Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: June 2012 Proposed Multitranche Financing Facility, Technical Assistance, and Administration of Technical Assistance India: Rural Connectivity Investment Program

2 CURRENCY EQUIVALENTS as of 15 May 2012 Currency unit Indian rupee/s (Re/Rs) Re1.00 = $ $1.00 = Rs ABBREVIATIONS ADB Asian Development Bank CPF community participation framework CPS country partnership strategy EARF environmental assessment and review framework EIRR economic internal rate of return EMP environmental management plan FAM facility administration manual FFA framework financing agreement IEE initial environmental examination km kilometer LIBOR London interbank offered rate MFF multitranche financing facility MORD Ministry of Rural Development NRRDA National Rural Roads Development Agency PFR periodic financing request PIC project implementation consultant PIU project implementation unit PMGSY Pradhan Mantri Gram Sadak Yojana (Prime Minister's Rural Roads Program) RCTRC rural connectivity training and research center RRNMU rural road network management unit SRRDA state rural roads development agency TA technical assistance TSC technical supervision consultant NOTE In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director S. Widowati, Transport and Communications Division, SARD Team leader Team members Peer reviewer O. Tonkonojenkov, Senior Transport Specialist, SARD M. Ajmera, Social Development Specialist, SARD M. Davidovski, Senior Counsel, Office of the General Counsel K. Yangzom, Environment Specialist, SARD C. D. Salter, Senior Natural Resources and Agriculture Specialist, Southeast Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS INVESTMENT PROGRAM AT A GLANCE Page I. THE PROPOSAL 1 II. THE INVESTMENT PROGRAM 1 A. Rationale 1 B. Impact and Outcome 2 C. Outputs 2 D. Investment and Financing Plans 3 E. Implementation Arrangements 5 III. TECHNICAL ASSISTANCE 5 IV. DUE DILIGENCE 6 A. Technical 6 B. Economic and Financial 6 C. Governance 7 D. Poverty and Social 8 E. Gender Impacts 8 F. Safeguards 8 G. Risks and Mitigation Measures 10 V. ASSURANCES 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework for the Investment Program List of Linked Documents 14

4

5 INVESTMENT PROGRAM AT A GLANCE 1. Project Name: MFF - Rural Connectivity Investment Program (Facility Concept) 2. Project Number: Country: India 4. Department/Division: South Asia Department/Transport and Communications Division 5. Sector Classification: Sectors Primary Subsectors Transport, and information and Road transport communication technology 6. Thematic Classification: Education Technical education and vocational skills training Themes Primary Subthemes Economic growth Widening access to markets and economic opportunities Environmental sustainability Natural resources conservation Private sector development Capacity development Public-private partnerships Institutional development 6a. Climate Change Impact Adaptation Mitigation High Low 6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender benefits (SGB) No gender elements (NGE) 7. Targeting Classification: General Intervention Geographic dimensions of inclusive growth Targeted Intervention Millennium development goals Income poverty at household level 8. Location Impact: National Rural Medium High 9. Project Risk Categorization: Complex 10. Safeguards Categorization: 11. ADB Financing: Environment Involuntary resettlement Indigenous peoples Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign MFF-Facility (Loan) Ordinary capital resources Sovereign Capacity Technical Assistance Special Fund 1.0 development technical assistance Total B C C 12. Cofinancing: 13. Counterpart Financing: 14. Aid Effectiveness: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Capacity Japan Fund for Poverty Reduction 1.3 development technical assistance Total 1.3 Source Amount ($ Million) Government Total No Aid Effectiveness available.

6

7 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed multitranche financing facility (MFF) to India for the Rural Connectivity Investment Program. 1 The report also describes proposed technical assistance (TA) for Institutional Development for Rural Roads Asset Management and, if the Board approves the proposed investment program, I, acting under the authority delegated to me by the Board, will approve the TA. 2. The investment program proposed for financing by the Asian Development Bank (ADB) will construct to all-weather standard about 9,000 kilometers (km) of rural roads connecting around 4,200 habitations in the investment program states of Assam, Chhattisgarh, Madhya Pradesh, Odisha, and West Bengal. For the investments in physical infrastructure to be effective and sustainable, the investment program will also focus on improving institutional arrangements, business processes, and associated capacity building, especially in relation to design, operation, safeguards, finance, road safety, and asset management. 2 II. THE INVESTMENT PROGRAM A. Rationale 3. Road map. ADB s country partnership strategy (CPS) for India is closely aligned with the priorities of India s Eleventh Five Year Plan, The CPS reconfirms continuing ADB assistance for development of rural roads, which are critical for rural development as they provide access to markets, health, education, and administrative services. Absence of allweather road connectivity is a serious problem, making rural communities inaccessible for up to 90 days a year. Poor road infrastructure affects economic growth in rural areas, agricultural productivity, and employment, and has a strong link to poverty. The Government of India is addressing this problem through implementation of a nationwide rural road investment program the Prime Minister's Rural Roads Program (PMGSY) aimed at providing all-weather road connectivity to currently unconnected eligible habitations in India s rural areas. The investment program will support the government s objectives under the PMGSY. 4. Strategic context and policy framework. The specific contribution of the PMGSY to the achievement of country strategic development goals includes reducing poverty (faster and more inclusive growth), expanding and strengthening rural infrastructure to accelerate agricultural growth and the rural economy, creating jobs, and social development (improved education, health, and social indicators). The PMGSY is also very relevant to the pillars of the policy framework in the road sector, including sustainability (promoting longer-term road maintenance), road safety (mainstreaming road safety audits and community awareness), and seamless connectivity (as rural roads provide the last mile connectivity). 5. Investment program. The PMGSY identified the investment program states among the 10 states with large rural populations that lack adequate coverage in terms of all-weather road connectivity. The poverty head count rates in these states are among the highest in India. The PMGSY started in 2000 and has thus far constructed 108,637 km of rural roads in the investment program states, connecting 39,721 habitations to a greater transportation network. 3 1 The design and monitoring framework is in Appendix 1. 2 ADB provided project preparatory TA. ADB Technical Assistance to India for Preparing the Third Rural Road Sector Investment Program. Manila. 3 Chhattisgarh and Madhya Pradesh have been provided with ADB assistance under ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to

