SRI LANKA ROAD SECTOR POLICY REVIEW NOTE

Transcription

1 SRI LANKA ROAD SECTOR POLICY REVIEW NOTE December 4, 2003

2 EXECUTIVE SUMMARY 1. Context. This policy note aims to: (i) facilitate the sector reform dialogue with the Government of Sri Lanka (GOSL); and (ii) provide the basis for discussion and agreement with GOSL for a Bank lending operation in the roads sector. In doing so, this note outlines a road sector business strategy for the World Bank on how it can assist GOSL improve the country s road system during the current Assistance Strategy (CAS) period. It supports the GOSL s development strategy entitled Regaining Sri Lanka: Vision and Challenges for Accelerated Development (RSL) and the CAS approach to help Sri Lanka achieve the Millennium Development Goals. It is based on: (i) a brief assessment of the current state of the sector; (ii) the GOSL strategy; (iii) current and planned support by other donors; and (iv) proposed support for the future, including policy reform initiatives to be supported and an outline for investment operations, with particular emphasis on a relatively simple operation to bring quick result and meet the priority needs of the country. This note recognizes the opportunities arising from: (i) the present Government s drive for reform in the sector; and (ii) the peace dividend. 2. Goals. In view of: (i) a recent request by the GOSL for support to the roads sector; and (ii) the Bank's renewed emphasis for infrastructure investment lending, the Bank proposes to re-engage in the road transport sector to mainly support the growth pillar of Regaining Sri Lanka by: (i) increasing connectivity of the different regions; (ii) helping close the implementation gap which currently exists between the GOSL s planned reforms and the institutional capacity on the ground for implementation; and (iii) supporting private sector participation (PSP) and public private partnerships (PPP). In pursuing these goals, the Bank s contribution would be to support the GOSL initiative to build a national highway system and integrated road network by introducing key reforms and PPP to expand the scope for investment. 3. Background. The Government expects the economy to grow at an annual rate of 7% by 2007 (and 10% in the long term), and transport and communications, with an estimated annual growth rate of 10%, to become the single largest contributor to GDP growth after other services. For this reason, it is expected that about 1.7% of GDP will be devoted to capital expenditure in the sector by 2006, a substantial increase from 1.1% in In view of current resource constraints, it is uncertain whether the desired level of capital expenditure in the road sector would indeed materialize. Government agencies dominate the sector far beyond the tasks of road network planning and management and consequently the role of the private sector is underdeveloped. To address this, Regaining Sri Lanka (RSL) sets forth a broad agenda for road transport, including connecting poor regions and production centers to domestic and international markets, building a national highway system and an integrated road network, enhancing road safety, and promoting private sector participation in the sector. At present, as the comprehensive road master plan is still being developed, it is not clear how the agenda concerning the road sector, presented in RSL, would be implemented 2. Nevertheless, the government has initiated a number of actions to start addressing the problems faced by the sector, but these reforms are still in their initial phase. 4. Business Shift. The Bank s present CAS proposes a base case of no IDA financing in the sector. However, bearing in mind the current reform drive and that the GOSL has initiated the implementation of a road fund, the Bank is ready to respond to the sector reform initiatives and to investigate possible support through a sector wide operation (see CAS, paragraph 53). This provides a good opportunity for the Bank (through this road sector policy review note) to work with both the public and private sector to strengthen road sector institutions and improve capacity for maintenance, rehabilitation and upgrading at the national level. 1 Source: Regaining Sri Lanka, The road sector master plan would be completed by December i

