Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: August 2008 Proposed Loan India: Bihar State Highways Project

2 CURRENCY EQUIVALENTS (as of 25 August 2008) Currency Unit Indian rupee/s (Re/Rs) Re1.00 = $ $1.00 = Rs ABBREVIATIONS ADB Asian Development Bank BOT build-operate-transfer DFID Department for International Development (DFID) of the United Kingdom EIRR economic internal rate of return GOB government of Bihar IEE initial environmental examination km kilometer LIBOR London interbank offered rate MDR major district road ODR other district road PMU project management unit RCD Road Construction Department TA technical assistance NOTES (i) (ii) The fiscal year FY of the Government of India ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 31 March In this report, "$" refers to US dollars. Vice-President B. N. Lohani, Vice-President-in-Charge (Operations 1) Director General K. Senga, South Asia Department (SARD) Director K. Higuchi, Transport and Communications Division, SARD Team leader Team members H. Yamaguchi, Senior Transport Specialist, SARD B. Huang, Young Professional, SARD A. Motwani, Project Implementation Officer, India Resident Mission, SARD R. Nagpal, Counsel, Office of the General Counsel M. Roesner, Transport Specialist, SARD L. M. Tai, Social Development Specialist, SARD D. Utami, Senior Environment Specialist, SARD

3 CONTENTS Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT A. Impact and Outcome 6 B. Outputs 7 C. Special Features 7 D. Project Investment Plan 8 E. Financing Plan 8 F. Implementation Arrangements 9 IV. TECHNICAL ASSISTANCE 12 V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 12 A. Institutional and Operational Improvements 12 B. Economic Assessment 12 C. Financial Sustainability 13 D. Social Impacts 13 E. Environmental Impacts 15 F. Risks 15 VI. ASSURANCES 16 VII. RECOMMENDATION 18 APPENDIXES 1. Design and Monitoring Framework Bihar Road Sector Analysis Institutional Strengthening Action Plan External Assistance to the Road Sector List of Project Roads and Summary of Design Standards Detailed Cost Estimates and Financing Plan Organization Structure for Project Implementation Implementation Schedule Indicative Contract Packages Procurement Plan Technical Assistance for Institutional Strengthening of the Bihar Road Sector: Outline Terms of Reference for Consulting Services Summary Poverty Reduction and Social Strategy 49 SUPPLEMENTARY APPENDIXES (available on request) A. Outline Terms of Reference for Consulting Services for Construction Supervision B Economic Assessment C. Summary Resettlement Plans D. Summary Initial Environmental Examination

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5 LOAN AND PROJECT SUMMARY Borrower Classification Environment Assessment Project Description India Targeting classification: General intervention Sector: Transport and communications Subsector: Roads and highways Themes: Sustainable economic growth, capacity development Subtheme: Fostering physical infrastructure development Category B An initial environmental examination was undertaken for all project roads. The Bihar State Highways Project will rehabilitate and reconstruct about 820 kilometers (km) of state highways identified under the State Highway Development Program in the state of Bihar. Consulting services will be provided to support implementation of the civil works. Road improvement works under the Project include upgrading of existing roads to two lanes, strengthening culverts and bridges, constructing new bridges and crossdrainage structures, and constructing structures for resettlement and rehabilitation. The Project will enhance overall sector management capacity by providing (i) equipment necessary for the government of Bihar (GOB) to enhance sector capacity in areas such as quality control, survey and design, road safety, and control of overloading and vehicle emissions; and (ii) technical assistance (TA) to support institutional development initiatives of GOB, especially for reform of the Road Construction Department (RCD) and capacity development, including (a) modernization of road institutions, (b) improvements to RCD business processes, and (c) support for increasing private sector participation. Rationale The road network in Bihar is very poor in terms of coverage and conditions while demand for road transport is increasing. Insufficient funding for road maintenance has increased the number of roads that are beyond maintainable condition, and the backlog of deferred maintenance. GOB is undertaking the State Highway Development Program to rehabilitate and upgrade state highways to at least two lanes and expand the state highway network by upgrading major district roads to two lanes. The improvement of 820 km of state highways is part of a series of the program to help meet increased demands for road transport, and accelerate the process of economic development in the state.