8 2 Construction of an additional 32,158 km of roads is ongoing. According to the June 2011 program update, 85,690 km of roads to connect all remaining eligible habitations in the investment program states are yet to be constructed under the PMGSY. 6. The latest estimate for the remaining PMGSY financing requirement to achieve its goal by 2016 in the investment program states is about $7.95 billion, while available PMGSY funding for the same period is estimated to be around $5.04 billion. While exploring the possibilities for domestic borrowing to close the financial gap, the government has approached ADB to provide funding of $0.8 billion under the investment program to assist with the implementation of the PMGSY in the investment program states. The investment program is consistent with the strategic objective set out in the CPS, and is included in ADB s country operations business plan, Lessons learned from the previous ADB rural roads projects in the investment program states (footnote 3) show that, the states also need support in improving business procedures covering the whole life cycle of rural roads, and strengthening related capacities. Specifically, while the emphasis is shifting from construction to the operation and maintenance of the rural road network, 4 the related capacities for rural road network management are lagging. There is also a mismatch between the extent of the rural road network (around 80% of the total road network) and supply of skills, as the training of civil engineers, technicians, and site supervisors is oriented towards high-category roads. Another lesson learned shows the necessity of better development coordination with the World Bank, which in addition to the geographical delineation of effort should strive to achieve synergies of the interventions between the two partners. 5 B. Impact and Outcome 8. The long-term impact of the investment program will be reduced poverty and deprivation, and inclusive socioeconomic growth in the communities served by the investment program roads in Assam, Chhattisgarh, Madhya Pradesh, Orissa, and West Bengal. The immediate outcome will be improved and sustainable connectivity of rural communities in the investment program states to markets, district headquarters, and other centers of economic activity. C. Outputs 9. The investment program will have six outputs. These include that: (i) selected priority rural roads will be constructed to all-weather standard; (ii) the design quality of investment program roads will be improved; (iii) maintenance of the investment program roads will be improved and sustained; (iv) road safety measures will be incorporated into the life cycle of the investment program roads; (v) the qualification and skills of PMGSY engineers, technicians, site supervisors, panchayati raj institution staff concerned, 6 design consultants, and contractors in India for the Rural Roads Sector I Project. Manila (Loan 2018-IND and TA 4220-IND), which was closed in The investment program states are receiving ADB assistance under the ongoing ADB Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to India for Rural Roads II Investment Program. Manila (Loan 2248-IND), to be closed in More details are in the sector assessment summary (accessible from the list of linked documents in Appendix 2). 4 Specifically, more than 65,000 km are currently on 5-year post-construction maintenance, and the length of roads beyond 5-year post-construction maintenance will increase from around 17,000 km to more than 80,000 km by Development coordination (accessible from the list of linked documents in Appendix 2). 6 A panchayat is a body of directly elected people responsible for development of activities in an area constituted for rural areas under Article 243-B of the Constitution of India. The three levels of panchayati raj institution are the gram panchayat at a village level, intermediate panchayat at a block level, and zilla panchayat (called a parishad in some states) at a district level. These panchayats are collectively called panchayati raj institutions.