3 5. Various donors, mainly the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC), have been active in the development of the sector and continue to finance key programs in roads. The proposed Bank strategy would complement the efforts of other donors under the leadership of ADB and the medium-term policy framework developed and agreed with the Government as roadmap for future ADB s lending to Sri Lanka s road sector. 6. Instruments. The note recommends a programmatic approach to support the road sector in Sri Lanka. Past experience both through Bank and other donor s interventions in Sri Lanka suggests that institutional reform initiatives need to be addressed in a comprehensive but gradual manner, and to be sustained if they are to produce lasting improvements. This is difficult to achieve through a single project. The programmatic approach recommended, would therefore complement the medium-term programmatic assistance agreed between the GOSL and ADB as part of the Road Sector Development Project approved in November 2002, creating the opportunity to link the financing of successive projects to the implementation of this common medium-term reform agenda. This approach would facilitate close coordination of sector policy dialogue of each donor involved. 7. In the meantime, a relatively simple Specific Investment Loan (SIL) is proposed for FY05 to bring quick results on the ground and meet the priority needs of the country, resulting from the peace process. Consistent with Government policy, the main focus of this SIL would be on national highways as it is in this area where there are immediate and pressing needs, which once addressed, would result in a significant contribution to economic growth. Indeed, national highways carry over 70% of the traffic in Sri Lanka. Uncontrolled roadside development results in relatively low travel speeds and poor level of service, discouraging long distance traffic and hindering the spread of economic activities and therefore development away from the Colombo Metropolitan Area (CMA). By assisting the GOSL reach its goal of having 90% of national highways in maintainable condition by 2010, the Bank would contribute to economic development, further support the peace process and aid in the sustainability of the peace dividend. In addition, the SIL could be the vehicle for Bank support of the GOSL s latest reform initiatives concerning the winding up of RCDC and the implementation of a road maintenance fund. A substantial increase in the funds available for road maintenance is paramount for the sustainability of the road sector investment and constitutes a key justification for Bank s involvement in the sector. This SIL would have the potential of quickly delivering results on the ground, as some preparation work in the form of pre-feasibility studies, feasibility studies and some detailed engineering designs, has already been carried out by the Road Development Authority (RDA). It is estimated that about $100 million IDA financing is required for this proposed SIL. 8. The proposal recognizes that there are also pressing needs concerning provincial and rural roads. As over 65% of the population live in rural areas, assistance for rural roads would also ultimately benefit a large percentage of the population. However, substantial capacity must be built at the local level before significant investment can be undertaken. Thus this SIL could attempt to address rural road needs, by incorporating a pilot component which could be followed later on by a specific investment operation in the rural areas. The proposal specifically leaves out support for provincial roads, as both ADB and JBIC are providing substantial support to the government in this area through their operations in the Southern, Western, North Western, Uva, Central, Sabaragamuwa and North Central Provinces. 9. Risks. This strategy proposes a re-engagement in the road transport sub-sector where the Bank has remained disengaged for the past decade. The main risk include: (i) slower reform to those stated in Regaining Sri Lanka; (ii) GOSL s inability to mobilize sufficient resources for road maintenance; and (iii) lack of transparency and misuse of the road maintenance fund for construction of new roads. 10. Next Steps. Upon endorsement by GOSL of the approach proposed in this note, the GOSL would be expected to appoint an agency to work with the Bank team on the preparation of the first proposed operation. The Bank would quickly send a team to Sri Lanka to start the preparation of the SIL. The GOSL may need to request project preparation assistance from the Bank as needed. ii

4 SRI LANKA ROAD SECTOR POLICY REVIEW NOTE I. SECTOR STATUS AND GOVERNMENT STRATEGY 1. Road Transport in Sri Lanka and the Government Strategy - Regaining Sri Lanka (RSL). About a third of Sri Lanka s population is poor, according to the higher poverty line, and 25% according to the lower poverty line 3. Due to uneven regional economic growth, regional disparities have emerged and as a result poverty is relatively higher in some parts of the south and in the North and East than in the rest of the country. The Greater Colombo area, where most of the growth has concentrated, has the lowest poverty levels at around 10%. While substantial progress has been achieved since the 1990s when poverty declined from 31% in the mid-1980s to 25% in the mid-1990s, Sri Lanka needs faster and more inclusive growth to continue reducing poverty across the regions. Regaining Sri Lanka sets a target of reducing poverty headcount from 25% to 20% by 2005 and achieving sustainable 10% growth per annum in the next few years. The road transport sector can help contribute to this agenda by increasing connectivity of poor regions and production centers to domestic and international markets, stimulating national trade. For this to be realized, RSL sets the goal to build a modern road network along with the immediate upgrading of existing roads. National highway developments and improvements in secondary road systems are seen as areas where there is an urgent need to invest in improvements. 2. Road Sector Background and Performance. The road sector is the backbone of the transport sector in the country. With 19 million people, Sri Lanka has a road network of about 92,700 Km comprising about 11,600 Km of national highways (Classes A and B), 16,500 Km of provincial roads (Classes C, D, and E) and 64,600 Km of Pradeshiya Sabhas roads (Local Authority roads) 4. This network constitutes a vital component for the movement of people and goods and plays an important role in integrating the country, facilitating economic growth and ultimately reducing poverty. Given the country s road density of 1.6 Km/Km2 of area, which is much higher than India, Pakistan, and even Bangladesh with a road density of , a focus on asset preservation is paramount. The road transport sector is currently incurring heavy asset losses due to inadequate and deferred maintenance and these losses constitute a huge impending liability for Sri Lanka. 3. About 80% of passenger-km is traveled on buses, over 15% on private vehicles, and the remainder on railways 6. With the liberalization of vehicle imports in 1978, the active vehicle fleet has increased by about four-fold during the last 18 years. To date, there are almost 2 million registered vehicles in the country, growing at about 6% per annum. This sudden increase in vehicle population has resulted in a substantial augmentation in the traffic volumes on the trunk road system of the country. Road transport accounts for about 92% of all passenger and freight transport, of which around 76% is carried by national highways. Despite this substantial increase in traffic demand, there has been very little investment for improving existing trunk roads, upgrading (e.g. widening) of roads and construction of new national highways 7. During the past four decades, most of the government investment in new roads has concentrated on small, rural access roads rather than on roads that provide rapid access to urban centers 8. Despite the fact that ADB, SIDA and NDF have been active in providing assistance for road safety, Sri Lanka remains one of the countries with the highest road accident fatality rate in Asia. The National Transport Policy estimated in 2000 that the annual cost of road accidents is about 0.4% of GDP ($50 million /year). 3 Data for the mid 1990s. The results of the 2002 poverty survey are not yet available. 4 The 2001 Sri Lanka Central Bank Report quotes a much greater length of rural roads (i.e. over 81,400 Km), which would result in a total network length of about 108,000 Km. 5 Source: JBIC, ODA report Figure for Data for Source: ADB, Road Sector Development Project, November During the 1990s, infrastructure investment was less than 2-3% per annum. Source: Regaining Sri Lanka, page Source: Regaining Sri Lanka, page 54. 1

5 4. The cease-fire in place since February 2002 and the current peace talks may mark the beginning of a sustained acceleration in economic growth. GDP growth reached 5.6% in the first half of 2003, and industrial growth increased to almost 9% for the first time in three years. Unemployment of 7% is at its lowest level in many years, inflation has dropped to below 5% and nominal interest rates have fallen. The Government expects this trend to continue, the economy to grow at an annual rate of 7% by 2007, and transport and communications, with an estimated annual growth rate of 10%, to become the single largest contributor to GDP growth after other services. For this reason, it is expected that about 1.7% of GDP will be devoted to capital expenditure in the sector by 2006, a substantial increase from 1.1% in Transportation normally contributes about 10% of GDP and generates about 4% of employment. In view of current liquidity constraints, it is uncertain whether the desired level of capital expenditure in the road sector would indeed materialize. In addition, Government agencies dominate the sector and consequently the role of the private sector is underdeveloped 10. To address this, Regaining Sri Lanka (RSL) sets forth a broad agenda for the road sector, including connecting poor regions and production centers to domestic and international markets, building a national highway system and an integrated road network, enhancing road safety, and promoting private sector participation in the sector through both maintenance contracts of current roads and BOT/PPP schemes for new expressways. However, at present, there is no comprehensive road network master plan and it is not clear how the agenda presented in RSL would be implemented National Highway Provision. National highways consist almost entirely of two-lane roads. About 9,600 Km are bituminous roads with sand sealing, 1,000 Km are surface stress roads and 1,000 Km are asphalt or concrete roads. Uncontrolled roadside development along these roads has resulted in a mix of many kinds of traffic, including pedestrians, bicycles, animal pulled vehicles and motor vehicles. This, compound with lack of side lanes or paved shoulders, results in relatively low travel speeds and poor level of service, discouraging long distance traffic and hindering the spread of economic activities and therefore development away from the Colombo Metropolitan Area (CMA) and to other parts of the country. During the last 15 years, the majority of highway investment has gone into the rehabilitation of the existing road system rather than into the construction of new roads. Due to the fact that some of the important trunk roads had reached or were expected to reach their design capacity in the short term, the GOSL concluded that the existing system of trunk roads would not be adequate to cater to the increasing traffic demand. Therefore, a policy decision was taken to implement a major road development program to provide: (i) higher capacity two-lane roads; and (ii) a system of expressways (four-lane, dual carriageway to connect major growth centers in the country). The Road Development Authority (RDA) has undertaken pre-feasibility, feasibility and detail engineering designs of several important routes to major cities, including five new major highway projects to be completed by 2015, all at various stages of development. One of these projects, the Colombo-Katunayake Expressway has recently been abandoned due to, amongst other things, lack of financing. Other projects are: (i) the Southern Transport Development Project; (ii) the Outer Circular Highway; (iii) the Alternate Highway from Colombo to Kandy and (iv) the Alternate Highway from Katunayake to Anuradhapura via Padeniya. A total of 250 Km of new roads is expected to be completed by This program would require a substantial increase in capital investment, in the domestic road provision capacity and would result in a much greater road asset base to be maintained. Therefore, the GOSL is seeking private sector participation (PSP) for the financing, construction and operation of such highways. However, to carry out this program, the existing problems of inefficiency, lack of capacity and inadequate maintenance need to be overcome. 9 Source: Regaining Sri Lanka, According to the National Construction Association of Sri Lanka, there are only 11 major road contractors capable of undertaking contracts above $3 million, and include public sector undertakings such as RCDC, and the State Development and Construction Corporation (SDCC). This is based on the classification by the Institute for Construction, Training and Development (ICTAD) updated every two years. 11 A road sector master plan is currently being developed and should be completed by December

6 6. The Ministry of Transport, Highways and Civil Aviation (MTHCA) has overall responsibility for policies and programs concerning national transport. The Ministry of Highways (MHs) has the main responsibility for programs and projects for national highways and RDA, established in 1981 as a statutory institution assigned to the Ministry of Highways, is responsible for maintenance, planning and managing the development of the highways network. In practice, however, RDA has relatively limited autonomy despite having the structure of a commercial organization. Up until 1989, RDA had the responsibility for maintaining all roads and this was largely carried out through RCDC. Since then, the provincial councils have the responsibility for provincial roads and the work is mainly undertaken by direct labor. The government has decided to wind up RCDC, by the end of 2003, which used to receive about 80% of total road contracts from RDA. It is expected that with the policy decision concerning RCDC, all maintenance works for national roads would be ultimately undertaken by private contractors. 7. Provincial Roads. At the provincial level, following the 13th amendment to the constitution in 1989, responsibility for provincial roads was devolved from RDA to the Ministry of Home Affairs, Provincial Councils and Local Government (MHAPCLG). Lack of appropriate institutional arrangements to carry out road responsibilities has resulted in a severe deterioration of the provincial road network. Their capacity is mainly confined to performing public works on a very small scale often using direct labor. The ongoing ADB s Southern Provincial Roads Improvement Project is helping the Southern Provincial Council implement an institutional development program. Due to its success, support to the provinces is being continued by ADB s Road Sector Development Project based on this model 12 for institutional development and capacity building. Therefore, it appears that in the context of the overall needs of the roads sector, the current support provided for provincial roads by ADB and JBIC is substantial, leaving the Bank to focus on other roads in the short term. 8. Local Roads. The level of competencies possessed by local Authorities (Pradeshiya Sabhas) for road maintenance is below that possessed at the provincial level. As a result, repair work has been neglected and this has left travel in agricultural regions and access between farm communities and cities in an inadequate state. Indeed, the implementation of the devolution mandate is still ongoing and consequently a major capacity building effort still needs to be undertaken at the local level before Pradeshiya Sabhas can carry out substantial work programs. 9. Sector Challenges. The GOSL faces some key challenges in improving the road sector. The main limitation of the road network is poor quality due to inadequate maintenance at every level, including in provincial roads and tertiary roads needed for basic access in poor areas. Road conditions are even worse in the conflict affected areas in the North and East. Thus, in the context of significant maintenance needs at every level, the main challenge to the GOSL appears to be the maintenance, rehabilitation and upgrading of national highways as these roads carry over 70% of the traffic in the country. It is in this area where addressing the immediate and pressing needs would result in a significant contribution to economic growth. Better national highways would increase travel speeds and improve the level of service, encouraging long distance traffic and fuelling the spread of economic activities and therefore development away from the Colombo Metropolitan Area (CMA) and to other parts of the country. This would further support the peace process and aid in the sustainability of the peace dividend. As important as addressing the maintenance backlog of national highways, is the preparation of local authorities to take responsibility for their roads through a program of institutional capacity building. In view of the fact that over 65% of the population live in rural areas, assistance for rural roads would also ultimately benefit a large percentage of the population in Sri Lanka. 10. With the progress made concerning the peace progress, an island-wide approach including the North and East areas needs to be adopted in future development of the country s road network. Immediate rehabilitation of the road network in the North East is crucial to facilitate humanitarian, social 12 See ADB s Road Sector Development Project, 2002, for details on the approach followed. 3

7 and economic activities in the area. Therefore, a cohesive vision and mission is needed for the entire sector, that lays out the key strategic principles for road transport vis-à-vis planning, fiscal and administrative matters in line with the broad national goals for economic and social development. In this context, the mid-term strategy for institutional and policy development should be implemented and adopted as soon as possible, and the institutional mechanisms for provinces and local authorities need to be revised and strengthened to finance and deliver roads. The national road master plan currently under preparation should be adopted with the caveat that this will evolve over time as policy ramifications demand appropriate course corrections. 11. Investment Needs and Financing Constraints. Road maintenance is chronically under-funded across the different types of roads. Sri Lanka requires large investments to address the resulting rehabilitation backlog, and to bring its road system to a level of performance and reliability consistent with the country s development objectives. To achieve its 2007 rural connectivity objectives, GOSL estimates it needs to spend over $100 million per year for the next few years in capital formation excluding recurrent expenditure. It also estimates the need for earmarking funds dedicated to road maintenance; funds which would have to be increased substantially for the sustainability of the sector and which constitute a key justification for the Bank involvement in the long term. 12. In 2003, RDA had a budget of about $100 million, of which $28 million were for rehabilitation of national roads and included the cost of land acquisition and $15 million for the proposed Colombo- Katunayake highway. These funds include annual counterpart allocations for three ongoing ADB projects and other JBIC projects. The 2003 periodic and routine maintenance budget for national roads amounted to $16 million, but was highly insufficient and RDA requested $27 million for These amounts reflect ceilings imposed by Treasury and therefore are much too low to meet actual maintenance needs. RDA estimates that a minimum of $70 million and $20 million per year is required respectively for routine and periodic maintenance of national roads. No sound estimates are available on the actual financing needs for rehabilitation and upgrading of national roads, but based on the implementation capacity of RDA, about $90 million of rehabilitation work could be carried out every year. Thus it is clear that the envisaged road fund would only partially cover road maintenance needs at the national level and therefore significant work should be carried out to ensure that there is a substantial increase in the funds available and a dedication of resources for maintenance. GOSL funding for new construction must necessarily come from elsewhere. 13. ADB and JBIC have been continuously providing assistance to national roads for rehabilitation and upgrading and also for construction of new roads. ADB itself has provided five loans in the last 15 years and is currently preparing the National Highways Sector Development Project, programmed for 2005, which may include a component to support private sector participation. No donor assistance has been given to the maintenance of national highways. 14. The annual budget for provincial roads are funded mainly from central government allocations supplemented by revenues raised by the provincial councils. The road related budgetary allocations for provincial councils is about 10% of the allocations for national highways. Rough estimates suggest that about $5 million per year are budgeted for routine and periodic maintenance of provincial roads, and that about $35 million of rehabilitation work could be carried out every year. However, immediate total rehabilitation needs of provincial roads may amount to as much as $118 million. In 2003, the GOSL allocated about $10 million for provincial road projects. Adding the commitments by ADB and JBIC and the corresponding GOSL counterpart funds, a total of about $31 million was made available, very close to the annual implementation capacity of provincial authorities of $35 million. This implies that, in the context of pressing needs throughout the sector, Although ADB s and JBIC s support to provincial roads is beginning to address these needs, there is a significant backlog of investment in this area. Before 2002, the only assistance to this sector was provided by ADB in the Southern province for 40% of the network in the province. This assistance increased in 2002 with the approval of two projects: (i) one financed by ADB covering about 12% of the network in four provinces (North Central, North Western, Western, and 4