6 ii RCD, in charge of overall sector development and management, lacks modern project management and procurement systems. This often leads to cost and time overruns in project delivery. For efficient and effective road asset development and management, RCD needs to be modernized by (i) harnessing private sector structures and skills to meet the public demand for infrastructure; (ii) encouraging private sector participation in road financing; and (iii) outsourcing functions of project preparation, design, construction, construction supervision, and quality audit to private entities. Improvements to road safety and control of overloading and vehicle emissions are also required for the safe and efficient use of road assets with minimal adverse environmental impacts. Impact and Outcome Project Investment Plan Financing Plan Allocation and Relending Terms The Project will improve transport efficiency of the state road network, which will contribute to expansion of economic opportunities and poverty reduction. This will be realized by (i) improving the state highway network, (ii) facilitating safe and appropriate road usage, (iii) increasing efficiency of transport services, and (iv) enhancing GOB capacity for road asset development and management. Improved roads will improve accessibility to social services and markets, and enhance the efficiency of road transport usage. The investment cost of the Project is estimated at $468 million, including taxes and duties. A loan of $420,000,000 from the ordinary capital resources of the Asian Development Bank (ADB) will be provided under ADB s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB s LIBORbased lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The Government of India (the Government) will provide the loan proceeds in local currency to GOB on the same terms and conditions as received from ADB. GOB will bear the foreign exchange risk on the loan. Period of Utilization Until 31 July 2012 Estimated Project Completion Date Executing Agency 31 January 2012 GOB through RCD

7 iii Implementation Arrangements Procurement Consulting Services Project Benefits and Beneficiaries The project management unit, headed by the chief engineer at RCD headquarters, will implement the Project. Project implementation units, each headed by a project manager, have been established and will be responsible for implementation in the field. One or two full-time project managers will be assigned for each contract package. The project managers will be delegated adequate technical and administrative authority for expeditious project implementation. RCD will engage construction supervision consultants to act as the engineer for the construction contracts. Procurement under the Project will be carried out in accordance with ADB s Procurement Guidelines (2007, as amended from time to time) and the Government s tender procedures acceptable to ADB. The civil works contracts will be procured under international competitive bidding. The Project will provide $4 million for equipment to be procured using national competitive bidding procedures if the estimated contract is valued from $0.1 million to $1 million, and shopping if the estimated contract amount is less than $0.1 million. Two international consulting firms will be recruited for construction supervision of civil works under the Project. RCD will select and engage the consultants in accordance with ADB s Guidelines on the Use of Consultants (2007, as amended from time to time). About 68 person-months of international consultants and 3,020 person-months of national consultants will be required. Improving management of the state highway network through the institutional development component and the TA, and the improvement to the road network under the Project will enhance the overall road condition and usability of state trunk roads. This will increase travel speeds, and reducing travel time, accidents, overloading, and vehicle emissions. The Project will enhance RCD capacity for road asset development and management. This will improve governance in road administration and accountability, and create an environment encouraging competition and efficiency within RCD and the construction industry. This will ensure more efficient road asset development and management, and higher quality of construction and maintenance, resulting in decreased recurrent costs over the medium and long term. These will lead to overall social and economic development in Bihar. Poverty is high in Bihar, among the highest of all India s states. The Project will improve access to socioeconomic services, increase employment opportunities, and improve transport services. This will reduce poverty in the region, and stimulate economic growth and human development in the state. Improved mobility will provide households with better-paying jobs outside of their villages.

8 iv Risks and Assumptions The risk of initial delays has been mitigated through advance actions by RCD and support provided by ADB. Training on safeguard and procurement requirements was provided to RCD staff to mitigate potential risk of initial delays due to procedural clearance. ADB has provided support to due diligence for all project roads. The risk of an unrealistic sector reform agenda has been mitigated by reflecting the context of the state in the institutional strengthening action plan. The plan considers the rather shortterm project duration, actions taken by GOB, Planning Commission recommendations, and recent development policy loan approved by the World Bank. The risk of maintenance financing will be mitigated by GOB initiatives to implement road asset management systems for better planning and budgeting. GOB has increased its maintenance budget to substantially meet requirements and obtained the full Government grant-in-aide under the 12th Finance Commission. RCD s strict monitoring systems for project implementation minimize the risk of underutilizing the maintenance budget. Technical Assistance In conjunction with the Project, a TA will be provided to support GOB sector development initiatives. RCD will be developed into a state-of-the-art road agency equipped with modern systems of business procedures, planning processes, quality assurance, engineering (pavement design, maintenance methods, and safety), and human resource management. The estimated total cost of the TA is $1,250,000, of which ADB will finance $1,000,000 on a grant basis from the ADB TA funding program. The TA consultants will be recruited in accordance with ADB s Guidelines on the Use of Consultants.

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11 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to India for the Bihar State Highways Project. The report also describes proposed technical assistance (TA) for Institutional Strengthening of the Bihar Road Sector, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve the TA. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. Bihar, a landlocked state lying in the middle Gangetic region, has an area of 94,164 square kilometers. It is surrounded by Uttar Pradesh (west), Jharkhand (south), West Bengal (east), and Nepal (north). The state has a rich history and cultural tradition, making it a major religious and tourist destination. While it has an extensive and well-developed rail system, and considerable potential for developing and utilizing inland waterways, rapid development and strengthening of the road network will provide momentum for accelerating economic development in the state, enabling Bihar to move from being dependent on subsistence farming to focusing on market-oriented agriculture and tourism. Since Bihar is the third most populous, poorest, and slowest-growing state in fast-growing India, development of the state is key to the country s goal of regionally balanced growth. 3. Bihar has 82,000 kilometers (km) of roads; 45,000 km are surfaced. It has 3,723 km of national highways, 3,128 km of state highways, 7,714 km of major district roads (MDRs), and 67,080 km of other district roads (ODRs) and village roads. The road density is 901 km per million population compared with the national average of 2,567 km. Almost all of the higher class of roads (national highways, state highways, and MDRs) are provided with a sealed (bitumen or concrete) surface, while 55% of ODRs and village roads remain unsealed. Only 2% of state highways have two or more lanes; 71% are single lane. For MDRs, 83% are single lane. All ODRs and village roads are single lane. The majority of state highways, MDRs, ODRs, and village roads are assessed to have deteriorated severely and require major rehabilitation largely because of the continuous short fall in investment for road maintenance until recently, and increasing volume of traffic and loads. The need to increase and improve the existing state highway network is critical. This can be accomplished by widening existing carriageways, and strengthening and constructing or reconstructing bridges and culverts. 4. Bihar Road Construction Department (RCD) is responsible for state highways, MDRs, and national highways approved and funded by the Government of India (the Government). Of the 3,700 km of national highways in Bihar, the National Highway Authority of India is responsible for 800 km. The Government recently approved upgrading 890 km of national highways to four lanes under the National Highway Development Program III using buildoperate-transfer (BOT). Roads that GOB identifies for development on a BOT basis are entrusted to India Infrastructure Finance Company and Infrastructure Development Finance Company to structure and implement the projects. District councils and the Rural Works Department are responsible for ODRs and village roads. The Rural Works Department is responsible for the chief minister s rural roads program, Mukhya Mantri Gram Sadak Yojana (MMGSY), which connects habitations with populations of , in parallel with the nationwide Prime Minister s rural roads program, Pradhan Mantri Gram Sadak Yojana (PMGSY), which gives priority to connectivity for habitations with populations of more than 1,000. The chief minister s rural roads program follows the basic principles and incorporates the

12 2 good practices of the Prime Minister s rural roads program, but employs more decentralized administrative and technical sanction procedures, and utilizes a separate set of guidelines for project selection. 5. Budgetary expenditure for state roads in 2006/07 was Rs1,974 crore 1 ($506 million) against an original budget of Rs2,147 crore ($551 million). In 2006/07, the budget was 2.8 times as large as the previous year s Rs648 crore ($171 million) due to the new state government s priority for road rehabilitation and development, supported by the Government s Backward Region Grant Fund (Rashtriya Sam Vikas Yojana or RSVY). The extent of underspending was only 8% of the original budget. This demonstrates remarkable improvement in RCD capacity and commitment to deliver. The 2007/08 budget has gone up further to Rs2,379 crore ($610 million). 6. Revenues relating to road use include vehicle taxes, permits, fees, and penalties and were Rs308 crore ($124 million) in 2005/06, up from Rs178 crore ($87 million) in 2002/03. The average annual increase is very high at 20% due to improved vehicle registration and tax payment. In addition, road users pay commercial sales taxes for such items as vehicles, fuel, tires, and spare parts. The Bihar Transport Department is a major resource-generating department, along with the commercial tax, registration, and excise departments. 7. The Transport Department is responsible for licensing, registration, and regulation of motor vehicles, drivers, and passenger and freight transport. Motor vehicle registration increased from 0.95 million in 2000/01 to 1.56 million in 2006/07, an annual average of 8.6%. The highest increase was for two-wheelers; when they are excluded, registration increased by 5.5%. Of the 1.56 million motor vehicles registered, 68% were two-wheelers. Excluding two wheelers, registered vehicles comprise cars and jeeps (31%), trucks (10%), buses and minibuses (3%), and tractors and trailers (43%). 8. The state-owned Bihar State Road Transport Corporation provides intra- and interstate bus services. It currently operates 2% 3% of buses in the state, and is authorized by GOB to fix its fares based on sound business principles. GOB grants permission for contract and private buses also on the same routes of the State Road Transport Corporation. Private bus operators adopt fares based on demand for specific routes. Truck hire rates are fixed by market demand. Private sector operators provide most of the services for passenger and freight transport. Competition is good. 9. The design and monitoring framework for the Project is in Appendix 1. Appendix 2 provides details of the road sector in Bihar. B. Analysis of Key Problems and Opportunities 1. Main Sector Issues and Government Initiatives 10. The state s road network is very poor in terms of coverage and conditions. Demand for road transport is increasing. Insufficient funding to road maintenance in the past has increased the number of roads that are beyond maintainable condition and the backlog of deferred maintenance. GOB has taken on the State Highway Development Program to rehabilitate and upgrade state highways to at least 2 lanes, and expand the state highway network by upgrading MDRs to 2 lanes. The program covers upgrading 2,831 km of the 3,127 km of state highways 1 A crore is equal to 10,000,000.

13 3 during the 11th Five Year Plan period through various schemes, including the Governmentsupported RSVY, BOT schemes, and Asian Development Bank (ADB) assistance. 11. GOB also takes on sector development initiatives in the framework specified in Bihar Road Sector Development New Dimensions 2 to develop and sustain the road network by modernizing road agencies; encouraging private sector participation in road financing; outsourcing design, supervision, and construction along with systems for independent proof checking and audit; setting up a stable source of funding for road development and maintenance; attracting financially sound and fully equipped contractors by offering large contracts for national and state highway projects; enabling smaller contractors to acquire experience; introducing long-term, performance-based maintenance contracts; initiating corridor management to expedite clearance of utilities and availability of materials; and strengthening capacity of local contractors. a. Reform and Capacity Building in Road Sector Management 12. Approaches identified by the Bihar road sector development strategy (footnote 2) include (i) harnessing private sector structures and skills to meet public demand for infrastructure; (ii) encouraging private sector participation in road financing; and (iii) outsourcing functions of project preparation, design, construction, construction supervision, and quality audit to private entities. This would leave government functionaries with the limited but important responsibility of policy development and management oversight, and improving accountability concentrating on performance monitoring and output, rather than the day-to-day running of public services. 13. For this purpose, RCD initially outsourced works of upgrading old state highways under RSVY with Rs3,000 crores ($790 million) to other road implementation agencies, targeting completion by 2008/09. Work on the remaining 1,554 km, of newly declared state highways, is proposed to be implemented with international best practices with ADB financing, adopting FIDIC 3 -based contract management and international competitive bidding procedures. GOB has been discussing potential BOT projects for 500 km of national highways with India Infrastructure Finance Company and Infrastructure Development Finance Company. 14. RCD is considering setting up a state roads and highways development authority or corporation to streamline decision making and increase autonomy for project execution and delivery. This requires redefinition of powers, functions, and accountability of road agencies; and changes to existing business procedures. Major actions taken by RCD so far include streamlining bidding procedures, quality control, asset management, and project management and monitoring. RCD s sector management capability, which was significantly strengthened during the last one and half years, will be improved under the Project. The established project management unit (PMU) for the ADB project is considered an embryo cell to be expanded and strengthened to become an autonomous authority for state road development and maintenance. b. Road Maintenance Financing 15. The nonplan budget increased from Rs201 crore ($52 million) in 2003/04 to Rs311 crore ($80 million) in 2006/07, an annual increase of 15.6%. The maintenance requirement until completion of the State Highway Development Program is not high as most 2 Government of India Bihar Road Sector Development New Dimensions. New Delhi. 3 Federation Internationale Des Ingenieurs-Conseils

14 4 state highways and MDRs will be upgraded under the program. After the program, the budget requirement for maintenance will be increased and is estimated at Rs420 crore ($108 million) annually. Revenue relating to road use is estimated at Rs308 crore ($79 million) in 2005/06, excluding excise, with historical increase of 20% per annum. This matches maintenance requirements and is absorbed in the general government revenue. 16. Efficiency of the use of nonplan budget has improved. The share of salaries and wages in the nonplan budget reduced from 43% in 2003/04 to 36% in 2006/07. This demonstrates GOB s increased commitment to maintenance and efficiency of road maintenance. Considering past budgetary provisions and trends, GOB is assessed as adequately providing maintenance financing in a sustainable manner. Increased maintenance quality due to introduction of 5-year performance-based maintenance contracts will increase the efficiency of maintenance works and reduce maintenance costs. GOB has provided assurance that it will provide adequate financing to maintain state highways developed with ADB financing. c. Road Safety 17. Bihar has a higher accident rate (17.3 fatalities per 10,000 vehicles between 2001 and 2004) than the national average (12.8 in 2003), and the rate is expected to increase as traffic grows. One of the major causes of accidents is lack of awareness and knowledge of traffic rules. To enhance awareness of traffic rules, the Transport Department organizes a road safety week every year for school children and the public. In Patna and major district centers including rural areas, the Transport Department undertakes inspection missions to ensure people follow traffic rules. GOB is planning to establish state and district road safety councils to provide guidance on road safety. 18. RCD will develop a road safety unit within its organization to institutionalize road safety audits, ensuring safety elements of India Roads Congress standards are incorporated in design and during construction. 19. In 1996, the Government recommended establishing a directorate of safety and traffic management and set up a road safety fund allocating 1% of cess revenue for national highways. An expert committee at the Ministry of Shipping, Road Transport and Highways will review these recommendations and finalize a road safety policy to address legal, institutional, and financial issues for road safety. This will provide a new context for the funding and institutional setup for state road safety. d. Overloading 20. Overloading is a nationwide problem; the number of multiaxle trailers has increased. Overloaded trucks on Bihar s major highways are also expected to increase in accordance with economic growth. An overloading control program is being set up; six weighbridges are being installed at state border points. More weighbridges will be installed, and regulations more strictly enforced, e.g., off-loading of overloaded trucks will be enforced in coordination with the police. e. Vehicle Pollution Control 21. To support a clean environment, GOB amended the 1992 Bihar Motor Vehicle Rules to require all vehicles to have a pollution control certificate. All vehicles must undergo pollution checks to obtain the certificate. While it continues to establish permanent pollution check centers, GOB is encouraging the private sector to develop centers and has given permission for

15 5 103 so far. GOB has established centers in 21 of the 38 districts in the state. Emission test machines are further required for each center. f. Construction Industry 22. The proposed large programs require good construction firms equipped with adequate technical personnel and modern construction machinery. In the absence of regular work in the past, the state s construction industry has become weak; only a few contractors are from outside the state. Local contractors have difficulty mobilizing the necessary financial resources to even bid and subsequently implement the works. 23. A local construction industry can develop around a large program if work is seen to be available on a regular basis over a long time. Initially, local agencies could associate with qualified construction firms from outside the state, and acquire the necessary technical and managerial skills to subsequently qualify on their own. Good contractors from outside the state will invest their resources only if they perceive a good opportunity in terms of contract size. Under the Project, GOB made the contracts as large as possible to attract qualified bidders. 24. The infrastructure equipment bank was set up to lease construction equipment to local contractors, starting with the first three branches at Bhagalpur, Muzaffapur, and Patna. This will help expedite the process of road construction in the state. RCD simplified contractor registration rules to reduce barriers to entry. This will help increase competition between contractors, and hence increase quality and reduce cost. 25. Key sector development initiatives are summarized in the institutional strengthening action plan (Appendix 3). 2. External Assistance and ADB Strategy 26. External assistance to roads in India has been substantial. ADB has provided loans as well as TA for about $3.7 billion. The World Bank has provided loans and grants totaling $5.6 billion for upgrading national highways, improving state highways, and upgrading rural roads. Japan Bank for International Cooperation (JBIC) has provided five loans for a total of $0.33 billion to upgrade national highways and construct bridges. The Government of the United Kingdom has provided TA to support the sector. ADB support has been developed in close collaboration with these key development partners. Coordination with the World Bank has particularly been active for transport operations. Mini retreats for transport operations in South Asia have become a regular practice for headquarters staff. For the resident missions, a broadbased sector collaboration mechanism has been instituted to facilitate the exchange of information between key sector coordinators of both institutions. With the Government of Japan and JBIC, cooperation has been active, particularly for the railway and urban subsectors. ADB has formed a close partnership with the Department for International Development (DFID) of the United Kingdom for the provision of TA for areas contributing to poverty reduction in India. Two organizations hold regular coordination meetings. A summary of external assistance is in Appendix Since 2002, ADB has provided four loans to improve India s state road network; to Madhya Pradesh in 2002 and 2007, Chhattisgarh in 2003, and Uttarakhand in Other state road projects are being prepared for the eight northeastern states and Jharkhand. In principle, ADB s support is provided to improve state road management capacity along with physical investment to improve the state road network. The states have shared their experience to

16 6 improve sector management and project implementation capacity. ADB facilitates experience sharing by holding workshops in states utilizing TA for state road projects. 28. To provide assistance to Bihar, ADB, DFID, and the World Bank have established a Bihar assistance coordination working group. The World Bank approved a development policy loan and credit in for policy and institutional reforms covering fiscal and procurement reforms, governance and administrative reforms, investment climate reforms, and sectorspecific policy reforms. For the road sector in Bihar, it has been closely coordinated to make synergy. The World Bank is providing support to rural road development and medium- to longterm sector reform, while ADB provides support for developing state roads in parallel with institutional strengthening focusing on project delivery in coordination with DFID. 3. Lessons 29. Many ongoing ADB-financed road projects in India are experiencing delays. These delays are mostly attributable to (i) lack of safeguard consideration in the selection and preparation of investments, and insufficient support in safeguards planning and implementation; and (ii) the gap in support between the feasibility phase and the construction phase for executing and implementing agencies that are often not familiar with ADB procedures for procurement of civil works contracts and recruitment of consultants. For the Project, RCD engaged detailed project report consultants to prepare subprojects and ADB provided support to RCD preconstruction activities so that the construction can commence without unnecessary delay after loan approval. RCD has prepared bidding documents, in close consultation with ADB, and initiated advance action for contracting, such as engagement of construction supervision consultants. RCD takes initiatives for speedy and quality completion of construction works, which include regular weekly monitoring of project progress. 30. For state road projects, ADB has undertaken policy dialogue in sector performance improvement; ADB s sector assistance program evaluation recommends broadening policy dialogue while ADB has been promoting private sector involvement in roads, mostly in rehabilitation and maintenance activities for state road projects. Under the Project, TA will be provided to support RCD initiatives in setting up enabling environments for implementing public private partnership schemes. The Project takes into account broad areas to be improved including development of the local construction industry. III. THE PROPOSED PROJECT A. Impact and Outcome 31. The Project will improve transport efficiency of the state road network in Bihar, which will contribute to expansion of economic opportunities and poverty reduction. This will be realized by (i) improving the state highway network, (ii) facilitating safe and appropriate road usage, (iii) increasing efficiency of transport services, and (iv) enhancing GOB capacity for road asset development and management. Improved roads will improve accessibility to social services and markets, and enhance the efficiency of road transport usage. 4 IBRD and IDA Program Document for a Proposed Loan in the Amount of US$150 million and a Proposed Credit in the Amount of SDR 47.8 million ($75 million equivalent) to the Republic of India for the First Bihar Development Policy Loan and Credit to the Republic of India, Washington DC.

17 7 B. Outputs 32. Investment Component. The Project will rehabilitate and reconstruct about 820 km of state highways identified under the State Highway Development Program, focusing on newly declared state highways. Consulting services will be provided to support implementation of civil works. Under the program, about 2,800 km of state highways and 5,700 km of MDRs are identified for rehabilitation and upgrading. During RCD s detailed project report preparation, more than 1,000 km of state highways were initially selected and about 820 km of these were identified for the Project, taking into account preliminary assessment of traffic volume, social and environmental impacts, state priority, and project readiness (Appendix 5). Road improvement works under the Project include improving roads to two lanes, strengthening culverts and bridges, constructing new bridges and cross-drainage structures, and constructing structures for resettlement and rehabilitation. 33. Institutional Development Component. The Project will provide equipment required by GOB to enhance sector capacity in areas such as quality control, survey and design, road safety, and control of overloading and vehicle emissions. Major equipment includes laboratory equipment, survey and design equipment and software, vehicle emission and fitness testing machine, and weighbridges. The consultants, engaged under a TA to support institutional strengthening, will identify the required equipment and timing for installation in line with the detailed institutional development action plan (Appendix 3). C. Special Features 34. This is the first road construction project in Bihar to adopt international best practices of procurement and contract management, e.g., international competitive bidding, FIDIC-based contracts, and outsourcing of construction supervision. This will attract qualified contractors to participate in state projects. Contracts are packaged into a larger size to attract qualified contractors who will transfer the necessary technical and managerial skills to local contractors through association like subcontracts. RCD officials will be exposed to international best practices in bidding procedures and contract management. ADB will provide support to RCD in managing FIDIC-based contracts. This exposure will help equip RCD with capacity to take on modern road development methods such as performance-based contracts, long-term operation and maintenance contracts, and public private partnerships. 35. The Project was prepared in collaboration with state government officials of Madhya Pradesh Road Development Corporation; they have gained substantial experience with ADB requirements and procedures. RCD engaged detailed project report consultants with its own funds, for possible ADB financing, and requested ADB to supplement the consultants work to fully comply with ADB requirements. The engineering design is prepared to minimize social and environmental impacts. Advance actions have been undertaken to ensure that the construction can be commenced without unnecessary delay. All of these are enabled by the support of ADB consultants, various exchanges between officials of state road agencies, and workshops and training provided. The Project demonstrates sufficient lessons accumulated to share among state road agencies to prepare and implement successful state road projects with improved project readiness.

18 8 D. Project Investment Plan 36. The project investment cost is estimated at $468 million, including taxes, duties, commitment charges, and interest during construction (Table 1). The detailed cost estimates and financing plan are in Appendix ADB will finance part of the local taxes and duties estimated at $47 million. On average, taxes and duties, which amount to 9% 13% of project costs for construction of state highways in India, are considered reasonable, transparent, and nondiscriminatory. Table 1: Project Investment Plan ($ million) Item Amount a A. Base Cost b 1. Investment Component Institutional Development Component 4.0 Subtotal (A) B. Contingencies c 37.7 C. Financing Charges during Implementation d 18.8 Total (A+B+C) a Includes taxes and duties estimated at $47 million. b In 2008 prices. c Physical contingencies computed at 5% for civil works. Price contingencies computed at 0.8% for foreign exchange costs and 6% for local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. d Includes interest and commitment charges. Source: Asian Development Bank estimates. E. Financing Plan 38. The Government has requested a loan of $420,000,000 from ADB s ordinary capital resources to help finance the Project. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB s LIBOR-based lending facility on the basis of 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. 39. The ADB loan will finance about 90% of the project cost. This is considered acceptable, taking into account that (i) the Project is part of the $2 billion state road development programs over the next 5 years, excluding projects under the National Highway Development Program, the Prime Minister s rural roads program, and the chief minister s rural roads program; (ii) the Project is part of ADB assistance to the Government s overall development program for roads, including the National Highway Development Program III ($12.5 billion by 2012) and the Prime Minister s rural roads program ($11 billion by 2009); (iii) state road development is the priority for ADB assistance in India and the Project serves one of the poorest states in India; (iv) even if the Project is included to the country program and strategy period starting from 2003, average