9 3 the investment program states will be improved and maintained; and (vi) effective project management will be provided. 10. Road infrastructure development. Under the investment program, about 9,000 km of all-weather rural roads will be constructed in the investment program states, which will connect around 4,200 habitations. 7 The investment program will pilot the use of new construction technologies 8 and the use of local materials will be increased. The adopted all-weather standard will increase the resilience of communities to the impacts of climate change. All constructed roads will be maintained under 5-year performance-based maintenance contracts. Selected districts will pilot contracts linking payments with the achievement of both the performance standards and a degree of consistency of performance, thus introducing a public private partnership approach to road maintenance. Another pilot will involve community-based protection of roads from excessive loads. 11. Institutional Strengthening. The investment program will support: (i) establishment of pilot rural road network management units (RRNMUs) for effective and high quality life cycle rural road network management with emphasis on performance-based maintenance of created assets; and (ii) establishment of rural connectivity training and research centers (RCTRCs). The support will include construction of modern facilities along with providing all necessary state-ofthe art equipment, systems, and tools. 9 Consulting services will include developing training modules, assisting in research and compiling best practices in rural roads, supporting RCTRC operations, and rolling out large-scale rural roads-oriented training. A capacity development TA will be provided to assist the roll out of RRNMUs and setting up of RCTRCs. D. Investment and Financing Plans 12. The investment program is estimated to cost $1, million equivalent, including civil works, consulting services, equipment, project management costs, social mitigation measures, taxes, duties, contingencies, and interest and other charges on the loan during construction (Table 1). Table 1: Investment Program Cost Estimates ($ million) Item Amount a A. Base Cost b 1. Road infrastructure development Institutional development Project management Subtotal (A) 1, B. Contingencies c C. Financing Charges during Implementation d Total (A + B + C) 1, a Includes taxes and duties of $51.3 million to be financed from government resources, and taxes and duties for certain goods and consulting services of $1.0 million to be financed by the Asian Development Bank (ADB). b In mid-2011 prices. c Price contingencies. d Includes interest and commitment charges. Interest during construction for the ADB loans is computed at the 5- year forward London interbank offered rate plus a spread of 0.40% and a maturity-based premium of 0.20%. Commitment charges for an ADB loan are 0.15% per year on the undisbursed loan amount. Source: Asian Development Bank estimates. 7 Includes new construction and upgrading to the all-weather standards. Adopted design standards are provided in Appendix G of Facility Administration Manual (accessible from the list of linked documents in Appendix 2). 8 Such as cold mix bitumen emulsion, interlocking concrete blocks, and eco-friendly jute geotextile and vetiver grass for soil stabilization and water conservation. 9 One RCTRC and around 6 RRNMUs will be established in each state under the investment program.

10 4 13. The government has requested an MFF of up to $800 million from ADB s ordinary capital resources to help finance a part of the investment program. The MFF will consist of four tranches, subject to the government's submission of related periodic financing requests (PFRs); execution of the related loan and project agreements for each tranche; and fulfillment of terms, conditions, and undertakings set forth in the framework financing agreement (FFA). 10 For the implementation of the investment program, the government will make the relevant portion of the proceeds of each tranche available to each investment program state promptly and on a grant basis on terms and conditions acceptable to ADB. The financing plan is in Table 2. Table 2: Financing Plan ($ million) Tranche 1 Tranche 2 Tranche 3 Tranche 4 Source Total Asian Development Bank Government and state governments a Total a State governments will finance the cost of utility shifting and social mitigation. Source: Asian Development Bank estimates. 14. All of the provisions of the ordinary operations loan regulations applicable to ADB s London interbank offered rate (LIBOR)-based loans 11 will apply to each loan, subject to modifications, if any, that may be included under any loan agreement. The government has the option to choose between eligible currencies and the interest rate regime for each loan. The specific terms of each loan will be based on the related PFR, with interest to be determined in accordance with ADB s LIBOR-based lending facility. The government has provided ADB with (i) the reasons for its decision to borrow under ADB s LIBOR-based lending facility based on these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. 15. Project 1. The government has submitted the first PFR 12 in line with the FFA. Project 1 is estimated to cost $341 million equivalent. 13 Project scope includes civil works for rural road construction; 14 civil works and equipment for RRNMU and RCTRC facilities; and consulting services for project management, safeguard monitoring, due diligence, and rollout of RCTRCs. A loan of $252 million from ADB s ordinary capital resources has been requested to cover part of the cost of project 1. The loan will use a sector modality, have a 25-year term including a grace period of 5 years, an annual interest rate determined in accordance with ADB s LIBORbased lending facility, 15 a commitment charge on the undisbursed loan amount of 0.15% per year, and such other terms and conditions set forth in the draft loan and project agreements. 10 Framework Financing Agreement (accessible from the list of linked documents in Appendix 2). 11 ADB Ordinary Operations Loan Regulations Applicable to LIBOR-Based Loans Made from ADB's Ordinary Capital Resources. Manila. 12 Periodic Financing Request for Project 1 (accessible from the list of linked documents in Appendix 2). 13 Includes taxes and duties of $16.1 million to be financed from government resources, and taxes and duties for goods and consulting services of $0.3 million to be financed by ADB. 14 In Assam (342 km), Chhattisgarh (1,008 km), Madhya Pradesh (1,187 km), Odisha (757 km), and West Bengal (167 km). 15 The interest on the loan shall include a maturity-based premium of 0.2%. This is based on the loan terms specified above and the government's choice of repayment options and dates.

