India: National Highway Sector II Project

Transcription

1 Validation Report October 2017 India: National Highway Sector II Project Reference Number: PVR-517 Project Number: Loan Number: 2154

2 ABBREVIATIONS ADB Asian Development Bank CSC construction supervision consultant DMF design and monitoring framework EIRR economic internal rate of return EMP environment management plan FIRR financial internal rate of return IEE initial environmental examination km kilometer m meter MFF multitranche financing facility NGO nongovernment organization NHAI National Highways Authority of India NHDP National Highways Development Project O&M operation and maintenance OMT operate maintain transfer PCR project completion report PIU project implementation unit PSP private sector participation RRP report and recommendation of the President VOC vehicle operating cost WACC weighted average cost of capital NOTE In this report, $ refers to US dollars. CURRENCY EQUIVALENTS Currency unit: India rupee/s (Re/Rs) At Appraisal (30 Nov 2004) At Project Completion (31 Dec 2011) Re1.00 = $ $ $1.00 = Rs Rs Director General Deputy Director General Director Team Leader M. Taylor- Dormond, Independent Evaluation Department (IED) V. Salze-Lozac h, IED N. Subramaniam, Sector and Project Division (IESP), IED Y. Ono, Senior Evaluation Specialist, IESP, IED The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of IED management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. The final ratings are the ratings of IED and may or may not coincide with those originally proposed by the consultant engaged for this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, IED does not intend to make any judgments as to the legal or other status of any territory or area.

3 PROJECT BASIC DATA Project Number PCR Circulation Date 21 Sep 2016 Loan Number 2154 PCR Validation Date Sep 2017 Project Name National Highway Sector II Project Sector and Transport Road transport (nonurban) Subsector Strategic Agenda Economic growth Safeguard Environment B Categories Involuntary Resettlement Indigenous Peoples Country India Approved ADB Financing ($ million) Actual ($ million) ($ million) ADF: 0.00 Total Project Costs OCR: Loan Borrower Beneficiaries Others Cofinancier Total Cofinancing Approval Date 21 Dec 2004 Effectiveness Date 15 Mar 2006 Signing Date 15 Dec 2005 Closing Date 31 Dec 2008 Project Officers IED Review Director Team Leader S. Widowati H. Yamaguchi N. Zhang D. K. Lee A. K. Motwani Location ADB headquarters ADB headquarters ADB headquarters ADB headquarters India Resident Mission N. Subramaniam, IESP Y. Ono, Senior Evaluation Specialist, IESP* From Dec 2004 May 2006 Jan 2007 Jun 2008 Jan Feb May 2012 To Apr 2006 Dec 2006 May 2008 Dec 2008 May 2012 ADB = Asian Development Bank, ADF = Asian Development Fund, IED = Independent Evaluation Department, IESP = Sector and Project Division, OCR = ordinary capital resources, PCR = project completion report. *Team members: B. Nguyen (Senior Evaluation Specialist), F. De Guzman (Senior Evaluation Officer) and A. Gezen (Consultant). A. Rationale I. PROJECT DESCRIPTION 1. Although road density in India was higher than that in many developing countries, road network standards and conditions were inadequate to meet the rapidly growing freight and passenger traffic. Only 6% of the national highways had four or more lanes, 25% had poor surface conditions, and many were seriously congested. This situation raised road-user costs; impaired road safety and the quality and frequency of transport services; and limited the roads contribution to national development, economic growth, and poverty reduction.

4 2 2. Faced with the national highway system s capacity shortage, the Government of India initiated several radical actions, including (i) launching the ambitious National Highways Development Project (NHDP), (ii) establishing the National Highways Authority of India (NHAI), (iii) creating a central road fund, and (iv) promoting private sector participation (PSP). 3. Improved road network was expected to encourage economic activity and ease the mobility of people who seek jobs, but may also potentially increase social risks. At appraisal, road accidents had continued to increase by 5% yearly average over the past 2 decades. One-third of the fatalities occurred on national highways. Increased incidence of HIV/AIDS was also a risk and trafficking of vulnerable rural people continued for exploitative labor because the improved road network may have facilitated the traffickers operations across the country. 4. The challenges facing NHAI required multidimensional skills. Managing about 6,000 kilometers (km) of completed national highways, completing the east west and north south corridors by 2007, and upgrading an additional 10,000 km of NHDP-III roads were needed simultaneously, using a well-structured mechanism. 5. The strategies of the Asian Development Bank (ADB) for India s national sector were to support the NHDP, strengthen project development and implementation capacity, and enhance private sector participation. ADB provided a series of loans to support the NHDP and the policy reform. Since 2001, ADB has adopted a programmatic approach for NHAI to advance the reform. The project also adopted the programmatic approach under a sector loan modality to support the reform. 6. Given this situation, the main objective of the National Highway Sector II Project was to improve transport efficiency leading to expanded economic opportunities. ADB approved a sector loan for $400 million in 2004 to support the project. 1 The project s objective would be achieved by (i) strengthening the NHAI capacity to develop the national highways and to undertake operation and maintenance (O&M); (ii) upgrading and increasing the capacity of 566 km of key national arterial corridors, particularly the north south corridor; (iii) improving road safety; and (iv) preventing the spread of HIV/AIDS and human trafficking. B. Expected Impacts, Outcomes, and Outputs 7. The project s expected impact was improved road transport efficiency, leading to the expansion of economic opportunities. The project s expected outcomes were to (i) strengthen NHAI to perform its responsibilities, and (ii) improve the access that connects the northern and southern parts of the country. At appraisal, the project s intended outputs were an (i) efficient authority responsible for managing national highways, (ii) upgraded north south corridor, (iii) improved road safety, and (iv) raised community awareness of the risks of HIV/AIDS and human trafficking. C. Provision of Inputs 8. Project cost. The ADB loan was approved on 21 December 2004 and became effective on 20 February 2006.The total cost of the project was estimated at $670.6 million equivalent at appraisal. The actual total cost during implementation increased by 11% to $744.4 million equivalent. The actual share of ADB decreased by 2.9%, whereas the government s portion 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to India for the National Highway Sector II Project. Manila.

5 3 increased by 31.6%. ADB disbursed $388.3 million and canceled the remaining loan amount of $11.65 million. The government s share increased from $270.6 to $356.1 million. The project experienced a significant cost overrun in civil works (appraisal: $502 million, actual: $612.9), attributed to the escalating prices of labor and construction materials. The average price for industrial labor increased by 22% from 2005 to 2008, while costs of materials, such as iron and steel (34%), cement (37%), and bitumen (150%) experienced higher increases. The cost of civil works at completion was 27.7% higher in rupee terms than the contract amount. The allocation of $8.4 million for equipment under the road safety component was not used because of delays in engaging consultants. At loan financial closure on 9 May 2012, total disbursements reached $388.3 million (97.1% of the total loan amount). 9. Project schedule. At appraisal, the project was planned to be implemented over 48 months including procurement and pre-construction activities, for completion by 30 June To expedite procurement, ADB approved an advanced action for the prequalification of civil works contractors. However, the procurement for civil works contracts was delayed. ADB approved the subprojects for Group I contracts in December 2005 and for Group II contracts in January The Group II contracts were approved by ADB but the NHAI later decided to rebid them based on an ex post facto finding of deviations in the multiple contracts evaluation procedure. The Group II contracts were awarded in January February 2007, about 2 years later than the appraisal schedule. The Group I contracts went smoothly and were awarded in April May 2006 (but still more than 1 year later than the appraisal schedule). 10. The implementation of Group I contracts was delayed by 2 7 years from the appraisal schedule, depending on the sections, mainly due to delays in the mobilization by contractors; weak site management; inadequate manpower and equipment; and poor planning and scheduling, including prolonged delays in taking up work on critical structures such as flyovers, roads over bridges, and bridges. Land acquisition and forest clearing were delayed for some contracts during the initial period, but these were not a primary reason for overall project delays. Some contractors were issued notices for their slow progress and pre-termination. The Group I contracts were completed between December 2009 and February The implementation of Group II contracts was satisfactory and these were completed during the period July 2010 February The loan closing date was extended three times from 31 December 2008 to 9 May The implementation of most Group I contracts went even beyond the extended loan closing date. 11. Technical assistances. Four technical assistance projects were envisioned in the project s design at appraisal. These included consulting services for (i) institutional development, (ii) construction supervision, (iii) road safety, and (iv) raising awareness on HIV/AIDS and human trafficking. Of these, consulting services of $1.0 million for institutional development were not provided since the NHAI completed institutional strengthening on its own. Consulting services of $0.2 million for road safety were not provided since the prerequisite road safety audit funded under a separate project was not timely implemented. NHAI engaged a consulting firm under the National Highway Corridor (Sector) I Project in March 2011 to carry out the safety audit, design the road safety zone, and prepare specifications for road safety equipment for both projects I and II, hence, no separate consultants were required Consultant inputs. Consulting services for construction supervision consultants (CSCs) envisaged at appraisal were four CSCs to provide 288 person-months of international and 4,487 2 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to India for the National Highway Corridor (Sector) I Project. Manila.

6 4 person-months of domestic consulting inputs. Actual use of the four CSCs totaled personmonths of international and 5,956.9 person-months domestic inputs. The authority of the engineer was delegated to the CSCs in accordance with the Fédération Internationale Des Ingénieurs- Conseils conditions of contract. Six nongovernment organizations (NGOs) were engaged by NHAI (two for each project implementing unit [PIU]) to assist in implementing the resettlement plans and the HIV/AIDS and anti-trafficking awareness program. 13. Environmental safeguard. The project was classified under environmental category B in accordance with ADB Environment Assessment Guidelines (2003) and complied with ADB Environment Policy (2002). Initial environmental examinations (IEEs) were carried and environmental management plans (EMPs) were prepared to ensure that all activities would be performed in compliance with the principles and objectives of an ecologically sustainable development. The environmental mitigation measures identified in the IEEs and EMPs were incorporated in the design and the EMPs were incorporated in the contract documents for civil works. ADB monitored compliance with environmental safeguard requirements by fielding environment experts, reviewing the monitoring reports, and providing suggestions to the PIUs, CSCs, and contractors to further strengthen the implementation of mitigation measures and monitoring mechanisms. 14. Land acquisition and resettlement. At appraisal, it was anticipated that the highway improvements would be carried out within the existing right-of-way. The project design avoided residential areas as much as possible, mainly by using bypasses, especially where religious places may have to be moved and where schools, clinics, and other common property facilities may be close to the new alignments. Payments were made to the affected persons as per the respective resettlement plans prior to the commencement of civil works on that section. None of the affected persons were disadvantaged by the resettlement process. The appraised cost of land acquisition and resettlement was $40.9 million and the actual cost totaled $34.9 million as a result of further avoiding residential and sensitive areas during implementation. This was made possible by (i) keeping rights-of-way to 45 meters (m) wide in built-up areas and reserve forest areas, (ii) adopting concentric symmetrical widening, (iii) raising carriageways over congested segments, and (iv) using bypasses to avoid congested urban settlements. 15. Road safety. The project aimed to improve road safety along the project corridor. It was envisaged at appraisal that the project would adopt the road safety zone concept and implementation arrangements developed under the predecessor, the National Highway Sector I Project that was implemented during (footnote 2). The equipment and consulting services under the road safety component amounting to $8.6 million was not used. This was because a prerequisite study to be funded under the predecessor project to carry out a safety audit, design the pilot road safety zone in Andhra Pradesh, and prepare specifications for road safety equipment installation was significantly delayed due to late recruitment of consultants. There was no time left for the project to implement this component. The project completion report (PCR) reported that some of the safety equipment had been incorporated in the completed highway facility as a part of the concession for O&M. Among the equipment that were planned at appraisal to be introduced into the safety zone were (i) vehicles and facilities for emergency rescue, first aid, patrolling, and routine maintenance; (ii) weighing equipment to control overloaded trucks; (iii) an advanced traffic management system to centrally monitor roads; and (iv) a speed-monitoring equipment. Items (i) and (ii) were introduced but items (iii) and (iv) did not materialize. 16. HIV/AIDS and human trafficking. The project intended to develop and implement a program to raise awareness on the risk of HIV/AIDS and human trafficking along the project

7 5 highways. In accordance with the civil works contracts, all contractors conducted the HIV/AIDS awareness and prevention programs for the laborers. NHAI engaged six NGOs to support the implementation of the resettlement plans and to conduct intensive HIV/AIDS awareness campaign at project sites. NHAI completed these tasks using its own resources, so the loan was not used for this output. D. Implementation Arrangements 17. NHAI was the project s executing agency, as envisaged at appraisal. NHAI established a project management unit for the north south corridor, headed by a chief general manager and assisted by general managers and deputy general managers. The project management unit was responsible for managing the project. NHAI, which was restructured in 2009, deployed chief general managers as regional officers in the states where it had major operations. The deployment of regional officers aimed to improve coordination with the state governments to expedite land acquisition, shifting of public utilities, forest clearing, and monitoring of construction works. Each general manager at NHAI headquarters in Delhi was responsible for two to three states. The HIV/AIDS prevention and anti-trafficking cell within NHAI s environment, and a social development unit and the PIUs implemented the related outputs. PIUs were established at Anantapur, Narshingpur, and Sagar even before the award of civil works contracts for the preconstruction activities, such as shifting utilities, cutting of trees, land acquisition, and resettlement of affected persons. Each PIU was headed by a project director, who was assisted by several managers for technical, resettlement, and environment aspects. The PIUs were adequately staffed with experienced personnel. Sufficient administrative authority was delegated to the PIUs for effective and timely decision-making. The PIUs were assisted by the CSCs. 18. Loan covenants. The project complied with all 52 covenants specified in the loan and project agreements. During implementation, the government and the executing agency established an organizational framework with adequate staff. Monthly and quarterly progress reports were submitted to ADB as required. The government provided the required counterpart funds, financed cost overruns in a timely manner, and ensured that the project was implemented successfully. Separate financial accounts for the project were maintained, as required, which were audited on an annual basis by statutory auditors, and financial reports were submitted to ADB with minor delays. II. EVALUATION OF PERFORMANCE AND RATINGS A. Relevance of Design and Formulation 19. The PCR rated the project relevant as it was an integral part of the government s strategy to develop national highways under the NHDP as set out in the government s 10th and 11th fiveyear plans. It indicated that the project was consistent with the ADB Country Partnership Strategy, for India, which was designed to support government efforts of achieving strategic goals of faster, more inclusive, and sustainable growth through strengthening infrastructure development in poor states, promoting PSP in infrastructure development, supporting climate change adaptation and mitigation, and encouraging innovative financing modalities to increase the leverage of ADB operations. In the Country Partnership Strategy, , ADB continues to support the government s strategic goals through faster, more inclusive, and sustainable growth. 3 3 ADB Country Partnership and Strategy: India, Manila.