8 Uva); and (ii) one financed by JBIC covering about 40% of the network in two other provinces (Central and Sabaragamuwa). No assistance has been given to the provincial roads in the Northern and Eastern provinces. Therefore, as 25% of the provincial road network in the Southern, Central and Sabaragamuwa provinces, 60% in the North Central, North Western, and Western provinces, and 80% in the North and East require assistance, there is still much support needed in this sector. 15. ADB is providing loans for rural infrastructure including rural roads in the Southern, North Central, North Western, and Central Provinces. But this assistance and overall donor assistance to this sector has been modest compared to the needs of this sector. Estimates of financing needs for local roads are still being finalized, but judging by the information available, it would appear that Sri Lanka cannot afford to maintain and keep such a dense rural road network and that it may be advisable to select a core network of strategic and priority roads for preservation. This is clearly of major importance if the GOSL wishes to increase the efficiency of its investment in rural roads and fuel economic development. 16. Sri Lanka has no overall pricing policy on transport. A variety of user charges are applied and include: (i) duties on imported vehicles; (ii) annual registration fees; (iii) import duties on spare parts and tires; and (iv) taxes on gasoline, diesel and lubricants. As a result, overall resource mobilization remains insufficient although significant progress has been made recently with the decision to implement a road maintenance fund 13, and the introduction of a national fuel cess in 2003 for gasoline and diesel, at 1 Rp. per liter of petrol and 0.5 Rp. Per litter of diesel, for road maintenance. The Road Fund has been established under the Companies, and collection of these levies has started. As there is no central aggregation of data about road-user revenues and many different agencies and government at different levels are involved in revenue collection 14, it is difficult to ascertain the size of revenues in the sector. An estimate for the mid-1990s suggests that they amount to about $250 million. To increase resource mobilization, a Government Committee on Pricing Policy for Private Transport would provide recommendations for the implementation of vehicle pricing based on actual economic costs. This would include issues such as import criterion of used vehicles, duty levels, tax on fuel, licensing and tolls 15 (although it appears that few roads have the necessary traffic volume for tolled highways to be feasible. 17. There is a growing interest expressed by many sector agencies in mobilizing private investment. But the potential for direct private financing of road infrastructure should not be overstated experience from other countries suggests that private investors can realistically be expected to fund only a small fraction of road sector investment. 18. Government Strategy. The GOSL expects to develop an efficient transport sector capable of reducing financial contributions form the public sector and attracting private investment. In doing so, the Government recognizes that improving the country s infrastructure, particularly its roads, is essential for increasing prosperity and reducing poverty. This is set forth in its road transport policy agenda as part of Regaining Sri Lanka issued in December , and includes: (i) building an integrated national highways and road network to connect poor regions and production centers to domestic and international markets; (ii) enhancing the performance of the bus system and implementing a fare policy; (iii) improving the management of the road sector; (iv) implementing a comprehensive traffic management policy; (v) facilitating rural transport development; (vi) designing and implementing an overall pricing policy for private transport; and (vii) institutionalizing road safety and discipline. 13 It appears that the proposed governance structure of the road fund is something between a first and second generation road fund. There would be no independent road fund board, but a professional body hired from outside the government and overseen by a government board would manage the fund. 14 The GOSL is introducing a new Revenue Authority as part of Regaining Sri Lanka. 15 Source: Regaining Sri Lanka, page Previous policy frameworks were captured by: (i) the national Transport Policy (June 2000); (ii) the National Road Policy (December 2000); and (iii) the National Highways Act (approved by Cabinet in 2000). 5