11 5 E. Implementation Arrangements 16. The implementation arrangements are summarized in Table 3 and described in detail in the facility administration manual (FAM). 16 Table 3: Implementation Arrangements Aspects Arrangements Implementation period 6 years Estimated completion date 31 December 2017 Management Coordination committee (chair: joint secretary, MORD; members: senior officials (i) Oversight body representing MORD, NRRDA, DEA; and governments of Assam, Chhattisgarh, Madhya Pradesh, Odisha, and West Bengal (ii) Executing agency National: MORD; state: governments of Assam (through public works department), Chhattisgarh, Madhya Pradesh, and West Bengal (through departments of panchayat and rural development), and Odisha (through department of rural development) (iii) Key implementing agencies (iv) Implementation unit Procurement Consulting services Retroactive financing and/or advance contracting Disbursement State Road Board in Assam, State Rural Roads Agency in Odisha, State Rural Development Agency in West Bengal, and Rural Roads Development Authority in Madhya Pradesh and Chhattisgarh PIUs established at the district level (28 in Assam, 50 in Chhattisgarh, 69 in Madhya Pradesh, 60 in Odisha, and 32 in West Bengal) National competitive About $ million bidding Works (roads): 1,970 contracts (estimate) Works (RRNMUs): 10 contracts Works (RCTRCs): 5 contracts Goods (RRNMUs and RCTRCs): 5 contracts Shopping Goods (RRNMUs and RCTRCs): 30 contracts Technical support About 300 person-months consultant (national) (QCBS 80:20) RCTRC consultant About 200 person-months (QCBS 80:20) (international and national) Civil works, goods, and consulting services About $15.00 million About $3.00 million About $1.00 million About $2.0 million About $2.0 million About $4.0 million The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. ADB = Asian Development Bank, DEA = Department of Economic Affairs, MORD = Ministry of Rural Development, NRRDA = National Rural Roads Development Agency, PIU = project implementation unit, RCTRC = rural connectivity training and research center, RRNMU = rural road network management unit, SRRDA = state rural roads development agency, QCBS = quality and cost-based selection. Sources: Asian Development Bank and National Rural Roads Development Agency estimates. III. TECHNICAL ASSISTANCE 17. The proposed capacity development TA for Institutional Development for Rural Roads Asset Management will support the piloting of RRNMUs and the establishment of the RCTRCs. 17 Support for RRNMUs will include (i) developing rural road network management policies, business procedures, and associated tools; (ii) providing advisory support in design and procurement processes for RRNMU facilities; (iii) providing dedicated rural road network management training; (iv) supporting RRNMUs with the implementation of rural road network management tasks; and (v) monitoring and analyzing RRNMU performance and lessons learned. Support for RCTRCs will include (i) formulating the concept, organizational structure, 16 Facility Administration Manual (accessible from the list of linked documents in Appendix 2). 17 Detailed terms of reference for each component of the capacity development TA are in Appendixes E and F of Facility Administration Manual (accessible from the list of linked documents in Appendix 2).

12 6 funding mechanisms, business procedures, and staffing requirements of RCTRCs; (ii) providing advisory support in design and procurement of RCTRC facilities; (iii) providing dedicated training to RCTRC staff; (v) developing an operational plan for the rollout of RCTRCs; and (vi) assisting in recruitment of the loan-financed RCTRC consultant. 18. The capacity development TA will be conducted over a period of 30 months from December 2012 through June The total cost of the TA is estimated at $2,300,000 equivalent, 18 consisting of $1,300,000 equivalent on a grant basis to be financed by the Japan Fund for Poverty Reduction and administered by ADB, and $1,000,000 equivalent on a grant basis to be financed from the Technical Assistance Special Fund (TASF-other sources). This excludes the in-kind contribution of the state governments providing counterpart staff, and all relevant information and data. International consulting firms will be recruited by ADB according to its Guidelines on the Use of Consultants (2010, as amended from time to time). The selection will be in accordance with ADB s quality- and cost-based selection method using a quality cost ratio of 80:20. Disbursements under the TA will be in accordance with ADB s Technical Assistance Disbursement Handbook (2010, as amended from time to time). IV. DUE DILIGENCE A. Technical 19. PMGSY guidelines will be followed in the selection of roads, and applicable standards of the Indian Road Congress 19 will be followed in preparation of designs. The states will also follow an improved road design process adopted for the investment program, as related to the design context, quality control, and incorporation of road safety measures. The project implementation consultants will include safeguard experts to ensure the proper incorporation of safeguards and community consultation in the process, and road safety experts to conduct road safety audits of designs, during and after construction. The technical support consultant will provide training and monitoring of the implementation of the road safety audit recommendations. A feasibility study conducted on the representative sample 20 in all investment program states has confirmed that all subprojects selected following PMGSY guidelines are technically feasible. The study has also confirmed the feasibility of subprojects in terms of the social and environmental impacts. B. Economic and Financial 20. A strong body of evidence 21 exists documenting the significant benefits provided by PMGSY all-weather roads, including health, education, agriculture, poverty reduction, employment and income, housing facilities, and moveable assets. As these benefits are not captured by the economic analysis, which accounts only for transport cost savings, the economic internal rate of return (EIRR) threshold of 10% for testing economic viability was adopted. Economic analysis, which considered only passenger time savings and transport and operation costs conducted on the representative sample, indicated that overall the investment program is economically viable, with EIRRs ranging from 13.9% to 16.4% on a state-by-state 18 The cost estimates and financing plan for each TA component are in Appendix K of Facility Administration Manual (accessible from the list of linked documents in Appendix 2). 19 The Indian Road Congress is the national body responsible for sharing knowledge on all subjects dealing with transportation. 20 This consists of 112 roads, including around 59 km in Assam, 100 km in Chhattisgarh, 99 km in Madhya Pradesh, 64 km in Odisha, and 82 km in West Bengal. 21 ADB Completion Report: Rural Road Sector II Investment Program (Project I). Manila; ADB Completion Report: Rural Roads Sector I Project. Manila; and socioeconomic impact assessment reports for Rural Roads Sector I Project and Rural Road Sector II Investment Program (Project I).

13 7 basis. 22 Sensitivity analysis indicated that, with a 15% increase in capital costs or a 15% decrease in benefits, the investment program remains economically viable in all states. With both a 15% increase in capital costs and 15% decrease in benefits, all states except Odisha continue to have EIRRs of more than 10%; for Odisha, the EIRR is only slightly lower than 10%. Economic analysis was further expanded to conservatively estimate only two out of numerous additional benefits of providing all-weather rural connectivity for a few road sections having EIRRs of less than 10%. 23 With these benefits accounted for, the EIRR values for such road sections increased significantly, reaching a minimum of 10.8% in Assam, 12.6% in Chhattisgarh, 11.5% in Madhya Pradesh, and 10.8% in Odisha, thus confirming that the proposed investment is economically viable, on both a state-by-state and road-by-road basis. C. Governance 21. Institutional. The investment program states have established equivalents of state rural roads development agencies (SRRDAs) 24 and field project implementation units to manage the PMGSY, and since the start of PMGSY in 2000 have developed adequate implementation experience, qualifications, and capacities. The investment program states will use the services of the project implementation consultants to assist with implementing safeguard frameworks and piloting new road safety and road maintenance procedures, while the Ministry of Rural Development (MORD) and the National Rural Roads Development Agency (NRRDA) will use the services of the technical support consultant for the overall due diligence, training, and monitoring of compliance. Capacity development TA will be provided to further assist with the implementation of the investment program s institutional strengthening component. 22. Financial management. The funds flow from MORD to the state governments will follow the pattern of grants-in-aid under the centrally sponsored schemes of the Government of India, and its relevant financial rules will apply. This includes providing audited utilization certificates for each fund release from MORD to the state governments and maintaining a separate account for the central government funds in each investment program state. For disbursement of loan proceeds under the MFF, reimbursement procedures will be used. Financial management assessment conducted in accordance with ADB s Guidelines on the Financial Management and Analysis of Projects 25 has confirmed that the project executing and implementing agencies have considerable experience in handling similar ADB-funded projects and are well prepared for financial management under the investment program Procurement of civil works and consulting services. All procurement of goods and works financed wholly or in part by ADB will be in accordance with ADB s Procurement Guidelines (2010, as amended from time to time). Procurement of civil works for construction of RRNMU and RCTRC facilities will be based on the ADB standard bidding document for procurement of works (small contracts). For the road construction, the investment program states will be following the national competitive bidding procurement process with the use of the 22 Few individual roads mostly those with higher capital costs related to more bridge and/or cross-drainage works (such roads may have other more pronounced benefits related to providing all-weather connectivity) have EIRRs below 10%. 23 These benefits are a 25% decrease in transport cost during about 60 days of the rainy season, and increased crop diversification and reduced spoilage resulting in an increase in agricultural revenue of 10%. 24 The functions of SRRDAs are carried out by the State Road Board in Assam, State Rural Roads Agency in Odisha, State Rural Development Agency in West Bengal, and Rural Roads Development Authority in Madhya Pradesh and Chhattisgarh. 25 ADB Guidelines on the Financial Management and Analysis of Projects. Manila. 26 Financial management assessment was conducted in each investment program state in More details are in Facility Administration Manual (accessible from the list of linked documents in Appendix 2).