8 6 20. The PCR noted that the sector loan modality was used for the project to facilitate the appraisal and approval during implementation. Sector loan modality is particularly appropriate when many subprojects in the sector are to be financed. However, a project loan may have an option to finance two sections. This validation does not recognize the strong necessity for the sector loan modality. The project adopted the programmatic approach, but it is not clear how this approach worked well to improve sector performance. The project also did not implement a sector-wide approach to integrate a series of projects to improve sector performance. The report and recommendation of the President (RRP) indicates that specific goals under the different policy areas and trigger points were adjusted during the last three projects but the evolution of goals and targets was not recorded in formal understandings between the government and ADB. Thus, the RRP suggested that the programmatic approach be reviewed regularly. However, the PCR did not indicate any such review and this validation notes that the programmatic approach was not focused on giving more attention to implementing the physical investment program at the expense of institutional and policy reform. The outcomes and impacts in the design and monitoring framework (DMF) at appraisal included the highway sector performance. The PCR assessed simply whether these targets were achieved, but the attribution of the project to sector performance is not clear. This validation further notes that one of the advantages of the sector modality lies in the flexibility of choosing the project sections, but this advantage was not enjoyed for this corridor road development since the proposed ADB-financed sections were already defined at appraisal. If the project had been approved with a project loan for two sections, the approval and the implementation would have been simpler. At appraisal, there was no multitranche financing facility (MFF) modality. MFFs can finance slices of large stand-alone projects with more flexibility than the sector loan modality. An MFF could have been selected for this project if the MFF modality already existed at appraisal. 21. The project was fully aligned with government policies and ADB strategies. The project had innovative PSP features and experience gained from the project was used in other projects in India. However, there was a weakness in project design since the sector loan modality was not properly implemented as the project did not address the sector-wide approach to improve the highway sector performance. This validation assesses the project relevant and agrees with the PCR rating. B. Effectiveness in Achieving Project Outcomes and Outputs 22. The PCR rated the project effective in achieving its envisioned outcomes. The outcome indicators, as listed in the DMF of both the RRP and PCR, were as follows: (i) completed upgrading of 13,000 km under the NHDP by 2008; (ii) developed an integrated corridor management concept for 6,000 km of highways and awarded contracts to the private sector by 2008; (iii) increased percentage of four-lane highways along the north south corridor by 15%; (iv) increased north south vehicle movement by 9% per annum; (v) reduced travel time on project highways by 50% by 2008; and (vi) reduced international roughness index from 8 m/km to 2.5 m/km on project highways by Of the outcome indicators, the first two are sector level indicators where attribution to the project is very limited. 23. The PCR reported that upon completion, the six outcome performance targets (para. 22) were achieved as follows: (i) 24,460 km of the national highways were upgraded as of 31 May 2016, (ii) an integrated corridor management concept for about 48,000 km of the national highways was developed, (iii) the percentage of four-lane highways along the north south corridor increased by more than 50%, (iv) north south vehicle traffic increased by 9.5% for the first year of the full operation in 2015 (this validation calculated the traffic growth rate based on distance weighted average of the growth rates in the two sections), (v) travel time on project highways