9 19. The Government also recognizes that overall improvement of the road transport sector performance requires a focus on implementation of institutional and policy reforms. Therefore in 2002, the GOSL incorporated in its National Road Policy a series of action plans including: (i) strengthening of road sector institutional capacity in planning, programming, project preparation and technical audit; (ii) establishing a sustainable mechanisms for funding of road maintenance; and (iii) increasing private sector participation in road sector works 17. It is expected that by 2010 there would be $30 million available for funding of road maintenance (a substantial increase form $17 million in 2001), that 75% of all road maintenance works would be undertaken by the private sector (nil in 2001) and that traffic accidents per 1,000 vehicles would have declined from 18 to 12. Similarly, it is expected that by 2010, 90% of national highways would be in maintainable condition (60% in 2001), 50% of provincial roads (from 26% in 2001), and that there would be 250 Km of newly constructed expressways Until recently, there has been no nationwide comprehensive road network master plan, covering all aspects of the road network from expressways to national highways and provincial roads, as an integrated network. The Government has now embarked, with the support from ADB, on the development of a master plan for the sector and its corresponding investment plan, including strategies to increase private sector participation. The master plan is expected to be finalized by December It will provide a prioritized plan to develop the road network for the next twenty years and will identify the most efficient core road network to promote economic growth and national integrity, covering expressways, national highways, and provincial roads linking major cities in the country to production/consumption centers and export gateways. This Road Sector Master Plan will include a framework for planning rural roads. In doing so, it will: (i) assess the need for road investment in the medium and long term, including maintenance, rehabilitation, upgrading and new construction; (ii) develop financing strategies for roads and bridges including private and public sector financing requirements and public-private partnerships (PPP); and (iii) identify a pipeline of possible projects for implementation during the next twenty years. The master plan would take into account the need to develop a modern highways system without abandoning the improvement of the existing road network. II. DONOR ASSISTANCE FOR SRI LANKA S ROAD SECTOR 21. In recent years, the Asian development Bank (ADB) and Japan Bank for International Cooperation (JBIC) have been the main sources of finance for the primary road network. Other funding agencies include those from Australia, Kuwait, Republic of Korea, SIDA and UNDP. ADB and JBIC are co-financing the construction of the southern highway and the improvement of provincial roads in Southern, Western, North Western, Uva, Central, Sabaragamuwa and North Central Provinces. ADB, the Nordic Development Fund (NDF) and SIDA are working together on road safety and road maintenance financing matters. JBIC has provided significant support in the form of grant assistance for roads and bridges, including a bridge master plan. Table 1 summarizes current donor assistance to the sector and Table 2 summarizes the assistance pipeline for Table 1. Summary of Donor Lending to the Road Sector In Sri Lanka, Donor Title Amount ($ million) Approval Date Effective date Closing Date Progress (% complete) ADB Third Road Improvement /09/94 21/07/95 31/12/03 97 (revised) ADB Southern Provincial Roads Improvement /11/97 30/04/98 31/12/ These action plans were derived from the recommendation of a 1998 ADB-financed TA for the re-engineering of road sector institutions. 18 Targets set in ADB s Road Sector Development Project, November

10 ADB Road Network /12/98 26/02/99 30/05/05 29 Improvement JBIC Ibid 28 08/12/98 26/02/99 30/05/05 ADB Southern Transport /11/99 30/10/02 31/12/06 10 Development JBIC Ibid /11/99 30/10/02 31/12/06 ADB Road Sector /12/02-30/06/08 0 Development JBIC Baseline Road Project II Sources: ADB, Sri Lanka Country Strategy and Program ( ), 19 August 2003; JBIC, ODA November Progress on Southern Transport Development Project provided by ADB staff. 22. Since the end of 1992, the road sector in Sri Lanka has received five ADB loans for a total of $310 million, and eleven technical assistance (TAs) for a total of $3.49 million. ADB s assistance strategy for the road sector is to contribute to improve the overall sector performance by: (i) supporting institutional and policy reforms; (ii) strengthening private sector participation; and (iii) financing strategic investments in the sector to link less developed regions to markets. In particular, key issues addressed are: (i) integration of the road network with other modes of transport; (ii) sector financing along with user charges; (iii) road safety; and (iv) proper financial allocation, planning and implementation of operation and maintenance. The most recent loan approved in November 2002 sets out the medium-term framework for developing the sector and summarized in Annex 1. This framework has been agreed with the GOSL and is well accepted by development partners. It is in the context of this medium-term framework that the Bank is proposing its assistance to the GOSL. 23. ADB plans to continue its support through a medium-term sector roadmap approach with a series of interventions until 2008 and summarized in Table 2. This roadmap was agreed with the GOSL as part of the Road Sector Development Project approved in 2002 and aims at: (i) separating the regulatory and service-provider functions within the government agencies; (ii) developing a strong presence of the private sector in the road sector; and (iii) implementing a sustainable road financing mechanism. The TA for road project preparation will constitute a fund to facilitate the preparation of road projects and intends to enable the development of: (i) concession agreements; (ii) project feasibility studies; (iii) project detailed designs; and (iv) project tender documents. It will also fund assistance to the project implementing agencies concerning consultant selection, procurement and contract negotiations. At the provincial level, ADB expects to increase its support to other regions, particularly the North and East. Table 2. Summary of Donor Assistance Pipeline to the Road Sector In Sri Lanka, Donor Program Name Year of Processing Estimated Project Cost ($ Millions) ADB TA for preparation of Road Projects lending ADB Expressway PPP 2003 ADB 2004 Road Sector Master Plan ADB 2005 National Highway Sector Development lending (plus 40 GOSL and 10 co-financing) ADB 2006 Road Network Sector Development lending JBIC Colombo Outer Circular Road lending 2004 but suspended due to 150 land acquisition delays JBIC Provincial Road Development II lending 50 JBIC Baseline Road III lending JBIC Mid Country Rural Road lending Not specified Not specified Sources: ADB, Sri Lanka Country Strategy and Program ( ), 19 August 2003; JBIC, ODA November

11 III. RECENT BANK EXPERIENCE AND PROPOSED BANK ASSISTANCE 24. From the late 1960s until the mid-1990s, the Bank provided four loans to the road sector and contributed significantly to sector policy development. In particular, the Bank engaged in overall planning and policy formulation for the sector and plan formulation of traffic conditions in urban areas. In 1999, the GOSL completed the Colombo Urban Transport Development Project, partly financed by the World Bank. Although street traffic improvements in Colombo did take place, the project was not successful as a vehicle to assist policy reforms in urban public transport. Just as in the case of ADB-assisted projects, some Bank projects experienced implementation difficulties caused by cumbersome procedures for procurement, land acquisition, resettlement problems and inexperienced domestic private contractors. In the case of ADB, there have also been problems relating to compliance of loan covenants related to road maintenance financing, a lack of ownership and slow progress in policy and institutional reforms. Therefore, the implementation of the reengineering action plan of road sector institutions is paramount for a sustainable development of the sector in the long term. 25. Goals. The Bank proposes to re-engage in the road transport sector to mainly support the growth pillar of Regaining Sri Lanka by: (i) increasing connectivity of the different regions; (ii) helping close the implementation gap which currently exists between the GOSL s planned reforms and the institutional set up on the ground; and (iii) supporting private sector participation (PSP) and public private partnerships (PPP). In pursuing these goals, the Bank s contribution would be to support the GOSL initiative to build a national highway system and integrated road network by introducing key reforms and PPP to expand the scope for investment. The present government has initiated a number of actions to start addressing the numerous problems faced by the sector. The main actions which show the commitment of the GOSL to reform are: (i) the creation of a road fund; and (ii) the winding up of the Road Construction Development Company (RCDC), the construction arm of RDA. 26. Proposed Assistance FY Past experience in the road sector in Sri Lanka both through Bank and other donor s interventions suggests that institutional reform initiatives need to be addressed in a comprehensive but gradual manner, and to be sustained if they are to produce lasting improvements. This is difficult to achieve through a single project. The programmatic approach recommended, would therefore complement the medium-term programmatic assistance agreed between ADB and the GOSL, creating the opportunity to link the financing of successive projects to the implementation of this common medium-term reform agenda. This approach would facilitate close coordination of sector policy dialogue of each donor involved. Proposed output indicators are summarized in Annex 2 including a substantial increase in the funds dedicated for road maintenance. In the meantime, a relatively simple Specific Investment Loan (SIL), consistent with Government policy, is proposed for FY05 to bring quick results on the ground and meet the priority needs of the country. The main focus of this SIL would be on the maintenance, rehabilitation and upgrading of national highways as it is in this area where there are immediate and pressing needs, which once addressed, would result in significant contribution to economic growth. As noted previously, national highways carry over 70% of the traffic in Sri Lanka. By assisting the GOSL reach its goal of having 90% of national highways in maintainable condition by 2010, the Bank would be further supporting the peace process and contributing to the sustainability of the peace dividend. In addition, the SIL could be the vehicle for Bank support of latest GOSL reform initiatives concerning the winding up of RCDC and the implementation of a road maintenance fund, because ensuring appropriate funding resources for planned network development as well as for operational and maintenance costs is paramount. This SIL would have the potential of quickly delivering results on the ground, as some preparation work in the form of pre-feasibility studies, feasibility studies and some detailed engineering designs, has already been carried out by RDA. 27. The proposal recognizes that there are also pressing needs concerning provincial and rural roads. However, substantial capacity must be built at the local level before significant investment can be undertaken. Thus this SIL could attempt to address rural road needs, by incorporating a pilot component 8

