Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No. PID7026 PID7026.

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1 PID7026.TXT Project Name Region Sector Project ID Borrower Implementing Agency Environment Category Estonia-Transport Project Europe and Central Asia Report No. PID7026 Infrastructure (Transport Sub-Sector) EEPE35775 Ministry of Finance Date This PID Prepared April 12, 1999 Date Initial PID Prepared April 12, 1999 Ministry of Transport 9 Viru Street, EE-0100 Tallin Tel: Fax: Projected Appraisal Date October 15, 1999 Projected Board Date May 15, 2000 Country and Sector Background B 1. Since regaining independence in 1991, Estonia has initiated a far-reaching economic transformation from a centrally planned to an independent market oriented economy. To overcome major structural problems, major economic reforms were introduced. After an initial period of high inflation and sharp contraction of real GDP in 1991 and 1992, Estonia's reforms have made major improvements in the economic environment, the economic decline has been halted and GDP is on the rise. Estonia introduced its own currency in 1992, and carried out a successful stabilization effort that has reduced inflation, encouraged foreign and local private investment, and increased output. In the road sector, financing for maintenance has been increasing over the past several years, and is now approaching optimal levels. The IBRDfinanced Highway Maintenance Project, approved in 1993 and completed in 1997, was rated "highly satisfactory" in the Implementation Completion Report. This project helped to make the Estonia Road Administration (ERA) more efficient and technically advanced. Operation of the Estonia Railways Corporation (ERC) has been greatly improved, operates one day service from Tallinn to St. Petersburg, and is now in the process of privatizing its operations. 2. The Government believes that Estonian growth and development in the years ahead can be encouraged by making Estonia a major trade center and transshipment point for goods passing through the region, with beneficial side effects in terms of value-added

2 activities as goods transit the country. To accomplish this requires an efficient and competitive transport system, transit procedures, and trade supporting services. The Government would like to create a supportive environment for the development of such services through a combination of legal and regulatory measures, infrastructure upgrading, equipment for electronic data interchange, and institutional strengthening. Objectives The objectives of the Project are to: (i) improve the competitiveness of Estonia's trade supporting infrastructure and services and increase value-added activities resulting from the expected increased transit traffic; (ii) reduce road transport costs between Estonia's two largest cities; and (iii) strengthen Estonia's road administration. Description 3. The project comprises the following components: (a) Implementation of selected elements of Estonia's Action Plan for Trade and Transport Supporting Infrastructure and Services, which includes (i) improvements in the policy, legal and regulatory framework and the administrative procedures for trade supporting activities, as identified in the study carried out for this purpose; (ii) improvements in trade supporting infrastructure, including installation of the first phase of an Electronic Data Interchange System (EDI System) to facilitate banking transactions, freight handling, customs clearances, and other steps in the transport processing system, and other infrastructure improvements identified in the study; (iii) institutional strengthening of the government agencies involved in trade supporting activities, including appropriate training; and (iv) private sector development designed to enable the Estonian private sector to develop trade supporting infrastructure and value-added opportunities offered by the project activities. (b) Improvements to the road network through upgrading portions of the Tallinn-Tartu road. (c) Continuation of the institutional strengthening of the Estonia Road Administration (ERA) that was begun under the Highway Maintenance Project, including improved budgeting, continued progress on improving road safety, and adoption of procedures that will permit contracting out of routine maintenance. Financing 4. Total project cost is estimated at US$46 million. The proposed IBRD loan would provide US$25 million, or 54 percent of the total project cost. EU-Phare and bi-lateral aid donors would provide US$2.4 million in grant financing for technical services, and the Government would provide US$18.6 million counterpart -2 -

3 financing. Implementation 5. Project implementation would be coordinated in the Ministry of Transport, where a small implementation unit would be established. The trade facilitation component would be implemented under the guidance of the Estonian Infrastructure and Trasnit Trade Development Foundation, with representatives of the interested ministries and agencies as well as private sector representatives. The road upgrading components will be managed by ERA with its regular staff, utilizing the experience with World Bank procedures learned during implementation of the Highway Maintenance Project. The expected implementation period is four years. Sustainability 6. Once in place, the system established to facilitate trade and transport should be sustained because it will become part of Estonia's regular trade and transport operations. The road civil works components and institution building component should be sustainable because ERA is a competent organization that has already demonstrated its effectiveness in maintaining the road network during the Highway Maintenance Project. Lessons learned from past operations in the country/sector 7. The Bank has broad experience in improving transport systems around the world. This includes the importance of insuring that existing systems are well maintained before investing in expanded systems, something that Estonia is now well aware of and has largely incorporated in its road operations. The experience with the Highway Maintenance Project showed that Estonia is fully capable of implementing World Bank projects and can cope with the procurement and other requirements without difficulty. The use of EDI systems is a relatively new technology for Estonia, and the Bank will be drawing on its experience in other countries to assist Estonia in its efforts to join the forefront of countries that utilize it. Poverty Category 8. An important benefit of the project is to generate increased revenue, investment and employment through increased transit activities, and to improve the competitiveness of Estonia's productive sector, including agriculture and forest products as well as manufactured goods. While not targeted directly to the poorer segment of society, it will provide an important means for sustainable income generation. Environmental Aspects 9. There will be only a limited environmental impact related to the Tallinn-Tartu road, since the upgrading to be included in the project will be for portions of the road that will not require - 3-

4 realignment, hence avoiding issues relating to land acquisition and resettlement. An environmental review will examine the environmental impact of operating asphalt plants for paving operations, quarrying operations to secure aggregate, and worker safety issues, and will propose appropriate mitigation measures. Program Objective Categories 10. The transport industry has been fully involved with the development of the trade and transport facilitation strategy and Action Plan, and will participate in the implementation phase as well. The project will enhance private sector development by improving Estonia's transport infrastructure and trade supporting services. It will make Estonia competitive as a transit point for the region, enhance its competitive position regionally as a partner in international production networks, and internally by establishing a better road connection between Estonia's two largest cities. It will also have a positive effect on the low income rural population by improving the access to the interior for agricultural and forest products. Contact Point: For the Government: Marek Kiisa, Director General of Foreign Relations Department Ministry of Transport and Communications 9 Viru Street Tallinn, Estonia Telephone No.: Fax No.: For the World Bank: Cesar Queiroz, (ECSIN) The World Bank 1818 H Street N.W. Washington, DC Telephone No.: (202) Fax No.: (202) The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C Telephone No. (202) Fax No. (202) Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending April 16,

5 Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID). If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID