World Bank Document

Home , Karakoram Highway

Document of The World Bank

Public Disclosure Authorized Report No: ICR2723

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-72120 IBRD-73410 IBRD-73760 IDA-38460 IDA-48160)

Public Disclosure Authorized LOANS/CREDITS

IN THE AMOUNT OF (US$ 495.0 MILLION EQUIVALENT)

TO THE

PAKISTAN

FOR THE

HIGHWAYS REHABILITATION PROJECT Public Disclosure Authorized

November 21, 2013

Sustainable Development Department Pakistan Country Management Unit South Asia Region

Public Disclosure Authorized

CURRENCY EQUIVALENTS

(Exchange Rate Effective November 5, 2013)

Currency Unit = Pakistan Rupee Rs 1.00 = US$ 0.009321 US$ 1.00 = Rs 107.2856

FISCAL YEAR

July 1 – June 30

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank AF Additional Financing AJ&K Azad Jammu and Kashmir AMP Annual Maintenance Plan BPR Business Process Re-engineering CAS Country Assistance Strategy CAGR Compound Annual Growth CDWP Central development Working Party CPS Country Partnership Strategy ECNEC Executive Committee of National Economic Council EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return EMP Environment Management Plan EOP End Of Project FATA Federally Administered Tribal Areas FMIP Financial Management Improvement Program FMR Financial Management Report FWO Frontier Works Organization FY Fiscal Year GDP Gross Domestic Product GOP Government of Pakistan HDM Highway Development and Management Model HRD Human Resource Development HRP Highways Rehabilitation Project HRTC Highway Research and Training Centre ICB International Competitive Bidding IP Implementation Progress IRI International Roughness Index ISR Implementation Status Report JICA Japan International Cooperation Agency JVR Jhelum Valley Road KKH Karakoram Highway KP Khyber-Pakhtunkhwa KVR Kaghan Valley Road LAA Land Acquisition Act L/C Letter of Credit

LRD Land Revenue Department M&E Monitoring & Evaluation MIS Management Information System MOC Ministry of Communications MOF Ministry of Finance MTBF Medium Term Budget & Expenditure Framework MTR Mid Term Review NCB National Competitive Bidding NHIP National Highway and Improvement Program NH&MP National Highways and Motorway Police NPV Net Present Value NTC National Trade Corridor N.W.F.P. North West Frontier Province O&M Operations and Maintenance PAD Project Appraisal Document PAP Project Affected Person PDO Project Development Objective PMU Project Management Unit PSDP Public Sector Development Program PRSP Poverty Reduction Strategy Paper RAMD Road Asset Management Directorate RAMS Road Asset Management System RMA Road Maintenance Account RPF Resettlement Policy Framework Rs Rupee SBD Standard Bidding Document SDR Standard Drawing Rights SIA Social Impact Assessment SMEC Snowy Mountain Engineering Corporation SOP Standard Operating Procedure TNA Training Needs Assessment VOC Vehicle Operating Costs

Vice President: Philippe H. Le Houerou Country Director: Rachid Benmessaoud Sector Director: John Henry Stein Sector Manager: Karla Gonzalez Carvajal Project Team Leader: Zafar Iqbal Raja ICR Team Leader: Zafar Iqbal Raja

PAKISTAN Highways Rehabilitation Project

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 5 3. Assessment of Outcomes ...... 14 4. Assessment of Risk to Development Outcome ...... 18

5. Assessment of Bank and Borrower Performance ...... 19 6. Lessons Learned ...... 21 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...... 23 Annex 1. Project Costs and Financing ...... 24 Annex 2. Outputs by Component ...... 25 Annex 3. Economic and Financial Analysis ...... 28 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 30 Annex 5. Beneficiary Survey Results ...... 32 Annex 6. Stakeholder Workshop Report and Results ...... 33 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 34 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ...... 35 Annex 9. List of Supporting Documents ...... 36 Attachement-I. Borrower’ ICR ...... 37 MAP – IBRD 32757