14 8 standard PMGSY bidding document (improved as needed in agreement with ADB) and electronic procurement (e-procurement). 27 Specific procurement procedures adopted under the investment program are detailed in the FAM (footnote 15). All consultants financed by the loans under the MFF will be selected and engaged in accordance with ADB s Guidelines on the Use of Consultants (2010, as amended from time to time) and other arrangements for recruitment of national consultants acceptable to ADB. Prior ADB review for the recruitment process with quality- and cost-based selection with a quality cost ratio of 80:20 will be followed. 24. Anticorruption. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government of India and state governments. The specific policy requirements and supplementary measures are described in the FAM. D. Poverty and Social 25. The investment program states are still lagging behind in terms of various development indicators. 28 The provision of all-weather roads in rural areas will be a key factor in reducing poverty. Specifically, (i) farmers will benefit from increased access to rural markets and agricultural productivity contributing to increased incomes, (ii) rural communities will be able to shift from subsistence farming to more commercially oriented agricultural production, (iii) mainstreaming of production of high-value perishable products will become possible, (iv) poor households will be able to access better-paying jobs outside their villages, (v) investments in nonagricultural enterprises will grow at a faster pace, and (vi) the investment program itself will create labor opportunities for rural poor. E. Gender Impacts 26. Gender analysis highlighted several key benefits which the all-weather roads constructed under the investment program will bring, including an increased rate of safe child deliveries, reduction in maternal and prenatal deaths and the mortality of children, and increased enrollment of girls in schools and universities. The gender action plan prepared for project 1 incorporates several gender mainstreaming targets, including (i) participation of not less than 30% of women in the transect walks; 29 (ii) participation of women in the road safety awareness sessions carried out for affected communities under the community participation framework (CPF); (iii) at least 10% of the households in rural habitations to be connected by project 1 roads will be headed by women, and at least 40% of inhabitants will be from vulnerable groups; (iv) at least 33% of and road maintenance will be done by women; and (v) RCTRCs will develop and use gender-sensitive training modules. F. Safeguards 27. Environmental impact. Project 1 is classified category B in accordance with ADB s Safeguard Policy Statement (2009). In line with the environmental assessment and review framework (EARF), 30 state initial environmental examinations (IEEs) of all road subprojects will 27 Approval of e-procurement for national competitive bidding in all investment program states was granted by ADB in The number of people living below the poverty line is around 5.57 million in Assam, 9.10 million in Chhattisgarh, million in Madhya Pradesh, million in Odisha, and million in West Bengal (based on poverty level estimates). 29 Consultation with the affected communities conducted in the process of walking of the community representatives together with the representatives of project implementation units, project implementation consultant, panchayati raj institution, and design consultant along the alignment of the proposed rural road. 30 Endorsed by the NRRDA following prior approval by each state government.

15 9 be prepared before each tranche approval; IEEs for project 1 have been prepared and are disclosed on the ADB website. Pursuant to provisions of the EARF, environmental assessment of non-road subprojects will be conducted during implementation of the MFF. The IEEs rate the scale of environment impacts from the physical interventions of the investment program as minor. 31 Mitigation measures for all impacts have been developed and integrated into construction works through incorporation of a standard environmental management plan (EMP) in the bidding documents and provision of road-specific EMPs with the detailed project reports. Assessment of institutional capacities and arrangements confirmed that they are satisfactory to effectively implement the requirements of the EARF, IEEs, and EMPs Involuntary Resettlement; Land Availability. Project 1 is classified category C in accordance with ADB s Safeguard Policy Statement (2009).The construction will be carried out mostly within existing rights-of-way, with widening and minor realignments in some cases, which will require narrow strips of land to be made available. In such cases, the voluntary land donation system will be used as in the preceding ADB interventions in the rural road sector (footnote 3). The system has been widely used under the PMGSY and other rural development schemes across India and has been proved effective. Projects under the investment program are not expected to involve involuntary resettlement and the government will ensure there is no involuntary land acquisition. Specific procedural requirements involving comprehensive consultations with the communities are provided in the state specific CPFs, which are disclosed on the ADB website. Transect walks conducted in the preparation of project 1 have confirmed the effectiveness of the adopted community consultation and social impact mitigation process. Assessment of institutional capacities and arrangements confirmed that they are satisfactory to effectively implement the requirements of the CPFs Indigenous peoples. Project 1 is classified category C in accordance with ADB s Safeguard Policy Statement (2009).The social assessment identified the presence of scheduled tribes in all investment program states. However, these groups are largely assimilated into the local population. The investment program will not have any differential impact on scheduled tribes: they will receive similar benefits from the investment program to those received by nonscheduled tribe households, and the impact on tribal and cultural identity will not be significant. All outputs will be delivered in a culturally appropriate and participatory manner. To further mitigate the risks, the CPFs identify special provisions for all scheduled tribe households, ensuring that their living standards are not adversely affected as a result of land donation or in the event of any loss of non-land asset and impacts on their livelihoods. 30. HIV/AIDS and other social safeguards. The social assessments done do not anticipate any rise in the incidence of HIV/AIDS as a result of the investment program. Each investment program state will ensure that works contracts follow all applicable labor laws and regulations and include provisions requiring contractors to carry out HIV/AIDS awareness programs for those employed during construction. The project implementation units will conduct close monitoring and, along with the contractors, will coordinate with the State AIDS Control Society on conducting HIV/AIDS awareness programs. 31 The predicted environmental impacts are minimal, temporary, and reversible as they are mainly related to occupational health and safety and minor issues of dust, noise, and water pollution, which occur mostly during construction. 32 Required capacity building of the contractors, PIUs, and PICs on environmental code of practice preparation and EMP implementation and monitoring will be organized by the NRRDA and SRRDAs with technical support from ADB, where necessary. 33 Required capacity building of the contractors, PIU, and PIC on CPF preparation and implementation and monitoring will be organized by the NRRDA and SRRDAs with technical support from ADB, where necessary.

