70111
RUSSIAN FEDERATION
VOLGOGRAD OBLAST
REVIEW OF FEASIBILITY STUDY OF A PROPOSED BY-PASS
AROUND THE CITY OF VOLGOGRAD
March 2009
Final Report (Phase 1)
Reimbursable Technical Assistance
EUROPE AND CENTRAL ASIA
SUSTAINABLE DEVELOPMENT DEPARTMENT (ECSSD)
Document of the World Bank
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS AROUND
THE CITY OF VOLGOGRAD
TABLE OF CONTENTS
1.
INTRODUCTION ...................................................................................................... 14
1.1
1.2
1.3
1.4
1.5
1.6
1.7
2.
REVIEW OF THE REGIONAL DEVELOPMENT PLAN AS A
JUSTIFICATION FOR THE PROPOSED BY-PASS ............................................ 19
2.1
2.2
2.3
2.4
2.5
2.6
2.7
3.
Background ......................................................................................................... 14
Scope of Advisory Services ................................................................................ 14
Comments on the Objectives of the Existing Feasibility Study .......................... 14
General Comments on the Existing Feasibility Report Structure and Content ... 15
Proposed Enhanced Feasibility Study Outline .................................................... 16
Proposed Process for Enhancing the Feasibility Study ....................................... 16
Requirements for Investment Fund and Federal Targeted Programs .................. 17
Justification for Considering Land Development in Conjunction with the
Proposed By-Pass ................................................................................................ 19
Land Development Benefits to the Oblast .......................................................... 19
Private and Public Sector Commitments............................................................. 19
Incentives to the Private Sector ........................................................................... 21
Implications of Charging Tolls on Spurring Land Development ........................ 21
Additional Traffic Generation ............................................................................. 21
Follow-up Activities ........................................................................................... 21
ECONOMIC ANALYSIS AND OPTIONS .............................................................. 22
3.1
3.2
3.3
3.4
Rationale for Assessing By-Pass Options ........................................................... 22
Identification of Other Options ........................................................................... 22
Options to Be Tested ........................................................................................... 23
Assessment of the By-pass in Conjunction with the Proposed Moscow to
Volgograd Motorway .......................................................................................... 24
3.5
Assessment of the Options .................................................................................. 25
3.6
Preliminary Design and Cost Estimates Needed for the Proposed Options ........ 26
3.7
Economic Evaluation of the Proposed Volgograd By-Pass Options .................. 26
3.8
Assessment Summary and Selection of the Preferred Options (or Options) ...... 28
Follow-up Activities......................................................................................................... 28
3.10
Illustrative Multi-Criteria Assessment Matrix .................................................... 28
4.
CURRENT TRAFFIC CONDITIONS, TRAFFIC FORECASTS, AND TRAFFIC
ASSIGNMENTS ......................................................................................................... 30
4.1
4.2
4.3
4.4
4.5
5.
Existing Traffic Conditions and Impact Assessment .......................................... 30
Traffic Forecasts and Impact Assessment ........................................................... 32
Traffic Assignments ............................................................................................ 32
Follow-up Activities ........................................................................................... 33
Detailed Assessment of the Traffic Assignment Model...................................... 33
TECHNICAL SOLUTION AND TOLL RATE ASSESSMENT ........................... 34
5.1
5.2
Introduction ......................................................................................................... 34
Traffic Analysis and Geometric Design .............................................................. 35
Page 2 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
5.3
5.4
Junctions, other structures and road safety features ............................................ 36
Pavement Design................................................................................................. 37
6.
CONSTRUCTION AND MAINTENANCE COST ESTIMATES......................... 38
7.
INTRODUCING PPP AND IMPLICATION FOR THE OBLAST ...................... 42
8.
REVIEW OF PPP MODELS APPLICABLE TO THE BY-PASS ........................ 46
8.1
8.2
8.3
8.4
9.
REVIEW OF FINANCIAL ANALYSIS .................................................................. 50
9.2
9.3
9.4
9.9
10
Model Options under Concession Law ............................................................... 46
Demand Risk Considerations in the Feasibility Study ........................................ 46
Demand Risk Mitigation (Guarantee Options) ................................................... 47
Most Viable PPP Model Option.......................................................................... 48
The Role of Financial Analysis ........................................................................... 50
Review of Feasibility Study Assumptions. ......................................................... 50
Review of Conclusions of the Financial Model (Methodology) ......................... 54
Review of Sensitivity Analysis ........................................................................... 63
FINANCING OPTIONS AND AFFORDABILITY OF PROPOSED OPTION .. 64
10.1
10.2
Sources of Funding ............................................................................................. 64
Affordability Analysis......................................................................................... 65
11.
REVIEW OF RISK ALLOCATION. ....................................................................... 67
12.
ENVIRONMENTAL ASSESSMENT ....................................................................... 69
13.
SOCIAL ASSESSMENT ............................................................................................ 76
14.
CULTURAL HERITAGE ASSESSMENT .............................................................. 80
14.1
14.2
14.3
15.
Context ................................................................................................................ 80
Rationale ............................................................................................................. 80
Framework guidelines and elements ................................................................... 81
ANNEXES ................................................................................................................... 83
ANNEX 1:
ANNEX 2:
ANNEX 3:
ANNEX 4:
Investment Fund of the Russian Federation .............................................. 83
Basic Assumptions for Economic Analysis .............................................. 88
Framework for Social Assessment ............................................................ 89
Framework for Resettlement and Compensation ..................................... 91
Page 3 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
EXECUTIVE SUMMARY
Main Message to the Volgograd Oblast
The proposed by-pass around the City of Volgograd is recognized by the Oblast as a strategic
investment not only to improve transit traffic through the city, but also to support the Oblast
territorial development and economic growth. The proposed road would link five main Federal
highways, relieve through-traffic in the City of Volgograd, and enable the relocation and
development of several companies and economic activities. The Oblast has put significant effort
in this concept and is in the process of preparing a Feasibility Study with the objective of
requesting Federal funding and implementing the by-pass as a Public-Private Partnership (PPP).
Under the terms of the agreement signed on December 18, 2008 with the Oblast, the World Bank
has reviewed the existing Feasibility Study prepared by local consultants with a view to ensuring
that it will be of sufficient quality to (i) present a strong case to the Investment Fund and Federal
Targeted Program for financial assistance, and (ii) determine the best possible arrangements for
implementing the project as a PPP. The objective of the assignment is to enhance the
prospects that the Oblast will be able to implement a solution that will support its
development objectives and remain affordable at the same time.
We have based our review on our experience and best practice, as well as specific requirements
of the Investment Fund and other Federal Funds. As a result, we are not commenting on any ToR
established between companies or methodology for feasibility studies available in Russia. The
work undertaken in the past few months by the Bank team has been done with the full
collaboration of the Oblast.
Viability of the Proposed By Pass and Potential for Private Participation
The World Bank team is firmly convinced that a by-pass around Volgograd is justified.
Moreover the basis for this justification can only increase over time as motor vehicle traffic
increases within the Volgograd metropolitan area and on the major national and provincial
highways traversing Volgograd. The need for a by-pass can be demonstrated in terms of
significant travel time delays to transiting traffic on the national and oblast highway network and
on the congestion that this transiting traffic causes on the Volgograd city street system. These
traffic delays and congestion conditions are having an adverse impact on economic impact on
both the national and local economy. Beyond these adverse conditions, the Volgograd Oblast
administration has made a convincing case that a by-pass also would serve to open up outlying
areas of the metropolitan area for urban development, particularly since the north-south oriented
road network in the city is very limited. In summary the case for a by-pass around Volgograd city
is substantial and the task is to determine the most appropriate solution taking into account a
range of practical factors.
While a by-pass is needed, the World Bank team does not believe that the currently
proposed design solution is viable given current economic and traffic conditions. Among the
reasons for this conclusion are the following.

The proposed project is unlikely to attract private sector investment, especially from
lenders (banks), due to (i) the lack of financial sustainability even if 75% of the capital
expenditure is obtained from Federal Funds and (ii) a preliminary risk allocation which is
Page 4 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
too much in favor of the Oblast. Correcting for these deficiencies would require
additional financial contribution from the Oblast as the contribution from other sources of
funds is limited. In addition, the current situation for PPP is that long-term private or
commercial debt, which is the main source of financing of PPP projects, has become very
scarce and will likely become more expensive. This effectively eliminates for at least the
near term future private sector investment as a primary candidate source of funding for a
project of this size.

The Oblast at present has very limited borrowing capability as it has committed funds for
other projects and investments and therefore cannot at the present time contribute
significantly to the proposed project without a major reallocation of funding
commitments and/or access to increased sources of revenue. Our review concluded that,
even if 75% of the capital cost is obtained from Federal sources, the Oblast will need to
provide significant financial contribution during operations under a PPP agreement. New
taxes and user charges have limitations in terms of generating additional revenue, and if
adopted will likely restrict regional development, and will be seen as risk by the private
sector.

Taking into account the estimated cost of the by-pass and projected traffic volumes on
this roadway, the proposed project would yield only very modest economic rates of return
(in the range of 3-5%) which does not bode well for seeking Federal assistance given
competing alternative projects seeking Government investment.
Alternative less costly by-pass designs should be considered and prepared. The World Bank
team believes that there are less costly design options for a Volgograd by-pass that could address
near term needs while at the same time keeping open longer term best-solution options. A less
expensive solution would also make the project more attractive to the private sector. While
developing alternative by-pass schemes is beyond the scope of the current assignment, it is clear
that by reducing the cost of the proposed by-pass (i) the economic rate of return of the project
would substantially increase and (ii) it would become more attractive to the private sector, should
the current financial crisis improve. Among the alternative options that have been proposed in
this report the World Bank team recommends in particular serious consideration of Option C
which is to build the by-pass in the currently proposed alignment to a substantially reduced
standard by reducing the number of lanes, eliminating some or all grade separations and other
cost savings measures. This lower cost option could be built in a manner that would permit
sequentially upgrading as traffic volumes increase and additional funding becomes available.
Other options involving the 3rd longitudinal and parts of the currently proposed by-pass also
appear to be worth serious consideration.
The case for Federal assistance based on the role of the by-pass within the national highway
network should be investigated. It is important to recognize that a major reason for the by-pass
is to accommodate long distance transit travel along the major M-6 highway corridor linking
Moscow and Astrakhan. Volgograd is the largest city along this route and represents the most
significant traffic bottleneck on the entire M-6 route. Given this rationale the case for Federal
funding appears very reasonable as the by-pass is principally an important part of this major
national highway. In many countries this major highway would be 100% funded by the central
government. The case for federal funding could be made substantially stronger by proposing a
much less costly by pass as described above.
The case for tolling the by-pass should be examined in relation to its impact on the Oblast
regional development plan. The Bank team understands that the use of tolls for the proposed by-
Page 5 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
pass would contribute to making it financially viable for the Oblast. The by-pass is seen by the
Oblast as a way to open up areas of metropolitan Volgograd for urban land development.
However, tolling the by-pass would certainly have the effect of discouraging some use of the bypass for this purpose. While the assessment of any toll-policy recommendation is outside the
scope of the current agreement with the World Bank, the team strongly recommend to incorporate
this analysis when investigating alternative solutions.
Review of the Existing Feasibility Study
As summarized above, the existing Feasibility Study and the additional information received to
date are not convincing enough to (i) justify the proposed by-pass around Volgograd as
economically justified and financially viable, (ii) present a strong case for securing Federal
Funding, and (iii) attract private investment under a PPP arrangement. More specifically,
significant weaknesses have been identified in the following areas:

Economic Justification: Although a by-pass around Volgograd appears to be warranted,
the analysis has not established that other solutions (incl. less expensive ones) could not
achieve the same objectives. An economic assessment of the proposed by-pass and
alternative solutions would have strengthened the argument that this particular solution is
needed. This assessment is even more relevant in the current global financial crisis,
which could reduce the availability of Federal and private sector funds.

Depth of Analysis in the existing Feasibility Study: Some key analysis, such as traffic
forecasts and cost estimates, were not fully supported and/or lacked consistency, and are
the back-bone of most of the subsequent analysis in the existing Feasibility Study.

Financial Analysis and Affordability: The preliminary review of the financial analysis
carried out by the Bank team found that much more public funding might be required to
make the project viable as a PPP, including during operations. The proposed by-pass is
likely to require financial contribution from the Volgograd Oblast (even if Federal Funds
are obtained and if the project is implemented as a PPP), and it was not shown in the
existing Feasibility Study that the Oblast would be required to make financial
contributions to the project. An affordability analysis should have been undertaken,
assessing (i) the project’s potential for obtaining additional sources of revenue (incl. land
transaction and taxes), and (ii) the financial implication of implementing this project for
the Volgograd Oblast.
The Bank team considers that more could have been done not only to justify the by-pass but
also to consider alternative solutions and determine the project’s affordability for the
Oblast, based on more realistic assumptions (in addition to official assumptions). Although the
team understands that the use of official figures was necessary to qualify for Federal support, its
view is that the Oblast will have ultimately to pay for any difference between official and actual
assumptions: a higher than expected interest rate or inflation rate means that the bid price of the
private sector will be higher than what was initially considered. However, the Bank team believes
that clear and detailed Terms of Reference between the Oblast and the consultants,, combined
with strong supervision and review of intermediate results, could have improved significantly the
quality of the feasibility study.
We have based our review on our experience and observed best practice, as well as specific
requirements of the Investment Fund and other Federal Funds. As a result, we are not
Page 6 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
commenting on any ToR established between companies or methodology for feasibility studies
available in Russia. We consider that the purpose of the assignment is not to determine if a
specific firm did a correct job but rather to ensure that the study determined if the proposed
solution is viable and would meet the requirement of the Federal Funds.
Proposed Next Steps
The World Bank team suggests that a two step approach might be best to prepare a feasibility
study suitable for seeking Federal Government assistance in financing a by-pass around
Volgograd. To enhance acceptance by Federal officials the World Bank team suggests that a
short report outlining a less costly by-pass solution (with some options) could be prepared along
with a justification for federal funding. This would be developed by the Bank team in cooperation
with the Volgograd Oblast Administration with modest input from the Oblast consultants. We
expect that this might require about 1-2 person month of World Bank team input.
Assuming a positive response from the Federal representatives, a second step involving a more
detailed feasibility study might then be conducted with consultants hired by the Oblast but with
some direction provided by the World Bank team, working in close cooperation with the Oblast.
The subsequent full feasibility study documentation would be prepared to (i) improve the overall
structure and coherence of all sections of the existing feasibility study, (ii) change key
assumptions and methodology in several sections, (iii) complete the analysis in specific sections
to strengthen the argument (such as traffic forecasts), (iv) develop analysis not done or
superficially covered (such as an economic analysis, affordability analysis or cultural heritage
impact assessment). The Bank team has prepared Terms of reference (ToR) for this additional
work, which are provided in the annexes to this report. Although the Bank team believes that the
consultants already involved in the preparation of the Feasibility Study could complete the work
based on the proposed ToR, successful completion of the additional work will require significant
coordination and assistance from the Bank team to ensure quality of the final product.
The Bank team has received comments from the Volgograd Oblast on the content of this report
and has updated the report. We remain available for any additional clarification and we hope that
the final version of the report addresses all questions/concerns expressed by the Oblast.
The World Bank Team
Page 7 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
DETAILED SUMMARY OF THE FEASIBILITY STUDY REVIEW
General Overview of the Feasibility Study
As indicated above, the World Bank team has reviewed the existing Feasibility Study and the
additional information provided by the Oblast. Overall, it is recognized that a significant amount
of work has been put into this study but the documentation is not comprehensive enough to justify
the proposed project on technical, economic, and financial grounds. Moreover, in most sections
of the Feasibility Study report, the analysis done will need to be reworked, either by changing
assumptions or even the methodology. Finally, the overall structure of the Feasibility Study
should be improved in order to be comprehensive, including a presentation of all pertinent
materials.
Given the work already done, it is recommended that the Oblast should agree with the consultants
on the basic outline of the final version of the enhanced Feasibility Study. It is also recommended
that the main body of the enhanced Feasibility Study should be prepared as a single clear and
coherent document rather than a compilation of several documents. The ToR for completing each
recommended chapter of the existing Feasibility Study are presented in the annexes to this
document, and are based on the assessment of the Feasibility Study.
Regional Development Plan
The existing Feasibility Study did not make a strong case for the proposed by-pass in the context
of the regional development plan of the Oblast. A better argument could have been made to
strengthen the case for financial support from Federal Funds, by showing how the road by-pass
would contribute to achieving the broader development objectives. Moreover, a stronger
justification would have made the project more attractive to the private sector, by showing for
example that the expected traffic forecasts are based on sound technical analyses.
The section on Regional Development Plan in this report makes specific recommendations on
how the proposed by-pass could be justified in the context of the Oblast Regional Development
Plan. More specifically, the Feasibility Study could have been more precise in specifying the
level of commitment expected from the public and private sector. Finally, the Feasibility Study
could have described how the proposed Regional Development plan would increase traffic flows
on the proposed by-pass and main road corridors.
Traffic Assessment
Although a significant amount of traffic data has been provided to the Bank team, the
presentation of this information in the existing Feasibility Study is not comprehensive and does
not fully support the traffic forecasts. Such forecasts form the basis for the technical design,
economic and financial viability of the proposed project and should be properly done to support
any conclusion of the report.
A more comprehensive traffic forecast section should have included the following: a) review of
existing traffic conditions to establish the case for a by-pass, (b) traffic projections, including well
documented assumptions and description of the methodology used for preparing these
projections, and (c) traffic assignments for each of the proposed by-pass options. Careful and
thorough documentation of this aspect of the Feasibility Study is absolutely critical to establish
the credibility and accuracy of the study outcome.
Page 8 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Option Identification and Analysis
The current Feasibility Study does not properly explore possible design and alignment options.
Even if some alternative options have been considered by the Oblast, a comprehensive analysis of
possible alternatives would make a much stronger case for justifying the selected solution as
economically viable but requiring Federal support to make it financially viable. The option
analysis would also provide the Oblast with more affordable options, which is essential given the
potential significant financial impact of the proposed solution (detailed in the report) for
Volgograd Oblast.
A list of alternative options to meet the development objectives of the Oblast is provided in this
report. These options should be tested in the updated Feasibility Study. The Bank team is
proposing a multi-criteria analysis which would use quantitative and qualitative criteria to
identify viable options. The list of criteria could include, for example, the following: economic
impact, impact on Oblast budget, potential for generating additional revenue and traffic relief.
Technical Solution
The Feasibility Study is relatively complete in relation to technical design of the by-pass option
as set out in the current Feasibility Study, but the choice of technical solution should be further
elaborated. Given the uncertainty of the traffic forecast, the choice of technical solution (Category
1b) cannot be confirmed by this review for the proposed by-pass in its entirety. The clarifications
received from the consultants confirm the choice of technical category 1b for three out of five
sections; with the other two sections falling into technical category II under the guidelines. Some
explanation will be required, however, why the feasibility study recommends these two category
II sections for the higher technical category 1b. The design of junctions, other structures and road
safety features appear reasonable, with a few exceptions detailed in the report.
Construction and Maintenance Cost Estimates
The current Feasibility Study does not provide the requisite justification for the costs of the
project. The costs for the northern section have been provided without the costing of major road
items with a breakdown of estimated quantities. Some inconsistencies have also been noted in the
construction cost estimates in the analysis. It would be advisable to have one section of the
Feasibility Study report detailing the construction and maintenance costs for the whole by-pass.
Clarifications provided by the consultant indicate a total cost of the by-pass at some 40 billion
rubles, but do not match with the previous estimates for some 42 billion in one section; and the
53.7 billion amount used in the cost-effectiveness section of the Feasibility Study.
In addition, the review of cost breakdown against international comparisons indicates that
construction costs are high, which could be possible but remains unlikely given the flat terrain of
the region. Full justification of the costs by providing precedent (similar construction contracts
comparisons) is a critical component in generating higher confidence of the construction cost
estimates. The inconsistencies in the maintenance costs provided in different sections, as detailed
in this review also need to be clarified.
The pavement design proposal appears reasonable, given the projected traffic forecast. The toll
rate for passenger cars is comparable with the rates in other middle income countries. However,
the review found that the toll rate for heavy trucks is relatively low and it is not clear why the rate
for buses is higher than that for heavy goods vehicles. The toll structure and level is very
important as it impacts the traffic and financial viability of the solution. Explanations for the
Page 9 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
decisions and recommendations made in the Feasibility Study are necessary to make it a more
robust document.
Introducing PPP and Implications for the Oblast
PPP can potentially provide investment to the proposed by-pass but is very complex to develop
due to the complexity of the contractual nature of the arrangement and the requirement to define
most features of the investment before signing the concession agreement. PPP projects take time
to develop and it is not uncommon to see procurement taking up to 24 months. PPP projects can
have significant fiscal risk for the Oblast (including traffic/revenue guarantees) and therefore
financial commitments have to be properly assessed. Experience from around the world has
shown that several failures and delays could have been avoided with a comprehensive Feasibility
Study, transparent and competitive procurement, and strong public sector institutional capacity.
The current international financial crisis is likely to make PPP investment more difficult to attract
and, given the lack of experience of Volgograd Oblast in PPP and toll roads, the private sector
will probably consider the project extremely risky. The Oblast should therefore seriously consider
(i) waiting for the market conditions to improve before starting any tendering, should it want the
proposed project to be implemented as PPP, or (ii) consider alternative options to PPP, such as
public financing.
Financial Analysis
The financial analysis is central to assessing if a project is viable as a PPP. It will not only
determine if the project will be attractive to the private sector, but will also estimate the necessary
level of public funding. The financial model that was used for the current Feasibility Study was
not provided to the Bank team but given its importance, a preliminary model was developed by
the Bank team to test the conclusions. A subsequent meeting in Moscow with the consultants
responsible for the financial model allowed the Bank team to clarify a few assumptions but did
not change the conclusions in terms of financial implication to the Oblast.
The financial analysis should be redone with a different objective and set of assumptions or at
least with sensitivity analysis to reflect the difference between official assumptions and those
most likely to be used by the private sector. The Bank team reviewed the assumptions made
(financial, economic, etc…) and concluded that although some of the financial assumptions
appear reasonable, several of these assumptions, such as the level of inflation or the financing
mechanism were found to be either outdated or unrealistic. However, the team understands that
the use of official assumptions is necessary to qualify for Federal support. One solution could
have been to use official figures for the feasibility study and incorporate the difference in value
into sensitivity analysis: for example, if official inflation is 2% lower than the private sector
expectation, the base case scenario could have been with the official figures and the sensitivity
analysis with inflation 2% higher. In addition, the revenue assumptions are not in line with what
was determined earlier in the existing Feasibility Study, resulting in what seem to be
overoptimistic results. Finally, the sensitivity analysis did not assess the impact on public sector
contribution and might mislead the Oblast in thinking that the private sector will accept all the
traffic, toll and cost assumptions without adjusting them in their proposal, resulting in an Oblast
financial contribution likely to be higher than forecasted.
The Bank team developed a preliminary model to test the impact of changes in the assumptions
used in the current Feasibility Study. The assumptions made by the Bank would have significant
implications on the financial viability of the proposed project. The preliminary finding is that the
Page 10 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
project would not appear to be financially viable without significant additional financial support
(from the Oblast or other sources), including during operation. These conclusions are
fundamentally different from the conclusions of the Feasibility Study.
PPP options and Risk allocation
The current Feasibility Study is realistic in terms of applicable forms of PPP, given the scope of
the Federal Concession law. However, the approach to risk analysis needs to be completely
reviewed, given that the principle of risk allocation has not been applied. Risk allocation is a
central component in the preparation of a PPP project, and although it can be fine-tuned at a later
stage, a preliminary proposal of risk allocation should have been included in the current
Feasibility Study report.
One of the key risks is demand risk (ie. traffic and associated revenue). The Feasibility Study
implies that the traffic risk could be allocated to the private sector, but did not assess the
feasibility of such assumption. Although this is certainly the preferred solution for the Oblast (if
traffic is lower than expected, it is the responsibility of the concessionaire), it is unlikely that the
private sector would accept such risk (even if minimum revenue guarantee is provided). Given
the lack of experience of the Oblast in PPP, the size of the investment, and the perceived project
risk, it is more likely that an Availability Payment1 mechanism would be requested by the private
sector. Although it is understood that the Feasibility Study’s objective was to request Federal
support, it should at least have described basic demand risk and carried out a preliminary
assessment of such risk and payment mechanisms.
Affordability and Financing Options
The issue of affordability has not been properly addressed in the Feasibility Study. The
Feasibility Study simply calculates the financial contribution necessary to complement private
investment and make the project viable as a PPP, without looking at sources of funding. Even at a
preliminary stage, the Feasibility Study should have looked at ways to finance the project and not
assume that all the public sector contribution will come from federal funds. Even if federal funds
and additional sources (such as additional taxes) are secured, the project will most likely require
funding from the Oblast budget. The study should have therefore undertaken a review of public
expenditure of the Volgograd Oblast in the transport sector, in order to identify ways to prioritize
projects to free additional resources.
In addition to Federal Funds and Oblast budget, the most viable source of funding could be the
increase in value of the land located near the proposed by-pass (especially close to the
intersection with the Federal highways). The Oblast could capture the increase in value of
publicly-owned land after construction of the by-pass or integrate it as contribution to the
concession (in this case the concessionaire responsible for implementing the by-pass would
develop the land). However, it is essential for this option to be viable that the Oblast refrains from
selling now any piece of land, even at a premium, as this would prevent it from capturing the full
benefit of the project.
Environmental Assessment
1
Availability Payment refers to a PPP financing mechanism through which fees are paid to the
concessionaire over an agreed period of time for maintenance and operation of the road to a defined
standard.
Page 11 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Environmental and social considerations today are an integral part of all large scale transport
infrastructure projects and are demanded and critically reviewed by the affected population as
well as national and international NGOs. Major international lenders and financial institutions
(IFI) have committed to the Equator Principles, which guide environmental and social conduct in
project financing. Many investors consider that an environmental due diligence process, which
complies with international good practice, substantially mitigates overall project risk. Risk
mitigation influences public attitudes towards the project and reliability of environmental
authorities, especially for construction and operational permits.
The World Bank team was impressed with the amount of data collected and how it was analyzed,
interpreted and presented. However, the Feasibility Study should also: (i) provide environmental
information with a level of detail corresponding to the engineering design, (ii) define how the
environmental framework will be used for the project, (iii) develop public awareness and
participation activities that comply with best practice international policies and procedures, and
(iv) assess and mitigate the broader environmental impact of the project.
Social Assessment
The most important social issues in the proposed project are resettlement and economic
displacement, and consultations with the population. These issues have been adequately
considered in the framework of current Russian legislation and its customary narrow
interpretation. Public consultations have been held in districts with most exposure to the by-pass
construction. Compensation has been assessed for temporary/permanent loss of public/private
land and property. However, it is unclear how this compensation (particularly in case of
public/private assets that is not agricultural land) has been evaluated. Unfortunately, no
grievance/conflict mitigation mechanism exists for disputes over the value of property. This
means that these grievances may occur afterwards, increasing the risk, and thus cost, of the
investment.
The above-listed social issues should be separately considered in a document, which would (1)
show how to make a particular list of public/private beneficiaries; (2) explain the calculation and
the principle of compensation; and (3) establish a framework for a resettlement/compensation
action plan, a monitoring and reporting system, and a separate grievance mechanism for out-ofcourt conflict resolution. A special entity/person should manage the resettlement action plan
throughout the life of the project. Public consultations should include information campaigns,
and feedback mechanisms for the communication between the affected population, institutional
stakeholders, the Volgograd administration, and the Contractor.
If the Oblast of Volgograd raises the treatment of social issues to international standards, the
project will not only be socially more viable, but it will also appear less risky for private
investors.
Cultural Heritage Assessment
The Volgograd by-pass will likely overlap terrain on which the Battle of Stalingrad was fought
during the Second World War. Therefore, it is probable that human remains and undetonated
weapons will be encountered during construction. While federal and national legislation regulates
both visible and undiscovered historical and cultural heritage, the discovery of human remains
could cause controversy and political tension, and thus erode investor confidence.
Page 12 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
The current Feasibility Study did not review the potentially high risks involved with cultural
heritage issues. An assessment of the historic and cultural assets in the project area should
identify and mitigate the potentially adverse impacts on these assets from the project. The main
output would consist of a Management Plan including the likely impact area, likely impact
activities, type of impact, mitigation measures for such impacts, procedures for archeological
discoveries, implementation responsibilities, financial responsibilities, public information
campaigns and monitoring procedures.
Summary of main issues and relevance for the project
Below is a summary of the identified issues, organized according to the requirements of (i)
Federal Funds (such as Investment Fund), (ii) international private investors and IFI (for
financing), and (iii) good practice that will ultimately benefit the project and the Oblast
Issues likely to impact the Oblast’s request for Federal Funds
 Lack of coherence and systematic analysis in the existing feasibility study
 Need to strengthen analysis to meet quantitative criteria for Federal Funds
 Weak justification of how the proposed project would specifically support the Oblast regional
development plan (incl. assessment of investment needs and broad benefit of the project)
 Lack of comprehensive traffic forecasts, weakening the justification of technical solution and
assessment of needs for Federal Funds
 Inconsistencies in cost estimates resulting in uncertainty on the total cost of the project, and
weakening the justification for specific grant needs
 Lack of economic assessment of alternative options, weakening the argument that there is no
alternative solution
Issues likely to impact the project’s financial viability and attractiveness to investors
 Lack of comprehensive traffic forecasts, increasing the risk that revenue from tolls might be
lower than expected
 Inconsistencies in cost estimates, suggesting that capital cost of the project might be different
from estimation
 Need to strengthen environmental, social and cultural heritage assessment and plan to align it
with international standards (for IFI and commercial lenders)
 Lack of affordability assessment of the project, raising serious doubt that it will be financially
sustainable for the Oblast
 Lack of allocation of key risks between the Oblast and private sector in a way that balances
requirements for private investors and benefit for the Oblast (traffic risk should be carefully
analyzed, including the choice between Minimum Revenue Guarantee and Availability
Payments)
 Weak financial analysis, raising doubt on the ability of the Oblast to provide the level of
financial contribution (from all sources) to make this project attractive to investors
Additional recommendations that will benefit the project and the Oblast
 Need to strengthen environmental, social and cultural heritage assessment and plan to prevent
negative impact of these issues on the project, Oblast and citizens of Volgograd
 Public Expenditure review to investigate options to contribute additional resources to the
project and increase borrowing capacity of the Oblast
 Implementation of additional measures to reduce congestion within the Volgograd
Municipality (incl. improvement of passenger transport system, traffic management systems)
Page 13 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
1. INTRODUCTION
1.1
Background
The Volgograd Oblast hired consultants to prepare a Feasibility Study for a proposed by-pass
around Volgograd city under a PPP arrangement. The feasibility study report was prepared with
the objectives of securing both Federal Government grant funding and private sector financing of
the proposed by-pass. The World Bank team has been requested to assist in this process
principally by: (a) reviewing the existing Feasibility Study and providing detailed guidance to the
Volgograd Oblast Administration in finalizing this study, and (b) providing guidance in
implementing the preferred solution as a PPP project, as might be feasible.
1.2
Scope of Advisory Services
An agreement for technical collaboration was signed on December 18, 2008 between the
Volgograd Oblast and the World Bank. Under the terms of this agreement, the World Bank
assistance in relation to this project is organized in three phases.