A. Basic Information

Highways Country: Pakistan Project Name: Rehabilitation IBRD-72120,IBRD- 73410,IBRD- Project ID: P010556 L/C/TF Number(s): 73760,IDA- 38460,IDA-48160 ICR Date: 11/21/2013 ICR Type: Core ICR Lending Instrument: SIL Borrower: GOP Original Total USD 200.00M Disbursed Amount: USD 514.36M Commitment: Revised Amount: USD 495.00M Environmental Category: B Implementing Agencies: National Highway Authority (NHA) Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 01/25/1999 Effectiveness: 02/27/2004 02/27/2004 Appraisal: 04/29/2003 Restructuring(s): 12/06/2005 Approval: 12/23/2003 Mid-term Review: 12/31/2006 12/06/2006 Closing: 06/30/2009 06/30/2013

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance:

i C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of No None time (Yes/No): Supervision (QSA): DO rating before Satisfactory Closing/Inactive status:

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 6 6 Forestry 2 2 Rural and Inter-Urban Roads and Highways 92 92

Theme Code (as % of total Bank financing) Administrative and civil service reform 20 20 Infrastructure services for private sector development 40 40 Injuries and non-communicable diseases 20 20 Public expenditure, financial management and 20 20 procurement

E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Praful C. Patel Country Director: Rachid Benmessaoud John W. Wall Sector Manager: Karla Gonzalez Carvajal Guang Zhe Chen Project Team Leader: Zafar Iqbal Raja Navaid A. Qureshi ICR Team Leader: Zafar Iqbal Raja ICR Primary Author: Zafar Iqbal Raja

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) Sustainable delivery of a productive and efficient national highway network, contributing to lower transportation costs.

Revised Project Development Objectives (as approved by original approving authority) Not Applicable.

ii (a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Reduction in average Vehicle Operating Costs by 5% [measured by reduction in Indicator 1: average network-level roughness from 5.4 IRI1 to 4.4 IRI; and reduction in NHA network in poor condition from 49% to 35%] Network-level roughness Network-level Network-level Value = 5.4 IRI roughness = 4.4 IRI roughness = 4.49 IRI (quantitative or qualitative) Network in poor condition Network in poor Network in poor = 49% condition = 35% condition = 35% Date achieved 04/29/2003 06/30/2009 06/30/2013 Comments Almost met targets. The achievements are based on data collected for the Road Asset (incl. % Management System (RAMS) on yearly-basis on about 11,000 km of National achievement) Highways network by the RAMS consultants. Indicator 2: Reduction in travel time (growth adjusted) on National Highway N-5 by 10% Value (quantitative or 47 hours 42 hours 39 hours qualitative) Date achieved 04/29/2003 06/30/2009 06/30/2013 Comments Exceeded the target (16% vs. 10% target). The achievements are based on data (incl. % collected by the National Transport Research Center on 1,700 kms of Peshawar- achievement) Karachi section of National Highway N-5. Improvement in the road safety situation along the National Highway N-5 corridor Indicator 3: [growth adjusted reduction in road fatalities by 10%] Value (quantitative or 109 fatalities/100 km 96 fatalities/100 km 39 fatalities/100 km qualitative) Date achieved 04/29/2003 06/30/2009 06/30/2013 Comments Far exceeded the target (63% vs. 10%). The achievements are based on data collected (incl. % by the National Highway and Motorway Police on 1,700 kms of Karachi-Peshawar achievement) section of National Highway N-5.

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1.1: About 550 km of highways rehabilitated; 306 km of highways resurfaced Value (quantitative or 0 km 856 km 907 km qualitative) Date achieved 04/29/2003 06/30/2009 06/30/2013 Comments Exceeded the target. The project completed 907 km by the revised closing date, with (incl. % some time and budget overruns but in satisfactory adherence to safety and quality

