Azerbaijan: Road Network Development Program (Multitranche Financing Facility and Tranche 4)

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Lessons

More robust due diligence during the design stage is vital to producing reliable cost estimates.

Inaccurate preliminary design of the Masalli–Astara expressway under tranche 1 led to a flawed cost estimate. At tranche 1 project inception, the updated cost estimate showed that $160 million more was needed to complete all 3 sections of the expressway, initially estimated to cost $142 million. Sections B and C were subsequently removed from project 1’s scope and funded under tranche 3. The final cost of section A turned out to be 26% higher than the estimated cost of the entire Masalli–Astara highway. The removal of sections B and C resulted in excessive allocation under the contingency category, and the unused balance under this category was canceled. The experience highlights the critical importance of more robust due diligence in cost estimation during the project design stage. Prices of materials should be examined carefully by an independent expert in relation to neighboring markets and the unit costs of similar items in previously awarded contracts. When appraisal estimates of costs and benefits result in an economic internal rate of return close to the threshold value, design interventions may be explored to add robustness to the project economic efficiency (e.g., cost reduction through project phasing).

Project Cycle Stage:

Preparation

Including in the bid qualification requirements the disclosure of information on subcontractors is necessary to ensure timely mobilization and startup.

The inability of a contractor to secure the services of suitable local subcontractors caused the slow mobilization and deployment of workers and equipment at program startup. This aggravated the startup delays due to administrative and operational issues. The readiness checklist for tranche 1 was not yet developed at this program’s approval stage. To minimize the risk of startup delays, the qualification criteria for contractors could include a requirement for the disclosure of information on subcontractors. The contractual provisions related to contractor performance such as mobilization should also be strengthened.

Project Cycle Stage:

Implementation

Weak oversight and interagency coordination impacts the quality and timeliness of program/project results.

A facility steering committee (FSC) was not formally established, as designed at appraisal. This led to deficient interagency coordination. A realistic and workable interagency coordination framework could have been established at the outset of tranche 1 implementation. Insufficient program oversight by the national government affected results, specifically under tranche 3, and the timeliness of many outputs. Strong oversight and interagency coordination are particularly important, given institutional changes in Azerbaijan’s transport sector and the challenging agenda for road sector management improvement.

Project Cycle Stage:

Preparation

Implementation

Planning and implementation of local road works in Azerbaijan need to be better synchronized with those of expressways.

Azerbaijan has significantly improved its road infrastructure quality between 2006 and 2019. It was ranked 27th among 141 countries in quality of road infrastructure by the World Economic Forum’s Global Competitiveness Report 2019. In 2011, the country was ranked 63rd among 139 countries. The improvement can be primarily attributed to the newly constructed, high-quality expressways. To enhance local community benefits and promote domestic connectivity, the planning and implementation of local road works should be better synchronized with those of expressways. (Preparation, Implementation: road projects Azerbaijan)

Project Cycle Stage:

Preparation

Implementation

Background

In July 2006, the government of Azerbaijan developed its Road Network Development Program (RNDP), 2006–2015. The program aimed to improve the country’s road network, which was about 70% in poor condition, resulting in high transport costs, long delivery times, and traffic accidents. Such a condition constituted an impediment to non-oil sector growth and poverty reduction. The overall investment cost of the program was estimated at $3.4 billion. In support of the program, the government and the Asian Development Bank (ADB) entered into a framework financing agreement in August 2007 for a multitranche financing facility (MFF) with an aggregate principal amount not exceeding $500 million. ADB approved the MFF investment program in September 2007.

The program’s envisaged impact was sustained economic and social development in Azerbaijan through improved road transport corridors and enhanced cooperation with neighboring countries. Its expected outcome was development of an adequate, efficient, safe, and sustainable road network, linking the country domestically and internationally. Its intended outputs were improvement of the Masalli–Astara section of the Alat–Astara expressway connecting Baku, the capital, to Azerbaijan’s southern border; rehabilitation of local access roads; and enhanced management capacity of the AzerRoadService Open Joint Stock Company (ARS), later renamed the Azeravtoyol State Agency (AAY).

Under tranche 1 of the MFF, section A of the expressway was constructed, including the Lenkaran bridge; 39.5 kilometers (km) of local roads were rehabilitated; and 4 vehicle weigh stations were installed at different locations along the M1 and M2 highways. Tranche 2 supported the upgrading of the two-lane paved Ganja bypass road on the east–west road corridor connecting Baku to the Georgian border. Tranche 3, designed to rectify the highly inaccurate preliminary design of tranche 1, supported the construction of sections B and C of the expressway.

Tranche 4, the focus of this report along with the entire MFF, was designed to support the reconstruction of 4 bridges in the Ganja-Gazakh region and provide project implementation support to AAY. All 4 bridges, with a total length of 22 km were successfully completed. During implementation and at government’s request, ADB approved changes in the project scope to (i) demine old Soviet Union military camp areas surrounding bridges 2 and 3; (ii) relocate a gas pipeline at the approach of bridges 1, 2, and 4; (iii) construct a flood protection wall at bridge 2; and (iv) rehabilitate 5 local roads, totaling 41 km, in the project area. All these additional activities were likewise completed.

Successful completion of the MFF resulted in (i) increased mobility and accessibility to markets, jobs, and social services; (ii) greater opportunities for private sector participation in business activities; (iii) lower transport costs; (iv) improved regional connectivity; (v) increased trade flows and competitiveness; and (vi) improved governance in the road sector. Increased traffic on all roads indicates growth in economic activities in the project area.

Initially, the Ministry of Transport (MOT) was the executing agency (EA), and the ARS, an open joint-stock company under the ministry, was the implementing agency. Following the reorganization of the ministry in January 2016, the ARS renamed AAY, became the EA. In December 2017, the AAY was restructured into the State Agency of Azerbaijan Automobile Roads, a public legal entity. A project implementation unit within the AAY carried out the program and its tranche projects on a day-to-day basis.

Project Information

Project Name:

Road Network Development Program (Multitranche Financing Facility and Tranche 4)

Report Date:

August, 2020

Main Sector:

Transport

Country:

Azerbaijan

Project Number:

39176-013

Report Type: