306

2.4 2.5

33 46

105

58 37 86 92 80

2001

3.6 20.0 27.1 9.8 5.4

1 .o 155.8 12.0

110.9 373.7

2002

3.0 1.3

Low- income

2,495 430

1,072

1.9 2.3

30 59 81

76 37 95

103 87

2002

3.7 18.0 29.3

3.8 0.1

3.1 147.1 45.5

2002-06

4.1 GDP per capita -1.9 -0.9 2.9 2.7

STRUCTURE of the ECONOMY

I% of GDP) Agriculture Industry

Services

Private consumption General government consumption imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

Manufacturing

1982

14.9 39.0 20.6 46.1

64.3 27.7 36.5

1982-92

1.6 2.0 5.7 0.3

2.7 1.4

-3.8 -1.4

1992

23.6 49.0 37.2 27.2

84.7 15.0 48.0

1992-02

4.2 -2.7 1.8 3.9

0.8 -5.3 7.5 2.6

2001

22.1 25.6 11.1 52.3

77.2 13.0 37.3

2001

-2.4 9.2 4.2 4.9

-3.6 44.7 15.9 27.2

2002

22.0 26.3 11.6 51.7

84.4 11.7 43.5

2002

-4.1 11.3 5.8 3.2

4.4 -1 1.9 -7.6 3.5

Development diamond'

Life expectancy

T GNI Gross

primary nroliment

per I .: capita

Access to improved water source

Zambia ~~

~ Low-income arom

Economic ratios'

Trade

T

Indebtedness

Zambia Low-income group

-

Growth of investment and GDP ( O h )

20 T

10

0

10

Growth of exports and imports (Oh) 40 - I

I E X D O ~ ~ S

'The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond wiil be incomplete.

- 80 -

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance I% of GDP, includes current grants) Current revenue Current budget balance Overall surplusldeficit

TRADE

(US$ millions) Total exports (fob)

Copper Cobalt Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold /US$ millions) Conversion rate IDEC, loca//US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD i DA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1982

6.1

1982

1982

1,044 1,291 -247

-399 -28

-561

623 -63

0.9

1982

3,665 348

12

334 43

0

69 176 57 39

0

61 27 19 9

25 -16

1992

197.4 165.6

18.4 -8.9

-12.6

1992

1,120 867 135 62

7.302 258 53

349

81 92 88

1992

1,204 1,586 -383

-32% -33

-76

178.9

1992

6,709 289 643

351 107

6

642 149 -13 45

0

253 174 72

102 41 61

2001

21.7 24.3

19.1 -0.5

-13.0

2001

884 504 86

203 1,253

10 220 460

65 87 74

2001

1,058 1,625 -567

-140 -20

-115

3,610.9

2001

5,671 17

1,869

129 10 12

271 121 54 72 0

40 126 13

114 9

105

2002

22.2 19.7

18.0 -1.5

-13.9

2002

945 520 39

213 1,204

11 247 325

60 88 68

2002

1,081 1,602 -521

-144 7

-187

306 4,398.6

2002

5,419 11

1,979

505 7

28

-17 -12

0 123 18

105 15 90

1 1 Inflation (%)

-GDP deflator +CPI

Export and Import levels (US$ mlll.) I 1,500 T

96 97 98 99 00 01

Exports W Imports

I Current account balance to GDP ( X ) 0 2 4 8 8

-10 -12 -14 -1 6 -1 8

Composition of 2002 debt (US$ mill.)

G: 175 A: F 138

4 . IBRD E . Bilateral 3 - IDA D. Other multilateral F. Private S . IMF G - Short-tern

'Note: I nis tame was proaucea trom the uevelopment tconomics central aataDase.

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Additional Annex 1 ICurrent Institutional Reforms in the Road Sector ZAMBIA: Road Rehabilitation and Maintenance Project

1. Introduction

The Government o f Zambia published i t s Transport Policy in M a y 2002 after allowing for significant public participation beforehand. This document provides a clear definition o f the policy changes required and to be implemented in the Transport Sector in Zambia. The Policy focuses on all transport modes and, due to i t s relative importance to the Zambian economy, details several initiatives in the road sector. O f particular importance to the Road Rehabilitation and Maintenance Project i s the impact the three new Agencies, the National Road Fund Agency (RFA), the Roads Development Agency (RDA) and the Road Transport and Safety Agency (RTSA) will have on the management o f road traffic and infrastructure in future.

The purpose o f this Annexure i s to highlight the pertinent changes that will occur during the course o f the Road Rehabilitation and Maintenance Project and where the Bank should focus i t s support.

2. Transport Policy The situation analysis included in the 2002 Transport Policy observed that the road sector developed significantly since deregulation and the tax concessions on the importation o f passenger transport vehicles in 1994 and 1995. The road infrastructure, o n the other hand, deteriorated due to lack o f proper maintenance caused by, among others, the following five main causes attributed to these problem areas.

The inadequacy o f the road institutional framework. Inadequate and erratic f low o f funding. Poor terms and conditions for those charged with roads management. Lack o f clearly defined responsibilities. Lack o f managerial accountability.

This created an untenable situation and the Transport Policy Document states that the GRZ decided to resolve these problem areas through the following interventions in the road sector.

Institutional reform and human resources development. Improving management and systems for road agencies. Establishing a sustainable and sound financial base for the provision and maintenance o f

Moving away from the management o f roads as a social service to a fee for service, and Provision o f an acceptable, transparent structure for the management o f funds collected

road infrastructure.

for the construction and maintenance o f road infrastructure.

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The Policy Document also defines the required strategies for the other transport modes and finally supports the principles o f an integrated transport strategy, the introduction o f a transparent infrastructure pricing model that includes al l costs for the different modes, a strong environmental policy and access to the sector for women, children and the disabled.

Following the publication o f the Transport Policy the GRZ also promulgated three Acts to enable the reforms required to improve the problems experienced in the road sector. These are the National Road Fund Act, 2002 (No. 13 o f 2002) dealing with the establishment o f the National Road Fund Agency (NRFA), the Public Roads Act, 2002 (No. 12 o f 2002) dealing with, amongst others, the creation o f a Road Development Agency (RDA) that will manage the road network and the Road Traffic Act, 2002 (No. 11 o f 2002) dealing with, amongst others, the establishment o f a Road Transport and Safety Agency (RTSA).

Under ROADSIP the GRZ appointed consultants to assist with the establishment o f these three agencies. This process will not be complete once these three entities are established but will continue for at least three years during which the systems required for their proper functioning i s in place and operational. I t i s one o f the objects o f the Road Rehabilitation and Maintenance Project to ensure that these entities are set up correctly as a firm and accountable institutional structure managing the road sector in terms o f sustainable funding, proper road maintenance and road safety management.

3. National Road Fund Agency

The NRFA will supersede the current National Roads Board and will administer and manage the road fund and wil l be responsible for,

Recommending to the Minister fue l levy and other road user charges, Recommend to the Minister projects for funding, Allocate resources for the construction, maintenance and rehabilitation o f roads; for road

transport, traffic and safety management and other activities conducive or incidental to i t s functions, and

Publish the Annual Statements as required in the Act.

4. Road Development Agency

This Agency will manage the public roads in Zambia in terms o f development, maintenance and improvement and will provide similar guidance to other road authorities, e.g., local authorities. The RDA will also act as the Minister’s road manager in supporting the said roads authorities and dealing with road and traffic management.

I t i s important to note that this Ac t provides a clear move away from multiple roads authorities with the new RDA taking responsibility for the public road network consisting o f the primary, secondary and tertiary roads. The RDA may recommend to the Minister to appoint another party as a road authority to look after a specific portion o f the public road network.

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5. Road Transport and Safety Agency

The RTSA will replace two current Agencies, the Road Traffic Commission and the National Road Safety Council. I t will deal with both road transport and road safety issues and will be responsible for the following main functions,

Implement road transport, traffic management and road safety policies, Register motor vehicles, Issue drivers and other licenses and permits, Conduct road safety education and coordinate such programs, Transfer such portions o f the revenue, as the Minister may determine, to the NRFA, To continuously improve road safety standards through studies and research. These would

end up as policy change recommendations to the Minister and through amending the minimum road safety specifications for vehicles and public roads.

6. Advantages of the new Systems

The three new Agencies will have several advantages for GRZ when considering the problem areas highlighted in the Transport Policy Document. The main ones are the following,

There i s a clear division o f responsibilities, the NRFA i s responsible for funding, the RDA for road management, the RTSA for traffic and road safety management.

There i s a requirement o f the NRFA to provide a sustainable source o f funding for the construction, maintenance and rehabilitation o f the public road network.

The road management tasks are centred in the RDA. This will cut out much o f the currently experienced red tape.

In terms o f decentralisation the RDA may use local authorities, etc, as their road authorities to manage smaller portions o f the public road network. This will enhance the development o f sustainable ski l ls bases in rural centres.

7. Potential areas o f Conflict

The three Acts clearly show that the GRZ i s serious in i t s road reform process. However, the following potential problem areas remain and need to be managed as the new Agencies are established.

There i s a need to clearly motivate to the Minister any recommendations for RUC amendments to streamline the decision process. This could include a decision time l ine to encourage accountability. Also, what happens if the Minister does not approve the recommended changes?

There may be a national requirement to develop a National Road Master Plan to manage new developments and a Road Management System based on the principle o f least total cost to the road user.

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There i s a need to develop a maintenance contracting method that would support the objectives o f the Transport Policy in terms o f environmental, gender, disabled and aged provisions. These methods should also be designed to ensure a sustainable and competitive private sector.

There i s a need to co-ordinate al l the funding and disbursement requests. This may be done through a standard NRFA-procedure based on a formal agreement between all parties allowed to request funds from the Road Fund.

There i s a need to involve the road user in the consultations on road user charging levels. If the road user agrees, the Minister may be more inclined to accept RUC-recommendations. These consultations should take place o n the local level with recommendations channelled into the annual funding proposals.

There i s a need to ensure that capacity i s built throughout the new institutional framework. This capacity building should focus on maintenance planning, contract management and road safety management. It may even be advisable to include traffic law enforcement.

8. WayAhead

With the completion o f ROADSIP the institutional changes would not be complete yet. It would therefore be the responsibility o f the Road Rehabilitation and Maintenance Project-credit to ensure that al l the concems mentioned above are met. I t i s recommended that these are included as points for discussion at the various stages during the implementation o f the Road Rehabilitation and Maintenance Project.

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P

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