16 10 G. Risks and Mitigation Measures 31. Major risks and mitigating measures are summarized in Table 4. More details are provided in the risk assessment and risk management plan. 34 Risks Initial delays in start of civil works Inadequate road maintenance Sustainability of RRNMUs and RCTRCs Table 4: Summary of Risks and Mitigating Measures Mitigating Measures Advance action for procurement will be used. A new adopted procedure for road design will minimize delays caused by design omissions. E-procurement adopted in each investment program state will attract more bidders and promote competition, thus reducing rebidding. All contracts will include 5-year post-construction road maintenance. Under PMGSY, MORD strictly enforces the inbuilt mechanism linking release of central funds for construction with provision of adequate maintenance financing by the states. The investment program will further increase the effectiveness of the maintenance planning, budgeting, contracting, and administration. All states have committed to (i) provide adequate staffing and budget for RCTRCs and RRNMUs, and normally (ii) not transfer key staff from the RRNMUs for at least 3 consecutive years; (iii) not leave key positions vacant for more than 30 days; and (iv) not transfer more than one key staff member within a 6-month period. The consultants (loan financed and under the capacity development TA) will help support the rollout and knowledge transfer. MORD = Ministry of Rural Development, PMGSY = Prime Minister s Rural Road Program, RCTRC = rural connectivity training and research center, RRNMU = rural road network management unit, TA = technical assistance. Source: Asian Development Bank. V. ASSURANCES 32. The Government of India and the state governments have assured ADB that implementation of the investment program will conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the FAM and loan documents. 33. The Government of India and the state governments have given ADB certain undertakings for the MFF, which are set forth in the FFA. Specific covenants agreed by the national and the state governments with respect to individual tranches under the MFF are set forth in the loan agreement and project agreements for the respective tranches. VI. RECOMMENDATION 34. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $800,000,000 to India for the Rural Connectivity Investment Program, from ADB's ordinary capital resources, with interest to be determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility, and such other terms and conditions as are substantially in accordance with those set forth in the framework financing agreement presented to the Board. 21 June 2012 Haruhiko Kuroda President 34 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

17 Appendix 1 11 DESIGN AND MONITORING FRAMEWORK FOR THE INVESTMENT PROGRAM Design Summary Impact Reduction in poverty and deprivation, and inclusive socioeconomic growth of the communities served by the investment program roads Outcome Connectivity of selected rural communities in five investment program states of Assam, Chhattisgarh, Madhya Pradesh, Odisha, and West Bengal to markets, district headquarters, and other centers of economic activity is improved and sustainable. Outputs 1. Selected priority rural roads in five investment program states are constructed to all-weather standard 2. Quality of design of the investment program roads is improved. Performance Targets and Indicators with Baselines Three years after completion of the investment program (2020) as compared to 2011: Improvement in social indicators in rural areas served by the investment program roads by 10%, including poverty rates, maternal and infant deaths, safe delivery, immunization, employment opportunities, and agricultural revenue By the end of the investment program (2017): About 4,200 rural habitations (with at least 10% of households headed by women and 40% of inhabitants from vulnerable groups) are newly connected by all-weather investment program roads under longterm PBMCs. By the end of the investment program (2017), about 9,000 km of priority rural roads (2,000 km under PPP-based PBMCs) in the participating states are constructed to allweather standard. By the end of the investment program (2017) as compared to 2010: 100% of road designs follow standardized DPR template, undergo quality control with the use of quality control toolkit, and account for the climate change related impacts. 100% of affected communities (at least 30% Data Sources and Reporting Mechanisms Census (2011, next due around 2018), state and district statistics Impact monitoring by TSC in a sample of villages Post-project monitoring by NRRDA OMMAS Impact monitoring and surveys by TSC OMMAS Quality control checklists attached to DPRs Community design briefs as included in the DPRs Assumptions and Risks Assumption PMGSY is prioritized in the Government of India s Twelfth Five- Year Plan and being implemented in accordance with the PMGSY targets Risks Extreme weather condition and severe economic downturn derail implementation Assumption Continuous allocation of central and state government funds for post-construction road maintenance Risk Initial delays in start of civil works due to delays with government clearances (e.g., environmental) Assumption SRRDAs allocate enough budget for the preparation of designs and adequate staff time for the quality control of designs

