ASIAN DEVELOPMENT BANK RRP: IND 34420

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1 ASIAN DEVELOPMENT BANK RRP: IND REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE NATIONAL HIGHWAY CORRIDOR (SECTOR) I PROJECT November 2003

2 CURRENCY EQUIVALENTS (as of 20 October 2003) Currency Unit rupee/s (Re/Rs) Re1.00 = $0.022 $1.00 = Rs45.34 For the purpose of calculation, $1.00 = Rs45.00 was used. ABBREVIATIONS ADB Asian Development Bank AP project-affected person BOT build-operate-transfer CAG Controller and Auditor General of India CMU corridor management unit CRF Central Road Fund EIRR economic internal rate of return ESDU environment and social development unit E-W East-West (Corridor) FIRR financial internal rate of return FYP Five-Year Plan GAAP generally accepted accounting practices GRC Grievance Resolution Committee HDC high-density corridor HIV/AIDS human immunodeficiency virus/acquired immunodeficiency syndrome ICB international competitive bidding IEE initial environmental examination IPDP indigenous people development plan IPSA initial poverty and social analysis IRI international roughness index JBIC Japan Bank for International Cooperation LIBOR London interbank offered rate MORTH Ministry of Road Transport and Highways NACO National Aids Control Organization NGO nongovernment organization NH national highway NHAI National Highways Authority of India NHDP National Highways Development Program N-S North-South (Corridor) O&M operation and maintenance PCU passenger car unit PIU project implementation unit PPP public private partnership PSP private sector participation RP resettlement plan R&R resettlement and rehabilitaiton ROW right of way SMT Surat-Manor Tollway Project SOE statement of expenditure SPV special-purpose vehicle WTC Western Transport Corridor Project

3 NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 March In this report, $ refers to US dollars. This report was prepared by S. Tsukada (team leader), E. Glennie, H. Iwasaki, R. Jayewardene, A. Motwani, V. S. Rekha, R. Sabirova, S. Tanaka, D. Utami, H. Yamaguchi, and L. Weidner.

4 CONTENTS Page LOAN AND PROJECT SUMMARY MAP iii vii I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, 1 AND OPPORTUNITIES A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3 C. Lessons Learned 5 D. External Assistance 5 III. THE PROPOSED PROJECT 6 A. Priority Highways 6 B. Objectives 6 C. Components and Outputs 7 D. Cost Estimates 9 E. Financing Plan 9 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, AND RISKS 14 A. Social Aspect 14 B. Environmental Assessment 19 C. Economic Assessment 20 D. Financial Analysis 20 E. Potential Risks 20 VI. ASSURANCES 21 VII. RECOMMENDATION 24 APPENDIXES 1. Project Framework Sector Analysis, Government Strategy, and Sector Profile External Assistance to the Highway Sector Cost Estimates Contract Packages Implementation Schedule Financial Statement of NHAI Economic, Financial, and Poverty Impact Assessment Summary Poverty Reduction and Social Strategy Revised Summary Resettlement Plan Eligibility Criteria and Procedure for the Subprojects 57

5 ii SUPPLEMENTARY APPENDIXES A. SECTOR OVERVIEW 1. Transport Profile 2. Private Sector Participation in NHDP Overview and Lessons Learned 3. Road Safety Policy Matrix in India 4. Organization Structure of NHAI B. PROJECT STRUCTURE AND DESCRIPTION 1. Design Feature of Investment Component 2. Description of Private Sector Participation Component 3. Description of HIV/AIDS and Anti Trafficking Component 4. Road Safety Component 5. Organizational Structure of Project Implementation Units C. SECTOR LOAN ELEMENTS 1. Summary Appraisal Report Format 2. Checklist for Involuntary Resettlement and Indigenous People 3. Environmental Screening Form 4. Institutional Assessment of NHAI 5. Summary Initial Poverty and Social Analysis (IPSA) Project Form 6. Resettlement Framework 7. Indigenous People Development Framework 8. Detailed Environment and Resettlement Procedure and Criteria D. PROJECT IMPLEMENTATION 1. Compilation of Performance Monitoring Indicators 2. Outline TOR for the Construction Supervision Consultants 3. Compliance of Covenants of Ongoing Projects 4. Terms of Reference for Financial Adviser E. ECONOMIC AND FINANCIAL ASPECTS 1. Financial Management System 2. Financial Viability and Sustainability Assessment 3. List of Assumptions for Economic and Financial Analyses