Phase 1: Initial Assessment of the Feasibility Study and Recommendations for
Improvement (including identification of financing options)

Phase 2: Guidance on updating the Feasibility Study and requesting financial support
from identified investors/lenders

Phase 3: Assistance in Implementing the Proposed Solution (including detailed
preparation of a PPP)
This report represents the main output for Phase 1. Upon completion of this phase the terms of
reference and cost of Phase 2 will be assessed and the Oblast and the World Bank will determine
whether to proceed with Phase 2. Similarly, and assuming that the proposed PPP option is found
to be feasible during Phase 2, detailed terms of reference and costs will be prepared during and a
decision to move forward with Phase 3 will be made jointly by the Oblast and the Bank.
This report presents the findings of the World Bank team in reviewing the existing Feasibility
Study and other documentation received to date. The report also presents suggestions for
improving the overall Feasibility Study documentation, including the report structure and content,
and the process for collaboration in refining the Feasibility Study content. The report does not
pre-suppose that Phase 2 will be implemented, and the recommendations are based on the review
by the Bank team of the available documents and perception of the situation.
1.3
Comments on the Objectives of the Existing Feasibility Study
The following observations are based on the first World Bank mission to Volgograd in September
2008, after which an Aide-Memoire was prepared and sent to the Oblast. The review of the
Feasibility Study is based on the following fundamental assumptions regarding the objectives of
the existing Feasibility Study.
Page 14 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
The primary objective of the Feasibility Study is to determine the most feasible means to improve
conditions for through transit travel around Volgograd city to reduce travel time and operating
costs of this transiting traffic. The secondary objectives are to reduce traffic congestion within
the Volgograd municipality and to open up additional land for urban development.
The conclusion of the first World Bank mission was that a by-pass would help in addressing
congestion within the Volgograd municipality. However, the Bank team believes that this
roadway improvement will not be sufficient to have a major impact (with the possible exception
in southern Volgograd) unless several additional complimentary measures are undertaken within
Volgograd city. These measures include improvements to the passenger transport system,
improved traffic management, and additional road network improvements. Similarly, opening up
additional land for urban development will require substantial additional expenditures beyond
that of a by-pass road including additional road network improvements, extension of utilities and
passenger transport services, as well as substantial commitments by the private sector. Therefore,
the team preparing this report has been assuming, as mentioned in the Aide-Memoire, that these
secondary objectives would be considered but only as by-products of the primary Feasibility
Study objective.
1.4
General Comments on the Existing Feasibility Report Structure and Content
It is recognized that the current Feasibility Study is a work in progress and that it did not include
all information available. The Bank team requested additional information from the Oblast and
has prepared this review based on the documents received, although some of the
information/analysis requested has not been received. As a result, the comments on the adequacy
of the current Feasibility Study might be occasionally partial, although all efforts have been made
to limit this situation to the minimum.
While a substantial amount of work has been undertaken in preparing the existing Feasibility
Study report, the structure and content of the documentation as presented is not to a standard that
would be internationally recognized as suitable for justifying such a major road investment. The
overall structure of the Feasibility Study documentation is not conducive to a clear and coherent
story line. The clarity of the document is important to show that the study has been prepared in a
professional way and can influence the credibility of the analysis. It is therefore recommended
that the existing Feasibility Study should be redrafted in a logical sequence that builds the case
for a proposed by-pass. Moreover, the content of the presentation in some cases will need to be
substantially strengthened to convincingly make the case. As is described later in this report, the
Bank team suggests in particular that the Feasibility Study report should be improved in the
following way:

More information should be provided on existing travel conditions and the current
reasons for justifying a by-pass around Volgograd city

Clear explanation should be given of the assumptions and methodology used for the
traffic forecasts

A thorough and systematic review of several proposed possible by-pass options should be
undertaken other than the single by-pass option as currently presented in the Feasibility
Study
Page 15 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
1.5

More specific information should be presented on actual commitments of the private and
public sector to advance land development within the by-pass impact zone

A more comprehensive discussion should be given of PPPs (incl. institutional review,
value of implementing the project as PPP, affordability of proposed solution for the
Oblast, etc…) and other financing options.
Proposed Enhanced Feasibility Study Outline
Based on the above comments, it is recommended that the following outline be used for the final
version of the Feasibility Study. Terms of reference for completing each chapter of the Feasibility
Study as outlined in Box 1 are presented in the annexes to this report and are based on the
detailed assessments of the Feasibility Study as set out in the following sections of this report.
Box 1.1: Proposed Outline of the Enhanced Feasibility Study
1.
2.
3.
4.
Executive Summary
Introduction & Study Objectives
Existing Traffic Conditions and the Need for a By-Pass
Land Development Proposals in Conjunction with the Proposed By-pass and Regional
Development Plan
5.
Identification and Descriptions of by-Pass Options
6.
Introduction for PPP and Review of the PPP Framework
7.
Traffic Forecast and Assignments to the Selected By-Pass Options
8.
Assessment of the By-Pass Options and Selection of the Preferred Option
9.
Technical Solution for Road Tolling and Toll Rate Assessment
10.
Capital and Operating Expenditures for Preferred By-Pass Option
11.
PPP Assessment of the Proposed option
12.
Environmental, Social and Cultural Impact Assessments of the Preferred By-Pass Option
13.
Summary of Feasibility Study and Recommended next steps
Annexes
1.6
Proposed Process for Enhancing the Feasibility Study
As indicated in the proposal, the Bank team has (a) reviewed and commented on the current
Feasibility Study, and (b) has made detailed recommendations on how the feasibility study can be
improved. The team could also provide specialized inputs to the Feasibility Study including, in
particular, recommendations on public-private-partnership arrangements. However, it is strongly
recommended that the responsibility for preparing the final feasibility report rest with the lead
consulting firm hired by the Volgograd Oblast.2 To ensure that the final Feasibility Study
document(s) will be of a high standard, it will be important for the World Bank team to work in
close consultation with the lead consulting firm hired by the Oblast as well as with Oblast
2
The lead consulting firm will be paid separately by the Volgograd Oblast. The level of compensation to
this firm might be reasonably estimated after receipt of our assessment of the current Feasibility Study
along with a detailed description of the additional work needed to produce an adequate final Feasibility
Study document.
Page 16 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
representatives (the client). For specific assignments, the current consultants might not be able to
complete the work and the use of international consultants might be needed. Enhancing the
Feasibility Study will have financial implications for the Oblasts, but they should be taken in light
of the importance of the investment.
More specifically, the principal output of this phase I activity consists of a detailed set of
recommendations on additional work the lead consulting firm will need to undertake to improve
the existing Feasibility Study. Once these recommendations are reviewed by the Volgograd
Oblast and the lead consulting firm, it will be important to reach agreement among all parties on
the intermediate and final study outputs and a timetable for these outputs. During phase 2, the
Bank team will review the intermediate and final outputs and will communicate in a timely
fashion these reviews. Subject to approval of the client, the consultant will incorporate the Bank
team’s comments in the Feasibility Study document(s). The team believes that this approach will
be the most cost and time efficient for the Oblast.
For this process to work smoothly, the Bank team would require very close cooperation with the
lead consulting firm through frequent interactions and reviews of the study outputs as they are
being prepared.
1.7
Requirements for Investment Fund and Federal Targeted Programs
Assessment of the Feasibility Study
The Volgograd Oblast is planning to request Federal Funds in order to finance the proposed bypass. These funds have very specified set of quantitative and qualitative criteria, which need to be
fulfilled to receive financing contribution. This section summarizes the requirement and presents
the implication for the project. A more detailed description of the requirements is presented in
Annex 1.
However, the Oblast is also considering implementing the project as a PPP, which would bring
international investors, including International Financial Institutions (IFI, such as EBRD or IFC).
In addition to seeking a financially sustainable project, IFIs tend to have specific requirement in
terms of social, environmental and cultural heritage issues. These issues have to be addressed as
well by the Feasibility Study.
Finally, the Bank team believes that the proposed project should meet international standards of
best practices. Applying international best practices will not only result in a more sustainable
project but would help the Oblast meet several qualitative criteria of the Federal Funds. The
economic analysis recommended by the Bank team is not strictly speaking required by the
Federal Funds but would make stronger its case. For example, a solid economic analysis of the
different options would justify the need to demonstrate “substantial lack of substitute products”
(see qualitative criteria for Federal Budgetary Funds).
The Feasibility Study made an attempt to justify that the proposed by-pass would meet the criteria
set for the Investment Fund and Federal Budgetary Funds. However, this exercise has not been
done in a systematic way and results in a weak justification. Moreover, some required analysis,
such as the economic and budgetary efficiency appears not to have been undertaken. Although
the Feasibility Study considered that the project would be implemented as PPP, it did not
incorporate most of the analysis that would be expected to secure interest from private investors
and IFI. Finally, as shown in subsequent sections, the Feasibility Study is missing key analysis
Page 17 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
that would either support the qualitative criteria or ensure the sustainability of the project
(including the impact on the Oblast’s budget).
Summary of Federal Funds requirements
Some key implication for the Investment Fund and Federal Budgetary Funds are as follows:
Investment Fund (IF)
1. Although IF allows for investment/concession projects and projects of federal/regional
significance, they should be implemented as PPP.
2. Investors are expected to contribute at least 25% for regional projects and 50% for federal
projects.
3. The regional budgets are expected to provide a share of co-financing for implementation of
regional projects supported by the IF. For Volgograd Oblast, the Ministry of Regional
Development put this share as 24%.
4. All projects are expected to meet the following quantitative criteria
a. Financial efficiency: met if NPV is negative without IF support and becomes positive
with IF support
b. Budgetary efficiency: met if ratio of discounted sum of direct and indirect tax
payments to Federal budget and savings (over 10 years) to the amount of the planned
budgetary allocation from the IF is equal or higher than 1
c. Economic efficiency: met if the ratio of direct and indirect contribution of the project
to the (regional) GEP over a period of 10 years is higher than 0.01%
5. Any project claiming IF financing shall be supported by a positive opinion of an investment
consultant reflecting the projects’ compliance with the qualitative and quantitative eligibility
criteria
Federal Budgetary Funds
1. Federal Budgetary Funds have a set of qualitative and quantitative criteria
2. Qualitative criteria include: (i) substantial lack of substitute products, (ii) justification of a
need for construction of a capital construction object under the investment project, and (iii)
favorable conclusion of the State Expertise on the design and project documentation and the
results of site investigations for capital construction objects;
3. The precise criteria for the Federal Targeted Program have not yet been approved.
Implication for the proposed by-pass
Based on the information above, the implication for the proposed by-pass are the following:
 An economic evaluation of alternative options would likely be needed to justify the need
for the proposed by-pass;
 The Feasibility Study should clearly state and demonstrate that the proposed project
meets the financial efficiency, economic efficiency and budget efficiency criteria;
 Even if Investment Grant is obtained from the Investment Fund, the Oblast will need to
provide co-financing, which has not been assessed in the Feasibility Study;
 It is not possible at this stage to define how the Feasibility Study should be written to
fulfill the requirement for the Federal Targeted Funds;
 A final step following the completion of the Feasibility Study would be to have an
independent review confirming that all the selection criteria have been met.
Page 18 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
2.
REVIEW OF THE REGIONAL DEVELOPMENT PLAN AS A JUSTIFICATION
FOR THE PROPOSED BY-PASS
2.1
Justification for Considering Land Development in Conjunction with the Proposed
By-Pass
The Volgograd Oblast has introduced land development as a major factor in justifying investment
in the by-pass. This is a sensible approach as road development and land development often
occur together, especially when new roads traverse open lands near urbanized areas. This
approach also clarifies the regional development plan and corresponding investment programs for
the metropolitan Volgograd region. It will also be easier to secure Federal grant funding, for the
proposed by-pass, which is conditional on substantial private sector investment
While the World Bank team concurs with the approach, the land development section of the
Feasibility Study does not convincingly support the argument for a by-pass. This could be
accomplished with a relatively modest amount of additional work based on the information
already on hand with the Feasibility Study team. The remainder of this section presents
suggestions for improving the presentation which we suggest should be included in a separate
section of the revised Feasibility Study report.
2.2
Land Development Benefits to the Oblast
The current Feasibility Study documentation has attempted to present a case for the proposed land
development that is likely to accompany the proposed by-pass. The suggested benefits include:




It would open up a large land area for new development
It would encourage relocation of constrained (and/or undesirable) land users in
Volgograd to relocate outside the city, in some cases reducing traffic congestion and
pollution.
It would improve the tax base of the Volgograd region
It would create additional jobs
However, the Feasibility Study does not present these positive outcomes (or any other positive
land development features) that are to be spurred by the proposed by-pass in a concise and
convincing format. Doing so would have shown the project’s strategic importance to the Federal
Authorities. It would also reassure potential investors in this project (should it be implemented as
PPP) that the Oblast properly assessed the need for the project and is committed to its realization.
2.3
Private and Public Sector Commitments
Private Sector Commitments. While possible private sector commitments to undertake new
development in the by-pass impact zone have been identified, the Feasibility Study would be
more convincing to the Federal Authorities if the details of these commitments, and the process
for securing them, were more specifically described. More specifically, the following is
suggested:
Page 19 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD

List the names of the companies that have made commitments, the type and scale of the
proposed investment, the likely employment level, and the estimated cost of the
development3

Indicate the process that each private sector developer and the public sector will undergo
in order to secure firm private sector commitment to land development in the by-pass
zone.

Indicate to the extent possible the precise current level of commitment of each above
listed private sector developer to actually invest in the by-pass impact zone, and when.

Indicate the estimated timetable for these investment to occur
Describing the current commitment would likely strengthen the development plan and attract
more private participation. If any private sector commitments can be mapped in proposed
locations, this also would be helpful.
The Feasibility Study should have described current land ownership and made a strong case for
maintaining land around the by-pass under public hand (except those already under private
ownership). Should the proposed by-pass be implemented, land value around the road is expected
to increase significantly. The increase in land value can contribute to the financing of the project.
As a result, it is important to identify the ownership of strategically located pieces of land
(especially at the intersection of the proposed by-pass and the Federal roads). An important issue
is to avoid early selling of land owned by the Oblast, as this might reduce benefit of the
transaction to the Oblast and the subsequent financial viability of the proposed project.
Public Sector Commitments. The proposed by-pass alone will not be sufficient to permit
extensive land development in the by-pass impact zone. This holds even with the assumption that
private sector investment will be attracted (directly in the proposed by-pass or following
completion of the project). A substantial amount of public sector investment at least in roads,
utilities, and public transport services will be required for the proposed land development.
Beyond these commitments, additional public facilities such as administrative buildings, schools,
and parks may be required.
While it is understood that the consultants preparing the initial Feasibility Study might have seen
it in isolation, the completion of the Feasibility Study could include a preliminary assessment of
the investment required around the proposed by-pass in relation to the proposed regional
development plan. More specifically, it would be helpful to estimate in the near term (five years)
what public sector commitments (type and cost) are to be made in the impact zone, and what level
of commitments would need to be made over the longer term (10-20 years) to permit the land
development proposals to occur. If specific public sector commitments (such as new roads and
land developments) can also be mapped in proposed locations, the case for the proposed by-pass
would be strengthened. This information could be available in an existing General masterplan for
the Volgograd City.
3
The details of the specific investment commitments might be best placed in an annex with only a
summary provided in the main body of the Feasibility Study report.
Page 20 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
2.4
Incentives to the Private Sector
Incentives to Land Developers. Beyond public sector commitments for supporting roads and
utilities, there may be additional incentives to entice private sector developers to either relocate to
the by-pass impact zone (such as industries presently located on the Volga River waterfront) or to
develop new land uses in this area. One of these incentives might be short or medium term tax
breaks or other monetary incentives. Also, any non-monetary incentives that are anticipated
could be documented here.
Land Development Incentives for the Private Sector Road Concessionaire. The existing
Feasibility Study documentation indicates that a high percentage of the land in the vicinity of the
by-pass is “state property.” This being the case, the possibility of transferring some of these lands
to the selected private sector road concessionaire might be considered as part of the overall
concession package. Some of this land, especially parcels at or near major interchanges with the
by-pass, would have considerable market value and might be particularly interesting to potential
road investors and, as a result, might encourage them to propose to cover a higher percentage of
the total estimated by-pass cost. If this option is to be considered it should be documented in this
section of the Feasibility Study.4
2.5
Implications of Charging Tolls on Spurring Land Development
While the proposed by-pass will encourage more land development in its impact zone by virtue of
high accessibility, a toll road option may be less attractive than the non-toll alternative for some
proposed land uses. This section of the feasibility report should accordingly assess this land
development potential for both toll and non-toll options, and which potential land uses could be
most affected.
2.6
Additional Traffic Generation
Once these land developments occur, additional traffic will be generated for the by-pass and the
rest of the road network. To make the by-pass more attractive, the Feasibility Study team should
prepare estimates of this additional traffic on the proposed by-pass based on reasonable
assumptions of the level and type of land development that will occur within the by-pass impact
zone. These estimates could also be used in evaluating the alternatives to the by-pass.
2.7
Follow-up Activities
The World Bank team recognizes that the above suggestions for improving the land development
presentation will require additional work and that some of the suggestions may not be practical.
We suggest that, once this section of the report has been reviewed, the Volgograd Oblast and its
principal consultant will discuss in detail the process for advancing this portion of the Feasibility
Study.
4
Should this option be viewed as feasible and acceptable to Volgograd authorities, safeguards would have
to be developed on what kinds of land uses would be permitted along with agreements on the timing of
development.
Page 21 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
3.
ECONOMIC ANALYSIS AND OPTIONS
3.1
Rationale for Assessing By-Pass Options
The World Bank team has reviewed the current feasibility study report which proposes a major
motorway of approximately 98 km in length to by-pass Volgograd city. The primary objective of
this by-pass is to facilitate transiting traffic around the city. Secondary objectives are to reduce
traffic congestion in Volgograd city and to facilitate land development in open land west of
Volgograd city. While acknowledging the merits of this proposal, and understanding its
importance for the oblast’s development plan, an objective feasibility study needs to thoroughly
review and assess alternative by-pass options. This options analysis should constitute a separate
section of the feasibility study.
Based on the documentation received to date, and the September 2008 field visit to Volgograd,
the World Bank team concurs that a by-pass around Volgograd city appears justified. However,
the current feasibility study documentation does not adequately explore possible design and
alignment options. Since the Federal Infrastructure Fund requires demonstrating that the by-pass
cannot be constructed without the Fund’s budget allocation, the lack of an alternatives analysis
could be considered a serious omission. Alternatives to the proposed by-bass should have been
considered to show that it is the most economical option and can only be implemented with
Federal support.
Financial constraints, including the current adverse global financial conditions, also call for
exploring alternative by-pass options. The private sector under current conditions is likely to be
more risk averse than normal to financing road investments. The financial model in the existing
Feasibility Study predicts that even if all revenues from tolls are collected by the private sector,
the public sector (most probably a combination of Federal and Oblast resources) will need to
finance about 75% of the total capital cost of the proposed by-pass design. Given this large
estimated public sector contribution, it is important to consider alternative by-pass options that
would be less costly and would achieve most of the objectives of the Volgograd administration. It
will be important, in particular, to assess other possible by-pass options if Federal Funding cannot
be obtained.
3.2
Identification of Other Options
Many alternative by-pass arrangements could be tested, including different routes around
Volgograd city and different design standards for each of these routes. A feasibility study should
address all potentially less costly options that would achieve most of the objectives before
proposing the preferred option (or options). The proposed options set out below rely on one or
more of the following criteria:
(a) Greater use of existing road infrastructure,
(b) Alternative by-pass options already proposed,
(c) Constructing only part of the proposed by-pass,
(d) Considering lower design standards for the currently preferred by-pass option, and
Page 22 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
(e) Options based on combinations of the above listed criteria.
3.3
Options to Be Tested
The following specific by-pass options are suggested by the World Bank team to be tested for
feasibility. This will require traffic assignments, cost estimates, a map showing the options, and
other information as set out in later in this section of the report. The proposed options to be tested
are as follows:

Option A: Do nothing significant to improve the existing road network with the
exception of routine maintenance. Under this option no improvements to the existing
road network, other than routine maintenance, would be undertaken. While a by-pass is
likely to be needed, a good feasibility study should test all options against the “donothing” option.