19 9 cost sharing will remain at 68%, which is less than the current country limit of 70%; and (v) the higher cost sharing by ADB helps the state with fiscal reforms. 40. The Government will provide the loan proceeds in local currency to GOB on the same terms and conditions as received from ADB. GOB will bear the foreign exchange risk on the loan. The financing plan for the Project is in Table 2. Table 2: Financing Plan ($ million) Source Total % Asian Development Bank Government Total Source: Asian Development Bank estimates. F. Implementation Arrangements 1. Project Management 41. The Executing Agency for the Project will be the state of Bihar through RCD. RCD has established a PMU at its headquarters, headed by a chief engineer, for implementation of the Project. RCD has also established five project implementation units, each headed by a project manager, who will be responsible for the implementation of one or two project roads in the field. One or two full-time project managers will be assigned for each contract package. The project managers will be delegated adequate technical and administrative authority for expeditious project implementation. RCD will engage construction supervision consultants to act as the engineer for the civil works contracts. The organization structure for project implementation is in Appendix Implementation Period 42. The Project will be implemented over 4 years, inclusive of procurement, preconstruction activities in 2007, and defect liability period of 1 year. It is expected to be completed by January The implementation schedule is in Appendix Procurement 43. Procurement to be financed from the ADB loan will be carried out in accordance with ADB s Procurement Guidelines (2007, as amended from time to time). The civil works contracts will be undertaken in nine contract packages (Appendix 9). These contracts are estimated at more than $10 million and will be procured through international competitive bidding procedures. ADB standard bidding documents for large works with postqualification under the two-envelope system will be adopted. Equipment financed by the Project will be $4 million under the institutional development component, and will be procured using national competitive bidding procedures if the estimated contract is $0.1 million to $1.0 million, and shopping if the estimated contract amount is less than $0.1 million. Contract packaging for equipment will be based on required technical features and timing of procurement. The TA consultants engaged for institutional development will identify the packages during TA implementation. The procurement plan is in Appendix 10. National competitive bidding procedures adopted for procurement of goods and services under the Project will use the advertised tender enquiry

20 10 method stipulated in the General Financial Rules, 2005, and elaborated in the Manual on Policies and Procedures for the Purchase of Goods issued in August 2006, by the Ministry of Finance of the Government, with clarifications and modifications described in the procurement plan. 4. Consulting Services 44. RCD will recruit two international consulting firms using the quality and cost-based selection method to supervise construction of civil works under the Project. One consultant will be engaged for the north region and the other for the south. RCD will select and engage consultants in accordance with ADB s Guidelines on the Use of Consultants (2007, as amended from time to time). The outline terms of reference for consulting services for construction supervision are in Supplementary Appendix A. About 68 person-months of international consultants and about 3,020 person-months of national consultants will be required. 5. Advance Contracting and Retroactive Financing 45. ADB approved advance contracting of civil works in May During project preparation, RCD s procurement activities were well advanced; all contracts were bid out in February Based on this, the Government and GOB requested retroactive financing for all project components. Up to 20% of the loan proceeds will be eligible for retroactive financing, provided that expenditures are incurred on works, equipment, and consulting services for the Project in accordance with agreed procedures and during the 12 months before the signing of the loan agreement. The Government and GOB have been informed that approval of advance contracting and retroactive financing does not in any way commit ADB to finance the Project. 6. Anticorruption 46. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government, GOB, and RCD. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to review and examine, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. In this regard, investigation of government officials, if any, would be requested by ADB to be undertaken by the Government. To support these efforts, relevant provisions of ADB s Anticorruption Policy are included in the loan regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project will include provisions specifying the right of ADB to audit and examine the records and accounts of the Executing Agency and all contractors, suppliers, consultants, and other service providers as they relate to the Project. 47. RCD has significantly strengthened its governance during the last 2 years. It has standardized bidding documents and initiated e-procurement for selected contracts. For project management and monitoring, RCD introduced strict monitoring systems of work progress, controlled under the newly established supervision and monitoring wing. It discloses the targets, progress, and achievements to the public on the website and in the local newspaper. RCD has identified roads for inclusion in public private partnership schemes, and outsourced all maintenance works to the private sector. Accounting officers in field offices have been deputed from the accountant general s office to ensure appropriate recording of financial matters. To ensure construction quality, laboratory equipment is being enhanced, and mobile quality control squads have been established in all district offices. It also introduced a third-party quality control system. To enhance competition and capacity of the construction industry, RCD set up an