6 iii LOAN AND PROJECT SUMMARY Borrower India Classification Thematic Economic growth and private sector development Poverty Others Environment Assessment Project Description Category B sensitive An initial environmental examination (IEE) was undertaken. The summary IEE was circulated to the Board on 4 August To solve chronic capacity shortage of national highways (NHs) and upgrade key arterial corridors, in 1999 the Government launched the National Highways Development Program (NHDP). Its key components are (i) rehabilitation and widening of the Golden Quadrilateral, a 6,000-kilometer (km) highway network, to be completed by the end of 2004 (first phase); and (ii) rehabilitation and widening of the 4,000 km North-South (N-S) and 3,300 km East-West (E-W) corridors, to be completed by the end of 2007 (second phase). In support of NHDP, since 2000 the Asian Development Bank (ADB) has provided a series of loans. The National Highway Corridor (Sector) I Project is the fourth in this series and the first sector loan. The Project s main element is to rehabilitate and widen priority sections of the E-W Corridor, with emphasis on 662 km of existing highway in the states of Rajasthan, Madhya Pradesh, and Uttar Pradesh. Rationale A program of this magnitude requires broad-based policy reforms, ranging from institutional capacity building for financial management to creation of an enabling environment for private sector participation (PSP). ADB has adopted a programmatic approach to advance these reforms in a progressive and evolutionary manner through a multiyear lending program. ADB, through the programmatic approach, will assist the Government in its efforts to (i) strengthen project development and implementation capability of National Highways Authority of India (NHAI); (ii) enhance PSP in highway development; (iii) boost sources of funds for NHDP development; (iv) strengthen operation and maintenance (O&M) functions of NHAI; and (v) through these actions, enhance NHAI s professional management capability and financial viability. A key instrument to facilitate reaching these goals is the trigger point, which requires satisfactory implementation of the agreed-on milestone action before project processing starts. While the trigger point for last year s project was the progress of PSP, for this year s project it was to secure adequate funds to complete phase 2 of NHDP. Based on ADB s 2002 recommendation to increase the

7 iv cess by 40%, the Government increased it by 50% effective 28 February 2003, triggering the initiation of this year s project processing. Objectives and Scope The objective of ADB s programmatic approach is to help the Government strengthen a policy and institutional framework for the efficient delivery of highway development and O&M services through policy and institutional reforms of current systems. Under this overall framework, this year s Project focuses on the E- W Corridor, using the sector loan modality, to achieve the following objectives: (i) (ii) (iii) (iv) Upgrade the key national arterial corridors connecting the eastern and western ends of the country to help reduce regional disparities. Facilitate PSP in highway development by providing advisory services to process the PSP component. Help the Government to prevent further spread of HIV/AIDs and raise public awareness of the risks of trafficking in women and children. Enhance road safety by introducing a safety zone concept for a pilot section in the E-W Corridor. Cost Estimates Financing Plan The total project cost is estimated at $760 million equivalent, including allowances for interest during construction. Foreign exchange costs are estimated at $454 million, representing 60% of the total cost, while the local currency costs are estimated at $306 million equivalent, representing 40%. It is proposed that ADB provide a loan of $400 million from its ordinary capital resources to help finance the Project, while the Government will provide the foreign currency cost of $34 million to cover the front-end fee and interest during construction, as well as local currency cost of $258 million equivalent. ($ million) Foreign Local Total Exchange Currency Cost Percentage Source Asian Development Bank Government Private Sector Total Source: ADB mission and NHAI. Loan Amount and Terms A loan of $400 million from ADB s ordinary capital resources will be provided under ADB s LIBOR-based lending facility. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB s LIBOR-based lending facility, a commitment charge of 0.75% per annum, a front-

8 v end fee of 0.50%, and such other terms and conditions set forth in the draft Loan and Project Agreements. The Government will cover the cost of $292 million equivalent in foreign and local currency cost. Allocation and Relending Terms The Government will make the loan proceeds available promptly to NHAI. The Government s policy of assistance to NHAI for the E-W Corridor is a loan-grant ratio of 20:80. In June 2003, the Public Investment Board issued blanket approval of the entire E-W and N- S corridors. The Government will bear the foreign exchange risk on the loan. Period of Utilization Until 31 December 2007 Estimated Project Completion Date Executing Agency Implementation Arrangements Procurement Consulting Services 30 June 2007 NHAI The Project will be implemented by two project implementation units (PIUs) to be established by NHAI along the priority highways, and such other PIUs as required for non-core subprojects. Civil works will be procured in accordance with ADB s Guidelines for Procurement, following international competitive bidding (ICB). Procurement of civil works will be carried out among prequalified bidders. ICB will be used to procure equipment of an estimated value of $500,000, international shopping for contracts with an estimated value of $100,000 $500,000, and direct purchase arrangement for contracts of less than $100,000. Consulting services will be required for (i) construction supervision for the project roads (except for the PSP component), (ii) provision of a financial adviser s services for the PSP component, and (iii) design of the road safety zone concept and establishing operational arrangements for enforcement and emergency medical services along the pilot section of the safety zone. Consultants will be recruited using the quality- and cost-based selection method (and full or simplified technical proposals, depending on the size of the contracts) in accordance with ADB s Guidelines on the Use of Consultants, and other arrangements acceptable to ADB for selecting and engaging domestic consultants. In addition, an individual domestic consultant would be engaged for overseeing the activities of nongovernment organization who would implement an awareness campaign to prevent HIV/AIDs and trafficking of women and children, and to build capacity. The domestic individual consultant will be recruited in accordance with arrangements acceptable to ADB for selecting and engaging domestic consultants.

9 vi Project Benefits and Beneficiaries A major benefit of the Project is the sustainable economic growth to be attained through enhanced efficiency of economic activities. The Project will enable cargo and people to move faster and wider at lower cost. While the Project s overall impact on economic growth is difficult to estimate quantitatively, direct economic benefits were estimated conservatively based on the estimate of vehicle operating cost savings. The economic internal rate of return thus calculated was 23% for the core subproject. Another related project benefit is reduced disparities between fastand slow-growing states. Linking the eastern and western ends of the country to major manufacturing and consumption centers will help significantly integrate isolated and backward economies into the mainstream economies. The Project will contribute to the poverty reduction by establishing an integrated road network consisting of rural roads, major district/state roads, and national highways. The network will thus enhance long-term economic opportunities of rural communities by (i) enabling villagers to shift from subsistence farming to marketoriented agricultural surplus production; and (ii) helping local people, particularly the youth, move out of their communities to work at better-paid jobs in manufacturing or trading. Project construction, tree planting, and ensuing maintenance works will directly increase earnings of the poor, who are largely depending on temporary employment, and thus have a short-term poverty reduction impact. Risks and Assumptions A potential risk is possible delays in implementation due to prolonged land acquisition. The need for land acquisition is relatively limited. Existing right of ways are usually broad enough to accommodate service roads and drainage lines. The recent amendment of the National Highway Act enables NHAI to acquire land expeditiously and predictably. Another potential project risk is possible delay in processing noncore subprojects due to unfamiliarity of NHAI with procedural requirements of ADB s sector loan. Detailed forms of summary subproject appraisal report, checklists, and other reporting formats have been provided to NHAI to facilitate processing of its subprojects. To strengthen its technical capability, NHAI has established a technical group of experts within the project team. The project preparatory technical assistance consultants will train the team staff, including the experts. These actions will minimize possible delay due to a new lending modality.

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11 1 I. PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to India for the National Highway Corridor (Sector) I Project. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. India s economy has long suffered from the national highway (NH) system s chronic capacity shortage. Of the NH network of 58,112 kilometers (km), 39% are still single lane and 59% are two lane, while four-lane highways, a desirable standard for arterial national corridors, account for only 2%. The Government s Tenth Five-Year Plan (FYP, ) thus set forth several investment programs to improve the NH system by (i) widening 22,000 km of two-lane roads to four lanes; (ii) constructing 2,000 km of expressways; (iii) widening 22,500 km of single-lane roads to two lanes; and (iv) strengthening 19,300 km of pavement. Total investment required to implement these programs is estimated at $37 billion (Appendix 2). 3. Because of the magnitude of investments required, the Government has placed highest priority on the National Highway Development Program (NHDP) to upgrade three key arterial corridors in 10 years ( ): (i) Golden Quadrilateral 6,000 km; (ii) North-South (N-S) Corridor 4,000 km; and (iii) East-West (E-W) Corridor 3,300 km. Total program cost is estimated at $13 $15 billion, on which the Government decided to allocate the central road funds on a priority basis. NHDP is expected to help contribute to the increased integration of the country by connecting the entire eastern and western and also northern and southern ends of the country. 4. Since 2000, the Asian Development Bank (ADB) has supported NHDP with three loans, and plans to provide another two for , totaling $1.54 billion (12% of the total program cost). As NHDP implementation is halfway through, ADB conducted a mid-term review and evaluated (i) physical progress of NHDP; (ii) extent of PSP; (iii) financial viability and sustainability of NHDP; and (iv) effectiveness of the institutional arrangements. 5. Physical delivery of the program. The first phase of NHDP for the Golden Quadrilateral, slated for completion by the end of 2004, is well underway. To date, 24% (or 1,408 km) has been completed, 74.5% (or 4,354 km) is currently under implementation, and 1.5% (or 84 km) has yet to be awarded. Over the last 4.5 years, the National Highways Authority of India (NHAI) has issued approximately 155 contracts for a total of 6,025 km under NHDP (of which 40 contracts or 893 km have been completed). This is an impressive procurement achievement an estimated 35 contracts on average per year or roughly 1,400 km annually. However, assuming an average contract implementation period of 3 years, NHAI will have to double this number of kilometers to complete the remaining 6,962 km programmed by the end of Doubling the pace of delivery will require NHAI to strengthen project management capability and, wherever possible, simplify and standardize project preparation and processing. 6. Private sector participation. Since 1999, NHAI has actively explored options to increase participation of the private sector in highway development. To date, eight toll-based build-operate-transfer (BOT) concessions, eight annuity-based contracts, and eight specialpurpose vehicles (SPVs) have been awarded, covering 1,154 km (19% of total length contracted to date), and $1.9 billion of the total project cost with PSP (of which $1.1 billion is

12 2 estimated to be the private sector contribution). By the end of FY2007/08, the private sector will have contributed $1.8 million or almost 12% of total capital cost for NHDP. This level of PSP, however, has been achieved by the Government provision of subsidies of 16 49% of construction costs 1 and also by its payment of annuity of around 16% return. As projects move to less-trafficked segments of NHDP networks as those in the E-W and N-S corridors, the public sector contribution is likely to be increased significantly. This potential increase should be minimized by introducing a variety of credit enhancement mechanisms and innovative PSP schemes (Supplementary Appendix A-2 for an overview of, and lessons learned from, PSP). 7. Financial viability and sustainability. To complete NHDP, the first- and secondphase programs, and others mandated to NHAI, require a total of $32.5 billion 2 over FY1999 FY2017: $15.2 billion for capital financing, and $17.3 billion for debt service ($1.6 billion for onlent government loans and $15.7 billion for market borrowings). To finance these capital works and debt service, it is anticipated for NHAI to raise $30.7 billion over the same period: $15.7 billion from cess (tax), $9.1 billion from market borrowings, $4.1 billion from external assistance, and $1.8 billion from PSP. The shortfall of $1.8 billion is envisaged to be financed out of NHAI tolls. Toll revenue for FY2005 FY2017 is estimated to amount to $6.5 billion, 3 of which operation and maintenance (O&M) will require $5.0 billion. 4 Assuming tolls are fully indexed with inflation, estimated toll revenue is almost sufficient to cover government debt servicing of $1.8 billion for the period estimated 5 (Supplemental Appendix E-2). 8. A year ago, ADB conducted a long-term cash-flow analysis to find out whether NHAI could finance investments to complete the second phase of NHDP and associated cost of debt services. The analysis found that NHAI would face major cash-flow problems during FY2007- FY2009, and recommended substantial increase of cess or toll. 6 Acting on this recommendation, the Government increased cess by 50% effective on 28 February While this action will substantially resolve anticipated cash-flow problems, overall achievability of NHAI s cash-flow forecast still needs to be critically reviewed. The following are the issues: (i) (ii) An additional $6.7 billion has to be raised from the market (2-3 times larger than the amount already raised from the market [$2.4 billion]). While the market has been receptive to NHAI offerings, they will become less attractive as liabilities of NHAI increase and its liquidity becomes more dependent on future borrowings. Strengthening cash-flow management and developing a more transparent financial reporting system will be critically important (paras ), and will be supported by ADB technical assistance (TA). 7 A fund of $4.1 billion must be raised from multilateral and bilateral agencies. NHAI is likely to receive $1.5 billion from ADB (including 2003 and 2004 loans for NHDP) and $1.5 billion $2.0 billion from the World Bank (including one or two pipeline loans for ). The Japan Bank for International Cooperation 1 A notable exception to this is the BOT project for the Delhi-Gurgaon section, which has generated to NHAI a negative grant amounting to 11% of project cost. 2 Rupee cash-flow forecasts converted at $1 = Rs45. 3 Rupee cash-flow forecasts assume Rs2.0 million and Rs1.0 million is collected per kilometer on the golden quadrilateral, and N-S and E-W corridors, respectively. NHAI toll estimates are indexed in accordance with inflation estimated at 4.56% per annum. 4 Cash-flow forecasts estimate O&M at Rs11.5 lakh/km of four-lane highway. O&M estimates are indexed in accordance with inflation estimated at 4.56% per annum. 5 With no growth in traffic, Rs1.4 billion will be generated from tolls; with 2% growth in traffic, Rs2.2 billion will be generated (the latter covering the entire $1.8 billion shortfall). 6 ADB Report and Recommendation of the President to the Board on a Proposed Loan to India for the East- West Corridor Project. Manila (Loan 1944-IND, para. 13 of the main text, and Supplemental Appendix Z). 7 The TA s scope of work was modified in February 2003 to include social issues and road safety.

13 3 (iii) (JBIC) has not yet committed any new loans for the highway sector. The sources for the additional $1.1 billion $1.6 billion have yet to be identified or confirmed. $6.5 billion tolls need to be collected, which require reliable traffic forecast and ability to collect toll revenues immediately after roads are commissioned, and political willingness to fully and annually index toll revenues with inflation. 9. Institutional aspect. Since NHDP started, NHAI has expanded significantly. In 2000, it had 200 staff, in 2001, 9 and 530 now. 10 Although the pace of expansion is very fast, it might be justifiable as investment programs are escalating rapidly and government pressure to speed up NHDP is mounting. In , staff, productivity increased significantly (by 60%) in terms of kilometers processed. However, this pace of staff expansion is still alarming, and staffing increase should be kept to a minimum. 10. A key element to slowing down the pace of expansion is outsourcing. NHAI has been pursuing this direction in a vigorous manner by contracting out various project development and implementation activities to the private sector, including design, construction, construction supervision, and O&M. While enabling NHAI to deliver a larger number of contracts more efficiently, this approach outstrips NHAI s capability to monitor consultants and contractors. The problem is compounded by NHAI s recruitment policy, which largely depends on deputation of staff from government agencies such as Ministry of Road Transport and Highways (MORTH) and state public works departments (PWDs). Most professional staff of NHAI (270 out of 530) are deputed from these agencies for 2 years, with possible extension of another 3. This staffing policy has caused problems in retaining qualified professional staff, building internal engineering and operational capacity, and nurturing a corporate culture significantly different from ordinary government agencies. The Project addresses monitoring capacity by strengthening the project team s capacity by engaging six experienced technical experts. Staffing is being addressed under the ongoing Institutional Strengthening Study financed by the World Bank. B. Analysis of Key Problems and Opportunities 1. ADB Strategy a. Programmatic Approach and Policy Dialogue 11. In providing a series of loans to NHDP, ADB has adopted a programmatic approach to realize medium- to long-term goals in a progressive and evolutionary manner. ADB, through the programmatic approach, will assist the Government in its efforts to achieve the mid-term objectives to (i) strengthen project development/implementation capability; (ii) enhance PSP in highway development; (iii) strengthen NHAI s fund mobilization capability; (iv) strengthen NHAI s O&M function; and (v) enhance NHAI s professional management capability and financial viability. As the midterm review indicates, significant progress has been made for the first three goals. 12. ADB has systematically pursued these goals by introducing the concept of the trigger point (project processing starts only upon satisfactory implementation of agreed-on milestones). While the trigger point for last year s project was progress of PSP, for this year s project the trigger point is to secure adequate funds to complete the second phase of NHDP. The trigger 8 World Bank India Transport Sector: The Challenges Ahead. Volume 2. Washington DC. 9 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to India for the Western Transport Corridor Project. Supplemental Appendix L. Manila. 10 NHAI: A finding of the Loan Fact-Finding Mission.

14 4 point of this year s project was met when the Government increased cess on 28 February With progress made in achieving the first three goals, policy dialogue will shift its focus to the remaining two goals (i) enhancement of O&M function, and (ii) organizational realignment. 13. Operation and Maintenance Issue. As more highways are constructed and placed in service, O&M is becoming an increasingly important issue for NHAI. Newly created assets need to be maintained, tolls collected with minimum leakage, and rights of way (ROW) kept clear. Given the government decision to convert four-laned NHs into toll roads, O&M should no longer be considered a cost center but a potential profit center. NHDP could generate $200 million $400 million per year. The organizational arrangement, however, is not structured to capture this opportunity. The possibility of establishing a separate line of business within NHAI should be explored, together with development of associated accounting systems which would enable proper cost and revenue allocations among different lines of businesses. 14. The concept of O&M has been significantly expanded to include asset management, and will be further expanded to include traffic and ROW management. The ongoing corridor management unit approach is one trial moving in this direction, which will be continuously pursued under the programmatic approach. It should be fine-tuned so that the corridor management unit approach is effectively implemented under diverse operational circumstances such as annuity-based or BOT concession schemes. During the Appraisal Mission, it was agreed to hold a tripartite meeting between ADB, World Bank, and the Government to discuss these O&M-related issues in more depth and from a broader context. 15. Another O&M-related issue is tolling, which is a major determinant of NHAI s financial sustainability. Once NHs have four lanes, tolls should be collected as soon as possible in any event, within six months after construction is completed. Once tolling is widely accepted, the next challenge will be setting tolls at the right level to cover O&M costs and debt services from multilateral agencies. While this current toll policy is justifiable, in the long run they should be gradually increased to cover all debt services. Another element of tolls is how they are collected. NHAI recently set up an in-house committee to deliberate on toll collection and optimization. These issues will be addressed in the tolling system study funded under ADB s Surat-Manor Tollway Project. 11 This study will be conducted as an integral part of the policy dialogue to be conducted between the Government and ADB. Another issue is the need to grant NHAI the right to retain tolls as revenue. Based on the covenant between the Government and ADB in October 2002, NHAI initiated discussions this year with agencies to acquire this right. The Government agreed to finalize an arrangement so that NHAI can be able to retain tolls collected as its own revenue by 31 December Organizational structure of the National Highways Authority of India. This relates to two sub-issues: a short-term one a need to realign the current organizational arrangement, and a long-term one a need to change corporate structure. NHAI s organizational arrangement evolved over the years in a rather ad hoc manner. New units were created and new project implementation units (PIUs) added without a clear guide to allocate functions among various units. Now that it has entered a new phase of program implementation and grown in size, NHAI should evaluate how efficient the current organization is and what readjustments are necessary to accomplish its mission more efficiently. 17. In the long run, NHAI should look into the possibility of introducing alternative form of organization. NHAI s current business model (a government agent that receives management 11 Negotiation with a consultant was delayed and is now scheduled for 15 November 2003.

15 5 fees in return for construction and maintenance) 12 is less valid now in light of the future operation of NHAI. The resulting financial structure (tolls collected are not NHAI s revenue, and highways constructed are not NHAI s assets) has significantly constrained strategic options to mobilize funds. Once it is allowed to retain tolls as revenue as covenanted in the Loan Agreement of the East-West Corridor Project, NHAI should start exploring alternative forms of organization (including public corporation) and compare their merits and demerits with those of the present organization. Since next year s project is likely to be the last in this series of lending to NHDP, the issue of organization will be addressed during preparation and processing of next year s project. b. Sector-Loan Approach 18. The midterm review indicated that subproject preparation and processing should be standardized and project monitoring capability strengthened. To do so and to grant the Government s request to increase flexibility in selection of road sections to be financed by ADB, it was decided to apply the sector-loan modality for this year s project. Requirements for the sector loan are (i) existence of a sector development plan, (ii) institutional capability to implement the sector development plan, and (iii) development of policies to enable the sector to improve its performance. The Fact-Finding Mission found that these requirements were satisfactorily met (Supplemental Appendix C-4). 19. The sector-loan approach adopted for this Project has the following features: (i) (ii) (iii) Priority highways will be identified to ensure minimum contiguity of project roads. From the above priority highways, a core subproject will be selected as an exemplary subproject for the appraisal of the rest of subprojects. NHAI will select eligible non-core subprojects and appraise them according to criteria agreed on between ADB and NHAI (Appendix 11). Appraised subprojects will be sent for approval to ADB using a summary report format, with supportive documents being attached. C. Lessons Learned 20. Since 1988, ADB has approved eight loans for the road subsector (Appendix 3) in India, totaling $1.8 billion. Implementation of earlier projects approved in were significantly delayed due to operational and institutional shortcomings. ADB has thus (i) allowed advance civil works procurement and recruitment of construction supervision consultants, ensuring award of contracts upon loan effectiveness; (ii) removed utilities and other encumbrances before construction starts; (iii) introduced a larger size of contract packages to attract experienced international contractors; and (iv) raised the level of authority of the engineer to ensure efficient and objective decision making during execution. Challenges now are system-wide operational issues rather than project-by-project implementation problems. The former includes the need to standardize project development, to be addressed by adopting the sector-loan modality. D. External Assistance 21. The World Bank has also provided 16 loans, amounting to about $3.5 billion, to upgrade national highways, improve state highways, and construct and rehabilitate rural roads. As combined World Bank and ADB assistance for the road subsector is over $5 billion, providing 12 The fee for construction is 1% of cost, while that for maintenance is 9%.

16 6 such assistance should be done in a well-coordinated manner to generate maximum synergy in operations, with minimum duplication. In 2001, ADB and World Bank developed their coordinated assistance strategy for India s road subsector, which has been updated from time to time to keep it relevant to the government agenda. The Government, ADB, and World Bank, have been holding tripartite meetings periodically to discuss major policy and investment issues in the road sector. The most recent meeting was held in April 2003, with secretary-level participation from the Government. Close coordination between ADB and World Bank will continue using these mechanisms. 22. JBIC is another major donor to the highway sector, having provided five loans amounting to $300 million to upgrade NH sections and construct a bridge. While JBIC has not been active in India s highway sector for the last few years, ADB has been in close contact with JBIC to exchange information and explore the possible areas of cooperation. The Department for International Development of the United Kingdom is another important partner of ADB in its operations in India, having provided grant assistance to the Madhya Pradesh State Road Project and the proposed rural roads sector project. III. THE PROPOSED PROJECT A. Priority Highways 23. The Project 13 will finance sections of the E-W Corridor under the sector-loan modality. Of these sections, 662 km are priority highways in Rajasthan, Madhya Pradesh, and Uttar Pradesh. Priority highways are divided into five sections. Among them, section C was selected as a core subproject since it represents a typical set of project development issues, including technical, environmental, and social ones. If NHAI identifies other sections that need to be developed more urgently, the above sections can be replaced by others, or other sections can be added to the above sections, provided that the other sections (i) are part of the E-W Corridor and (ii) satisfy eligibility criteria of subprojects (Appendix 11). Table 1: Priority Highways Section Priority Highways Specific Locations Length State A B C Chittorgarh-Kota (excluding Kota Bypass) Kota- RJ/MP Border (excluding Kota Bypass) RJ/MP Border-Jhansi (excluding Jhansi Bypass) NH 76 (km212 km376) 164 km RJ NH 76 (km406 km579) 173 km RJ NH 76 (km579 km609) Shvpuri Bypass (24km in length) NH 25 (km15 km92) Jhansi Bypass (16km in length) NH 25 (km104 km212) D Jhansi-Orai (including Jhansi Bypass) E Orai-Bognipur-Barah NH 25 (km212 km255) NH 2 (km422 km449) km = kilometer, MP = Madhya Pradesh, RJ = Rajasthan, UP = Uttar Pradesh. B. Objectives 131 km MP/UP 124 km UP 70 km UP 24. The objective of ADB s programmatic approach is to help the Government strengthen the policy and institutional framework for efficient delivery of highway development and O&M 13 The Project was prepared under ADB National Highway Corridor (Sector). Manila (TA 4036-IND). ADB s previous requirement to convert the grant amount exceeding $250,000 into a part of the subsequent loan will not be applied.

17 7 services through policy and institutional reforms to enhance transport efficiency without causing major environmental and social problems. 25. Under this framework, the Project focuses on the E-W Corridor to achieve the following: (i) Upgrade key national arterial corridors connecting the eastern and western ends of the country to help reduce regional disparities. (ii) Facilitate PSP in highway development by providing necessary advisory services. (iii) Contribute to the Government s efforts to prevent spread of HIV/AIDS 14 and increase awareness of possible risk of trafficking in women and children by collaborating with relevant state authorities concerned with health, women, and children. (iv) Enhance road safety through pilot introduction of a safety zone for a part of national highway under the E-W Corridor. C. Components and Outputs 1. Highway Investment 26. The component will finance the widening of stretches between Chittorgarh and Orai (592 km) into four-lane roads. The core subproject, a 131 km section between the Rajasthan and Madhya Pradesh border and Jhansi, will cost $151.8 million, while non-core subprojects will cost an estimated $484.5 million, covering 461 km. ADB will finance the entire foreign exchange portion of the project cost, except the front-end fee and interest during construction, which will be borne by the Government (Supplementary Appendix B-1), and part of local currency costs. Once these sections are completed, their O&M will be contracted out to a third party. 2. Private Sector Participation 27. As NHAI must be encouraged to use PSP as a key modality to finance highways, ADB and NHAI agreed that at least 10% of project highways are to be developed under a PSP scheme. NHAI will identify section(s) to be developed under the PSP scheme within 3 months of loan effectiveness. NHAI will explore the possibility of PSP in the Orai-Balah section (70 km) the eastern end of the priority highways adjoining golden quadrilateral at Barah. An agreement was reached with NHAI that the PSP component(s) will meet all requirements imposed on the subprojects to ensure, among other requirements, compliance with ADB s safeguard policies. NHAI further agreed to report to ADB in a timely manner the results of the bidding, negotiations, and financial closure so that, in case these are not finalized, the Government and ADB can take necessary action promptly. 28. While it will not directly finance the PSP development, ADB will help NHAI engage a financial adviser (a domestic firm costing $100,000 equivalent) (Supplementary Appendix D-4 for terms of reference). Furthermore, to catalyze the inflow of commercial funds for PSP, if requested by the Government and NHAI, ADB s private sector window would help the private concessionaire through lending or guarantee operations. ADB s private sector support modalities will, however, be subject to a separate due-diligence exercise. 14 Human immunodeficiency virus/acquired immunodeficiency syndrome.

18 8 3. HIV/AIDS and Anti-Trafficking 29. This component is designed to reduce risks of spreading HIV/AIDS and trafficking women and children. 30. HIV/AIDS subcomponent. This subcomponent will build upon the collaborative model to be finalized between NHAI and the National AIDS Control Organization in the form of a memorandum of understanding. 15 The subcomponent will involve contribution of technical expertise by state AIDS control societies as well as on-the-ground operations along priority highways carried out by nongovernment organizations (NGOs). This subcomponent will engage in the following key activities: (i) awareness raising among construction workers, (ii) public awareness raising and a change behavior campaign among high-risk groups, (iii) strengthening of referral systems for sexually transmitted diseases and HIV for early diagnosis along priority highways, (iv) condom promotion and distribution; and (v) capacity building of service providers and decision makers. 31. Anti-trafficking subcomponent. This subcomponent will be carried out by NGOs in conjunction with HIV/AIDS prevention activities. It will draw on knowledge and expertise from state departments of women and child development and social welfare, already-operating NGOs, and other locally available resources. The subcomponent will engage in three main activities: (i) awareness raising and a safe-migration campaign (target groups are from the demand side [e.g., truck drivers/helpers] and supply side [e.g., commercial sex workers, tribal women and children, and migrant women]); (ii) channeling resources from national or state programs to empower women and children to vulnerable tribal women or children; and (iii) capacity building of service providers, communities, and decision makers. 32. NHAI s environment and social development unit (ESDU) 16 will establish an HIV/AIDS prevention and anti-trafficking cell within the unit to implement this component. The cell will be headed by a general manager in charge of social development issues, who will be assisted by three staff consultants to be engaged later under a separate financing arrangement. 17 The cell will engage three locally based NGOs. The activities of these NGOs would be coordinated and monitored by a domestic consultant to be financed by ADB. The estimated cost for the component is about $400,000 (Supplementary Appendix B-3). 4. Road safety 33. This component is designed to enhance road safety by introducing a safety zone to a selected pilot section on the E-W Corridor. The safety zone is intended to institute several road safety equipment/systems in an integrated manner to maximize their impacts. It will be equipped with (i) advanced traffic management systems to monitor the road situation in a centrally controlled manner; (ii) weigh-in-motion and/or static weighing platforms to control overloading; (iii) speed-monitoring equipment to spot speeding vehicles; and (iv) ambulances and other relief equipment to provide emergency road services. To ensure the effective operation of the safety zone, appropriate operators and/or authorities will be mobilized to enforce traffic regulations and provide emergency medical services. The component will decide what systems will work best for the pilot section. The km pilot section will be identified for the Jhansi-Lucknow section, which has the highest traffic level in the E-W Corridor. NHAI s corridor management 15 Development of the memorandum of understanding was facilitated by the World Bank. 16 ESDU was established in 2000 at the headquarters to handle environmental and social development issues. It is headed by a general manager. 17 Financed by the World Bank.

19 9 unit will be a focal point for this component and guided by an appropriate arrangement to be established within 6 months of loan effectiveness, in coordination with MORTH and relevant state authorities. ADB will finance the consultancy services of $500,000 to define the safety zone concept and operational arrangements for enforcement and emergency medical services. ADB will also finance the cost of purchasing equipment and systems ($11.8 million) (Supplemental Appendix B-4). D. Cost Estimates 34. The total project cost is estimated at $760 million equivalent, including allowances for contingencies and interest during construction. Foreign exchange costs are estimated at $454 million, representing 60% of the total cost, while local currency costs are estimated at $306 million equivalent, representing 40%. The estimated project cost is in Table 2 (Appendix 4 for more details). Item Table 2: Project Cost Estimates a ($ million) Foreign Exchange Local Currency Total A. Base Cost 1. Civil Works Right of Way Relocation of Utilities Environment Consulting Services , Equipment Project Management Subtotal B. Front-End Fee C. Interest/Commitment Charges During Construction Total a Contingencies were not included because of the sector-loan modality. Source: Asian Development Bank staff. E. Financing Plan 35. The Government has requested a loan of $400 million from ADB s ordinary capital resources to finance the Project. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB s LIBOR-based lending facility, a commitment charge of 0.75% per annum, a front-end fee of 0.50%, and such other terms and conditions set forth in the draft Loan and Project Agreements. The Government has provided ADB with (i) reasons for borrowing under ADB s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. 36. The Government will cover the foreign exchange cost of $34 million to cover the frontend fee, interest, and other charges on the loan during construction. The Government will also cover the local currency cost equivalent to $258 million. The construction cost of the Orai-Barah section of priority highways ($67 million equivalent) or such other subproject to be identified by