Option B: Build the by-pass in the alignment and to standards as proposed in the
current feasibility study. This facility would be approximately 98 km in length,
constructed to motorway standards with 4 lanes divided. All access to and from this
roadway would be via grade separated interchanges. This is the stated preferred
alternative against which other alternatives will be evaluated. This option should be
evaluated with tolling and non-tolling sub-options.

Option C: Build the by-pass in the alignment as proposed in the current feasibility
study but to significantly lower design standards. This option would permit the
eventual construction of the by-pass to the standards proposed in option B when traffic
volumes will be higher by securing the same right of way alignment and width, but with
initially constructing the roadway to much lower design standards. Various design suboptions should be considered including the elimination of some if not all grade separated
interchanges, reducing median and lane widths, and possibly reducing the number of total
travel lanes to only two in the least traveled sections. No road tolling would be
considered under this option.

Option D: Build only the northern part of Option B. This facility would extend from
the Saratov Road (P226) to the Rostov Road (M21), approximately 52 km. The rationale
for selecting this option is that it might attract a very high proportion of transiting traffic
around Volgograd at far lower total cost. This option should be evaluated with tolling and
non-tolling sub-options.

Option E: Build only the southern part of Option B. This facility would extend from
the Rostov Road (M21) to the Astrakhan road (M 6), approximately 47 km. This option
has been proposed since design work is well advanced and consequently could be
constructed earlier than either Option B or Option C. This option should be evaluated
with tolling and non-tolling sub-options.

Option F: Construct the proposed southern extension of the 3rd Longitudinal. This
option envisions the extension of the existing 3rd Longitudinal approximately 35 km
southward from its current southern terminus to the Krasnoarmensk settlement in
southern Volgograd city. This should include a bridge over the Don canal. The roadway
should be 4 or 6 lanes with grade separations at the major road intersections. The more
Page 23 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
recently proposed alignments around difficult topography should be used. This option
relies extensively on existing road infrastructure and may provide more traffic relief to
southern Volgograd than Options B, C, or D.
3.4

Option G: Upgrade and extend the 3rd Longitudinal. This option should include all
of Option E plus the selective upgrading of the existing 3rd longitudinal over the 30 km
length from the existing southern terminus to the main Saratov highway intersection
north of Vodstroy. The upgrading should include widening of all road sections to 4 lanes
where this is not currently the case, pavement rehabilitation if required, provision of a
grade separation under the railway crossing north of Vodstroy (or overpass if this would
be less costly), and an improved intersection at Ulitsa Mendeleva & Avtomgestralnaya
(possibly grade separated if this is required to adequately maintain a good level of
service). This option has been selected largely for the same reason as the selection of
Option E and also provides a more realistic alternative to the preferred Option B.

Option H: Construct by-pass Option D and the Southern Extension of the 3rd
Longitudinal (Option F). Under this option only the Saratov to Rostov (Option D)
sections (from P226 to M21) of the by-pass would be constructed along with Option F
portion of the 3rd Longitudinal. This option may be less costly than Option B while
possibly providing the most traffic relief to southern Volgograd. The portion of this
option containing Option D should be tested with tolling and non-tolling options.
Assessment of the By-pass in Conjunction with the Proposed Moscow to Volgograd
Motorway
Beyond the by-pass options outlined above, the World Bank team has learned of a planned major
upgrade to motorway standards of the M6 highway between Moscow and Volgograd (See Figure
3.1 below). More specifically, two sections of this motorway totaling 86 kilometers apparently
have funding allocations.5 The Feasibility Study team should assess with Federal authorities the
potential of extending this motorway to Volgograd in the near future and the likely timetable for
this extension. It would appear that the case for the proposed Volgograd by-pass would be
considerably enhanced if plans for upgrading most or all of the Moscow to Volgograd M-6 route
to motorway standards were to be accelerated in the near future. The case might even be stronger
if private sector financing will be sought for some or all sections of the M6 motorway.
5
The funding allocations amount to nearly 17 million rubles (approximately $680 million equivalent).
Unfortunately the sections proposed for near term upgrading are not close to Volgograd.
Page 24 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Figure 3.1
3.5
Proposed Moscow to Volgograd Motorway & Other Motorways
Assessment of the Options
The World Bank team recommends a multi-criteria assessment of the by-pass options outlined
above. The assessment of these options should include at least the following:

Traffic Assignments and Traffic Impacts. As indicated in section 4 of this report, traffic
assignments should be made for all these options reflecting near term and longer term
traffic conditions.6 Solid traffic assignments based on a careful assessment of existing
traffic conditions and a well-calibrated traffic model are particularly important. While
traffic volume assignments are important, it is equally important to assess the actual
impact of these by-pass investments on the quality of traffic operations. More
specifically, the level of service (travel speed and delay indicators) afforded to motorists
wishing to transit Volgograd should be assessed, as well as the potential improvement of
traffic operations on city streets relieved from carrying by-passing traffic.

Preliminary Design and Cost Estimates. Good estimates of the cost of constructing the
proposed by-pass options (as well as associated maintenance costs) will be especially
important both to assess the cost-benefit relationship of each option, as well as to
determine the level of financial contribution required from potential government and
6
Since the preferred option (Option B) is proposed as a toll road, traffic assignments for this option should
be prepared with and without tolls.
Page 25 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
private sector participants. A brief description of this assessment measure is provided
below.
3.6

Economic Rate of Return The economic feasibility of each option against the do-nothing
option should be established. This assessment measure is particularly important to show
where alternative solutions might generate more value per unit of investment. A
description of this important assessment measure is provided below.

Financial Rate of Return. The financial rate of return should be calculated for those
options on which toll facilities are proposed.

Sources of Finance. Possible sources of funding for each option should be assessed along
with a candid assessment of the likelihood of receiving this funding.

Special Requirements for Federal Financial Assistance. Beyond the above assessment
measures there are additional special Federal Government requirements to qualify for this
assistance. Each option should be assessed with regard to these specific measures. This
includes both qualitative and quantitative measures.

Safeguard Measures. The Russian Federation Government as well as the World Bank
and other international financing organizations require addressing certain environmental,
social, and cultural heritage measures to ensure the proposed by-pass does not cause
significant adverse impacts. During the options evaluation stage it will be important to
identify any significant adverse impacts that would affect the selection of the preferred
by-pass option (or options). Once the preferred by-pass option is selected, mitigation
measures, if needed, would need to be implemented to address any negative impacts.

Other Evaluation Criteria. Additional evaluation criteria which the Volgograd Oblast
may find to be significant, especially those related to the regional development plan,
could be considered.
Preliminary Design and Cost Estimates Needed for the Proposed Options
While no more information is required to assess Option A (do nothing) and Option B (the Oblast
recommended option), additional preliminary engineering design and corresponding cost estimate
information may be required to assess the other options. This should not require a substantial
amount of work given that a Feasibility Study has been undertaken for Option F (southern
extension of the 3rd longitudinal) and given that some reasonable estimates could be made for
Option G (modest upgrading of the existing portions of the 3rd longitudinal). However, at least
the longitudinal section drawings for all proposed road options should be prepared showing the
road alignments as well as typical road cross sections.
3.7
Economic Evaluation of the Proposed Volgograd By-Pass Options
The current Feasibility Study (FS) made available to the World Bank team does not include an
economic evaluation of the proposed Volgograd By-Pass. The FS section titled Economic
Evaluation is in fact a Financial Evaluation, where expected revenues from tolls are taken into
account.
Page 26 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
An economic evaluation uses costs and benefits for the society as a whole. Benefits may either be
included as exogenous monetized values or may result from the difference between the costs
associated with the “without” versus the “with” project scenarios. Costs and benefits are both
‘shadow priced’, or expressed in economic terms. By doing so, the economic evaluation uses
‘resource’ costs and thereby measures the cost savings to the country, as resources are considered
scarce commodities. More specifically, the economic evaluation of proposed road improvements
rests largely on vehicle operating cost savings and travel time savings.
The World Bank team recommends that the economic return on each of the above listed by-pass
options should be computed. This should include the economic internal rate of return (EIRR) and
net present value (NPV) which is described in the box below.
Description of Economic Internal Rate of Return (EIRR) and Net Present Value (NPV)
The Economic Internal Rate of Return (EIRR) and Net Present Value (NPV) are economic
indicators frequently used to provide the socio-economic justification (or not) of a proposed
project, and are also helpful for priority rankings.
The EIRR is independent of the discount rate used (unlike the NPV). By definition the EIRR is
the discount rate at which the NPV is nil, i.e. discounted costs equal discounted benefits.
The NPV provides a measure of the net worth of a proposed project and uses the appropriate
discount rate. A discount rate commonly suggested by the World Bank for transition economies
is 12 percent per year. All projects in the same country should use the same discount rate so that
the estimated NPV of all projects are directly comparable.
The optimal timing of projects can be assessed through the use of First Year Rate of Return
which discounts the first year net benefits relative to the project cost.
EIRR is calculated through an iterative mathematical procedure that automatically discounts the
net benefits of a project over the life of the project. A discount rate is used irrespective of
inflation (which is excluded from an economic analysis), since the time has an inherent value
associated with it. Economic analysis uses constant base year prices which are called ‘real’
values. As the costs and benefits are in real values no inflation/price contingency is included.
The base year is usually assumed to be the year in which the analysis is undertaken and in
particular the year when the project cost estimates are made. These should always be the latest
costs (original estimates or updated) available.
The identification, quantification and valuation of costs and benefits are central to preparing an
economic evaluation. The main objective is to determine whether a project is economically
viable, that is, an effective and timely use of public money and resources.
An important part of evaluating a project includes the need to address problems and constraints
(such as congestion on roads) and considering possible alternative solutions.
Project planning ensures that a project is not over-designed (for example, not building a 6 lane
highway when a 4 lane highway would be adequate for a given first phase of say a 10-year
horizon).
Page 27 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Preliminary Estimates of EIRR and NPV for the Proposed Volgograd By-Pass (Option B). The
World Bank team, based on some basic information provided in the currently available feasibility
study, as well as some rough preliminary assumptions, made a first approximation estimate of the
range of EIRR and NPV (at 12% discount rate) that might be expected for the Volgograd Bypass. The basic assumptions used are summarized in Annex 2. Based on these approximate
assumptions, the following results were obtained, using the World Bank Roads Economic
Decision Model (RED):
(a) Assuming a construction cost of the By-pass of US$20 million per km: EIRR, 3%; NPV,
- US$822.5 million;
(b) Assuming a construction cost of the By-pass of US$10 million per km: EIRR, 11%;
NPV, - US$59.6 million; and
(c) Assuming a construction cost of the By-pass of US$5 million per km: EIRR, 22%; NPV,
- US$336.8 million.
The First-Year Benefits per Economic Investment Cost (ratio) for the three options above are
0.06, 0.11, and 0.23, respectively.
While very rough assumptions were made to assess the EIRR and NPV for the proposed By-pass,
the results obtained seem to point out to the need to reduce costs to make the project more
economically feasible. This can be achieved, for example, by significantly lowering design
standards. To make it easier to eventually construct the by-pass to the high standards originally
proposed, when traffic volumes will be higher, the Oblast could consider securing now the same
right of way alignment and width that would be required later. Various design sub-options could
be considered including the elimination of some if not all grade separated interchanges, reducing
median and lane widths, and possibly reducing the number of travel lanes to only two in the least
traveled sections. The World Bank team strongly recommends that the internal rate of return and
net present value should be computed for all of the above listed by-pass options.
3.8
Assessment Summary and Selection of the Preferred Options (or Options)
Based on the above assessments, the Feasibility Study team can establish the relative merits of the
various by-pass options. The options assessments should first consider the merits of each option
assuming the necessary funds could be made available (i.e. making assessments principally on the
basis of the economic rate of return and other positive criteria). After this, another assessment
should be undertaken taking into account the likelihood of alternative possible sources of public
and private sector funding. The final step of this assessment should be a recommendation on the
preferred by-pass option (or options).
Follow-up Activities
The above suggestions may require more work than anticipated. Some of our suggestions may
also not be practical. We suggest that, once this section of the report has been reviewed and
digested, the Volgograd Oblast and its principal consultant should discuss in detail the process for
advancing this portion of the Feasibility Study.
3.10
Illustrative Multi-Criteria Assessment Matrix
Page 28 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Option Option
A
B
Option
C
Option
D
Option
E
Option
F
Option
G
Option
H
Evaluation Criteria
Traffic Impact (which options
provide best solution for transiting
traffic and secondarily provide the
most relief for city traffic)
Capital Cost of Construction
Economic Rate of Return (internal
rate of return and net present
value)
Financial Rate of Return (for those
options proposed with tolling)
Likely Availability of Potential
Sources of Finance (Federal,
Oblast, and private)
Meeting Special Qualitative
Requirements for Federal
Financial Assistance (including
substantiating that the project
would be impossible without
Investment fund budgetary
assistance)
Meeting Special Quantitative
Federal Financial Assistance
Criteria for Financial Assistance
(financial efficiency, budgetary
efficiency, and economic
efficiency as defined)
Addressing Safeguard Measures
(environmental, social, cultural
heritage)
Other Proposed Evaluation
Criteria (speed of implementation,
etc.)
Page 29 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
4.
CURRENT TRAFFIC CONDITIONS, TRAFFIC FORECASTS, AND TRAFFIC
ASSIGNMENTS
The viability of a proposed by-pass around Volgograd critically rests on an assessment of current
and projected traffic conditions. While a considerable amount of traffic information is provided
in several documents, the presentation of this information in the main Feasibility Study document
is disjointed and does not establish a firm foundation for assessing the viability of the proposed
by-pass.7 What is required is a comprehensive description of the following:
(a)
Existing traffic conditions to establish the case for a by-pass,
(b)
Traffic projections, including well documented assumptions and description of
the methodology used for preparing these projections, and
(c)
Traffic assignments to proposed by-pass options.
This information needs to be presented in a full chapter (or chapters) of the Feasibility Study
report.8 Since some of this information and analysis will be highly technical, parts of the
documentation that are not critical to the flow of the Feasibility Study report should be provided
in an annex or annexes.
This section of the report describes the additional data requirements:
4.1
(a)
What information is required that is not presented in the current Feasibility Study
report,
(b)
What additional traffic analysis will be required, and
(c)
How this information should be presented.
Existing Traffic Conditions and Impact Assessment
The current main Feasibility Study document does not present in any detail current traffic
conditions in terms of flows on the principal roads under consideration, the amount of bypassable traffic, nor a detailed assessment of the adverse traffic conditions caused by the lack of a
by-pass. This assessment should be presented in a separate chapter of the Feasibility Study.
More specifically this is required to (a) establish the case for the proposed by-pass; and (b)
establish a firm factual foundation for making future traffic estimates. The following information
is essential in adequately documenting existing traffic conditions:
7
The World Bank team acknowledges receipt of a substantial amount of existing traffic data which
apparently was not included in the Feasibility Study. More recently (during November 2005) additional
traffic information has been received which should be included in the Feasibility Study.
8
Given the importance of traffic information, it is proposed that existing traffic conditions and estimates of
future traffic conditions should be presented in separate Feasibility Study chapters. See the proposed
detailed Feasibility Study terms of reference.
Page 30 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD

The current average daily traffic on the principal road (national and oblast) approaches
to Volgograd in the vicinity of the proposed by-pass. (This information should be made
available in mapped and chart form.).

The average daily traffic on the three longitudinal roads as they cross the center of
Volgograd (just south of Ulitsa Nevskaya/Prospect Zukova) as well as traffic along
Prospect Universitetsky and on the road crossing the dam over the Volga River (This
information also should be made available in mapped and chart form).

The percentage (and total volume) of traffic on each of these road links which has
neither an origin or destination in Volgograd (ie. by-passable traffic)

The composition of traffic by vehicle type (trucks, passenger cars, other) on each of
these road links.

An hourly profile of traffic volumes on each of the road links to establish peak hour
traffic volumes

Average moving operating speeds and stopped time for by-passing traffic on each of the
major by-pass routes of the principal roads approaching Volgograd9

Recent growth in traffic volumes by approaching road links (the change in average daily
traffic over the last 5 years)
The above information should be obtained from adequate traffic surveys. Especially important
should be the following surveys:

16 hour classified counts (by vehicle type) on the above listed road segments
(preferably on three or more separate representative days)

Surveys determining the percentage of traffic that is by-passing Volgograd on these
road links (either at motorist checkpoints or license plate matching surveys)
If surveys to this level of detail have not been undertaken, the possibility of undertaking these
surveys should be seriously considered or reasonable alternatives should be proposed.
Based on the above assembled information, an assessment of current traffic problems should be
undertaken. This should include at least the following analysis:



9
A summary of the volume of traffic that seeks to by-pass Volgograd that is presently
using city streets (repeat from the above analysis)
An estimate of time savings and vehicle operating cost reductions that could be
accomplished with a by-pass accommodating this traffic at normal highway speeds.
The current level of service (including average operating speeds) on those urban
streets adversely impacted by the traffic that could be rerouted to a by-pass; also an
assessment of possible improved traffic conditions on these city streets with a
proposed by-pass.
This can be accomplished at low cost using a hand held GPS device.
Page 31 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
4.2
Traffic Forecasts and Impact Assessment
Based on the assessment of current traffic conditions described above, forecasts of future traffic
volumes and traffic conditions should be presented. Again this information has not been clearly
and logically presented. It is important to demonstrate how the traffic projections were
systematically developed starting with existing traffic volumes and patterns. What is lacking in
the current Feasibility Study is a step by step presentation of the methodology of the traffic
forecasting process, including the assumptions made. These traffic forecasts along with traffic
assignments to selected by-pass options require a separate section or chapter of the Feasibility
Study.
Particularly important will be a description of the logic and methodology used in forecasting
increases in traffic volumes. The World Bank team noticed, for example, that estimated traffic
volumes where traffic estimates were made were increasing only about 3% or less per annum.
This appears to be conservative on the low side, but valid reasons may exist for this estimate.10
Some discussion might be directed at suggesting a reasonable range of traffic growth that could
be expected and the possible impact of this range of estimates.
4.3
Traffic Assignments
The traffic assignment methodology has not been presented in convincing detail in the Feasibility
Study. This discussion needs to be as clear and concise as possible. See the Box below which
presents in detail the requested information about the traffic assignment model. Due to the
technical nature of this request in this box, the response could be documented in an annex to the
Feasibility Study.
The current traffic assignments are based on a single by-pass option. While this option is desired
by the Volgograd Oblast, and for which Federal Government and private sector funding is being
sought, the World Bank team is proposing to consider alternative by-pass options (see Section 3
of this report). These alternatives would enhance the credibility of the Feasibility Study, as well
as present fall back options should the higher cost preferred option be economically or financially
unviable, especially in the current global financial situation.
Given the proposed alternative by-pass options, it will be important to determine whether the
current traffic assignment model can assess these proposed by-pass alternatives, and what
additional traffic or other information may be required and incorporated into the model to permit
reliable traffic assignments. Particularly important would be reliable origin-designation
information to permit reliable assignments. The World Bank team notes, in particular, that the
traffic assignment model should take into account the completion of the new bridge over the
Volga River and the road connections to this bridge on the right (west) bank.
Assuming that the traffic assignment model will be able to adequately assign traffic based on the
alternative by-pass options, it will be important to systematically assess the impact of the traffic
assignments on the alternatives. Besides assigning the respective traffic volumes, an assessment
of traffic conditions (level of service) on the by-pass and principal Volgograd streets will be
important as a major input to the overall Feasibility Study.
10
It would be useful in the presentation to indicate the rapid growth in motor vehicle ownership and the
recent trend in traffic increases that have occurred on the principal highways approaching Volgograd.
Page 32 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
4.4
Follow-up Activities
The World Bank team recognizes that the above suggestions may require substantial additional
work and may not be practical for various reasons. We suggest that, once this section of the
report has been reviewed, the Volgograd Oblast and its principal consultant discuss in detail the
process for advancing this portion of the Feasibility Study.
4.5
Detailed Assessment of the Traffic Assignment Model11
It is important for the accuracy of the Feasibility Study to have a robust traffic model. The
following information would allow the World Bank team to assess the adequacy of the traffic
assignment model and the basic input data used by the model:
(a)
Provide the source of the base traffic data (clearly delineating the base year of the
model); including details of survey dates, types of surveys and results of traffic surveys on the
different road links. This should also include substantiation of origin-destination surveys used to
determine network zoning options, and matrix trip-ends for use in the model. The results from the
traffic model of the through traffic analysis, and the time periods modeled (whether AM peak,
PM peak, off-peak) as necessary ought to be documented.
(b)
Describe the calibration process of the traffic model. It would be helpful if a calibration
report was available. The details required include noting which road links have been modeled,
and the zones that have been adopted. Then, information on demonstrating the robustness of the
model; i.e. how well it reasonably replicates actual traffic conditions in Volgograd should be
presented (for example a greater than 85% level of accuracy is considered sufficiently robust). A
table of results comparing the actual traffic link counts versus modeled link flows for the major
roads would be helpful. The validation exercise would then include matrix validation, network
validation and assignment validation including comparisons between observed and modeled link
flows, turning movements at major junctions, queues and journey times. The difference between
the calibration and the validation is the fact that other independent traffic data is used to confirm
the model robustness from that used at the calibration stage. Possible use of screen lines and
cordon comparisons would be helpful. It would also be helpful if a validation report for the model
actually in use is also available. The reproduction of model outputs (tables, figures) would be
helpful in determining the robustness of the model calibration and validation exercises.
(c)
Present the methodology and results of the traffic forecasting exercise (model trip-ends
for a reference year). This reference model will then be taken as the starting point for testing the
proposed options for Volgograd by-pass.
11
Most of this information could be presented in an annex to the main Feasibility Study document.
Page 33 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
5.
TECHNICAL SOLUTION AND TOLL RATE ASSESSMENT
5.1
Introduction
The proposed Volgograd By-Pass (with a total length of 98.3 km), has been divided in two main
sections:12
(a) Northern section, 51.5 km -- from the road 1Р 228 Syzran - Saratov – Volgograd, to the
road M-21 "Volgograd - Kamensk-Shakhtinsky"; and
(b) Southern section, 46.8 km – from the road M-21 "Volgograd – Kamensk - Shakhtinsky"
up to the sector Volgograd - Astrakhan of the road M-6 "Caspiy"), Volgograd to
Astrakhan.
This technical review is based on the Feasibility Study (FS) for Volgograd by-pass undertaken by
LLC “Managing Company “RusTekhConsulting,” and their subcontractor, “Institute of Risks
Management”, under a contract assignment from the Road Department of Volgograd Oblast. This
study contains three Volumes: (i) Volume 1. - financial and economic part, the project realization
scheme; (ii) Volume 2. Book 1 – technical part plus Volume 2. Book 2 – technical part
(appendixes); (iii) Volume 3 – presentation materials.
This technical review highlights the major points regarding the FS that need to be
addressed to strengthen the FS; and make it more robust and consistent. The review also
raises some issues that may need to be clarified or substantiated to ensure that the FS complies
with international norms, while also meeting the requirements for federal funding.
The main technical components of the Feasibility Study are provided in Volume 2 Book 1;
and this forms the basis of much of the review work presented here. Volume 2 Book 2
(appendixes) presumably contains the main standard detail drawings and sections. The review
stipulates that the information provided in the Technical Volume 2 Book 1 are aptly represented
in the matching drawings in Book 2 for all inferences made on the design.
The environmental conditions affecting the design of pavement and drainage structures
(and consequently infrastructure costs), as well as vehicle performance, as presented in the
FS, include: (a) volume of precipitation, 400 to 450 mm /year; (b) average elevation, 96 m; (c)
border of IV and V road-climatic zones (Appendix I, СНиП 2.05.02-85) with moderate climatic
conditions for road construction; (d) average temperature of the coldest month, January, -7.6°С.
The FS confirms that the terrain in Volgograd is generally flat with some incidental uplands
and lowlands, river valleys and unique lakes. This favorable terrain indicates minimal
engineering cost implication options as opposed to a more challenging relief that would entail the
construction of major embankments, tunnels and bridges.
12
See paragraph 6.2, Volume 2, Book 1.
Page 34 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
5.2
Traffic Analysis and Geometric Design
The Traffic forecast is given in Table 4.2, FS Volume 2, Book 1. The traffic volume ranges on
the five (5) sections of the by-pass for the time period 2015 to 2030 respectively are as follows:
(i)
(ii)
(iii)
(iv)
(v)
For the section from the direction of Saratov towards Moscow, flows between 5,000
vpd and 8,000 vpd;
For the section from the direction of Moscow towards Rostov, flows between 15,000
and 25,000 vpd;
For the section Rostov to Oktyabrsky, flows between 15,00 and 25,000 vpd;
For the section Oktyarbrsky to Elista, flows between 12,000 and 18,000 vpd;
For the section Elista to Astrakhan, flows between 5,000 and 9,000 vpd.
The Feasibility Study has determined that these levels of traffic under the prevailing
guidelines indicate a design under Technical Category 1b. First, it is not clear whether these
traffic volumes are given in terms of passenger car units (pcu) or if they are the total number of
vehicles (i.e., cars, buses and trucks)13. The basis is made on the traffic volumes for a 20-year
design period. Second, the traffic forecasts are said to be based on the “Manual on the forecasting
of the traffic intensity on roads” approved by the Ministry of Transport of Russia, No. OC-555 of
June 19, 2003. However, the actual forecast percentage growth numbers for the different years
are not elaborated in the study, nor are the assumptions made. Further, the relevant tables or
charts in the Design Standards used for determining the Technical Category are not presented. As
such, it is not possible to verify the choice of Technical Category 1b.
Notwithstanding the above, the variation in traffic volumes across the five sections raises
some issues. The traffic forecasts indicate low projected volumes on the two end-sections and
higher volumes on the three mid-sections. This would indicate that the whole road may not have
to be designed to the same Technical Category. Lower technical categories may be justifiable for
some sections or even for the whole road on both engineering and economic grounds.
For international benchmarking, this review has compared the geometric characteristics
presented in the design against two comparable design standards. The design standards used
for comparative purposes are the Design Manual for Roads and Bridges (DMRB) Volume 6, of
the United Kingdom14, and the French Motorways Design Standards (ICTAAL) “National
Instruction on Technical Design Requirements for Rural Motorways”. The results of this
comparative analysis and the relevant comments are shown in Table 5.1 below.
Table 5.1
Comparative review of geometric design parameters
Parameter
Volgograd By-Pass
DMRB
ICTAAL
Remarks
Design Speed
120 km/h
Carriageway width
2 x 7.5m
Max. 120 km/h; varies
depending on alignment
and layout constraints,
can go to as low as 70
km/h
2 X 7.3m
Max. 130 km/h in plain
terrain; 110 km/h in
difficult terrain. If
terrain is very difficult,
as low as 90 km/h.
2 X 7.0m
4 lanes of 3.65m each
4 lanes of 3.5m each
Further analysis may
find that a lower design
speed may be desirable;
if not for all, then for
some sections.
Lower parameters may
be justifiable given
traffic levels and
economic
considerations.
(predicating 4 lanes of
3.75m each)
13
14
See Chapter 5, Volume 2, Book 1.
Available online at www.standardsfor highways.gov.uk
Page 35 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Shoulder
Not mentioned; perhaps
in drawing details (not
seen)
6.0m
2 X 3.3m
2 X (2.5 to 3)m,
absolute min. 2 X 2m
4.5m (hard strip &
central reserve)
5.0m (2 X1.0 m strips
and variable central
reserve of about 3m)
Verge
Not mentioned
2 X 1.5m
Verge part of safety
zone which is 8.5-10m.
Minimum Curve
Radius (Horizontal)
1,500m
Between 510 and 2880
depending on design
speed; 1,020 for a 5%
super-elevation
600m plain, 400m
difficult; and 1000m
plain and 650m difficult
for non-super-elevated.
Traffic Strip Width
(Central Median)
Minimum Curve
Radius (Vertical)
Concave (Sag)
7,889m
Convex (Crest)
15,002m
Maximum
longitudinal gradient
3.94%
Visibility oncoming
vehicle
450m
Depend on comfort
criteria
Depend on visibility
criteria
3% for motorways and
4% for dual
carriageways; 8% is the
maximum departure
from standard
Stopping sight distance
295m (120km/h)
4,200m plain, 3,000m
difficult;
12,500m plain, 6,000m
difficult
5% plain
6% difficult
Stopping Distance
280m (130km/h)
Needs further
elaboration from design
drawings.
A reduced width would
yield cost savings.
Needs further
elaboration from
drawings.
Safe horizontal
alignment
Stated minimum radii
appear reasonable.
Actual radii on different
sections must be
confirmed by designers.
The maximum
longitudinal gradient of
3.94% is reasonable.
Visibility parameter as
stated is reasonable.
The World Bank team did not receive the engineering drawings. However, it is expected that
the requisite cross-section drawings, longitudinal profiles and road plans have been appropriately
prepared for the chosen alignment. This should reflect the full roadway width extents and objects
therein including buildings, existing accesses, other physical features, and any other objects that
would affect the road construction.
5.3
Junctions, other structures and road safety features
There are a total of six junctions outlined in the FS Volume 2, Book 1. These are at km
0+000, 27+000, 51+535, 86+025, 89+775 and 96+125. Four of these junctions have been
designed as a default “clover-leaf” type junction for a four-way interchange (27+000, 51+535,
89+775 and 96+125). While clover-leafs involve large land take, they offer a number of
advantages, and their selection seems reasonable. The km 0+000 junction has been designed as a
tube/ trumpet, which is the most traditional way of separating a 3-way junction. The drawing
provided should include directional arrows to show that the bridge is two-way; and an
explanation is lacking as to why/whether all movements have not been considered. For the
junction at km 86+025, it is unclear as to what movements are being catered for in the design
especially for two ramps. This means that it would be helpful to have a drawing indicating the
traffic movements with arrows; not that the design itself would be inadequate.
The other structures and road safety features, as described in FS Volume 2, Book 1, para
6.3, appear to be reasonable.
Page 36 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
5.4
Pavement Design
A comparison of four selected pavement design alternatives was carried out in the FS15. The
FS notes that on taking into account the construction cost and engineering experience in the
region, an option with the following design parameters was the most economic:
1. Surfacing: stone mastic asphalt concrete mixture ЩМА-20 thickness of 4 cm;
2. Base course divided in three layers:



Upper layer: hot porous coarse asphalt concrete (type I), 7 cm thick, with the reinforced
geonet "Hatelit" C 40/17, with a 1cm thick protective fine aggregates layer;
Medium layer: asphalt layer (referred to as black road metal- clarification on this
terminology is needed since it is not clear if this is an open graded or close graded
Bitumen Macadam or even a penetration macadam), 8 cm thick;
Bottom layer: graded road metal (clarification on this terminology is needed since it is
not clear if this refers to graded crushed stone or some other material), 38cm thick,
laid out in three layers: H upper = 12cm, H medium= 13 cm, H bottom = 13 cm;
3. Additional layer (Sub-base layer): has been proposed, comprised of light silty loam soil in the
nonwoven synthetic material "Dornit-250", with a required module of elasticity of Etr=308 MPa.
The FS notes that local recent experience has shown that it is possible to increase the service
performance of the asphalt concrete with such reinforcement. The thickness noted in the adopted
variant (variant 2) for this layer is 60cm, but is not reiterated in the final pavement profile; and
this also needs to be reconciled.
The pavement design proposal appears reasonable, given the projected traffic loadings but
clarifications are needed on the salient points discussed above.
15
See paragraph 6.3, FES Volume 2, Book 1
Page 37 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
6.
CONSTRUCTION AND MAINTENANCE COST ESTIMATES
6.1
Analysis of Cost Estimates
The Feasibility Study does not provide the requisite justification for the costs. The costs
have been provided for the northern section without costing of major road items and
breakdown of estimated quantities. The costs provided are wholesome in nature for items like
earth road bed, road covering etc instead of breaking them by line items for different road
elements like the pavement layers, with estimation of quantities required, and unit rates. Without
the background information, and calculations, the road cost estimates appear arbitrary and cannot
be justified.
At the same time, inconsistencies have been noted in the construction cost estimates
presented and used in different parts of the analyses. According to Chapter 9 of the document
provided during the mission (presumably Volume 1 of FS) on Cost Effectiveness of the Project,
the total construction cost of the By-pass is estimated at Rb 53.7 billion, to be implemented in
2009 (5 percent), 2010 (28 percent), 2011 (35 percent), and 2012 (32 percent). The study
anticipates that the private sector would cover 25 percent (or Rb 13.6 billion) of the construction
costs and all subsequent maintenance and rehabilitation costs, while the public sector would
contribute 75 percent (or Rb 40.1 billion) of the construction cost through a grant (or subsidy).
However, the construction cost of the Northern section of the By-pass, as indicated in paragraph
6.3, FS Volume 2, Book 1, is estimated at Rb 42.1 billion. No cost estimate for the Southern
section is provided in FS Volume 2, Book 1. If the total construction cost of the By-pass is Rb
53.7 billion (as used in the analysis of Cost Effectiveness of the Project), the Southern section
would cost Rb 11.6 billion, which does not appear realistic. Its cost should be closer to the cost of
the Northern section, as the difference in length of the two sections is only about 9 percent.
There also seems to be an inconsistency, within FS Volume 2, Book 1, between two cost
estimates of the Northern section: while its cost estimate is Rb 42.1 billion in paragraph 6.3, the
detailed calculations in Chapter 13, Table 13.1, show an estimated cost of Rb 40.6 billion.
A comparative review of the cost breakdown for the Volgograd by-pass indicates the
construction costs to be on the high side (See Figure 6.1 below). The construction cost
estimates of Rb 53.7 billion is equivalent to some € 1.54 billion. For 98.3 km, this amounts to an
average of €15,657,405 per km. From a sample of some international comparisons of motorway
costs per km (at 2007 prices), only Romania and Slovenia show costs approaching these levels
(both these averaging between €10 and €11 million per km). Given the discrepancies against
international benchmarking, the only costs justification can be made on the basis of the FS
contractor providing a reasonable backup of the validity of their estimates, e.g. from similar
contracts completed in the region/ Russia in general. It is also worth noting that the international
cost estimates in countries with high unit motorway costs are usually liked with projects that go
through difficult mountainous terrain, which is not the case for Volgograd.
Page 38 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Figure 6.1
International Unit Cost km comparisons for motorway construction
Cost per km (€ millions - 2007 prices)
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
P OL
H UN
C ZE
S LO
US A
R OM P OR
GR E GER
FRA
IR E
F IN
D EN
SPA
B UL
CRO
Sources: European Investment Bank, World Bank ROCKS database, Poland road agency data,
Romania Association of Construction Entrepreneurs among other sources.
The FS has detailed the required maintenance and operation requirements for the
Volgograd by-pass and all associated elements in Section 9.2 of Volume 2 Book 1. The cost
review presented here refers strictly to the repair costs. The repair costs, as estimated, would
amount to a total of Rb 7.5 billion over the 2013 to 2043 period (see Cash flow statement Table
9.3, Chapter 9). Using the maintenance unit rates provided by the VOHD, the estimates appear
reasonable given the assumptions of periodic maintenance every 4 years and a renewal after every
12 years. However, it is unclear how the expenditures presented in section 8.3.4 of the Financial
Model report correspond with the expenditures presented in the Cash flow statement in Table 9.3,
Chapter 9. Clarifications that reconcile these elements are necessary.
Conclusion on cost estimates: Before further analysis, it would be important that the FS contractors
provide a clear indication of the derivation of the construction and maintenance cost estimates
(including quantities and unit cost breakdowns) for the Northern and Southern sections of the Bypass.
6.2
Toll Rates and Collection System
Toll rates are discussed in Chapter 4 and toll collection systems in Chapter 7 of Volume 2.
Book 1 – technical part, of the report on “Financial and Economic Substantiation (FS) for the
Volgograd By-pass.”
The recommended toll rates in the FS16 are:
-
16
passenger cars: Rb 1.5/km or about US$0.06/km
medium trucks (2 or 3 axles): Rb 2.6/km or about US$0.10/km
heavy trucks (more than 3 axles): Rb 3.7/km or about US$0.14/km
buses: Rb 5.2/km or about US$0.20/km
See paragraph 4.1 of Volume 2 Book 1.
Page 39 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
A comparison of toll rates in different countries worldwide is presented in Figure 6.2. The
summary results are based on IMF data (reproduced in an assessment report by ECORYS 17)
60
2
40
1
20
0
0
Toll rate
France
80
3
Poland
4
Spain
100
Portugal
120
5
Slovenia
6
Italy
140
Volgograd
Bypass
160
7
Croatia
8
Toll rate/GDP per capita
(Volgograd=100)
Toll rates comparison (in EUR/km)
Serbia
Toll rate (EUR cents/km)
Figure 6.2
Toll rate/GDP per capita
Source: IMF data as quoted in ECORYS (2008)
The toll rate for passenger cars is comparable with the rates in other medium income
economies. Another data comparison also shows this rate to be about the same as that in use on
the Rio de Janeiro to Sao Paulo toll road concession in Brazil. The toll rate for passenger cars per
GDP (PPP) per capita also compares well with the other countries.
However, the toll rate for heavy trucks, about US$0.15/km, is relatively low. In several
countries, such rate is calculated by multiplying the truck number of axles by the rate for
passenger cars (See for example the data for 13 countries available at the International Bridge,
Tunnel and Turnpike Association (IBTTA) website18). For a 4-axle truck, this rate would then be
US$0.24/km. Subject to other parameters, such as affordability and willingness to pay, it is
recommended to consider adopting a higher rate for heavy trucks than the one currently proposed.
Given that the bus toll rate is also usually aligned to the rate adopted for lower-axled heavy
vehicles, it is unclear why the bus toll rate is higher than that for heavy goods vehicles. In
the countries where height or tonnage is the over-riding factor or where all vehicles with more
than 2 axles are charged the same price, the rate for buses is the same price as the heavy trucks
and not more (See for example Australia and USA case studies on IBTTA website). Clarification
is needed as to this bus rate choice versus that for the heavy trucks.
6.3
Demand Projections
The report indicates that the model used to estimate future traffic volumes on the proposed
tolled by-pass has been applied in a number of previous projects in Russia. It also states that
the differences between forecast volumes and actual traffic volumes (after the facility was opened
to traffic) have been within 10 percent. It would be helpful if the report showed the data used in
17
18
ECORYS (2008) Assessing the potential for [please complete]
http://ibtta.org/Information/content.cfm?ItemNumber=542&navItemNumber=1238
Page 40 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
such comparisons. Perhaps as important would be the data for calibration and validation of the
model for Volgograd. Traffic forecasting experience on toll facilities elsewhere have shown
larger differences between actual and forecast data; usually with optimism bias for traffic. (See
for example the Standard & Poor’s report on Traffic Risk in Start-up Toll Facilities19).
6.4
Toll Collection System
Manual, automatic and telepayment toll collection technologies are proposed to be included
in the By-pass toll collection systems (TCS). Three toll plazas are proposed. Regarding the
telepayment system, the report (paragraph 7.2) states that “no stopping of the vehicle is required,
the driver should only reduce the speed at an entrance to TCS to 5-10 km/h and wait for a barrier
to open.”
While the proposed telepayment system is widely used, more modern systems do not
require any speed reduction by vehicles paying toll with a “tag.” The consultants clarified that
such system has not been considered at this stage as its installation would required defining the
permanent users of the road. The issue of installation will be reviewed after commissioning of the
facility without requiring substantial investments.
Toll plaza design used the following hourly carrying capacity (paragraph 7.4):
- payment by cash - 160 vehicles/hour,
- use of magnetic cards - 250 vehicles/hour
- telepayment (no stop) - 600 vehicles/hour
- coupon delivery station - 200 vehicles/hour
- Peak hour traffic volume was taken as 8 percent of the daily volume.
The selected parameters seem reasonable.
6.5
Conclusion and Toll Parameters
The toll collection parameters adopted seem reasonable. It would be useful to include an
explanation as to why a free-flowing electronic toll collection system for “tagged” vehicles has
not been considered.
19
http://siteresources.worldbank.org/INTINFANDLAW/Resources/TrafficRiskS&PReport.pdf
Page 41 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
7.
INTRODUCING PPP AND IMPLICATION FOR THE OBLAST
7.1
Overview of PPP20
What is a PPP?
There is no widely agreed, single definition or model of a PPP but all models have common
characteristics. The term “public private partnerships” has been used since the 1990s as a form of
private sector participation (PSP) in infrastructure financing. All definitions, however, are based
on the common principle that PPP is a ‘procurement process’ to provide services or deliver assets
through joint public and private cooperation. Concessions, BOT, leases, etc… are all forms of
PPP, although some are more applied based on the type of project and public sector objectives.
PPP is based on the recognition that the private sector can contribute to reducing the overall cost
of delivering infrastructure services through increased efficiency and better management of some
risks (such as construction). At the same time, it means that the private sector’s higher cost of
financing and need for a return on its investment must be overcome by the benefits it provides.
Why embark on a PPP?
The main benefit of PPP is to provide better value-for-money to public authorities, which means
cheaper/better services over the long-term. A review of construction projects by the UK National
Audit Office showed that PPP in the UK on average had only 22% of cost overrun for the public
sector, as opposed to 73% under traditional procurement. This is, however, was possible only
with an optimal risk allocation between the public and private sector. Some risks, such as
construction, can be better managed by the private sector: for example, traditional procurement
often leads to costs being over budget or delays in construction, which are better managed by the
private partner. If the same is applied to operations and maintenance and is well designed, a PPP
project can ensure that proper maintenance is done, extending the life of the assets and reducing
its overall management cost. This results in more “value-for-money” for Government (or the
Oblast or City) than if it was undertaken as a traditional project.
The other reason why PPP has been used is to bring additional financing, although there is often a
misconception about this contribution. PPP can potentially bring financing from the private
sector, as investors typically contribute to the cost of the infrastructure. However, as this is done
through borrowing and equity participation, the private partner needs to repay its debt and
generate a reasonable profit. In practice, sources of revenue are often limited to user charges and
public sector contribution, which are available regardless of the project being a PPP or not. When
looking at PPP as a way to bridge the infrastructure financing gap, public authorities should also
ensure that the PPP option is cheaper than traditional procurement and public sector borrowing.
What are the risks associated with PPP?
The main risks associated with PPP are fiscal, with one being its direct fiscal impact. Although
the public sector is usually asked to contribute to capital expenditure, part of its contribution is
often phased during the life of the concession. The risk implication is that the public authorities
might decide to implement a project that is not affordable, simply because the initial contribution
is relatively small. However, future payments over a long period of time (often 30 years) are not
usually accounted for in the budget planning, but will likely restrict the Oblast/City ability to
finance other much needed projects. As a result, public authorities must implement only projects
that are absolutely needed and take into consideration the long-term financial commitment
associated with PPP.
20
Source: Brochure on PPP and Infrastructure Finance (under preparation)
Page 42 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
The other fiscal risk is linked to the contingent liabilities associated with PPP. Some risks, such as
traffic for a highway project are difficult to completely transfer to the private sector. As the traffic
is impacted by many events not in its control, including policy decisions by the public authorities,
the private sector is not willing to fully take on this risk. As a result, the public sector often
provides minimum revenue guarantees that are used if traffic is below a certain level. From a risk
management perspective, this means that the public authorities make realistic projections on
required budget outlays during project life, considering the possibility of revenue support for the
private party in case of insufficient traffic demand..
In practice, however, as these payments are often contingent on the occurrence of an event, they
are usually not accounted for by the public authorities. Experience has shown that traffic forecasts
are often very optimistic, and it is not uncommon that actual traffic is 30% lower than the
estimates. The implication is that the public sector can end up paying more than initially foreseen
and take on significant liabilities should the demand be much lower than expected. Although it
depends on the project, it is in practice difficult to avoid providing some form of guarantees to the
private sector. Again, the associated risk must be accounted for in future budget provision or
reporting.
7.2
International Best Practice in relation to Project Preparation
International experience over the last 15 years has shown that several of the issues facing PPP
projects can be linked to specific weaknesses in a PPP program. A PPP project is very complex
and different from traditional procurement. Several failures of PPP projects in the world can be
attributed to a weak Feasibility Study and absence of comprehensive planning. Over-ambitious
agenda often leads to lack of preparation and common mistakes in a Feasibility Study include unrealistic demand forecast, poor risk allocation and undefined public sector contribution. Other
identified important factors for successful PPP include clear contractual rules, competitive
procurement and credible contract enforcement.
Successful PPP projects were often relatively modest in size and the public official showed
realism in implementation/planning. Experience has shown that, especially for Oblasts/Cities with
limited PPP experience, a recommended approach is to carefully select the projects that would be
considered as PPP. As much as possible, initial projects should not be smaller than US$ 1 billion
and significant investments should be implemented in phases whenever possible. One example
can be to phase a four-lane highway in a first phase, corresponding to a 2 lane highway or a
section of the highway, and then complete the project in a second phase. By doing do, the private
sector will view the project as less risky, and can for example, test the traffic forecasts with a
lower level of investment. In addition, by borrowing less, the private partner will be able to obtain
better financial terms than what would have been obtained for a bigger project.
Careful preparation, with a detailed Feasibility Study, is one of the most important factors
contributing to the success of a PPP project. The objective of the Feasibility Study goes beyond
obtaining the necessary approvals and Federal funding. It will enable the project to be better
prepared in the best interest of the Oblast/Cities and the users. As a result, sufficient time and
resources should be allocated to the Feasibility Study, and the use of good consultants with
international experience is absolutely necessary. A good Feasibility Study can easily take 6
months to be completed, but ultimately saves time and money during procurement and
operations.
Projects should move into procurement phase only if they demonstrate value-for-money,
appropriate risk transfer and affordability. As explained earlier, PPP is not the solution for all
Page 43 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
infrastructure projects, even when Federal Funds are available. Oblasts/City officials should have
a clear understanding of the value brought by the PPP option, and when to consider instead a
traditional project. Such information ultimately saves money for the Oblast/City and if proposals
from the private sector are too expensive, it will be easier/faster to revert to traditional
procurement. Risk allocation between the private and public sector is project-specific but should
be based on international best practice, as some risks cannot be borne by the private sector, and
can lead to limited response during procurement. Finally, PPP projects are long-term contracts,
sometimes resulting in significant financial commitments (direct or contingent) that should be
taken into consideration, in the light of available budget.
Competitive bidding remains the best procurement option for the public sector, being more
transparent and reducing the cost for Government and users. There is a belief that directly
negotiated contract are faster and lead to the same result as competitive bidding. Experience
shows that absence of competitive bidding often leads to long delays during negotiations and the
public sector end up paying more than with competition. The services under a PPP project are
often provided in a non-competitive environment so procurement is often the only time
competition can be introduced. In addition, lack of competition often leads to perception of
corruption, resulting in strong opposition from the public to the project. The concession law in
Russia also requires competitive bidding.
Finally, appropriate mechanisms and resources should be placed on the PPP contract monitoring
and regulation following contract award and financial close. PPP projects are long-term contracts
(a 30 year contract or more is quite common for concessions or BOT types of projects). Attention
is often focused on the transaction without taking into consideration that close contract
monitoring and supervision will guarantee that services are delivered according to the agreement
to the users. Absence of solid contract monitoring can lead to additional costs or missing revenue
for the public authorities, as well as poor services received by the users. The design of a contract
monitoring system starts during preparation and having the right institutional arrangement and
resources is essential.
If PPP is going to play an important role in financing projects in Volgograd, more needs to be
done. The points raised above are essentially related to project preparation. Particularly, a solid
legal, regulation and institutional Framework should be put into place. Moreover, significant
effort in capacity building and use of international consultants with expertise in PPP is highly
recommended.
7.3
Overview of PPP investment and potential impact of current crisis
Although PPP Investment has been significant in the world, is it very likely that such investment
will reduce in the context of the current economic crisis. PPP investment in the world has been
the highest since 1990, driven by positive economic growth and need for investment in the
transport sector. At the same time, several countries have matured and there are more regions
now attracting PPP investment. At the same time, as shown by Chart 7.1, PPP Investment has
been very much impacted by economic cycles: the decrease and low level of investment from
1998 to 2003 correspond to the various economic crises (Asian Crisis, Argentina and Russia
Crisis, tech-bubble, etc…). Based on this historical trend, there is a high possibility that PPP
investment will significantly decrease in 2009 and this will also be felt in Russia.
Page 44 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Figure 7.1
PPP Investment in Transport (1990-2007) by region
35000
30000
25000
US$ million
Sub-Saharan Africa
20000
South Asia
15000
Middle East and North
Africa
Latin America and the
Caribbean
East Asia and Pacific
10000
Europe and Central Asia
5000
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Source: PPI Database (World Bank) - Russia is considered as part of Europe and Central Asia in this analysis
While it is too early to determine the exact impact of the current crisis, there is an understanding
that the private sector will find it more difficult to finance PPP projects in Russia. It is expected
that the current liquidity crisis will have negative effect on the availability and cost of private
sources of capital. In practice this might result in potential PPP projects facing lower risk
tolerance by creditors, shorter debt maturity, wider spread and a flight to quality by investors.
This situation could lead in projects not finding any serious bidder able to raise long-term debt
but will certainly result in more expensive cost of capital. The implication will be a more
expensive project for the Oblast or simply no serious proposal from the private sector.
Given the size of the proposed by-pass, the Oblast might be better off waiting for the market
conditions to improve or consider alternative financing means. The timing might be better to
strengthen the current legal and institutional framework for PPP and strengthen project
preparation. In the current situation (November 2008) there is limited scope for the private sector
to be attracted in such a huge project in a region with no previous experience in PPP. The market
could improve in the future but there is no agreement on how long the crisis will last. As a result,
in addition to carefully assess the viability of the proposed project as a PPP, the Oblast should
give serious attention to the current market situation and carefully assess the options of (i) waiting
for the market situation to improve, or (ii) considering alternatives options to PPP. In any case,
this is an additional argument for seriously considering less expensive options to the proposed bypass.
Page 45 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
8.
REVIEW OF PPP MODELS APPLICABLE TO THE BY-PASS
8.1
Model Options under Concession Law
The Feasibility Study (Financial and Economic Substantiation, hereinafter referred to as
FS) first presented a diagnostic review of a wide range of possible ways in which a PublicPrivate-Partnership (PPP) project could be designed. Among these, it includes Privatization,
Concession, Build Own Transfer (BOT), Build Transfer Operate (BTO), Build Own Operate
Transfer (BOOT), Build Own Operate (BOO); Reconstruct Operate Transfer (ROT) and Lease,
Develop, Operate (LDO) among others. Many other variations exist in the literature including
Design Build (DB), Design Build Finance Maintain (DBFM), Design Build Finance Operate
(DBFO), Design Build Finance Maintain Operate (DBFMO) with some variations in roles and
payments (including use of shadow tolls instead of actual tolls).
However, given the premises of the Concessions Law21, the FS notes that only two options
are worthy of discussion: presented as the Concession type, and the BTO model. All other
options would face possible legal hurdles; with the only few contracts operating in Russia outside
the concession law being small contracts that rely on the civil code, or being implemented under
the St Petersburg PPP law (such as Nadzemny Express). In some parts of the literature, the BTO
model is actually not in any way de-linked from a concession; and is one of many types of
concession options possible22.
The FS recommends moving the Volgograd PPP forward as a BTO project, which is in line
with what is prescribed in the Concession Law. The reasoning is that transfer of the assets is
made into the title of the State at the end of the construction period; making this type of model
acceptable within the Concession Law. The choice of a BTO model option for Volgograd by-pass
seems reasonable given the constraints posed by the Concessions Law. Moreover, whatever is the
model option chosen under the framework of the Concessions Law, the fact that only Russian
courts have exclusive jurisdiction with no recourse to foreign arbitration makes the case for
private sector interest constrained or raises the possibility for high priced offers.
In summary, although the feasibility study goes into a very descriptive review of all possible
options, when essentially a few are only allowed under the Concession Law, the
recommendation of implementing the project under a BTO scheme appears reasonable.
8.2
Demand Risk Considerations in the Feasibility Study
The assumption that the private sector will bear the traffic risk is unrealistic. One of the
main considerations for a PPP arrangement is the allocation of demand risk. The FS does not state
explicitly how the demand risk is apportioned. However, all indications point to the fact that an
assumption has been made that the private sector will bear this risk. This inference is made from
the fact that the FS does not discuss the two commonly used traffic mitigation options of
21
Russian Concessions Law signed into law on 21st July 2005 and entered in force on 1st January 2006.
See for example Trefor Williams (2003), “Moving to Public Private Partnerships: Learning Experience
from around the World”; and the Government of Assam, India PPP website note on PPPs available online
at http://assamppp.gov.in/pppmodels.pdf
22
Page 46 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Minimum Revenue Guarantees (MRG) or Availability Payments (AP) for the proposed PPP
model option.
Three points need to be borne in mind when considering traffic risk allocation for this project:
First, the fact that there is no prior PPP experience in Volgograd is suggestive of heightened
conservatism on the part of investors (lenders, equity investors/sponsors). In fact, very few
transport PPP projects of similar size, which already reached financial close, exist anywhere in
Russia. The closest project is the Western High Speed Diameter (WHSD) toll road in St.
Petersburg (currently in bidding phase). Moreover, the prior lack of PPP experience raises the
issue of the likely public response to tolling; and possibilities for traffic using alternative routes or
Government authority backtracking on tolling.
Second, given the fickleness of demand forecasting, it is unlikely that potential
concessionaires will regard the traffic forecasts for Volgograd by-pass without skepticism.
This is an internationally recognized weakness with many PPP projects that have failed to deliver
on projected forecasts making lenders and equity holders very cautious23. In 2004, Standard and
Poor’s found that toll road forecasts have on average overestimated traffic by between 20 and 30
percent24. With limited confidence in forecasts, the private sector will need a measure of
reassurance in the form of a MRG or AP to participate in a PPP arrangement.
Third, the Volgograd by-pass project in its entirety at some Rb 53.7 billion rubles (€ 1.54
billion) is a very large project. Securing the private contribution required (25% of total capital
cost, based on the Feasibility Study) will not be easy for any investors especially in the
environment of hardening credit terms, and freezes in credit under the financial crisis; or in its
aftermath. Even internationally, the Volgograd by-pass ranks among the largest PPP projects in
financial terms. Failure to incorporate a revenue guarantee mechanism will all but leave the
potential for securing private financing very slim or potentially even non-existent.
8.3
Demand Risk Mitigation (Guarantee Options)
Given the above concerns, it is clear that the issue of demand risk is one that the Volgograd
authorities will have to take or share if the project is to be viable for private sector
participation. There are essentially two traffic risk mitigation options: (i) use of Minimum
Revenue Guarantees (MRG) or (ii) Availability Payments (AP). The review finds that
strengthening the FS to consider and evaluate the option of an AP mechanism would make
Volgograd By-pass more attractive to the private sector. The MRG option is not considered an
appropriate one for Volgograd by-pass because the residual traffic risk is still likely to be
unattractive to the developers and those developers that bid are likely to charge a high risk
premium.
How the AP will be structured or funded, and the payment profile are issues that will need
further investigation25. Contributions from the Investment Fund, the Federal Targeted Program
See for example the Standard & Poor’s report on Traffic Risk in Start-up Toll Facilities available online
at http://siteresources.worldbank.org/INTINFANDLAW/Resources/TrafficRiskS&PReport.pdf
24
See 2004 report online at http://www.people.hbs.edu/besty/projfinportal/S&P_Traffic_Risk_2004.pdf
25
The availability payments can be calculated using the World Bank Highway PPP Toolkit available online
at http://rru.worldbank.org/Documents/Toolkits/Highways/start.HTM
23
Page 47 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
for Transport, use of Oblast budget money, tolls, land transactions, taxes and other fees,
Volgograd city contributions or other sources all remain possible options. In addition, the
payment profile (including initial capital grant contribution) and profile of availability payments
are all important considerations that will have to be determined.
8.4
Most Viable PPP Model Option
The most viable model scenario for Volgograd by-pass is for the proposed BTO model with
an availability payment, an initial capital grant contribution and tolls. The initial capital
contribution would go towards meeting some of the costs at the construction stage, linked to the
attainment of construction milestones by the private developer. The availability payments must be
structured to be available for the duration of the concession (31 years as per FS). Under an AP
arrangement, the developer would generally be compensated with a periodic payment (eg
quarterly) given that the contracted or agreed lanes are available at the determined level of service
and/or other factors. These payments can be calibrated to include incentives for the private party
to construct, operate and maintain the road in the most optimal manner. These payments provide
a level of predictability and transparency with greater confidence from the private developer.
Moreover, the payments are agreed to in the contract and can only be adjusted downwards if the
private developer fails to perform to standards.
The setup for this model scenario is as shown in Figure 8.1 below. The financing of a PPP
project like the proposed by-pass will likely be based on project finance. The implication is that
the private sector will create a dedicated legal entity, the concession, which will raise financing
(debt and equity). Debt and equity holders will be paid with revenue from the project and not
from the balance sheet of the companies. The concession is expected to include construction and
maintenance contractors, toll operators, investors and banks to form what is known as a Special
Purpose Vehicle (SPV). Multilateral organizations26 will play an important role, by providing
financing to the concessionaire, following selection of preferred bidder, or directly to the Oblast
(with or without sovereign guarantee).
Figure 8.1
Possible viable PPP model structure
Guarantees
Co-investing
Lenders and
Equity
Holders
Sub-national
lending
Oblast
Multilateral
organizations
Concession rights
Availability Payments
Equity/ Debt
Dividends/ Interest
Multilateral
organizations
Tolls
Volgograd Bypass
Concessionaire
CAPEX
Tolls
Users
OPEX
Construction
26
Operations
Maintenance
Here, a multilateral organization refers to an international financial institution such as the World Bank,
the EBRD or the EIB.
Page 48 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Source: adopted from ECORYS (2008)
Under this arrangement, all tolls collected would be State revenue; and hence help in
offsetting the availability payment obligations as much as is possible. Depending on the
approach taken, the toll collection can be collected by the operator and handed over to the
Government, which can then earmark the funds as availability payments or part of the availability
payments. As a rare option, the Government could organize the toll collection itself.
The use of AP would also benefit the Oblast by increasing the number of bidders and
potentially lowering the financing contribution. Even with the use of AP, the private sector
will need to raise long-term limited recourse financing. However, the use of AP will reduce the
perceived risk, resulting in better financing terms or lower expected return on equity, thus
reducing the total project cost. The Oblast would benefit from the lower financing cost, as
Volgograd will ultimately need to finance a portion of the project cost. Moreover, the reduction in
traffic risk will increase the potential number of bidders and the associated competition during
procurement. This competition will result in more aggressive bids, which would also contribute to
a lower contribution from the Oblast.
Page 49 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
9.
REVIEW OF FINANCIAL ANALYSIS
9.1
The Review Approach
The review of the financial analysis was based on the information given in the feasibility study.
The financial model used for the analysis in the Feasibility Study was not available to the World
Bank team at the time of preparing this report. For intellectual property reasons, the consultants
responsible for the financial model agreed to show it only in their premises. The review thus
centered on the assumptions and conclusions of the analysis as described in the Feasibility Study.
To test the methodology and analysis and confirm their consistency with the results, the Bank
team did a preliminary financial simulation. If the model is made available in a timely manner,
the report would be updated with the detailed review of the financial model. However, the
financial analysis will need to be redone given that this section recommends changing several
assumptions and analysis.
9.2
The Role of Financial Analysis
Financial analysis is an essential component in the preparation of any PPP project. It allows
assessing the attractiveness of a potential project to private participation and allows the Oblast to
test the financial implications of different policy decisions. More precisely, financial analysis will
determine the financial contribution needed from the public sector to make the project bankable
for lenders and attractive for equity investors.
The financial model is the central tool in performing financial analysis. It should be sufficiently
flexible to test various options and scenarios, and to support the Oblast during the various stages
of the project cycle. For example, the financial model can be used to support negotiations with the
preferred bidder by assessing the financial impact of any risk allocation proposal.
The quality of financial analysis depends on the quality of assumptions. It is understood that
official figures have been used to support the application to Federal Funds. However, bidders will
assess the risk associated with the project and will use market prices (such as construction costs)
when making a proposal. This is why financial analysis which does not use current market data
will generate results that are different from what the Oblast will receive from bidders. The
subsequent analysis is based on market prices and assumptions that the private sector is likely to
make.
Performing sensitivity analysis (testing changes in assumptions) with the financial model is
necessary to give a range of likely results. Some preliminary assumptions can have a significant
impact on the final results. For example, the capital cost of the project directly impacts the total
amount of capital grant required to make the project attractive to investors.
9.3
Review of Feasibility Study Assumptions.
As mentioned earlier, the results of the financial analysis greatly depend on the quality of
assumptions used in the model. The analysis should be based on assumptions that correctly
estimate the costs and revenues of the project and reflect the current situation in the market.
Page 50 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Confirmation of the financing assumptions used in the model with financial experts (eg
international banks), is important.
Chapters 8 and 9 of the Volume I of the Feasibility Study contain the description of the
assumptions used in the model. However, all assumptions are not explicitly described, and the
team had to derive some assumptions from the financial statements, which also appear to be
incomplete. The Feasibility Study would benefit from a more detailed description of all the
assumptions and their sources (incl. when official sources have been used). Standard practice
would be to include the list of assumptions as a separate Annex to the Feasibility Study.
While many assumptions described in the Feasibility Study are reasonable, some key assumptions
appear unrealistic. Correcting the unrealistic assumptions, or undertaking sensitivity
analysis, will likely result in different conclusions about the feasibility of the project.
The current market situation has significantly impacted the financial assumptions that were
presented in the existing feasibility study. Debt maturities are shorter and private investors and
lenders may demand higher levels of equity IRR and DSCR. However, the scope of the current
review is focused on reviewing the financial analysis, which was completed before the crisis.
Therefore the recommendations for financial and economic assumptions are based on the market
situation before the crisis.
The discussion of the key assumptions is provided below.
Operating Assumptions
Revenues. The Feasibility Study would need to specify in more detail the assumptions on the
growth of tolls and traffic, and whether different growth rates are expected for different
groups/categories of vehicles. Another important issue in relation to revenue assumptions is that
there has not been any analysis of sources of revenue in addition to tolls and wayside
development. These potential additional revenues will ultimately reduce the amount required
from Federal Funds and the Oblast (capital and recurrent expenditures). Even at a preliminary
stage, the Feasibility Study could have identified the potential revenue from each available
source.
Two key factors will determine the total toll revenue – traffic projections and toll rates. The
Feasibility Study does not explicitly mention the assumptions of toll growth rates, but it appears
from the tables in Chapter 9 that toll rates are expected to grow about 3.2% per year. This growth
level is smaller than the inflation rates seen in Russia in the past few years.
As mentioned in previous sections, the traffic growth forecast should be strengthened. In addition
to impacting the choice of road option and technical solution, the quality of traffic forecast
directly impacts the financial viability of a PPP project. This issue is not specific to Volgograd or
Russia. The majority of PPP projects suffer from over-optimistic traffic demand forecasts, in
many cases overestimated by as much as 30-40%. A study by Standard & Poor’s examined the
accuracy of estimates of first-year traffic on 87 toll roads and found that the average forecast was
about 24 percent too high27.
Standard & Poor’s, Infrastructure Finance, “Traffic Forecasting Risk: Study Update 2004”, 19 October
2004.
27
Page 51 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Unsupported or over-optimistic traffic forecasts can have significant negative impact for the
Oblast. If traffic forecasts are not strongly supported by analysis, potential private investors will
see it as a high risk for the project and will either not bid, request a higher return (risk pricing) or
ask for the Oblast to take traffic risk. This is even more of a concern when a country/region does
not have past experience in PPP projects. If actual traffic levels end up being lower than forecast
and if the concessionaire is taking traffic risk (as proposed in the feasibility study), it will result in
lower than expected revenue. In practice, the concessionaire could become bankrupt or seek
contract renegotiations. The extreme case is bankruptcy, which could leave the Oblast with no
other option than to take over the debt of the concessionaire, with the associated fiscal
implication.
The private sector tends to be very conservative in their traffic projections, and might discount the
provided forecast as much as 30 percent if it does not feel comfortable with the analysis. This will
directly result in higher public sector contribution requested by investors when they will submit
their proposal.
An important point mentioned later in the report is that revenue used in the financial model does
not seem in line with the rest of the feasibility study. Such revenue appears overestimated and
might have resulted in underestimation of public sector contribution. This comment is further
detailed in the review of the methodology (financial model).
Capital Expenditures (CAPEX). The Feasibility Study provided the estimated capital costs of the
project as 40.590 billion Rubles. This estimate has been used in the financial analysis and the
current review is assuming this as given. It is however essential to understand the financial
implication of under-estimated CAPEX, as even a slight variation can lead to a higher financial
contribution from the Oblast. As a result, it is strongly recommended to add in the financial
analysis sensitivity analysis of the total financial contribution from the Oblast based on variation
in CAPEX.
Operating Expenditures (OPEX). Based on the review of the tables provided in the financial
analysis section, it appears that maintenance and rehabilitation costs are in line with what was
presented in earlier sections. Moreover, inflation has been applied to these costs, but there are
concerns expressed in the following section on the value of inflation being applied.
Macroeconomic assumptions
Inflation. Assumptions about the inflation are critical for accurate assessment of the feasibility of
the project. Bidders will use market rates when making their proposal and should inflation be
underestimated, the Oblast will likely pay the difference. The issue for Volgograd comes from the
fact that official inflation figures might be required when applying for Federal funding, and such
inflation rates might be lower than the market forecasts that bidders would use. One possible
solution is to use up to date official inflation forecasts.
Inflation estimates used in the Feasibility Study appear to be largely underestimated, even
compared to official figures. The inflation estimates are based on the Ministry of Economic
Development (MED) prognosis done in 2005, three years ago. These forecast numbers differ
substantially from the actual figures and estimates available in 2008. For example, the estimates
used in the Feasibility Study are almost half the estimated inflation by the International Monetary
Fund (IMF) (as of Oct. 2008) and almost 1.5 times lower than the updated forecast by MED (for
2009-2011) (see the Table 9.1 below).
Page 52 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Table 9.1 Inflation (at the end of period)
2005
2006
2007
2008
2009
2010
2011
2012
2013
MED* as of 2005
12.7%
9.7%
7.7%
6.3%
9.0%
11.9%
10.5%11.8%
4.8%
5.0%6.8%
4.2%
10.9%
5.0%
5.5%7%
4.5%
MED** (as of Oct. 2008)
5.2%
7.0%8.5%
IMF*** (as of Oct. 2008)
10.9%
9.0%
11.9%
13.8%
10.5%
10.0%
8.5%
8.0%
7.5%
* Ministry of Economic Development of the RF, data used in the Feasibility Study, prognosis at 2005.
** Ministry of Economic Development of the RF, The prognosis of Social and economic development of Russia for 2009
and planned 2010-2011. (actuals for 2005-2007)
*** International Monetary Fund, World Economic Outlook Database, October 2008 (actuals for 2005-2007)
Potential concessionaires are also very likely to use more conservative estimates of the inflation
in their financial analysis. It should be noted also, that the inflation in the construction sector is
higher than overall inflation, and is estimated to be in double digits in Russia. The bidders are
likely to take that into account as well, which would result in a higher amount of public sector
contribution from the Oblast.
Foreign Exchange Assumptions (FX). The Feasibility Study did not mention whether FX
assumptions have been incorporated into the model. It is likely that in the current market situation
some part of debt financing might be denominated in foreign currency. The model should have
the flexibility to account for that scenario.
Financial Assumptions
Debt Equity Ratio. The assumption of debt/equity ratio is reasonable. While bidders will likely
prefer a bigger ratio, because the cost of equity is usually higher than the cost of debt, the lenders
would require sufficient equity, and the assumption of 30% equity requirement is realistic.
The Debt Service Cover Ratio (DSCR). The DSCR is one of the most important ratios dealing
with project bankability and creditworthiness. The ratio shows the number of times the funds
from operations before interest cover the annual repayment of principal and interest payments on
the debt. The Feasibility Study established the target of the minimum DSCR at 1.2. A DSCR
above 1.3-1.4 would be a more realistic expectation of the required ratio by the banks. The riskier
the project becomes, the larger the DSCR required by lenders. In practice potential lenders should
be contacted at a later stage to better estimate the required DSCR.
The Return on Equity (ROE). The assumption for the return on equity that will be required by
investors (at least 17%) is reasonable. As in the case for the DSCR, potential investors should be
contacted at a later stage to fine-tune this assumption.
Net Present Value (NPV) and Internal Rate of Return (IRR). The Feasibility Study established
the target of positive NPV and the IRR higher than the discounted rate of return. Both targets are
reasonable.
Page 53 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Cost of Government Funds. Assumption of 6.74% would need to be confirmed at the time of
revision and update of the Feasibility Study to reflect the most recent data.
Debt Assumptions. While the Feasibility Study provides some description of the loans available
on the market and used for financial simulation, the description is quite limited, and it is not clear
on what sources it is based. It is also not clear what debt assumptions were actually used in the
model, what was assumed base rate, margin, grace period, and maturity of the loans, front-end
fees and commitment fees. All of these assumptions are very important for projection of debt
servicing costs.
The debt assumptions are believed to be slightly overoptimistic. The Feasibility Study assumes
interest rates of 9.5%, 8.5% and 8.0%, which appear to be too low, and it is not clear whether any
preliminary market testing has been done for the project potential financing and whether these
quotes were the result of discussions with prospective lenders, or rather hypothetical assumptions.
The standard assumption in the Russian capital market is to use the Moscow Prime Offered Rate
(MosPrime) as the base rate, to which the banks would add their margins. The MosPrime rate in
2006 and 2007 was about 10.5 – 10.8, and in the first two quarters of 2008 was about 11.3. Once
the margins are added, this would significantly increase the cost of financing for the project and
will change the conclusions of the analysis.
In addition, the assumptions about refinancing arrangements appear to be unrealistic. As apparent
from the financial statements the Feasibility Study assumes that after an initial loan for
construction, the concessionaires would be able to refinance it to a loan for which no principal
payments are made until its maturity in 14 years, which will then be refinanced again until the
end of the concession period. It is unlikely that any lender would agree to provide this financing
without explicit government guarantees (more on this issue in the section 1.4).
Depreciation Assumptions. It is standard practice to match the period of depreciation to the
economic, or operating, life of an asset. The analysis in the Feasibility Study treats depreciation
only for the first 20 years of the operating period as required by the relevant regulations and legal
rules in the Russian Federation28. However, it is unclear what the economic rationale is behind
such regulations and is unlikely to be used by the private sector.
Distribution of Dividends. It is not clear from the financial analysis how the distribution of
dividends is calculated. Such calculation has a direct implication on the return on equity for
investors.
It should be noted that the table in Annex 1 to Volume I on Risks Matrix does mention measures
of mitigating certain risks like creation of reserve accounts for maintenance, debt service,
contingencies, insurance, etc, however, it is not clear how this has been treated in the model and
whether any related assumptions have been made.
9.4
Review of Conclusions of the Financial Model (Methodology)
28
The consultants clarified to the World Bank team that, according to the Russian classification of fixed
assets, a “high speed road” is included in “Depreciation Group 7” (code 12 4527311) with service life of up
to 20 years inclusive,
Page 54 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
The first review of the financial model was limited by the fact that the model could not be
released by the consultants who undertook the financial analysis. There was no model book