18 12 Appendix 1 Design Summary 3. Maintenance of the investment program roads is improved and sustained. 4. Road safety measures are incorporated into the life cycle of the investment program roads. 5. Qualification and skills of PMGSY engineers, technicians, site supervisors, PRI staff concerned, design consultants, and contractors in the investment program states are improved and maintained. 6. Facility is managed effectively. Performance Targets and Indicators with Baselines women) are consulted in the design process By the end of the investment program (2017): At least 30 RRNMUs (with at least 25% of new staff as female staff) are established, fully operational, and mainstream a PPP approach to road maintenance (at least 33% of which is conducted by women). By the end of the investment program (2017) in all RRNMU districts (30 in total): At least 50% of designs and 30% of existing rural road network undergo RSAs annually and are improved accordingly, with emphasis on vulnerable road users By the end of the investment program (2017): five RCTRCs are established, fully operational, and completed training and certification of at least 4,000 PIU staff, 300 PRI staff (at least 30% women), 100 design consultants, and 300 contractors Each tranche is approved as scheduled, and completed on time and within budget Data Sources and Reporting Mechanisms Government circulars and budget allocations Annual reports by RRNMUs PIC and TSC monitoring reports Summary RSA reports by PICs, TSC, and RRNMUs Annual reports on road safety works completed and response reports by SRRDAs Government circulars and budget allocations RCTRCs' training certification records OMMAS Assumptions and Risks Assumption States fully adopt RSA procedures and provide adequate budget for road safety improvements All investment program performance targets and indicators are systematically monitored and achieved. Activities with Milestones 1.Construction of rural roads 1.1 State-wise PMGSY road lists for 2012 (project 1), 2013 (project 2), 2014 (project 3), and 2015 (project 4) selected and approved by start of the project year 1.2 Detailed designs cleared and sanctioned by NRRDA 2 months before PFR submission 1.3 Contractors implement contracts according to schedule and design OMMAS PIC reports TSC reports Inputs ADB: $ million Amount Item ($ million) Road infrastructure development Institutional development Improvement of quality control of design 2.1 New procedure for quality control of DPRs is piloted

19 Appendix 1 13 Activities with Milestones on project 1 DPRs (throughout 2011) and subsequently used by all five investment program states throughout the investment program 3. Improvement of asset management 3.1 RRNMU (fully staffed) in place in five pilot districts: December 2012; in 25 more districts: December Construction and equipping of five RRNMUs completed: September 2014; 25 more RRNMUs: March Improvement of road safety 4.1 Systematic RSAs on existing roads, on sample DPRs under each tranche during construction, and on sample of newly constructed roads conducted (by PICs and PIUs: in ; by RRNMUs: in 2013 in 5 districts, and in 2015 in 30 districts) 5. Capacity building 5.1 RCTRC (fully staffed) in place in five investment program states: December Large-scale training started: June Construction and equipping of five RCTRCs completed : December Effective project management 6.1 SRRDAs, PIUs, TSC, and PICs in place with full staffing and equipment: throughout the investment program 6.2 Technical assistance-financed consultants in place: December Loan-financed RCTRC consultant in place: March Advance procurement of civil works starts: at least 2 months before PFR approval 6.5 Construction supervision by PIUs 6.6 Baseline surveys by TSC and DPR consultants prior to or during the first year of each tranche 6.7 Subsequent tranches prepared (annually) 6.8 Internal monthly monitoring by PIUs; quarterly reporting by SRRDAs; quarterly external monitoring by TSC and PICs (throughout the investment program implementation) 6.9 Impact monitoring by TSC (on completion of tranche 1 3 roads) and by NRRDA (on completion of the investment program) Inputs India and the States: $ million Amount Item ($ million) Road infrastructure development Institutional development Project management Contingencies Finance charges Japan Fund for Poverty Reduction: $1.30 million Amount Item ($'000) Consultants Remuneration and per diem 1, International and local travel Reports and communications Equipment Workshops, seminars, conferences Miscellaneous administration and support costs Representative for contract negotiations Contingencies Technical Assistance Special Fund (TASF-other sources): $1.00 million Amount Item ($'000) Consultants Remuneration and per diem International and local travel Reports and communications 5.00 Equipment 7.00 Workshops, seminars, conferences Miscellaneous administration and support costs Representative for contract negotiations 6.00 Contingencies ADB = Asian Development Bank; DPR = detailed project report; km = kilometer; NRRDA = National Rural Roads Development Agency; OMMAS = online management, monitoring, and accounting system; PBMC = performance-based maintenance contract; PFR = periodic financing request; PIC = project implementation consultant, PIU = project management unit; PMGSY = Pradhan Mantri Gram Sadak Yojana (Prime Minister s Rural Roads Program); PPP = public private partnership; PRI = panchayati raj institution; RCTRC = rural connectivity training and research center; RRNMU = Rural Road Network Management Unit; RSA = road safety audit; SRRDA = state rural road development agency; TSC = technical support consultant. Source: Asian Development Bank.