9 7 reduced by more than 50%, and (vi) international roughness index reduced from 8 m/km to 2.5 m/km (PCR, Appendix 1, p. 15). 24. The DMF in the PCR includes four project outputs. For Output 1 (efficient authority for managing national highways), the performance indicator to be achieved by 2007 were that the new organization structure and staffing are in place, the permanent staff s proportion increased by 50%, standards and guidelines updated, and the financial management system improved. The PCR stated that under the government s own initiative, NHAI implemented a restructuring program on institutional development to strengthen project management efficiency. It also adopted updated standards and code of practice for the planning, design, construction, and maintenance of highways. Under the restructuring program, NHAI expanded its board and created new functional units responsible for road safety, legal issues, quality control, and project appraisal. The output indicator for Output 1 is at a sector level and the project did not implement the sector level approach to achieve the targets. The targets were achieved with limited attribution to the project. 25. The indicator for Output 2 (upgraded north south corridor) was to have a minimum of 560 km of national highways upgraded by Upon completion, km of national highways along the north south corridor were upgraded and widened to four lanes, and substantial road safety features were incorporated. This validation assesses that the target for this output was achieved. 26. The indicator for Output 3 (improved road safety) was reduced traffic fatalities by 20% in the road safety zone. The road safety zone was not introduced in the project. From 2014 to 2015, road accidents along the project roads increased from 576 to 915, with fatalities increasing from 121 to 173 and injuries from 853 to 1, No further data for other years have been provided, but during this short 2-year period, the trend was not decreasing. The project highways incorporated in its design significant road safety features, including service roads, flyovers, grade separators, vehicle overpasses and/or underpasses, rest areas, truck and bus lay-bys, bus shelters, and traffic signs. Despite these measures, the number of accidents and fatalities increased presumably due to the increase in vehicle speeds and traffic volumes, hence, the highways are not fully access-controlled and served mixed traffic, including local traffic, and pedestrians. Although some road safety equipment were purchased by the O&M contractors, since the road safety zone was not introduced and road accidents had been increasing, this validation assesses that the target for this output was not achieved. 27. The indicator for Output 4 was available and accessible information, prevention tools, and services for testing, counseling, and treatment of HIV/AIDS. Public awareness of HIV/AIDS and anti-trafficking significantly increased through the campaigns conducted by the six NGOs and the continuous efforts of the HIV/AIDS prevention and anti-trafficking cell within NHAI s environment and social development unit, and by the PIUs. This validation assesses that the indicator for this output was achieved. 28. Environmental mitigation measures identified in the IEEs and EMPs were incorporated in the design and the EMPs were incorporated in the contract documents for civil works. ADB monitored the compliance of the environmental safeguard requirements. Land acquisition and resettlement were properly managed. The PCR reported that none of the affected persons were disadvantaged by the resettlement process. 4 ADB Completion Report: National Highway Sector II Project in India. Manila. Appendix 10, Table 10.4.

10 8 29. This validation assesses that all six outcome targets and three out of four output targets were met. However, among these, two outcome targets and one output target were at a sector level and these achievements were not necessarily attributed to the project. The sector loan project needs to introduce a sector level approach to improve sector level performance, but this was not achieved. Since this negative point was already included in the relevance assessment, this validation does not count this in the effectiveness assessment to avoid double counting. Excluding the sector level targets, all four outcome targets and two of three output targets were achieved. There was no safeguard issue reported in the PCR. Therefore, this validation assesses the project effective. C. Efficiency of Resource Use 30. The PCR rated the project efficient. The economic internal rate of return (EIRR) for the whole project (combined southern and northern sections) was recalculated at 15.5% using a discount rate of 12%. The recalculated EIRR for the northern section is 12.1% and the southern section is 19.2%. The EIRR for the north section is lower than the 14.9% estimated at appraisal because of higher capital costs and lower-than-expected traffic volume. 5 The computation of EIRR at project completion used the same method as during appraisal, with the conversion of financial values to economic values of traded goods using a factor of 0.9 and shadow pricing for unskilled labor at These conversion factors are generally used. However, the economic evaluation should specify the numeraire and monetary unit so that conversion takes into account appropriate border price equivalent values. Furthermore, shadow-priced economic prices (shadow exchange rate factor or standard conversion factor) should not be used for project benefits since vehicle operating cost (VOC) savings are tradable and should not be converted. On the other hand, time savings are non-tradable and should be shadow-priced. 31. The PCR adequately explained the procedure for updating the traffic forecast. This is based on actual toll data obtained from the two O&M concessionaires and the annual growth rate for the northern section assumed at 9.7% for , 8.3% for , and 6.3% for The corresponding figures for the southern section are 5.9%, 5.8%, and 4.3%, respectively. These are considered realistic and on the conservative side. One important point to note is that traffic at toll plazas was not counted. The PCR explained that traffic forecast was adjusted by adding roundtrip traffic, monthly pass traffic, and toll-exempted vehicles, but the methodology for adjusting traffic forecast was not indicated. 32. Both the RRP and PCR used the HDM-4 model for estimating the EIRR. Although this model is convenient and commonly used, its emphasis is on user costs and benefits such as VOCs and time savings. Beyond the user costs and benefits, there are wider economic benefits associated with generated traffic as a result of a more efficient and cost-effective road providing access to passengers and trucks. These macro effects were not captured in the HDM-4 model and, thus, the EIRR tends to be underestimated using the model. 33. At appraisal, the project was planned to be implemented over 48 months and to be completed on 30 June The procurement for civil works contracts for Group II and implementation of civil works contracts for Group I were delayed. However, the appraisal schedule for the procurement was from September 2004 to March 2005 that was a challenge. The loan closing date was extended three times from 31 December 2008 to 9 May The implementation of most of these contracts went even beyond the extended loan closing date. The last contract was completed in February The actual total project cost increased by 11% or 5 At appraisal, only the northern section was selected as a sample for the economic evaluation.