21 11 equipment bank and simplified contractor registration rules. This will help increase competition between contractors, and hence increase quality and reduce cost. To enhance overall road sector management, TA will be provided for institutional strengthening of RCD, which will improve governance of road administration and accountability and create an environment that encourages competition and efficiency within RCD and the construction industry. For the Project, ADB procurement procedures using international competitive bidding will enhance transparency and fair competition, and ADB disbursement procedures and FIDIC-based contract management will mitigate corruption problems during implementation. 7. Disbursement Arrangements 48. Loan disbursements will be in accordance with ADB s Loan Disbursement Handbook (2007, as amended from time to time). Direct payment and reimbursement procedures will be used for civil works, consulting services, and equipment. Any individual payment to be reimbursed under statement of expenditure procedures will not exceed $100, Accounting, Auditing, and Reporting 49. RCD will maintain separate records and accounts adequate to identify the goods and services financed from the loan proceeds, expenditures incurred, and the use of local funds under the project components and their subprojects. The accounts will be set up in accordance with sound accounting principles. Independent auditors, acceptable to ADB, will audit the accounts and related financial statements annually. The Government will submit consolidated annual audited reports and related financial statements to ADB within 6 months from the end of the previous fiscal year. The annual audit report will include an audit of the statement of expenditure procedures, and will include a separate audit opinion on the use of loan proceeds and compliance with statement of expenditure procedures. 50. RCD will prepare and provide ADB with quarterly project progress reports, including any changes to the implementation schedule, problems or difficulties encountered and remedial actions taken, anticipated problems and the proposed remedial measures, and work to be undertaken in the following period. RCD will submit the quarterly progress reports to ADB within 45 days from the close of each quarter. These reports will include a summary financial account for each subproject, expenditures to date, report on performance monitoring, and results of monitoring of social and environmental impacts. 51. RCD will prepare and provide ADB with a road completion report within 3 months of physical completion of each individual road and a project completion report within 3 months of completion of transactions under the Project. These reports will provide a detailed evaluation of the design, costs, contractors and consultants performance, social and economic impact, economic rate of return, and other details relating to the Project as may be requested by ADB. 9. Project Performance Monitoring and Evaluation 52. RCD will, within 3 months of the loan signing, develop a systematic project performance monitoring system, in a form and substance acceptable to ADB, for use throughout the life of the Project. 53. RCD will establish, within 3 months of loan effectiveness, a baseline for performance indicators to be used for monitoring implementation of each road subproject. It will conduct annual evaluation surveys for each road subproject, in accordance with the project performance

22 12 monitoring system, to evaluate the scope, implementation arrangements, progress, and achievement of the project objectives. 10. Project Review 54. ADB and RCD will meet regularly as required to discuss the progress of the Project and any changes to implementation arrangements or remedial measures required to achieve the project objectives. They will undertake a midterm review focusing on issues related to implementation arrangements, and agree on changes, if needed, to achieve the project objectives. IV. TECHNICAL ASSISTANCE 55. A TA for $1,000,000 for Institutional Strengthening of the Bihar Road Sector will support some of GOB s institutional development initiatives set out in the action plan (Appendix 3). The focus of the TA will be to (i) redefine and restructure RCD to a state-of-the-art road agency, and (ii) implement new business procedures and provide training to RCD officials to enable RCD to restructure and adopt a new institutional and management structure. New business procedures will cover (i) procurement and contracting processes, (ii) planning processes, (iii) quality assurance systems, (iv) engineering (pavement design, maintenance methods, and safety), and (v) human resource management. 56. The consultants will undertake the services in close consultation with principal secretary and engineer-in-chief, RCD. They will conduct district and state training and workshops as required. They will consult with all RCD divisions to disseminate the concepts of the sector development initiative. 57. The TA will be financed on a grant basis from the ADB TA funding program, and be carried out by an international consulting firm, to be recruited in accordance with ADB Guidelines on the Use of Consultants. International consulting inputs of 31 person-months are required (Appendix 11). The TA will be implemented from October 2008 to August V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS A. Institutional and Operational Improvements 58. Improving management of the state road network through the institutional development component and the TA, and the improvement to the road network under the Project will enhance overall road conditions and usability. This will increase travel speeds and reduce travel time, accidents, and overloading. The enhancement of RCD s capacity for road asset development and management will improve road administration governance and accountability, and create an environment within RCD and the construction industry that encourages competition and efficiency. This will ensure more efficient road asset development and management, and higher quality of construction and maintenance, resulting in decreased recurrent costs over the medium and long term. This will lead to overall social and economic development in Bihar. B. Economic Assessment 59. The approach used to evaluate the Project follows the standard practice of comparing life cycle road agency and user costs with and without the Project, using net present value with