12 which could be followed later on by a specific investment operation in the rural areas. Therefore, the proposed SIL would include: (i) deferred maintenance, rehabilitation and minor upgrading of priority national highways; (ii) provision of capital grants to encourage PPP on national highways with the possibility of partial risk guarantees to leverage private investment in highways; (iii) implementation support for the proposed road fund and other recent policy initiatives; and (iv) a pilot component on local road maintenance which would start the process of capacity building for road maintenance at the local authority level. It is estimated that about $100 million IDA financing is required for this proposed SIL. Other possible operations in the future could continue include a continuation of the traffic management work in the Colombo Metropolitan Area (CMA) already undertaken. 28. Deferred Maintenance, Rehabilitation and minor Upgrading of Priority National Highways. Annex 3 shows a summary of the national highways in needs of urgent repair and rehabilitation totaling about $110 million. The Bank proposes to adopt a selective rehabilitation and minor upgrading approach and support the most urgent works in this list, including those on strategic roads and those at the most advanced level of preparation. This would be complemented by the financing of deferred maintenance of strategic roads. 29. Capital Grants - Private Sector Participation. The Bank would continue to encourage the contracting out of works to the private sector, but most importantly, it would provide support for the GOSL s capital contributions for PPP arrangements for developing expressways and national highways when clear and transparent International Competitive Bidding Procedures (ICB) are used. Possible arrangements could include Maintain-Operate-Transfer (MOT), Rehabilitate-Operate-Transfer (ROT) and Build-Operate-Transfer (BOT). This would be a small component of the proposed project and would only provide seed money for these arrangements. 30. Policy Reform. It is expected that the GOSL would continue with the implementation of current policy initiatives, including the winding up of RCDC, and the setting up of a clear and transparent regulation concerning the use of funds of the road maintenance fund. On this basis, the Bank would complement ADB s support in the separation of policy and operational functions of the road sector agencies and government departments. The road map for this support would be the re-engineering action plan of road sector institutions being followed by the GOSL. 31. Capacity Building at Local Level and Selected Pilot Investments. Due to the fact that most of the traffic volume is moved by national highways and that there is insufficient capacity at the local level to carry out major investment programs, a full investment operation for rural roads is not envisaged at this time. Rather, the Bank would start the support to local roads by piloting small assistance initiatives with a view to implementing a major investment operation later on. This component would include: (i) all the analysis required to determine the current sate of the rural road network and to identify the core rural network to be maintained and improved; and (ii) the investment required by a few (2-3) Pradeshiya Sabhas to address their road rehabilitation and maintenance needs using different community-based implementation schemes. The approach proposed would complement the efforts of ADB and JBIC at the provincial level by assisting capacity building and institutional strengthening at the local level. 32. Risks. This strategy proposes a re-engagement in the road transport sub-sector where the Bank has remained disengaged for the past decade. The main risk include: (i) slower reform to the one stated in Regaining Sri Lanka; (ii) GOSL s inability to mobilize sufficient resources for road maintenance; and (iii) lack of transparency and misuse of the road maintenance fund for construction of new roads. 33. Next Steps. Upon endorsement by GOSL of the approach proposed in this note, the GOSL would be expected to appoint an agency to work with the Bank team on the preparation of the first proposed operation. The Bank would quickly send a team to Sri Lanka to start the preparation of the SIL. The GOSL may need to request project preparation assistance as needed. 9

13 10

14 ANNEX 1 Summary of GOSL s Mid-Term Reform Framework Area of Reform Description Status Reflect reforms of road sector institutions in policy and legislation Draft policy prepared Policy and Regulatory Framework Reform of Road Sector Institutions Legislation and regulation for access control Draft Act approved by Cabinet and submitted to Parliament for approval Improve efficiency of transport services Under proposed ADB s TA/incorporation into future projects pending Identification of reform requirements Completed Implementation of agreed upon reengineering action plans Under ADB s Road Sector Development Project Strengthening road function of provincial councils Under ADB s Road Sector Development Project Land acquisition and resettlement Under ADB s Road Sector Development Project Coordination of reform process Under ADB s Road Sector Development Project Governance Strengthening government procurement procedures Completed new procedures introduced Oversight of reform program Under ADB s Road Sector Development Project Safeguard against monopolies Under ADB s Road Sector Development Project Public information Under ADB s Road Sector Development Project Cost effectiveness and transparency of procurement and execution works Under ADB s Road Sector Development Project Private Sector Participation Use of ADB-financed projects to begin use of domestic private sector for execution of road construction works Use of ADB-financed projects to deepen use of domestic private sector for execution of road construction works Domestic private sector to perform most domestically financed road works on a recurrent basis Domestic private sector to carry out more domestically financed engineering and related services Ongoing Under ADB s Road Sector Development Project Under ADB s Road Sector Development Project Under ADB s Road Sector Development Project Training and capacity building to support private sector development Ongoing Private sector financing and operation Programmed for 2004 Road Maintenance Increase budget for road maintenance Annual maintenance budget to be determined Maintenance of Southern Highway To commenced upon completion of construction in 2005 Adequate level of road maintenance financing on sustainable basis Under ADB s Road Sector Development Project Assignment of periodic maintenance budget on the basis of economic returns Under ADB s Road Sector Development Project Road Safety Institution building and highway improvement to improve road safety Action plan completed and measured implemented Development of multi-facetted national road safety program Not yet commenced Follow on support for road safety Incorporation into future projects pending Source: Summary by the World Bank from ADB s Road Sector Development Project, Appendix 4. 11