11 9 $744.4 million equivalent. The project experienced a significant cost overrun in civil works (appraisal: $502 million, actual: $612.9), attributed to escalating prices for labor and construction materials. Project completion delays and cost overrun were incorporated in the EIRR calculations. Since the recalculated EIRR of 15.5% for the whole project was higher than 12%, which is the threshold of economic viability, this validation assesses the project efficient. D. Sustainability 34. The PCR rated the project likely sustainable based on adequate institutional, financial, and environmental arrangements for road O&M. The project s financial internal rate of return (FIRR) was reevaluated based on actual capital costs, O&M costs, and the private concessionaires actual revenues in Three major assumptions were used in the FIRR recalculation. One, capital costs included all capital expenditures in the civil works, land acquisition and resettlement activities, and consulting services, but excluded the financial charges of the loan. Periodic maintenance was treated as capital costs. Two, the private concessionaires actual O&M costs in 2015 were used as the basic costs. The O&M costs were kept at constant prices and a 3% increase per year was added to account for traffic increases and deterioration in road condition, which required increasing funds for routine maintenance. Three, the actual toll revenue in 2015 was used as the basis of revenue Rs808.2 million for the northern section and Rs1,359.0 million for the southern section. It was assumed that toll revenues would increase along with the yearly traffic increase during the evaluation period. The revenue calculation also considered roundtrip and monthly ticket vehicles, and those that are toll-free or with reduced toll rate. 35. Based on the above, the FIRR was recalculated at 5.2% for the whole project. The FIRR for the northern section is 3.4% and the southern section is 7.3%. The northern section has a higher FIRR than the 3.3% estimated at appraisal because of higher tolls. 6 The southern section has a much higher FIRR than the northern section because of higher traffic volume and revenue. The recalculated FIRRs are higher than the recalculated weighted average cost of capital (WACC) of 1.93%. The project can be rated financially viable. However, under the operate maintain transfer (OMT) contracts, the concessionaries cannot set the fares freely and, thus, a higher FIRR than the WACC does not necessarily mean that the OMT is financially sustainable. 36. Sensitivity analysis indicated that FIRR was very sensitive to revenue changes. A 10.0% reduction in revenue results in a 14.7% reduction in FIRR. NHAI and the concessionaires need to improve their management of toll collection and carefully monitor revenue fluctuations to ensure a continued sufficient revenue intake. 37. The O&M of the project highways was awarded to private firms, as envisaged at appraisal. The project highways are operated by two private firms under 9-year OMT contracts. The PIUs of the NHAI are in charge of contracting and supervising the O&M of the project highways. They have also engaged independent engineers (consulting firms) to supervise such O&M. The independent engineers, as well as the PIU staff, visit the project highways regularly to inspect the performance of the operation and the highways condition using parameters such as surface roughness, lane availability, road furniture, and safety facilities. The independent engineers issue directives to concessionaires for the repair and rectification of any defects and deficiencies in the project highways, according to the concession agreement. 6 The base toll rate for cars was Rs0.55 per vehicle-km at appraisal, and Rs1.06 per vehicle-km in 2015.