20 10 NHAI to be developed under a PSP scheme will be covered by a private concessionaire. ADB will fund consulting services for the PSP scheme ($100,000). The detailed financing plan is in Table 2. Table 3: Financing Plan ($ million) Source Foreign Exchange Local Exchange Total Cost Percentage Asian Development Bank Government Private Sector Total Note: The Government s foreign exchange contribution is toward the front-end fee and interest during construction. Asian Development Bank s local currency contribution is toward the domestic consultants fee, but will not be applied to other local currency costs. Source: ADB team and NHAI. 37. The Government will make loan proceeds available to NHAI promptly. The Government s policy of assistance to NHAI for the E-W and N-S corridors is a loan-grant ratio of 20:80. Clearance was obtained on 6 June 2003 from the Public Investment Board for construction of the E-W and N-S corridors and for the loan-grant ratio. The Government will bear the foreign exchange risk of the loan. F. Implementation Arrangements 1. Project Management 38. NHAI will be the Executing Agency for the Project. The Project will be implemented by two especially created PIUs, which will be in Kota (for the sections in Rajasthan and Jhansi (for the sections in Madhya Pradesh and Uttar Pradesh) (Supplementary Appendix B-5 for organizational structure) and by such other PIUs as required to implement additional non-core subprojects. PIUs should be adequately staffed within 2 months of loan effectiveness and, in any case, before the award of civil works contracts under the subprojects, whichever is earlier. Two staff at the level of general manager or deputy general manager will be assigned as project directors, one for each PIU, to be assisted by deputy general managers or managers, each responsible for one contract package or a PSP component. An additional deputy general manager or manager will be assigned for each PIU to oversee resettlement activities, and handle grievances to be filed by the public, including project-affected people and NGOs. An accountant/financial management specialist will be assigned to each PIU. Sufficient administrative authority will be delegated to PIUs for effective and timely project implementation. PIU activities will be overseen by the NHAI chair through the project team, which is headed by a chief general manager in charge of the E-W Corridor. The project team s main function is to organize preparation and implementation activities of the Project and process and implement various consulting service contracts. 39. NHAI has already established a project team to develop the E-W Corridor. The team will be supported by a technical group of experts consisting of (i) a group leader/highway engineer; (ii) a bridge engineer, (iii) a pavement cum material engineer, (iv) an economic and financial analysis and PSP specialist, (v) an environmental specialist, and (vi) a resettlement and other social development specialist. The core functions of the technical group of experts are the following:

21 11 (i) (ii) (iii) (iv) Review and examine all technical reports, including the feasibility studies, preliminary design, initial environment examination (IEE), resettlement plans, poverty and social development strategy, indigenous peoples development plan (IPDP) if required, and detailed design to ensure that subprojects are prepared in accordance with ADB s policies and NHAI s design standards and other requirements. Evaluate the overall viability of individual subprojects, and prepare a summary appraisal report to be submitted to ADB for approval, together with necessary attachments. Conduct proof checking for highways and bridges. Prepare bidding documents for the PSP component(s). 40. Eligibility criteria and detailed procedures for the approval process to facilitate preparation of non-core subprojects are in Appendix 11 and the Summary Appraisal Report Format in Supplementary Appendix C Implementation Schedule and Period 41. The Project will be implemented over 48 months, inclusive of procurement and preconstruction activities, and is expected to be completed by 30 June The schedule will allow for acquisition of land free from encumbrances; resettlement; and clearance of all utilities, trees, and any other obstructions from the land to be used for construction. The implementation schedule is in Appendix Procurement 42. Civil works will be procured in accordance with ADB s Guidelines for Procurement through international competitive bidding (ICB). Procurement of civil works under ICB will be carried out among prequalified bidders. A list of contract packages for the core subprojects is in Appendix 5. For procurement of goods, ICB will be used for supply contracts estimated at more than $500,000, international shopping for $100, ,000, and direct purchase arrangement for less than $100, To expedite procurement, advance action for prequalification for civil works contracts was approved by Management on 29 July The Government has been advised that this approval does not commit ADB to finance the Project. 4. Consulting Services 44. For the highway investment component, three consulting firms will be engaged to supervise construction of civil works using full technical proposal method (Supplemental Appendix D-2 for terms of reference, 417 person-months of international and 4,719 personmonths of domestic consultants will be required). For the PSP component, a domestic consulting firm will be engaged to provide financial adviser s services using simplified technical proposal method (Supplemental Appendix of B-2; 15 person-months of domestic consultants will be required). For the road safety component, an international consulting firm will be engaged using simplified technical proposal method to develop a safety-zone concept and build capacity to enforce traffic regulations and provide emergency medical services (Supplemental Appendix B-4; 15 person-months of an international consultant and 15 person-months of domestic consultants will be required). NHAI will engage these consultants in accordance with ADB s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB on the