Volgograd Oblast: Review of the Feasibility Study of a Proposed Road by-Pass to the City of Volgograd
RUSSIAN FEDERATION
Volgograd Oblast
Review of Feasibility Study of a Proposed By-Passaround 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
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Volgograd Oblast: Review of the Feasibility Study of a Proposed Road by-Pass to the City of Volgograd
Table of Contents
1.Introduction
1.1Background
1.2Scope of Advisory Services
1.3Comments on the Objectives of the Existing Feasibility Study
1.4General Comments on the Existing Feasibility Report Structure and Content
1.5Proposed Enhanced Feasibility Study Outline
1.6Proposed Process for Enhancing the Feasibility Study
1.7Requirements for Investment Fund and Federal Targeted Programs
2.Review of the Regional Development Plan as a Justification for the Proposed By-Pass
2.1Justification for Considering Land Development in Conjunction with the Proposed By-Pass
2.2Land Development Benefits to the Oblast
2.3Private and Public Sector Commitments
2.4Incentives to the Private Sector
2.5Implications of Charging Tolls on Spurring Land Development
2.6Additional Traffic Generation
2.7Follow-up Activities
3.ECONOMIC ANALYSIS AND OPTIONS
3.1Rationale for Assessing By-Pass Options
3.2Identification of Other Options
3.3Options to Be Tested
3.4Assessment of the By-pass in Conjunction with the Proposed Moscow to Volgograd Motorway
3.5Assessment of the Options
3.6Preliminary Design and Cost Estimates Needed for the Proposed Options
3.7 Economic Evaluation of the Proposed Volgograd By-Pass Options
3.8Assessment Summary and Selection of the Preferred Options (or Options)
Follow-up Activities
3.10Illustrative Multi-Criteria Assessment Matrix
4.Current Traffic Conditions, Traffic Forecasts, and Traffic assignments
4.1Existing Traffic Conditions and Impact Assessment
4.2Traffic Forecasts and Impact Assessment
4.3Traffic Assignments
4.4Follow-up Activities
4.5Detailed Assessment of the Traffic Assignment Model
5. Technical Solution and Toll Rate Assessment
5.1Introduction
5.2Traffic Analysis and Geometric Design
5.3Junctions, other structures and road safety features
5.4Pavement Design
6.CONSTRUCTION AND MAINTENANCE COST ESTIMATES
7.Introducing PPP and Implication for the Oblast
8.Review of PPP Models applicable to the by-pass
8.1Model Options under Concession Law
8.2Demand Risk Considerations in the Feasibility Study
8.3Demand Risk Mitigation (Guarantee Options)
8.4Most Viable PPP Model Option
9.REVIEW OF FINANCIAL ANALYSIS
9.2The Role of Financial Analysis
9.3Review of Feasibility Study Assumptions.
9.4Review of Conclusions of the Financial Model (Methodology)
9.9Review of Sensitivity Analysis
10Financing options and affordability of proposed option
10.1Sources of Funding
10.2Affordability Analysis
11.Review of Risk Allocation.
12.Environmental Assessment
13.Social Assessment
14.Cultural Heritage Assessment
14.1Context
14.2Rationale
14.3Framework guidelines and elements
15.Annexes
ANNEX 1: Investment Fund of the Russian Federation
ANNEX 2:Basic Assumptions for Economic Analysis
ANNEX 3:Framework for Social Assessment
ANNEX 4: Framework for Resettlement and Compensation
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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 linkfive 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 Studyprepared 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 too much in favor of the Oblast. Correcting for these deficiencies would require additional financial contribution from the Oblast as the contribution from other sources of funds is limited. In addition, the current situation for PPP is that long-term private or commercial debt, which is the main source of financing of PPP projects, has become very scarce and will likely become more expensive. This effectively eliminates for at least the near term future private sector investment as a primary candidate source of funding for a project of this size.
- The Oblast at present has very limited borrowing capability as it has committed funds for other projects and investments and therefore cannot at the present time contribute significantly to the proposed project without a major reallocation of funding commitments and/or access to increased sources of revenue. Our review concluded that, even if 75% of the capital cost is obtained from Federal sources, the Oblast will need to provide significant financial contribution during operations under a PPP agreement. New taxes and user charges have limitations in terms of generating additional revenue, and if adopted will likely restrict regional development, and will be seen as risk by the private sector.
- Taking into account the estimated cost of the by-pass and projected traffic volumes on this roadway, the proposed project would yield only very modest economic rates of return (in the range of 3-5%) which does not bode well for seeking Federal assistance given competing alternative projects seeking Government investment.
Alternative less costly by-pass designs should be considered and prepared. The World Bank team believes that there are less costly design options for a Volgograd by-pass that could address near term needs while at the same time keeping open longer term best-solution options. A less expensive solution would also make the project more attractive to the private sector. While developing alternative by-pass schemes is beyond the scope of the current assignment, it is clear that by reducing the cost of the proposed by-pass (i) the economic rate of return of the project would substantially increase and (ii) it would become more attractive to the private sector, should the current financial crisis improve. Among the alternative options that have been proposed in this report the World Bank team recommends in particular serious consideration of Option C which is to build the by-pass in the currently proposed alignment to a substantially reduced standard by reducing the number of lanes, eliminating some or all grade separations and other cost savings measures. This lower cost option could be built in a manner that would permit sequentially upgrading as traffic volumes increase and additional funding becomes available. Other options involving the 3rd longitudinal and parts of the currently proposed by-pass also appear to be worth serious consideration.
The case for Federal assistance based on the role of the by-pass within the national highway network should be investigated. It is important to recognize that a major reason for the by-pass is to accommodate long distance transit travel along the major M-6 highway corridor linking Moscow and Astrakhan. Volgograd is the largest city along this route and represents the most significant traffic bottleneck on the entire M-6 route. Given this rationale the case for Federal funding appears very reasonable as the by-pass is principally an important part of this major national highway. In many countries this major highway would be 100% funded by the central government. The case for federal funding could be made substantially stronger by proposing a much less costly by pass as described above.
The case for tolling the by-pass should be examined in relation to its impact on the Oblast regional development plan. The Bank team understands that the use of tolls for the proposed by-pass would contribute to making it financially viable for the Oblast. The by-pass is seen by the Oblast as a way to open up areas of metropolitan Volgograd for urban land development. However, tolling the by-pass would certainly have the effect of discouraging some use of the by-pass for this purpose. While the assessment of any toll-policy recommendation is outside the scope of the current agreement with the World Bank, the team strongly recommend to incorporate this analysis when investigating alternative solutions.
Review of the Existing Feasibility 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 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 studydocumentation 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
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.