12 Although the PCR did not provide information on how well the OMT works financially, the higher FIRR compared to the WACC shows that it is financially positive in the long run. The institutional system was well established to keep the quality of the highway at a certain level. The PCR indicated that the project did not have any significant adverse environmental impacts. It also indicated that road safety remains a concern. The government at the highest level has increased its focus on road safety and has been undertaking several measures to improve it. Overall, this validation assesses the project likely sustainable. III. OTHER PERFORMANCE ASSESSMENTS A. Preliminary Assessment of Development Impact 39. The PCR stated that the project had significant overall impact. The two impact indicator targets in the DMF are (i) percentage of four-lane national highways increased from 6% to 20%, and (ii) increased cargo and passenger transport. By 31 May 2016, more than 26,000 km of national highways had been improved to four or six lanes. These constitute more than 40% of the national highways network of 65,569 km in 2004 and more than 27% of the current national highways network of 96,261 km. Cargo and passenger traffic have increased. Freight traffic on roads has increased by about 100% from FY2005 to FY2012. Passenger traffic on roads has also increased by about 100% from FY2007 to FY2012. Since the second impact indicator did not have quantitative targets, it is difficult to assess the achievement of the target. However, the impact on cargo and passenger traffic is likely to be significant. Another weak point is the limited attribution to the project of nationwide sector performance. The intended impact of the project was to improve road transport efficiency, leading to expansion of economic opportunities. At completion, the project had reduced VOCs, road congestion, travel time, and transport costs. 40. The project had significantly improved national highways connectivity along the north south corridor and in the project areas, which had facilitated the rapid socioeconomic development in the project states and throughout the country. The upgraded highway corridor particularly provides opportunities for further economic, industrial, and commercial development, potentially leading to increased employment. More importantly, the project has improved connectivity in rural areas and access among the poor residents. 41. At project completion, the following were achieved: (i) total VOCs were reduced by 42%, with savings per vehicle-kilometer (PVK) of Rs0.8 for two-wheeler vehicles, Rs3.1 for cars and jeeps, Rs12.6 for buses, Rs11.7 for trucks, and Rs14.1 for heavy trucks; (ii) savings in average travel time for a whole journey using cars and jeeps was 6 hours and 8 hours for bus passengers; (iii) some 24,000 person-months of inputs from local workers were utilized for construction; (iv) the average actual income of local residents has doubled; (v) the price of land along the project highways increased by about five times; (vi) some 560 full-time staff currently work at the seven toll plazas on the project highways; and (vii) a large number of roadside businesses were established or expanded, providing significant work opportunities to the local population, especially the poor. 42. Although achieving the impact indicators do not necessarily mean the project had a significant impact on the sector, the project improved road transport efficiency, leading to economic development in the project areas. The PCR indicated that the project would not have significant adverse environmental impacts. ADB monitored compliance with environmental safeguard requirements by fielding environment experts, reviewing the monitoring reports, and providing suggestions to the PIUs, CSCs, and the contractors. The project design avoided residential areas as much as possible, mainly by using bypasses. During implementation, land

13 11 acquisition and resettlement impacts were minimized to the extent possible. Unfortunately, road accident fatalities increased from 92 in 2014 to 133 in 2015 in the two project sections. If travel speeds and traffic increase, road accident fatalities are likely to increase. Implementing strong safety measures is, therefore, expected. Overall, this validation assesses the impact satisfactory. B. Performance of the Borrower and Executing Agency 43. The PCR rated the overall performance of the borrower and the executing agency satisfactory. Related government agencies, including the Department of Economic Affairs under the Ministry of Finance, actively participated in project coordination and monitoring. 44. NHAI established well-staffed PIUs, which coordinated feasibility studies, project preparation, shifting of utilities, land acquisition, tree cutting, acquisition of environmental clearances, procurement of civil works contracts, and engagement of CSCs. However, project implementation was delayed by 40 months. Some CSCs were not fully staffed, particularly at the initial phase of the project, and made frequent changes in their key personnel that in some cases led to delays in the issuance of designs, drawings, and critical decisions by contractors. The progress of most contracts under Group I was poor mainly because of the slow mobilization of equipment, lack of manpower, and poor site management. 45. Despite being included in the project design, NHAI implemented the project s institutional strengthening component on its own initiative and did not utilize an international consultant, which was covered in the ADB portion of the project cost. 46. NHAI continued to strengthen the framework for road safety and PSP in O&M as part of ADB s programmatic approach for a national highways system. Over the years, NHAI made significant progress in implementing NHDP. However, the project s component related to road safety was partially introduced. 47. NHAI complied with 51 of the 52 loan covenants. Compliance with the covenant on carrying out road safety audit suffered considerable delay due to the delay in mobilizing road safety consultants under the predecessor project (footnote 2). 48. The project could have been implemented more smoothly particularly during the initial stage. The institutional strengthening components were implemented by NHAI, although this was covered in the project cost, and the road safety component was partially implemented. Overall, this validation assesses the executing agency s performance satisfactory. C. Performance of the Asian Development Bank 49. The PCR rated the performance of ADB satisfactory. ADB headquarters administered the project until January 2009 then delegated it to the ADB India Resident Mission. ADB was closely involved in identifying and resolving issues during implementation through (i) tripartite project review meetings among the executing agencies, consultants, and ADB; and (ii) regular review missions. During implementation, ADB conducted 13 review missions, including the inception mission in 2006, three special loan administration missions, and the completion review mission in ADB analyzed implementation issues affecting the project and provided substantial inputs in preparing action plans to expedite project implementation. Documents for the engagement of consultants and procurement of civil works packages were approved in a timely manner at the processing and implementation stages. All claims for payment were processed promptly. This validation assesses ADB performance satisfactory.