(document describing how the model was designed) which is usually standard practice in relation
to financial modelling. In order to at least confirm that the financial model’s calculation would be
adequate, the World Bank team created a very preliminary financial model based on the provided
revenue, cost and financing assumptions. The expectation was to reach similar (although not
exactly the same) results, should the same assumptions be used. This “base case” model is useful
in showing the financial impact of changing some key assumptions. A subsequent meeting took
place in February to discuss the assumptions used and clarified that most of them have been
official assumptions, as opposed to “real/market” assumptions. This clarification explains why
such figures have been used but the opinion of the team remains that the implication for the
Oblast should have been assessed using real assumptions.
The conclusion of the review is that using the same assumptions (including revenue) as those
used in the consultants’ financial model produced the same results as those in the feasibility
study. This indicates that there are unlikely to be major errors in the logic of the
consultant’s financial model. However, when the Bank team used revised and more up to date
inflation assumptions, the cost of construction indexed to inflation increased almost 30%, which
would require significantly bigger capital grant for construction (from 40 billion to about 47
billion Rubles). In addition, the Bank team could not reconcile the very high revenue projected in
the feasibility study with tolls and traffic estimates. Correcting the traffic, tolls and more realistic
economic and financial assumptions resulted in a need for additional financial support from the
Oblast during the life of the concession. This means that the project cannot be implemented as a
PPP without significant additional resources from the Oblast, including during operations. These
conclusions would be confirmed if/when the Bank team will have full access to the financial
model used in the feasibility study.
9.5
Presentation of the Base Case and Analysis
In the base case model it is assumed that total CAPEX requirement is about Rbl 53.0bn. The
investment fund contributes about Rbl 39bn to the total cost, while the remaining funding comes
as debt and equity of Rbl 9.8bn and Rbl 4.1bn respectively. These assumptions are similar to the
results provided in the feasibility study. Running the base case simulation gives an equity return
of 17.8% with a minimum debt service cover ratio of 1.2 and total cumulative tariff revenue of
Rbl 121.5bn (net of VAT).
On the surface, the project appears attractive to both investors and the government with its
“bankable” equity return and high revenue projection.
Figure 9.1
Main project revenues and costs based on the feasibility study (Rbl million)
Page 55 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Financial Profile
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Revenue (net of VAT)
Total Debt Service
Net change in Cash and Cash equivalent
Op Costs (net of VAT)
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
1
-
Note: the revenue line includes also Oblast contribution during debt servicing to maintain DSCR above 1.2
Figure 9.1 shows the revenue and cost projections given in the feasibility study. Operating costs
fluctuate due to maintenance and repair work required at regular intervals. The net change in cash
(the cash available for dividends) fluctuates in response to the changes in operating costs (which
includes maintenance costs).
It should be noted however that the revenue line includes government support of Rbl 2.3bn which
will be needed in order to satisfy a DSCR of 1.2 during debt. This difference from the
conclusions of the feasibility study stems from the difference in treatment of the debt financing.
The refinancing arrangement proposed in the feasibility study was considered unrealistic, and in
the simulated model it was assumed that debt financing comes as a single tranche from the start
of construction with a 15 year maturity, 5 year grace period and 9.5% total interest rate.
Figure 9.2
Debt service requirement and net operating revenues in the base case
Page 56 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Debt payments and Revenues net of operating costs, in million
rubles
3,500
3,000
2,500
2,000
1,500
1,000
500
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19
Revenues net of operating costs
Total debt payments
Figure 9.2 demonstrates that the revenue after operating costs alone is insufficient to cover total
debt payments. Unlike in figure 1, no government support was assumed in this case. Given that
revenues fall short of covering debt repayments, it can be understood why a 14 year grace for the
second refinancing would be convenient for the project. However, as indicated above, this
assumption is infeasible in light of international practice and should not hide the conclusion that
the Oblast’s financial support would be required during debt service.
It is not clear in the feasibility study where the projected revenues come from. A large gap exists
between the traffic assumptions provided in the study and the projected annual revenue given in
the financial statements. Over the project life, the financial statement projects an annual average
revenue of Rbl 3.9bn29, which increases to Rbl 10.7million per day. Given that the average daily
traffic over project life is about 14660, the tariff per trip would have to be approximately 729
Rub. This tariff rate exceeds the toll rate assumed in the Feasibility Study, weighted average for
which is about 250 Rub per trip. As a result, the revenue projection appears not only overly
optimistic but also contradicts the traffic estimation provided in the same study.
9.6
Presentation of the revised case and analysis
In the revised case, the World Bank team ran the model with different assumptions to illustrate
how much the financial output can change as in response to a new set of inputs.
Please note that these alternative scenarios are for illustration only and do not serve as firm
recommendations by the World Bank on how the financing plan should be revised.
The first revised assumption was that of inflation. The provided inflation assumptions differ from
the updated figures released by the Ministry of Economic Development of the Russian Federation
(MED) and the International Monetary Fund (IMF) (see table 9.2 below). The source of the
inflation assumptions used in the feasibility study is the MED estimates done in 2005. It appears
that forecast inflation rates from 2005 were used for 2005-2007 while actual inflation figures for
those years are readily available.
29
Calculated as a simple arithmetic average: Rbl 121,473mn/31/365.
Page 57 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Another revision was made to the debt repayment profile, which currently assumes that the debt
required for construction can be refinanced at the start of operations with a 13 year grace period
and a “bullet repayment” of principal at the end of its 14 year loan period. This long a grace
period is practically never seen in project financing. It would increase the credit risk of the
lenders to unacceptable levels. A third party debt guarantee can sometimes be used to extend the
grace period of a loan, but the feasibility study provides no indication that this would have been
envisaged. In the base and revised case models, it was assumed that debt financing comes with a
15 year maturity and 5 year grace period. The total interest on the debt was held at 9.5% as given
in the study.
Changes were also made to the inflation assumptions for toll revenue and CAPEX projections. As
stated above, the revenue projection appears too optimistic. In the revised case, toll revenues were
calculated based on the toll rates and traffic projections were used in the other sections of the
Feasibility Study. These annual revenue figures were then assumed to grow at an inflation rate
forecast by the World Bank team from the first year of operations. For CAPEX, the construction
costs were similarly increased by a new set of inflation figures.
Table 9.2 Inflation assumptions used in the revised model
2007
2008
2009
2010
2011
2012
2013
11.9%
13.8%
10.5%
10.0%
8.5%
8.0%
7.5%
2014
7.5%
2015
7.5%
2016
6.0%
2017
6.0%
2018
6.0%
2019
5.0%
2020
5.0%
2021
5.0%
2022
4.0%
2023
4.0%
2024
4.0%
2025
4.0%
2026
4.0%
2027
4.0%
2028
4.0%
2029
4.0%
2030
4.0%
2031
4.0%
2032
4.0%
2033
4.0%
2034
4.0%
2035
4.0%
2036
4.0%
2037
4.0%
2038
4.0%
2039
4.0%
2040
4.0%
2041
4.0%
2042
4.0%
2043
4.0%
Note that these inflation assumptions are not official World Bank projections.
Figure 9.3
Main project revenues and costs based on revised assumptions (Rbl million)
Page 58 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Financial Profile
8,000
7,000
6,000
5,000
4,000
3,000
Revenue (net of VAT)
Total Debt Service
Net change in Cash and Cash equivalent
Op Costs (net of VAT)
35
33
31
29
27
25
23
21
19
17
15
13
9
11
7
5
3
1
2,000
1,000
-
In the revised case, the CAPEX requirement rises to about Rbl 62.8bn. Out of this total cost, the
Investment Fund contributes about Rbl 47.5bn, while debt covers Rbl 12.3bn and equity accounts
for Rbl 3.7bn. The new equity return is 15.6% and total cumulative toll revenue of Rbl 85.1bn
(net of VAT), which falls significantly from the projected revenue of Rbl 120 billion in the
Feasibility Study. The shape of operating costs and net change in cash is similar to the base case,
while the level of annual net cash available has fallen together with revenues. To satisfy the
DSCR of 1.2, an extra Rbl 19.3 bn of revenue is required during debt service.
The main conclusion of the revised model is that in addition to capital grant contribution of
Rbl47.5 billion to CAPEX , additional government support of Rbl 19.3bn is required during
the operating period.
Figure 9.4
Debt service requirement and net operating revenues in the revised case
Debt payments and Revenues net of operating costs, in million
rubles
3,500
3,000
2,500
2,000
1,500
1,000
500
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19
Revenues net of operating costs
Total debt payments
In the revised case, as illustrated in figure 9.3, net revenues are much lower than in the base case,
while total debt payments are higher. Lower net revenues result from using the revised revenue
Page 59 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
scenario, which applies new inflation estimates to the toll revenue projection given in the study.
The revised case projects an annual average revenue of Rbl 2.7bn, which becomes Rbl 7.5bn per
day. This is about 42.7% lower than the base case assumption but can be considered more
realistic. The higher total debt payments result from the higher CAPEX estimate and the
consequent need for more financing. In figure 9.4, no government support during debt service
was assumed. However, to attract private debt financing, the gap between debt service and net
revenues has to be closed by additional revenues – most likely public money.
There are several measures that can be further investigated to make the project feasible as a PPP:
1) Reduction of Costs. Careful review of construction and operating costs is needed to
determine if any cost savings are possible. This would also include review of different
technical solutions and alternative routes for the project and their cost implications. The
reduction of costs could be also in form of providing materials, land, completing part of
the project works
2) Increase in Revenue. Another way to improve the project indicators and make it
attractive for the bidders is to increase the revenue base during the operating period so
that it is sufficient to service the debt and provide the necessary profits. Increase in toll
rates might be considered, especially for the heavy vehicles and trucks. The proposed
tolls for the heavy trucks appear to be rather low in comparison with benchmarked
countries (see section “Technical Solution and Toll Rate Assessment” of this report).
More analysis is needed, including the assessment of the users’ willingness to pay.
Allocating some land for development and use by concessionaire along the corridor and
at major junctions might be another source of revenue and might look appealing to the
potential bidders. Some additional analysis would need to be done to assess this option.
3) Reduction in the Amount of Private Financing. In order for this project to maintain
appealing ratios of DSCR, ROE, IRR, etc., the share of private sector funding would need
to be decreased. This means that public sector contribution towards capital costs would
need to be significantly bigger than suggested in the Feasibility Study, possibly up to
85% of the construction costs. However, in this case the project would not be able to
meet the requirement of the Investment Fund for 25% contribution of the private sector.
4) Phasing the project, starting with the section of the motorway with the most traffic for
a PPP: Phasing the project could potentially attract the private sector interested in a
smaller project with a very solid traffic. The Oblast could then implement the other
phase(s) at a later either as PPP or traditional procurement. The phasing might generate
sufficient financial benefit to the Oblast to allow it to increase its financial contribution in
the future.”
9.7
Demand risk management in the financial analysis section
Options analysis should be part of the financial analysis. Financial simulation should allow
testing policy options, look at other possible sources of revenues, consider availability payments
and minimum revenue guaranties and present a comprehensive picture that will help in the
decision making process.
The financial analysis of the Feasibility study is not complete and does not include project pricing
based on different options. The Feasibility Study concentrated entirely on the option with capital
Page 60 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
grant from the public sector towards construction and all revenues coming from direct tolling and
disregarded other possible choices and combinations thereof.
There are several additional policy choices and payment mechanisms that can be considered for
the project:
Availability Payments
If toll rates cannot be increased to fully pay for the project, the government might consider
periodic payments to the concessionaire. Such payments can either complement toll revenues that
will be collected by the concessionaire, or offer fixed periodic compensation to the concessionaire
for availability of the road and maintaining it to prescribed standards, with the Oblast collecting
the tolls (the VAT implication of the Oblast collecting tolls or the private sector collecting and
then transferring the amount to the Oblast should be carefully assessed). Provision of availability
payments might allow a reduction in the contribution of the public sector towards construction
costs, and thus to maintain the required minimum of 25% for the Investment Fund. However, they
represent a fiscal commitment for the Oblast over the life of the project and need to be carefully
considered in view of affordability for the government.
Minimum Revenue Guarantee
The guarantee is an option of providing public support to a PPP project and a way to share the
traffic risk with the private party. The guarantee would kick in when the toll revenue is below the
defined minimum and is often combined with a revenue sharing mechanism in which a certain
level of revenues will be specified after which the revenues will be shared with the government in
a proportion defined in the PPP agreement.
9.8
Review of Financial Statements
The Chapter 9 of the Feasibility Study contains the financial statements for the project that were
supposedly derived as a result of financial simulation, However, they appear to be incomplete.
Below are a few comments on the statements in the Feasibility Study.
Income Statement (Profit and Loss)
The submitted income statement contains the key items required in presenting revenue, expenses
and net income. Its informational value could, however, be increased by providing more details
on each line item. The first line “Profit (net)” could be broken down into the component revenue
sources, for example by type of vehicle. A line should be added for possible government support
payment, which can come in the form of minimum revenue guarantee or availability payment.
After revenues, it would be helpful to classify the “operational expenses” into variable and fixed
costs. Combining all operating, maintenance, overhead and project development costs into one
line makes it difficult to analyze the cost assumptions with regard to other similar projects. While
revenues will not flow in until operations start, it may not be possible under Russian law to
capitalize all project costs during construction. A local accounting expert can advise whether
some project development costs should be expensed during construction.
Usually, amortization of grant (or “acknowledgement of a grant”) and depreciation expenses are
listed separately after EBITDA (earnings before interest, tax, depreciation and amortization). In
the submitted profit and loss statement, it is not clear why amortization of the capital grant should
end in year 2032 while operations continue until 2043. Amortization of the capital grant and
Page 61 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
depreciation of the capitalized costs should cover the whole period during which economic
benefit is derived from the project, in this case from 2013-2043.
EBIT (earnings before interest and tax) follows from adjusting EBITDA for amortization and
depreciation. Financing costs and taxes, which are given in the table provided, should then be
deducted from EBIT to arrive at net earnings.
Cash Flow Statement
The provided cash flow statement correctly includes a breakdown of cash flows into operating,
investing and financing activities. Similar to our comments on the income statement, it would be
helpful to have more detailed revenue and expense information also for cash flows. Under
operating cash flows, the treatment of taxes is inconsistent with the income statement. Why are
taxes being paid (on a cash basis) from year 2013 when they are not expensed in the income
statement until 2019? These timing differences between paid and expensed income taxes should
be disclosed and reported on the balance sheet as deferred tax assets (or liabilities).
As to the financing activities, it should be explained why no debt principal is repaid from 20142024. It is unusual for lenders to agree on a “bullet repayment profile” with a grace period until
maturity for large-scale project finance lending as seems to be the assumption in the cash flow
statement. Not receiving any principal repayment until the debt matures dramatically increases
the credit risk for the lenders and would require them to “price” this risk into their loan margin –
for them to even consider this type of repayment profile.
The cash flow statement should also include the free cash flow available to equity (FCFE) as a
net balance after cash flows to operations, investing activities and debt service. At the moment,
dividends to equity holders are missing from the cash flow statement. The amount and timing of
dividends is fundamentally what determines the basis for the equity return calculation and thus
project attractiveness to private investors. The cash flow statement should be concluded with a
line for “cash balance” which indicates the net change in cash assets for each year (this would
naturally also have to be reflected on the balance sheet).
Balance Sheet
The attached balance sheet should be revised according to international accounting standards. The
three financial statements should feed into each other and be easily reconcilable. In this case,
some inconsistencies exist between the income and cash flow statements and the balance sheet. It
is not obvious where in the income or cash flow statement the asset “VAT on purchases”, or the
liabilities “undistributed profit”, “stocks” and “incomes or future periods” are reflected.
Furthermore, explanation should be provided on why free cash flow from operating and investing
activities is not used to repay debt or distribute dividends. Instead, cash is being hoarded in the
balance sheet under “monetary funds”.
To better assess the financial position of the project (such as liquidity and solvency), the balance
sheet should distinguish between current and noncurrent assets and liabilities and provide a
section for owners’ equity, which should include items such as retained earnings, distributed
dividends and committed share capital.
Overall, the asset and liability balances fluctuate widely over project life and peak at the last year
of operations. These large balances are driven by the accumulating “monetary funds” and
“undistributed profit” line items. Typically in project finance, the assets and liabilities peak at the
start of operations and gradually wind down over project life as capital assets are depreciated and
Page 62 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
lenders and equity investors are paid back. To reiterate, information is required on why free cash
flow is not distributed to lenders and equity investors during project life.
9.9
Review of Sensitivity Analysis
The sensitivity analysis allows testing the resilience of the model to changes in the assumptions.
Sensitivity of key variables should be tested, in particular for project term, inflation rate, demand
and revenue, financing terms, construction costs and operating and maintenance costs.
Over-estimation of revenues and under-estimation of costs are the most common shortcomings of
many feasibility studies. The sensitivity analysis allows checking what would happen to the
project in the worst case scenarios, and provides an estimate of the impact that a change in
variable might have on a likely contribution of the government to the project. This will help the
Oblast to plan and take into consideration the uncertainty in any projection and budget for it
appropriately.
The sensitivity analysis identified most of the variables that are usually tested, inflation being one
of the key variables missed in the analysis. Testing of variations of 10 – 20 –30% is also
appropriate.
At the same time the sensitivity analysis had one major shortcoming, it looked at what would
be the impact of changed variables on the project after the concession agreement is signed, while
the entire focus of the sensitivity analysis is to estimate how changes might affect the cost of the
project on which the investors will bid, and what would be the implications for the required
contribution from the public sector.
As explained earlier, the team understands that the objective of the financial model was to make a
case for Federal Funding. As a result, it has used official assumptions as opposed to market
assumptions. The purpose of this review is not to assess the quality of the work done by the
individual consultants but rather the overall quality of the feasibility study.
Page 63 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
10
FINANCING OPTIONS AND AFFORDABILITY OF PROPOSED OPTION
10.1
Sources of Funding
The Feasibility Study needs to investigate all possible sources of funding for the project, their
requirements and implications on the structure and feasibility of the project. The reviewed
Feasibility Study centered its review on only two sources – funding from the Investment Fund
and private sector financing through a concession, in which part of funding will come from equity
and part from debt raised in the market.
The review of funding sources would need to be expanded to include a wider range of options,
some of which are mentioned below:
i.
Investment Fund – In addition to funding available for the projects of federal importance,
some allocations are also available to regional investment projects.
ii. Federal Targeted Program for Transport. There is some indication of support by the
program of the development transport hubs in major cities, including Volgograd; it also
appears that roads M-6 and M-21 are included in the program for reconstruction and
rehabilitation. It is necessary to investigate the possibility of getting funding from the
Program.
iii. Project prioritization in the Oblast Budget– It is important to review public expenditures
of the Oblast and look at investment priorities and allocation of funds to determine what
funding from the Oblast might be available either as a contribution towards construction
costs, or as potential periodic availability payments, or allocations for minimum revenue
guarantees.
iv. City of Volgograd contribution: This option should be discussed with the City but there
could be opportunity for the Oblast to co-finance the project with the City of Volgograd.
The rationale could be that the City would also benefit from less congestion as a result of
the by-pass being constructed. However, the Bank team is cautious in recommending this
option given the complexity of the policy implication, budget allocation process and lack
of knowledge about the feasibility of this potential solution.
v. Sub-national loan to the Oblast administration. The Feasibility Study needs to identify the
borrowing capacity of the Oblast to determine if taking a loan by the Oblast might be an
option, and if re-prioritization of investment could allow borrowing. Our understanding is
that there is currently limited capacity but a public expenditure review could determine
areas to improve borrowing capacity.
vi. Land transaction: The land around the proposed by-pass is expected to increase in value
should the road be built and additional development be implemented. Part of the land is
currently under public ownership and the increase in value could potentially be captured
to finance the project. The Oblast could either retain ownership and sell the land after
completion of the project or incorporate it as contribution to the concessionaire. Under
the second option, the concessionaire could develop further the land received and
generate additional value. However, it is not possible to assess in advance the potential
future value without a realistic and detailed development plan and market testing. It is
Page 64 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
also recommended to refrain from selling the land now as the Oblast will not be able to
capture the potential future increase in value.
vii. Levies and other user charging: one identified source of revenue is tolls to be paid by
users of the road. It is understood that the initial toll rate was determined through a
methodology that includes a survey of drivers’ willingness to pay. However, given the
lack of affordability of the project, the Oblast could reconsider the current level and
investigate how much more could be charged to the various groups (transit, residents,
cars, trucks, buses) without significantly reducing the benefit of the road. It is however
important to incorporate this survey with analysis of its impact on overall traffic and
regional development.
viii. Taxes on residents and companies (not based on use of the by-pass): in this case, the
Oblast could charge companies and residents in the area close to the proposed by-pass.
This solution has important policy implications, which should be properly assessed, as
the taxation policy could have a negative impact on the Oblast development plans.
In the current economic crisis, it is not clear if and how much of Federal grants will be available.
It is therefore not recommended to assume in advance that a project would receive a significant
amount of Federal money. In addition, the private sector is currently struggling to provide
financing and would consider the proposed by-pass as a very risky project. As a result, the current
potential for any project to be financed without significant contribution from the Oblast might be
limited.
The Bank team believes that even if all alternative sources of funding are investigated, there is a
solid probability that contribution from the Oblast budget will be needed for the proposed bypass. The Oblast should therefore undertake a public expenditure review for at least the transport
sector and consider reprioritizing its investment projects in this sector. The potential for land
contribution should not be underestimated but investigated further before committing to any
transaction that might prevent the Oblast (or potential concessionaire) from capturing the increase
in land value. Considering alternative options would more likely increase the chance that the
solution could be affordable, even if not implemented as a PPP.
10.2
Affordability Analysis
One of the tests that any PPP project should pass is affordability. A project is affordable if the
Oblast can fulfil its financial obligation to the project over the life of the concession. This means
in practice calculating the capital and operating financial contributions and comparing them with
the budget over the life of the concession. As the budget cycle is often limited to a few years, a
convenient way to assess the affordability is to determine the budget envelope likely to be
available based on a series of economic assumptions (such as growth, share of capital expenditure
in total budget, share of transport expenditure etc).
Once a PPP/Concession Agreement is signed with the concessionaire, the Oblast would have
contractual obligations to make payments and these payments will have a higher priority than
planned investment. The Oblast should therefore be very careful in assessing if implementing a
PPP project now would not reduce its capacity to undertake projects in the future and ensure
essential maintenance and rehabilitation of existing transport assets.
Page 65 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
In addition to direct payments, the Oblast should account for the financial implication of any
guarantees given (such as Minimum Revenue Guarantees for traffic risk). There are various ways
to manage these risks but at the minimum the Oblast should carefully assess the potential for
these guarantees being called and report them in future budget.
The feasibility study has not done a proper analysis to determine if the proposed project is
affordable to the Oblast. In fact, the analysis was limited to determining the amount of public
funding that would be needed to implement the project as a PPP. It has not determined if the
Oblast could afford such payment. Even if potential contribution could be expected from Federal
sources of funding, the feasibility study could have undertaken some scenario analysis (such as
50% of total public sector funding available from the Investment Fund) and determine if under
these assumptions, the Oblast could afford such payments.
In addition the feasibility study did not consider such choices in structuring PPPs as availability
payments during the operating period or minimum revenues guarantees and did not assess if the
Oblast budget could bear paying this and what would be the maximum contribution that that
Oblast can afford.
Under the assumptions used in the feasibility study (CAPEX, traffic, tolls, etc…), it is unlikely
that the Oblast can afford a solution as expensive as the proposed by-pass even with contribution
of the Investment Fund towards capital costs. Implementing a project as PPP will still require
significant financial contribution and the feasibility should be complemented to include (i) a
review and assessment of additional sources of revenue, and (ii) a proper affordability analysis.
Page 66 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
11.
REVIEW OF RISK ALLOCATION.
Chapter 7 of Volume I on Risks and Risk Matrix table in Annex 1 of the Feasibility Study tried to
identify project risks at different stages of the project. This is a good attempt, which however
misses a critical component – allocation of the responsibility for the identified risks.
As PPP are legally long-term contractual agreements, responsibilities are clearly defined and
determine the price that the Oblast will ultimately pay. For example, construction risk is usually
transferred to the private sector, which means that it will be responsible (and won’t be able to
claim additional compensation) for delays and cost-overruns in completing the works. The
approach is not to transfer all risks to the private sector, as it will then result in less interest (or no
interest at all) or a much higher cost to the Oblast. As a result, the risk allocation is a very
important exercise and component of the PPP assessment.
Given that the feasibility study’s approach to risk management was to focus on how to mitigate
specific risks rather than the best allocation, this section does not review individual allocation but
rather explains (i) what is risk allocation and (ii) how to undertake a proper risk allocation
exercise.
11.1
Best Practices in relation to risk allocation and recommendation
A good practice with the preparation of risk matrices is to have the following structure (divided
by the stages of the project):
 Description of the risk
 Proposed allocation of the risk (usually two columns – ‘Grantor’ and Concessionaire’and one of them gets checked for a particular risk)
 Comments
The general rule is that risks need to be allocated to the party that is best capable to manage them.
This means that the government would need to take some risks that it can manage better or
because the costs of the private sector assuming these risks would be too high. The private sector
will price the risk of the project based on how individual risks are allocated, their likelihood of
occurrence, and impact. If the private sector is transferred a risk that it cannot control (for
example inflation being higher than forecast) it will either take a very conservative scenario (in
this example, take a very high inflation rate) or simply not accept it (and therefore will not make
any proposal). The risk allocation exercise requires a very good understanding of the market and
project finance principles in order to allocate the risk in a way that balances the Oblast and
private sector requirements.
The preparation of a Risk Matrix would allow the government to decide which risk should be
allocated to which party. Risk framework is a useful tool that provides the basis for discussions
on potential structuring of the transaction and relevant policy choices, and allows the government
team preparing the project to discuss with the decision makers the proposed risk allocation and
obtain approvals for moving ahead with the transaction. The risk matrix should be prepared with
a legal perspective in mind because it should provide the basis for drafting the PPP legal
agreement/ concession agreement.
Potential bidders will carefully examine the risks and proposed risk allocation and will prepare
their bids based on their perceived risks and how comfortable they are with taking some of the
Page 67 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
risks. Given the big scale of the proposed project, very limited experience with PPPs in Russia
and the current volatility of the market the investors would be uncomfortable with assuming
many risks that are usually borne by the private sector in established economies with good track
record of PPPs.
The risk allocation matrix is not a one-off exercise. It is prepared with the support of transaction
experts and in consultation with potential bidders. Ultimately the risk allocation will determine if
a PPP project is financeable (ie. lenders will not finance it if they believe the risk allocation is not
appropriate), so the Oblast should remain flexible when designing such a matrix.
The recommendation of the World Bank team is that the risk allocation matrix in feasibility
study is revised to reflect the proposed structure and focus on risk allocation.
Page 68 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
12.
ENVIRONMENTAL ASSESSMENT
12.1
Summary of Findings
Key issues identified during the review of the Feasibility Study are summarized below:
 Safeguards schedule versus design schedule: Environmental information needs to be
consistent with and have the same level of detail as the engineering design. Proper information
flow between the designer and the environmental consultant should also be ensured
 Analysis of policy, legal and regulatory framework: The project developer needs to clarify
which safeguards framework will be used for the project. Roles and responsibilities of
agencies and stakeholders involved in the assessment, mitigation, and supervision of
environmental issues should be clearly defined.
 Public awareness and participation in the decision-making process should be significantly
increased not only to meet Russian standards, but also to conform to standard approaches of
international financial institutions.
 The developer needs to be more proactive in the public consultation process to mitigate the
significant risk of public resistance against the project. Efforts should go beyond current
national practice and comply with international good practice.
 The connection between by-pass project, city development master plan and
environmental mitigation measures should be made. Some of the induced impacts of the
by-pass (e.g. residential and infrastructure developments triggered by improved traffic
connectivity) may have impacts of significant scale.
 Under good international practice the project developer would establish a project safeguards
team which would responsibly deal with environmental and social issues, coordinate studies,
coordinate and manage consultants, and conduct and/or facilitates the dialogue between
various stakeholders on environmental and social issues.
Environmental Management Plan and monitoring plans are a direct link between the
environmental assessment and actual implementation during the construction and operational
phases. The Feasibility Study needs to recognize and promote this important safeguards
instrument and prepare for its practical and effective implementation.
12.2
Significance of Environmental Assessment and Management
Environmental and social considerations today are an integral part of all large scale transport
infrastructure projects and are demanded and critically reviewed by the affected population as
well as national and international non-governmental organizations (NGOs). Major international
financial institutions are in their lending operations committed to the Equator Principles, which
lay out good environmental and social conduct in project financing. The existence of an
environmental due diligence process according to international good practice is viewed by many
investors as a quality criterion for diligent project preparation and a substantial contribution to
overall project risk mitigation. The latter is relevant especially in the context of public attitudes
towards a project and regulatory reliability from the side of environmental authorities. This in
Page 69 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
turn has implications on the processing of project permits and licenses, most importantly the
construction permit and operational license.
12.3
Review of Environmental and Social Aspects of the Feasibility Study
The observations are based on a review of available documentation. Conclusions presented below
should be viewed as preliminary due to limited time available for review and complexity of the
documentation. Overall the reviewing World Bank team was impressed with the large amount of
data generated and the high level of diligence the project developer has employed in analyzing,
interpreting and presenting the information. Below, the environmental sections of the Feasibility
Study are (i) reviewed and commented and (ii) recommendations are made for improving the
Feasibility Study quality and aligning it with international good practice.
Documentation reviewed
 Feasibility Study of Volgograd By-Pass Highway project in Volgograd Oblast, volume 2
Book 1, Section 2. Environmental Conditions, Section 10. Proposals on Environmental
Protection;
 Volgograd By-Pass Highway Project: Engineering Design Document, Volume 7
“Environmental Protection” (2007);
 Volgograd By-Pass Highway Project: Engineering Design Document, Report on Public
Hearings (2006);
 The Project Conception of the Area Borders for Future Location of the Capital Construction
Sites within the Range of the Highway “Volgograd By-Pass highway” in the Volgograd
Region (2008);
 Opinion of the State Expertise (April, 2008);
 Illustrative maps on functional zoning, complex assessment, basic plan of the area
A range of common environmental risks and potential impacts exist for a project of such large
scale and complexity. The consultants performed well in undertaking the environmental
assessment of the project for the southern part of the proposed by-pass highway in the
framework of preparation of the Engineering Design Documentation. In this regard, the
environmental baseline conditions before construction were assessed and key environmental
impacts of the project were identified. Furthermore, baseline data were collected from the
locations likely to be impacted by the by-pass project, project layout was documented with maps
and drawings, the potential environmental impacts were evaluated and alternatives were
considered. In addition, appropriate remediation and mitigation measures were proposed,
including estimation of the economical feasibility of such measures. Calculation of ecological
damage was also undertaken related to air pollution and waste disposal during by-pass
construction and operational stages. Environmental considerations were taken into account at the
early stages of the design phase of the project: specific technical solutions and routing choices
were often based on environmental considerations.
Environmental assessment (EA) began at an early stage of project planning and already
completed several stages. In 2005 JSC “GiprodorNII” prepared OVOS required under Russian
national legislation. The OVOS completed the process of ecological expertise with positive
opinion issued on October 18, 2005. In 2007, a separate Volume 7 “Environmental Protection”
became a part of the Engineering Design document prepared for the Southern section of the bypass highway. The same exercise will be done when the design documentation and engineering
solutions for the Northern section of the by-pass will be developed. Environmental monitoring
Page 70 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
and evaluation procedures are built into the construction and operation stages. The Environmental
Assessment was undertaken in full compliance with Russian national legislation30. The project
consultant submitted the Engineering Design documents for the southern section of the by-pass to
the State Expertise. So far the documents have not been approved by the State Expertise which
provided the necessary comments to improve the particular parts of the materials submitted (in
April 2008). The project consultant is currently addressing these comments. The State Ecological
Expertise requested to see the exact locations of the waste disposed of by the construction and
operation of the by-pass. Also, the State Ecological Expertise requested to include in the design
document a calculation of the level of noise on the territory of the settlements, including
horticultural association, during day and night time.
Overall environmental impact on the Volgograd city level is positive. The Project would help to
improve communication between settlements in the oblast area, relieve available roads and direct
transit traffic around Volgograd city, thus reducing travel time and improving environmental
situation in the city. Local ecologists estimate that concentrations of toxic exhaust components
alone would drop by a factor of 2 or 3. While project implementation would reduce the harmful
influence of transport on the city environment, temporary and permanent negative impacts would
be expected at the construction and operation stages in the areas adjacent to the road. These
impacts should be mitigated. Three groups of potential impact exist on the environment:
operational (connected with the by-pass as engineering structure as well as transport activities),
construction (connected with the technical process of construction and envisaged as a temporary
one during the by-pass construction period) as well as indirect and induced impacts connected to
temporary works, borrow pits and dump areas during construction, and impacts caused by, for
example, better accessibility and resulting accelerated development.
No areas on the proposed by-pass route are considered sensitive habitats or areas of particular
biodiversity, or otherwise protected areas. Those by-pass segments which would cross forest
areas were agreed with the Forest Agency of Volgograd Oblast (two alternatives were
considered). The necessary activities of the forest land transferring to the transport land are
envisaged in the engineering design documents, including compensation measures such as
planting new trees in available areas.
12.4
Identification of Key Issues
The most important environmental risks are associated with excessive noise from construction
and high speed traffic, increased emissions from traffic, and risks of potential spills/emissions
from the hazardous materials transported on the road. The set of mitigation measures are
planned by the project consultants and designers focus on these issues. Where the road passes by
settlements, appropriate mitigation measures will be implemented (e.g. noise protection screens,
which are also reducing the concentration of polluting substances, 4-row noise-gas-dust
protection belt of bushes). Runoff from the road will be managed by constructive measures, such
as gabions and filtering plants, before discharging to reservoirs fit, for example, for. fisheries. The
Federal Law “On Environmental Protection” (#7-FZ of January 10, 2002)
Federal Law “On Protection of Atmospheric Air” (#96-FZ of January 7, 2002)
Federal Law “On Waste and Consumption Residue” (#89-FZ of June 24, 1998)
Federal Law “On Sanitary and Epidemiological Well-Being of the Population” (#52-FZ of March 30, 1999, as
amended by the Federal Law #199-FZ of December 31, 2005)
Regulations on Environmental Impact Assessment of the Proposed Business and Other Activities in the Russian
Federation (approved by Executive Order #372 issued by State Environmental Committee on May 16, 2000)
Federal Law “On Technical Regulation” (#184-FZ of December 27, 2002, Articles 2 and 7)
Government Resolution on Approving the Regulations on Social and Hygienic Monitoring (#60, dated February 2, 2006)
30
Page 71 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
project consultant has also designed waste handling and disposal measures (particularly at the
construction phase).
While a special volume is devoted to environmental protection measures as part of the
engineering design document for the southern part of the by-pass, the main part of the
Feasibility Study has a very short and generic description of environmental impacts and
mitigation measures. The substance in this section can be developed further on the basis of the
materials that were collected during the preparation of the engineering design.
The construction of the by-pass would lead to the land acquisition and conversion of
agricultural and forest lands into transport infrastructure. The proposed route of the by-pass
highway runs on the territory of Svetloyarsk, Gorodishensk districts of the Volgograd Region and
Sovetskiy district of Volgograd City. Over 80 percent of the road traverses Svetloyarsk and
Gorodishensk districts, which are known for their intense agricultural land use. The by-pass
corridor is mainly located on the agricultural land (around 65% of the surface), most of it state
property with a minor part in private ownership. Land use in some impacted areas is diverse,
including settlements designed for part-time farming, house construction, private housing
construction, gardens and plantations. Some areas are also used as flood relief zones (basins and
canals).
The density of physical cultural resources (PCR), such as historical monuments is very high in
the Volgograd region according to the information provided to the project consultant by the
Science and Industrial Center for Protection of Historical and Cultural Heritage of the Volgograd
Oblast (that is a regional agency attached to the administration). Major objects of historical
heritage/PCR exist in the World War II battlefields and the Volga-Don navigation canal, which is
the object of the cultural heritage of year 1952. A thorough, continuous archeological survey of
the by-pass corridor has never been carried out. In this connection, any change of the by-pass
route could potentially destroy hitherto undiscovered archeological items. This is further
developed in the section on “Cultural Heritage Assessment”.
The project consultants and designers are planning to examine in detail the zone of the
proposed construction activities (by-pass corridor plus all sites of accessory and temporary
works) to define an exact number of historical and cultural heritage objects. That will be done
in full accordance with the national legislation, namely the Federal Law “On Protection of the
Cultural Heritage Objects” and the RF City Planning Code. Beside the territory of the road, as the
experience of supervision over construction of roads showed, it is necessary to survey territories
of access roads or construction, places of excavation and storage of soil, borrow pits, work camp
facilities and parking of heavy machinery. The cost for such examination was calculated on the
basis of the national standards and norms by the Oblast Center for Protection of Historical and
Cultural Heritage and submitted to the project proponent on December 5, 2006. The project
consultant includes the cost for the said examination into the overall project costs.
The public consultation process is organized in accordance with provisions of the national
legislation – specifically, City Planning Code and Land Codes of the Russian Federation (RF),
Law on Environmental Protection of the RF. In this regard, the population was informed about
the planned by-pass construction via local mass-media and public hearings were held in 2006.
The report on the public hearings is an integral part of the Engineering Design document prepared
for the Southern section of the by-pass highway. At that time most technical solutions and even
routings were preliminary and unspecified. No evidence of complaints has yet been provided.
However, in the worst case scenario, protests and conflicts with local citizens can become a major
concern or even block construction.
Page 72 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
12.5
Recommendations
Listed below are recommendations which can be made after a review of the available
documentation. The comparative standard applied is international good practice in environmental
due diligence, which is reflected in international criteria such as the “Equator Principles” as well
as the World Bank’s environmental and social operational policies (“safeguards policies”). The
following gaps were identified between current environmental due diligence documentation and
procedures applied to the Volgograd By-pass Project, and good international practice:
Safeguards schedule versus design schedule: Environmental information should be as detailed
as on the corresponding design stage. To integrate environmental criteria into project design, the
project developer needs to hire environmental consultants to work with technical designers. The
flow of information between the technical designer and the environmental consultant has to be
well-managed. Also, a clear plan is required on how environmental information will be used by
the design engineers to improve the project’s environmental performance.
Analysis of policy, legal and regulatory framework: The project developer needs to clarify
which safeguards framework will be used for the project. Is the Russian environmental regulatory
framework currently in a condition to be applicable to a project which shall comply with
international good practice? If not, where does it need to be supplemented? Will it be necessary to
improve the institutional, legal and regulatory framework with respect to environmental and
social safeguards?
In this context, the Oblast should clearly define the roles and responsibilities of agencies and
stakeholders involved in the assessment, mitigation, and supervision of environmental issues. The
following questions should be addressed in particular:







How are environmental permits and licenses integrated with construction permits?
Who issues these environmental permits?
Who monitors?
Who analyzes?
Who prepares reports with recommendations?
Who receives reports?
Who has authority to act (e.g. withhold or authorize payments, impose fines, fire or ban from
site access contractors or individuals)?
Moreover, the Feasibility Study needs to clearly explain how information is transferred from
OBOC / other environmental studies into design documents, and into environmental permits or
environmental clauses in construction and operation permits. Is the process clear and realizable,
or a mere paper exercise?
Public awareness and participation in the decision-making process should be significantly
increased not only to meet Russian standards but also to conform to standard approaches of IFIs.
This would as a minimum entail public information meetings on (i) the TOR for the
environmental and social assessments, (ii) the findings on impacts and the recommended
mitigation measures as described in the draft EA reports (and social assessment reports).
Additionally, public participation should be encouraged through regular outreach meetings, and
public sharing of draft documentation of EA and also of construction permit decisions. Response
should be given to major comments and inquiries from the public, and sound recommendations
Page 73 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
from the environmental expertise review should be incorporated into mitigation and monitoring
approaches.
The Volgograd Oblast road department and design consultants should be more proactive and
develop a consultation process and/or public campaign aimed to mitigate the significant risk of
public resistance against the project. They should do this, even if it would require going beyond
current national legislation, to comply with the international good practice. Early, informed,
meaningful and responsive public participation in the environmental assessment and other
processes should be an integral part of project design. Public participation should be maintained
throughout the design and planning process and not be restricted to a few public hearings.
Instruments such as information bureaus and web-based public information should be extensively
used.
The connection between by-pass project, city development master plan and environmental
mitigation measures should be made. Some of the induced impacts of the by-pass (e.g.
residential and infrastructure developments triggered by improved traffic connectivity) may have
impacts of significant scale and need to be recognized and described in the environmental
sections of the Feasibility Study.
A cultural heritage survey of the complete by-pass corridor, including all areas temporarily
and permanently affected by construction activities (access and haulage roads, borrow areas,
dump areas, camp and storage sites, construction infrastructure and facilities) has to be carried
out. Clear chance find procedures have to be established and their readiness for implementation
ensured at the construction sites. These should be presented in a compact, practical manner in a
PCR management plan, which would, as the environmental management plan, become a fixed
item of the construction contracts.
Under good international practice the project developer would establish a project safeguards
team which responsibly deals with environmental and social issues, coordinates studies, manages
consultants, and facilitates the dialogue between various stakeholders on environmental and
social issues.
The EA report does not require a particular format, but contains components which present key
information in a structured and systematic way. This structure would also be recommended for
the environmental sections of the Volgograd by-pass FS:




executive summary
description of environmental (and social) baseline conditions
project description (including all variants and options considered under the FS)
description of impacts and the corresponding mitigation measures (known at this preliminary
planning stage, many of them, both impacts and mitigation measures, will still be generic)
 environmental management framework (EMF) for roads projects or
 environmental management plans (EMP) which form the basis for updates during subsequent
more detailed planning stages, including monitoring plans.
The Environmental Management Plan and monitoring plans link the environmental
assessment to the design of appropriate mitigation measures, and actual implementation during
the construction and operational phases. In the current version of the Feasibility Study, this
important safeguards instrument has not been fully explored. For this reason, environmental
Page 74 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
management during construction and operation has been developed with insufficient practical
content.
Induced development: Overall plans for the Volgograd Oblast development envisage that the
by-pass would better connect the districts of Gorodishensk and Svetloyarsk to the City of
Volgograd. This is expected to lead to significant economic impacts (such as rising commercial
activities, construction and industrial production, demand for commercial land, demand for
housing space). Large scale land conversion might be expected as an induced impact of the
project. This should be carefully analyzed and managed. In this context the connection to any
existing Urban Master Plan of Volgograd should be investigated. The by-pass area should be
reviewed from the perspective of urban planning, and the existing schemes should be integrated
into the Feasibility Study and subsequent design steps.
Page 75 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
13.
SOCIAL ASSESSMENT
The World Bank team has reviewed the materials in the Feasibility Study and the background
materials pertaining to the social assessment and the resettlement aspects of the Volgogorad bypass project. This section contains a review of the provided materials as well as recommendations
on how to adjust the social assessment and resettlement issues for the project to meet
international standards. In addition, advice is provided on how to make investments appear less
risky and more transparent to international financial institutions and other investors adhering to
world standards on environmental and social issues.
For the administration of the city of Volgograd the rationale for enhancing social safeguards to
meet international standards is two-fold:
a. enhanced social standards will increase sustainability of the project, decrease its
long-term social costs, and, ultimately, make it more viable;
b. enhancing social standards to the international level will increase the likelihood of
funding from international finance institutions (IFIs), which adhere to higher
social and environmental standards than are prescribed by law and practiced in the
Russian Federation. Heightened attention to social aspects of the project (in this
case, specifically, involuntary resettlement) reduces social risks to the creditor,
increases likelihood of obtaining funding, and improves the terms of financing.
In the case of the Volgograd by-pass project, the following social performance standards are the
most pertinent and require further action:
c. Social Assessment/public hearings;
d. Land acquisition and involuntary resettlement;31
e. Public hearing framework
These are also the issues covered, to a varying degree, in the Feasibility Study and the
background documents. The section will assess the work done under the Feasibility Study
against the international standards. It will also provide recommendations on possible
improvements to the social review, resettlement, and economic displacement framework
suggesting more consistent and appropriate analysis, presentation and staffing. Attached
annexes describe the actions necessary to meet the standards for safeguards 3a and 3b above.
The administration of Volgograd can refer to this framework when subcontracting
preparation for other infrastructure projects.
Reviewed documents include:
 Rostekhconsulting report on public hearings, 2006;
 Engineering project, DorProektServis, Volume 7, 2007;
 Feasibility Study of Volgograd Highway Project in Volgograd Oblast, Volumes 1
and 2.
Current version of the Feasibility Study contains references to social issues addressed by the
project.
f. The risk assessment matrix recommends an information campaign among the
population and relevant agencies (p. 122, v.1);
g. The cost tables assess the level of compensatory payments (pp. 108, 109, v. 2).
31
The cultural heritage standard will be reviewed separately
Page 76 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
Provided background materials (Engineering Design, Volume 7) list both public and private land
owners who are most likely to be affected by the road construction. Payments are calculated for
compensation made on the basis of decreed norms for the value of particular types of land as well
as for the likely loss of revenue from agricultural production. The same source also lists the
private and public buildings, private dwellings, businesses, utilities, and public
buildings/communications that expected to be destroyed druing. The need for “appropriate
compensation” and/or for the provision of adequate replacement dwelling is acknowledged.
However, no calculations of payments or replacement costs are provided. Finally, the same
document outlines the process of consultations and information campaigns conducted in the
affected areas. Such campaigns started with announcements about the forthcoming road
construction in local media and completed through the process of public hearings in affected
districts. The description of public hearings is complemented by a volume of more detailed
description of public hearings that were held in particular localities, complete with the protocols
of the meetings, the newspaper announcement informing about the project in general and the
meeting in particular, and background materials on the project presented at the meeting.
This is important background work, demonstrating attention of the project team to the social
safeguard issues. Furthermore, consideration for resettlement and public hearing issues appears to
comply with Russian legislation on land valuation, compensations, and information and
disclosure requirements.32 The main shortcoming of this work with respect to national legislation
and project cost calculation is lack of clarity on the cost of compensation and value of
property in case of resettlement or economic displacement. While the rationale is presented
for valuation of agricultural land, cost assessment of other property is not recorded in the
background documents presented to the WB.
If the Volgograd government wants to raise the quality of social review and framework to the
level of international best practices (for reasons for such an upgrade see paragraph 2 of this
section), some additional steps need to be taken. These steps will build on the significant work
already done. So provided that the expected trajectory of the road construction does not change,
additional costs are expected to be marginal and could be justified, considering the benefits of the
perceived lower risk of the project. The risk would be lower from the point of view of potential
international investors and with regard to the diminished social risk of complaints, legal and
public actions by discontented resettled or compensated owners, or local interest groups
dissatisfied with the impact of road construction on their lives and livelihoods.
From the point of view of international standards the main shortcomings of the information
campaign/resettlement/compensation calculations are as follows:
h. addressing resettlement/compensation/information campaign/consultations issues
in separate chapters of an Engineering review does not amount to a contiguous
social framework. A social framework would establish (1) a frame of reference for
addressing social issues; (2) a benchmark analysis on the basis of which a
particular and finite list of affected communities/households/indigenous groups
would be drawn; importantly (3) a plan for addressing social issues throughout the
life of the project if mitigation/correction intervention is needed (4) identify a
32
The Town Planning Code of the Russian Federation (#190-FZ of December 29, 2004, as amended on of July 22, December 31, 2005,
June 3, July 27, December 4, 18, 29, 2006, May 10, July 24, November 8, October 30, December 4, 2007, May 13, 16, July 14, 2008)
The Land Code of the Russian Federation (#136-FZ of October 15, 2001 as amended on June 30, 2003, June 29, October 3, December
21, 29, 2004, March 7, July 21, 22, December 31, 2005, April 17, June 3, 30, July 27, October 16, December 4, 18, 29, 2006, February
28, May 10, June 19, July 24, October 30, November 8, 2007, May 13, July 14, 2008); Regulation on the Procedure of Compensation
of the Losses to the Land Owners (RF Government Ordinance #262 of May 7, 2003)
Page 77 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
i.
j.
consultant/administrator (a company or an individual) responsible for overseeing
the implementation of the plan and for interaction with the affected
individuals/households/communities.
Resettlement/compensation plan should have a framework witch is to be updated
and monitored throughout the life of the project. Such a framework needs to have
(1) a clearly defined compensation mechanism. Again, the international standard
would not be based on land valuation (usually outdated and made unsatisfactory for
the recipient because of undervaluation, inflationary effects, etc.), but on the resale
value of property and current value of business losses. These principles should be
stated clearly and clearly presented to the recipients. (2) There also should be a
grievance mechanism, which could save costs and aggravation of court procedures
in the future.
Public hearings/information campaign from the international standards’
perspective should not be short-lived, conducted at the beginning of the project.
Rather, a feedback mechanism should operate throughout the life of the project. As
with the resettlement issues, a framework and a plan should exist, together with a
responsible entity to provide information on the district-specific progress of the
project, and pass complaints and suggestions for improvement to the overall project
management. This way the community will feel empowered and engaged and its
potential hostility towards the project because of temporary inconveniences or
permanent relocation will be diminished.
To summarize, the Feasibility Study makes a good effort to comply with the national
legislation on resettlement/compensation/land valuation/public hearings. However, it falls
short of international standards for (a) social assessment in general and (b)
resettlement/economic/physical displacement and (c) public disclosure plans/consultations
in particular. Social assessment and the related (b) and (c) issues are not treated as contiguous
stand –alone issues deserving of (a) a separate stock taking, (b) an action, plan, (c) a monitoring
and reporting mechanism, and (d) grievance mechanism.
The Feasibility Study could be brought to international standard on social issues if it contained a
separate section and a background document providing a social review of the project,
specifically (1) identifying various social impacts that are expected to be triggered by the project;
(2) risks and impacts of the project in the context of each concrete stage of construction.
Social Action Plan (AP) (could be prepared as part of an environmental action plan). An AP
needs to concentrate on
k. disclosure and consultations with the impacted communities (identified on the basis
of a completed social assessment), basis for compensation cost calculation, follow
up, mitigation/grievance mechanisms;
l. physical/economic displacement action plan
m. a detailed section on physical/economic displacement and measures taken by the
project to address these issues.
n. clearly identified firm/individuals/officials to be a focal point of social standard
issues and responsible for the follow up actions (correction of the plans, mitigation,
conflict resolution)
The AP, in addition to a consultation timetable, needs to provide for an actionable feedback
mechanism. Such a mechanism would include
o. a grievance mechanism
p. monitoring
Page 78 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
q. reporting
Page 79 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
14.
CULTURAL HERITAGE ASSESSMENT
Chapter 11 of the Feasibility Study notes that the density of monuments in [the] territory of
Volgograd region is very high. Thus while it recognizes that the project area is rich in both
visible and invisible cultural heritage, it nevertheless provides no targeted documentation,
suggestions and/or framework for addressing the potential risks of harming such heritage that
could arise during project implementation.
The following is a recommendation, substantiated by an objective rationale, to further investigate
the presence and potential threats to cultural heritage in the context of the proposed Volgograd
By-Pass project through the presentation of a framework for addressing cultural heritage issues as
part of project preparation.
14.1
Context
Volgograd has been engraved in world history and the memory of Russian citizens as the theater
of the Battle of Stalingrad, which was one of the longest and bloodiest sieges of Second World
War. Due to the extensive topographical area and duration of the armed conflict, available maps
indicate that the Volgograd By-Pass project is likely to overlap terrain that was formerly a battle
stage. As such the probability of encountering chance archaeological finds during construction is
relatively high and in view of the wide range of stakeholders in the project, be they investors or
beneficiaries, it is therefore important to establish a framework for addressing such events should
they occur.
The irrefutable historical significance of the site is rendered more complex by the recent nature of
the events that took place in and around it. This implies that sub-soil discoveries in addition to
products of human cultural activity including utilitarian objects and weapons, are also likely to
include human remains as well. Whereas the debate on the control, treatment and disposition of
human remains for scientific research purposes has been of an anthropological nature and has led
to the Native American Graves Protection and Repatriation Act (NAGPRA) in 1990 that has
become the most recognized reference for such cases, there are no international conventions for
the exhumation and re-burial of skeletal remains that are not considered as belonging to
indigenous populations. Thus, while arguably such remains could be classified as archeological
finds, nevertheless as manifest evidence of recent hostilities they further raise an entirely different
set of ethical and political issues pertaining to re-burial. Lastly, there is also a possibility of
safety risks to site workmen in the event of finding undetonated explosives.
14.2
Rationale
In view of the costs of the project, the consolidation of investments necessary for its realization is
likely to involve stakeholders from International Financial Institutions (IFIs) as well as from the
public and private sectors. Since IFIs often have specific policies for safeguarding and managing
cultural heritage in the context of development projects, it will be necessary to ensure that
implementation procedures adopted by the project are aligned with such policies. In this regard,
IFIs and multilateral institutions have a “do no harm” policy that often corresponds to the
recommendations expressed by international conventions. In order to avoid or reduce potential
adverse impacts of a given project, the required procedures usually include the identification of
Page 80 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
risks and measures to mitigate them. This in turn, entails the elaboration of a management plan
that describes the process in detail including the variety of impacts, relevant procedures for each
case, as well as institutional and financial responsibilities.
By the same token, the public sector also possesses a legal and regulatory framework often
articulated through the listing of sites and the rules and regulations governing urban planning,
land management and zoning. Finally some private sector enterprises abide by tenets of
Corporate Social Responsibility (CSR) that may also affect investment conditionalities.
As previously mentioned the possibility of finding human remains could lead to political tensions
and, in a worse case scenario, it could provoke polemics as was the case in Estonia in 200733.
Such controversial issues in turn may be a deterrent to private investments as public opinion plays
an important role in legitimizing development interventions. It is therefore critical to anticipate
potential risks and establish an environment that strives to take every precaution to protect
investments.
14.3
Framework guidelines and elements
In anticipation of potential risks to project implementation a series of steps ranging from
identification to planning are recommended.
a) Identification of physical cultural resources34. This section of the identification process
includes the presence of visible and invisible heritage assets at the proposed site and its vicinity.
Whereas visible cultural resources can be identified through mere observation during field
surveys, the presence of sub-soil artifacts necessitates different surveying tools. To the extent
possible, it is preferable to use non-invasive documentation techniques such as aerial (satellite
picture analysis) and low impact walkover ground surveys and geophysical prospecting including
sampling and laboratory analysis of transects.
b) Establishment of baseline Data. A direct output the baseline data is used to i) establish the
conditions of the site prior to interventions, ii) assess the significance of heritage and how it
relates to the local legal and institutional framework, iii) identify the additional types of expertise
needed, iv) assess potential impacts and v) verify the conditions of the sites after the intervention.
c) Identification of the applicable laws, regulations and policies. First and foremost this pertains
to national and local provisions. However in view of the range of investors foreseen, it is
recommended to review all relevant policies and procedures pertaining to the protection of
cultural heritage that may apply to ensure that there are no gaps between various requirements.
d) Identification of the institutional framework. This is will enable project implementers to
establish the specific roles of the relevant authorities and agencies responsible for cultural
heritage protection. This identification should be accompanied by an institutional capacity
assessment to determine whether there is a need for specific expertise such as forensic
archeologists, for example, or for targeted training. In the case of this project it is very important
to review the national procedures for chance finds including notification, study/waiting period,
preservation, storage, restitution and general administration35.
33
The dramatic events surrounding the reburial of WW2 soldiers and the removal of the Bronze Soldier
monument in Tallinn, led Russia to publicly formulate its position on moving the remains of the WW2
soldiers. Nevertheless it remains to be confirmed whether local practices do reflect this benchmark
position.
34
For the purposes of this note physical cultural resources is understood to include human remains.
35
When applicable these procedures should be included as standard provisions in construction contracts.
Page 81 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
e) Elaboration of a Management Plan. The management plan is developed based on the research
undertaken (see above points a to d) with an emphasis on which measures should be taken to
mitigate potential adverse impacts to the cultural heritage and resources. An integral
management plan implies undertaking stakeholder consultation prior to its elaboration. Therefore
it is recommended that stakeholder identification and consultation methodology to be included in
the preamble to the plan. The plan should include inter alia: the inventory of the areas likely to be
subject to impact, the nature of the activity likely to have an impact (installation of cables,
drainage, temporary structures, etc.), the type of impact (short term, medium term), measures
taken to mitigate such impacts, reasons for mitigation, implementation responsibilities, financial
responsibilities and monitoring procedures.
Page 82 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
15.
ANNEXES
ANNEX 1:
Investment Fund of the Russian Federation
The Investment Fund (IF) of the Russian Federation was formed by the RF Government
Regulation #694 of November 23, 2005. The IF took action on January 1, 2006. Currently the
Fund is managed by the Ministry of Regional Development (in accordance with RF Government
Regulation of October 25, 2007) which took over these functions from the Ministry of Economic
Development.
Rules for Allocation of the IF funds are stipulated in the RF Government Regulation #134 of
March 1, 2008. All projects for the IF’s budgetary allocations shall (i) have equal conditions for
access to the procedure for granting the Fund's budgetary allocations, (ii) comply with the criteria
established by these IF Rules, (iii) operate without loss, (iv) have risks allocated between public
and private investors, and (v) take into account public and private interests.
The size of the IF is approved on the annual basis. All the projects that could claim for getting
support from the IF may be divided into 2 categories:
 investment projects (including complex investment projects) and concession projects of
federal significance and
 projects of regional/interregional significance. Projects of regional significance are
defined as projects implemented within the territory of one region, and interregional
projects are defined as projects implemented at the territories of 2 and more regions.
The IF's budgetary allocations may be provided for implementation of a project within a time
period of 5 years at most. Both projects of federal and regional significance claiming to get the IF
financing shall be implemented as PPP projects.
The projects of federal and regional significance are differ by the minimum size of the requested
IF allocations (5 bln. rubles and 500 mln. rubles respectively), as well as by some diversity in the
required eligibility criteria and selection procedure. In particular, the cost of the project financed
by the investors participating in the implementation of a complex investment project of the
federal significance shall constitute at least 25% of the total project cost. For the projects of
regional significance the share of investor’s money shall be not less than 50% of the total project
cost.
Before June 2008, IF dealt with the projects of federal significance only. A definition of a project
of regional significance was provided in the RF Government Regulation #486 of June 23, 2008
which introduced amendments to the IF Rules.
Up to now – i.e. since 2006 - 20 federal projects of the total volume of 342 bln rubles were
approved to receive financing from the IF. The IF also envisages 80 bln rubles for
implementation of regional projects in 2008. At the moment there is a list of 20 regional projects
claiming to get IF financing, but no one regional project was approved to get financing from the
IF so far.
The ultimate size of the IF's budgetary allocations which could be granted for implementation of
the regional projects is determined for every subject of the RF and is available at the official site
Page 83 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
of the Ministry of Regional Development. Also, the regional budgets shall provide a certain share
of co-financing for implementation of the regional projects supported by the IF. For Volgograd
oblast the Ministry of Regional Development put this share as 24%. The applications to claim the
IF money for implementation of the regional projects shall be submitted to the Ministry of
Regional Development no later than on September 1 of the corresponding financial year.
The Rules for Allocation of the IF funds defines project eligibility criteria as qualitative and
quantitative criteria which are very similar for the projects of federal and regional significance.
The qualitative criteria that may be relevant for any project submitted for financing are as
followings:
 availability of the investor who confirmed the commitment to participate in a project
(except for a concession project) – both for the projects of federal and regional
significance;
 potential project’s impact on the economy's innovation development in connection with
implementation of innovation projects – both for the projects of federal and regional
significance;
 compliance of the project with the RF economic development goals and governmental
investing for an intermediate term, as well as with the economic sectors development
strategies endorsed by the RF Government (the judgment on the project’s conformity
with this criteria shall be provided by the RF Ministry for Economic Development) – for
the projects of federal significance. In case of regional projects the compliance with the
respective regional strategy for economic and social development and/or priority
directions of the regional development is also required;
 attainment of positive social results connected with a project's implementation – both for
projects of federal significance and regional projects. These results shall be confirmed by
provision of due calculations and justifications provided;
 substantiation of the impossibility of a project's implementation without the Investment
Fund's budgetary allocations – both for projects of federal significance and regional
projects.
The following showings are considered to prove the positive social effects generated as a result of
the project implementation:
 Generating employment;
 Improving the provision and access to the comfortable housing;
 Improving of environmental conditions;
 Developing and upgrading transport infrastructure, improving public healthcare,
Improving quality and access to education, developing of social infrastructure, housing
and communal services
The projects selected on the basis of the qualitative criteria cited above are subject to selection on
the basis the quantitative criteria, namely financial, budgetary and economic effectiveness which
are similar for the projects of federal and regional significance, plus additional requirements as
detailed below.
Financial Efficiency is measured by calculating the project Net Present Value (NPV) and
Internal Rate of return (IRR) with and without the financial support from the IF. The project
meets the Financial Effectiveness criterion if NPV is negative without IF support and becomes
positive with IF support. In other words, the IRR is lower and then higher than the Weighted
Average Cost of Capital (WACC). The calculations will have to result from the use of a robust
Page 84 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
financial model which should include the following elements: balance sheet, income statement,
and cash flow forecasts, sensitivity analysis for assessing the project risks, and foreign exchange
and inflation effects.
Budgetary Efficiency is calculated as the ratio of discounted sum of the direct and indirect tax
payments to the Federal budget over a period of ten years to the amount of IF support and/or
savings of the federal budget outlays caused by a project's implementation to the total amount of
the planned budgetary allocations from the IF. The project meets the criterion if the ration is
equal to or higher than one.
Economic Efficiency is calculated as the ratio of direct and indirect contribution of the project to
the GDP (or contribution to the Gross Regional Product in case of regional projects) over a period
of ten years. The project is considered to meet this criterion if the ratio is higher than 0.01%.
Additional requirements
Any project (both of federal and regional significance) claiming for IF financing shall be
supported a positive opinion of an investment consultant reflecting the projects' compliance with
the qualitative and quantitative eligibility criteria.
One more additional requirement which applies for the regional projects is correspondence of the
volume of the project’s financing at the expense of the RF budget funds to the minimum level of
co-financing, defined in conformity with the methodology for the calculation of indices and for
an application of the criteria of the efficiency of regional investment projects.
The IF Rules also suggest that the benefits arising from the project should be quantified and
agreed upon with a respective Federal Ministry (in case of road project it is the RF Ministry of
Transport). In case of the regional project, the project shall be agreed with the authorities of the
respective region.
Financing from other Federal Budgetary Funds
The Rules for examining investment projects for efficient use of federal budgetary funds
allocated for capital expenditures has been established by the RF Government Regulation #590 of
August 12, 2008. The said Rules do not apply to the investment projects financed from RF
Investment Fund, the projects carried out as per concession agreements and the projects which
obtained the support from the federal budgetary funds before January 1, 2009.
The Rules determine the procedure to examine investment projects involving construction,
reconstruction or technical modernization of capital construction objects36 and/or other
investment in fixed capital financed - fully or partially - from the federal budget for efficient use
of federal budgetary funds allocated for capital expenditures. The examinations shall be
conducted by the RF Ministry of Economic Development to be able to make a decision on
allocation of funds from the federal budget.
According to the Russian classification, the term “capital construction object” includes all types of
buildings and other permanent structures, infrastructure, as well as industrial plants and facilities, including
machinery and equipment
36
Page 85 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
The examination is performed on the basis of evaluation of qualitative and quantitative criteria, as
well as the minimum integral efficiency criterion set for the use of federal budgetary funds
allocated for capital expenditures in order to implement the project in question.
The qualitative criteria include:
 expressly stated goal of the investment project, with a quantitative project outcome
indicator (indicators) determined;
 compliance of the investment project’s goal with the priorities and objectives set forth in
the projections and programs for socio-economic development of the Russian Federation;
 comprehensive approach towards solving a specific problem under the investment project
in conjunction with the activities planned and carried out under long-term federal or
regional targeted programs;
 justification of a need for the construction, reconstruction or technical modernization of a
capital construction object under the investment project;
 substantial lack of substitute products, work or/and services which are already produced
or performed by other organizations;
 justification of the need to attract the federal budgetary funds to project implementation;
 availability of long-term regional and municipal targeted programs that envision
construction, reconstruction and/or technical modernization of capital construction
objects;
 appropriateness to use expensive construction materials, artworks for interior décor and
façade finishing (if any), as well as machinery and equipment (the examination of this
criteria is conducted by comparing the investment project in question with the called
“analogue” projects);
 favourable conclusion of the State Expertise on the design and project documentation and
on the results of site investigations for capital construction objects.
The investment projects which met the above qualitative criteria are subject to further
examination based on the following quantitative criteria:
 quantitative indicators of the outcome of the investment project implementation;
 ratio of the estimated cost of the investment project to the quantitative indicators of the
outcome of the investment project (the examination of this criteria is conducted by
comparing the investment project in question with the called “analogue” projects);
 availability of consumers for the products or services created as a result of the investment
project in numbers sufficient to provide for the planned (standard) capacity utilization
rate for the capital construction object;
 ratio of the planned capacity of the created or reconstructed capital construction object to
the capacity required to produce products or services in amounts sufficient to meet the
federal government needs;
 provision of the planned capital construction object with utility and transportation
infrastructure in volumes sufficient for implementing the investment project.
The investment projects that have passed the examination based on the above qualitative and
quantitative criteria shall be further examined based on the integral evaluation criterion set forth
in a special Methodology for estimating the efficiency of the use of federal budgetary funds
allocated for capital expenditures which is differ from the Methodology developed for the
Investment Fund projects.
This Methodology to estimate the efficiency of the use of the federal budgetary funds shall be
developed by the Ministry of Economic Development. However, by the moment the Ministry still
Page 86 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
did not issue the methodology. According to the MOED’s Department in charge of Federal
Targeted Programs, the delay is caused by the fact that currently the RF Government is
considering a possibility to amend the Regulation #540 in order to simplify the procedure of the
project’s examination. In particular, it is possible that the RF Government would somehow
shorten the scope of projects which will have to go through such examination, but the final
decision on such amending the Regulation #540 has not been done yet.
Page 87 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
ANNEX 2:
Basic Assumptions for Economic Analysis
This attachment summarizes the basic assumptions used in the preliminary estimates of EIRR and
NPV for the proposed Volgograd by-pass:
a. Construction costs: US$20 million/km, US$10 million/km, and US$5 million/km
b. Initial (normal) daily traffic on the new by-pass: 13,000 vpd
c. Traffic composition: Car Medium, 65%; Goods Vehicle, 8%; Bus Medium, 1%; Bus
Heavy, 1%; Truck Heavy, 21%; Truck Articulated, 4%
d. Generated Traffic Due to Decrease in Transport Costs: 60% of normal traffic
e. Traffic growth: 3% per year
f. Terrain: flat; Altitude: 100 m; Rise and Fall, 10 m/km; Horizontal curvature, 40 deg/km
g. Distances traversed by an average vehicle: On the by-pass, 98.3 km; on the existing roads
and streets, 85.0 km
h. Average roughness levels (IRI): On the more expensive by-pass, 2.5 m/km; On the
medium cost by-pass, 3.0 m/km; On the lower cost by-pass, 3.2 m/km
i. Average vehicle fleet speeds: For cars and goods vehicles, 100 km/h and 25 km/h,
respectively on the by-pass and the existing roads and streets; for all other vehicles, 90
km/h and 20 km/h, respectively on the by-pass and the existing roads and streets
j. Road Agency Economic Costs Factor: 0.85
k. Evaluation period: 20 years
l. Average Cost per Accident: US$10,000; With fatalities: US$120,000; With injuries:
US$13,000; With material damage only: US$2,000
m. New Vehicle Cost (US$/vehicle): from 10,000 for cars to 89,000 for articulated trucks
n. Vehicle utilization: from 18,000 for cars to 80,000 for articulated trucks, kilometers
driven per year
Page 88 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
ANNEX 3:
Framework for Social Assessment
Social assessment considers social risks and impacts of the project. For the sake of assessment
of social risks and impacts it would be important to
a. identify the project’s area of influence
b. analyze risks and impacts in the context of concrete stages of project
cycle (pre-construction, construction, operations, operations and
decommissioning/closure).
Social assessment and consultations with affected communities will constitute the basis of the
social section of the management program. Social sections need to identify the main social risks
and outline the mitigation/compensation plan. These specific measures would constitute an
Action Plan (AP). In the case of the Volgograd by-pass program social sections of the AP should
include sections on (1) Community Engagement and (2) Resettlement/other land compensation
issues.37
The AP will (a) describe the actions necessary to implement various mitigation measures to be
undertaken; (b) prioritize these actions; (c) include timeline for implementation; (d) be disclosed
to the affected communities; (e) describe the schedule and mechanism for internal reporting on
the implementation of the AP.
Community Engagement consists of two primary activities –(1) disclosure of information and
(2)consultations on issues of direct communal interest.
Disclosure of relevant project information helps community understand the project and its
impact. Communities that will be affected by the road directly have to be informed about project
activities and impact in the fullest and most direct manner possible.
Consultation. Consultations need to be carried out with the communities that are directly
affected by road construction. Consultations need to provide members of the affected
communities with a feedback mechanism, i.e. be carried out in a format that (a) is based on the
prior disclosure of the relevant and adequate information; (b) is carried out early in the Social
Assessment process; (c) is focused on adverse impacts and efforts to address those; (d) is
responsive to new risks and impacts as they arise; (e) community members need to be included
into the decision making process as to the appropriateness of mitigation mechanisms.
Grievance Mechanism. Grievance mechanism needs to be established to promptly and
adequately address the concerns of the affected community members. This process is an addition,
not a substitute to a legally or administrative available recourse.
Monitoring. Early on in the project preparation a monitoring system needs to be established to
track the implementation of the social AP. Monitoring should also include any necessary
adjustments to the AP necessitated by changes in construction/other project-related plans.
Reporting. Mechanisms for internal reporting on social issues needs to be established early in
the process. External reporting should include the disclosure of Action Plan to the affected
37
Cultural Heritage, since in this particular case the issue is primarily archeological artifacts, will be dealt
with as part of the Environmental Plan (EP)
Page 89 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
communities as well as progress updates as applicable and necessary. Format of the reporting
should be clear and easy to understand for the members of the affected communities.
Page 90 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
ANNEX 4:
Framework for Resettlement and Compensation
This note is to outline the needs for an involuntary resettlement plan to be developed in the
context of the Volgograd by-pass project. The note will specify the steps that are to be taken by
the municipal government and the sub-contracted firms to ensure lawful and just procedures in
compensating local families and firms for the loss of property/and or livelihood. The resettlement
plan is to be prepared at the stage of Feasibility Study to adequately prepare for the costs and
procedures associated with resettlement and loss of property compensation accomplished in
compliance with the national legislation and to the satisfaction of international financial
institutions involved in the project.
Content of a Resettlement Plan
The Resettlement Plan (the RP) has to be based on the current and reliable information about (a)
the proposed resettlement and its impacts on the displaced people and legal entities; (b) the
legal issues involved in resettlement.
Potential impacts. Identification of
a. project activities that would give rise to resettlement;
b. the zone of impact of such component or activities
c. the mechanisms established to minimize resettlement
Objectives. Objectives of the RP
Socioeconomic assessments describing
a. current occupants of the affected areas to establish the basis for the design of the
resettlement program and to exclude subsequent flow of people from eligibility for
compensation and resettlement assistance;
b. standard characteristics of displaced households and businesses, including baseline
information on livelihoods and standards of living;
c. the magnitude of the expected loss – total or partial – of assets, and the extent of physical
and economic displacement;
d. provisions to update information on the status of displaced households and businesses
(livelihoods/income source) so that the latest information is available at the time of the
displacement.
Other studies describing
a. land tenure and an inventory of natural resources from which the population/firms derive
their livelihoods;
b. public infrastructure and social services that will be affected by the project;
Legal framework covering
a. the scope of the power of eminent domain and the nature of compensation associated
with it in terms of both valuation methods and the timing of payment;
b. the applicable legal and administrative procedures, including the description of remedies
available to displaced persons in the judicial process and timeframe for such procedures;
any alternative dispute resolution mechanism that may be relevant to resettlement under
project;
Institutional Framework. The findings of the analysis of the institutional framework covering
a. the identification of agencies responsible for resettlement activities
b. an identification of capacity of such agencies
Page 91 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
c. any steps proposed to enhance the institutional capacity of agencies responsible for
resettlement implementation
Eligibility. Definition of displaced persons and criteria for determining their eligibility for
compensation and other resettlement assistance including relevant cutoff date.
Valuation and compensation for losses. Methodology to be used in valuing losses to determine
their replacement cost (standard used for compensation); and a description of the proposed
types and levels of compensation under local law and such supplementary measures as are
necessary to achieve replacement costs for lost assets.
Resettlement measures. A description of packages of compensation and other resettlement
measures that will assist each category of eligible displaced persons to achieve compensation
under the national laws and the adopted standards for the Project. In addition to being technically
and economically feasible the resettlement package should be prepared in consultation with
the displaced persons.
Site selection, site preparation, and relocation
a. relevant law governing land tenure, valuation of assets and losses, compensation, and
natural resource user rights; environmental laws and social welfare legislation;
b. laws and regulations relating to the agencies responsible for the implementation of
resettlement activities;
c. gaps between national laws and regulations covering eminent domain and accepted
international practices; mechanisms to bridge these gaps
d. any legal steps necessary to ensure the effective implementation of resettlement activities
under the Project, including a process for recognizing claims to legal rights to land,
including claims that derive from traditional usage.
Housing, infrastructure, and social services. Plans to provide (or to finance resettler’s
provision of) housing, infrastructure, and social service; if applicable, any necessary site
development engineering, and architectural designs for these facilities.
Resettlement plan (RP) is to be coordinated with the Environmental Protection and
Management plan (EMP)
Community participation
a. a description of the strategy for consultation with and participation of resettlers in the
design and implementation of the compensation/resettlement activities;
b. a summary of the views expressed and how these views were taken into account;
c. a review of alternatives presented and the choices made by the displaced persons,
including choices related to forms of compensation and resettlement assistance, to
sustaining existing patterns of group organization and retaining access to cultural
property (e.g. places of worship, cemeteries);
d. institutional arrangements by which displaced people can communicate their concerns to
project authorities throughout planning and implementation;
Grievance procedures. Affordable and accessible procedures for third party settlement of
disputes arising from resettlement;
a. Organizational responsibilities. The organizational framework for implementing
resettlement, including identification of agencies responsible for delivery of resettlement
Page 92 of 93
VOLGOGRAD OBLAST: REVIEW OF THE FEASIBILITY STUDY OF A PROPOSED ROAD BY-PASS TO THE
CITY OF VOLGOGRAD
measures; arrangements to ensure appropriate coordination between the agencies and
jurisdictions involved in implementation; any measures needed to strengthen the
implementing agencies’ capacity to design and carry out resettlement activities.
b. Implementation schedule. A schedule covering all resettlement/compensation activities,
including target dates for the achievement of expected benefits to resettlers/compensated
population. The schedule should indicate how the resettlement/compensation activities
are linked to the implementation of the overall project.
c. Costs and budget. Tables showing itemized costs estimates for all resettlement activities
including allowances for inflation, population growth, and other contingencies; timetable
for expenditures; sources of funds; and arrangements for timely flow of funds.
d. Monitoring
and
evaluation.
Arrangements
for
monitoring
of
the
resettlement/compensation activities by the implementing agency supplemented by
independent monitors to ensure complete and objective information; performance
monitoring indicators to measure inputs, outputs, and outcomes of resettlement activities;
involvement of the resettlement/compensated population in monitoring activities.
Page 93 of 93