14 12 IV. OVERALL ASSESSMENT, LESSONS, AND RECOMMENDATIONS A. Overall Assessment and Ratings 50. This validation rates the project relevant, effective, efficient, and likely sustainable. This validation assesses the project relevant as it was aligned with the government s priorities and the CPS, although the sector loan modality was not properly implemented as the project did not implement the sector-wide approach to improve the highway sector performance. This validation rates the project effective since all four outcome targets and two of the three output targets were achieved, excluding the sector level targets, which were irrelevant to the project. This validation rates the project efficient since the EIRR for the whole project is 15.5%. This validation assesses the project likely sustainable after concurring with the PCR on its overall financial, institutional, and environmental sustainability. This validation rates the project impact satisfactory since the project improved road transport efficiency, which had led to economic development in the project areas. Overall Ratings Validation Criteria PCR IED Review Relevance Relevant Relevant Effectiveness Effective Effective Efficiency Efficient Efficient Sustainability Likely Likely sustainable sustainable Overall assessment Successful Successful Preliminary Significant Satisfactory assessment of impact Borrower and Satisfactory Satisfactory executing agency Performance of ADB Satisfactory Satisfactory Quality of PCR Satisfactory Reason for Disagreement and/or Comments ADB = Asian Development Bank, IED = Independent Evaluation Department, PCR = project completion report. Note: From May 2012, IED views the PCR rating terminology of "partly" or "less" as equivalent to "less than" and uses this terminology for its own rating categories to improve clarity. Source: ADB Independent Evaluation Department. B. Lessons 51. The following lessons included in the PCR are assessed in this validation as reasonable: (i) Slow progress on land acquisition, resettlement, and forest clearing delayed some contracts initially, although not in a significant way. A project-readiness checklist now ensures that pre-construction activities take place in advance and that wellprepared projects are taken up for approval and implementation. (ii) Most of the project contractors were large, some of them international and had the financial and technical capacity for civil works. However, there was significant delay in the completion of the contracts due to poor contractor performance. The contractual provisions on the contractor performance including mobilization, staffing, and deployment of equipment and funds need to be strengthened to avoid similar delays in future ADB road projects in India. (iii) One contractor that was awarded multiple contract packages performed particularly poorly. Qualification criteria for awarding multiple contracts to a single

15 13 (iv) contractor should be strengthened in future projects. Unresolved contract disputes can affect project cash flow and progress. Some disputes under the contract remained unresolved even after works were complete. The contract dispute resolution mechanism needs to be improved to minimize and resolve disputes promptly. Although the project included substantial road safety features, road safety remains a concern. Better enforcement of traffic rules, road safety awareness campaigns, and enhanced road safety features should be incorporated in the design of future projects. C. Recommendations for Follow-Up 52. The PCR offered the following recommendations: (i) On project benefit monitoring and evaluation, the project has improved socioeconomic conditions in the project areas and the benefits are likely to expand to a larger area in the next few years. As the full completion of the north south corridor is likely to spur development along this transport artery, a benefit monitoring and evaluation study should be undertaken to document the socioeconomic benefits and the lessons learned for future projects; (ii) On project sustainability, future projects could benefit from measures to improve sustainability, especially in road maintenance and financing, toll policy, road safety enhancement, axle load control, and development of transport services. Concepts and tools on road asset management should also be introduced. This validation agrees with the PCR on all these recommendations. A. Monitoring and Reporting V. OTHER CONSIDERATIONS AND FOLLOW-UP 53. The loan agreement specifies that within 3 months of effective date, the executing agency will establish a project performance management system in such forms and detail as required by ADB. With the assistance of the project construction supervision consultants, the executing agency shall also annually monitor and evaluate the project s benefits and progress during project implementation and within 3 months after project completion. The PCR stated that baseline data and intermediate baseline data, when feasible, were collected during implementation. Project benefits and performance were evaluated at completion according to the project framework. B. Comments on Project Completion Report Quality 54. The PCR is consistent with no conflicting data observed. The quality in general is good and the report is complete, supporting needed analysis for validation purposes. However, the PCR should have assessed achievements and sustainability of the OMT contract system. Overall, this validation assesses the PCR quality satisfactory. C. Data Sources for Validation 55. The data sources include the RRP, PCR, and back-to-office reports on the project. D. Recommendation for Independent Evaluation Department Follow-Up

16 This validation agrees with the PCR that the project performance evaluation report be prepared in 2018 or later. By then, most of the project highway sections will have been fully operating for 5 years and the entire north south corridor would by then four lanes wide.