1 International Roughness Index – a measure of pavement ride quality

iii achievement) standards by the revised end date of the project, with satisfactory adherence to safety and quality standards. Indicator 1.2: Safety improvement works at 15-20 locations Value (quantitative or 0 15-20 locations Deleted qualitative) Date achieved 04/29/2003 06/30/2009 Year 2013 Comments Instead these works were included in the main civil works contracts through variation (incl. % orders (grade-separated interchanges, vehicular underpasses, pedestrian under- and achievement) over-passes etc. Indicator 1.3: Trees planted in about 2,500 avenue km in Right-of-Way Value (quantitative or 0 837,000 trees 837,000 trees qualitative) Date achieved 04/29/2003 06/30/2009 Year 2011 Comments Met the target. In addition, NHA has a contract with a consulting firm for maintenance (incl. % of these trees planted along the National Highway N-5 till 2016. achievement) Indicator 2.1: NHA Medium Term Budgetary Framework (MTBF) in place Value (quantitative or No MTBF MTBF adopted Not Applicable qualitative) Date achieved 04/29/2003 12/23/2003 Year 2013 Comments Met the target, An agreed 5-year MTBF (FY 03/04 – FY 07/08 was adopted and (incl. % implemented. achievement) Annual throw-forward of NHA Public Sector Development Program reduced from 4.2 Indicator 2.2: 2 years to 2 years Value (quantitative or 4.2 years 2 years 5 years qualitative) Date achieved 04/29/2003 06/30/2009 Year 2013 By Mid-Term (FY 06/07 – December 2006) throw-forward was reduced to 3.8 years; Comments however, end of project target could not be achieved due to deteriorated macro- (incl. % economic environment which necessitated drastic scaling down of capital development achievement) program expenditures in all sectors to curtail the fiscal deficit. FY 12/13 throw-forward is 5.0 years. Indicator 2.3: Share of expenditure on network conservation increased from 38% to 55% Value (quantitative or 38% 55% 66% qualitative) Date achieved 04/29/2003 06/30/2009 Year 2013 Comments Exceeded the target. Share of total expenditure on network conservation is above 66% (incl. % a – 20% higher than MTBF target of 55% achievement) Road Maintenance Account (RMA) operational and financing Annual Maintenance Indicator 3.1: Programs Value No RMA RMA set up Institutionalized

2 Ratio of aggregate value of commitments carried forward from previous financial year and budgetary allocation.

iv (quantitative or qualitative) Date achieved 04/29/2003 12/23/2003 Year 2013 Comments Met the target. RMA was set up prior to Board approval and is now fully (incl. % institutionalized. achievement) Routine and periodic maintenance funding increased from 25% to 100% of stable Indicator 3.2: network needs Value (quantitative or 25% 100% 88% qualitative) Date achieved 04/29/2003 06/30/2009 Year 2013 Comments (incl. % 88% target achieved. achievement) Allocation based on Road Asset Management System (RAMS); regular consultation Indicator 3.3: with Road Users; publication of RMA Annual Reports in public domain Value (quantitative or N.A. Institutionalized Institutionalized qualitative) Date achieved 04/29/2003 06/30/2009 Year 2013 Comments Met the target. (incl. % achievement) Satisfactory progress on implementation of the agreed NHA Institutional Reform and Indicator 4.0: Corporate Strengthening Program. Value (quantitative or N.A. Satisfactory progress Satisfactory progress qualitative) Date achieved 04/29/2003 06/30/2009 Year 2013 Substantially met the target. A Modern road asset management system is operational; Axle Load Management program was initiated in partnership with trucking industry and other stakeholders; HRD strategy and action plan developed; a dedicated HR unit established, training imparted; Action plan to improve financial management and internal controls implemented3 – audited NHA agency level financial statements and audited RMA accounts current, albeit with some qualifications; fixed assets accounted Comments and reconciled; A state-of-the-art laboratory supplied with latest Strategic Highway (incl. % Research Program (SHRP) equipment established and procedures are under achievement) development; Highway safety component implemented (safety audits, accident reporting, investigation and analysis, community safety awareness programs); Phase-1 of Business Process Reengineering program completed; Phase-II terminated4; Satisfactory compliance with EMPs, RPF and RAPs; Environment and social management capacity enhanced (improved practices adopted, dedicated professional staff engaged, grievance redressal system established).

3 Commercially audited NHA financial statements available up to FY 97-98 only; NHA fixed asset accounting incomplete/un-reconciled; RMA accounts not audited. 4 Due to non-performance of the consulting firm

v G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 03/21/2004 Satisfactory Satisfactory 0.52 2 07/29/2004 Satisfactory Satisfactory 1.41 3 02/22/2005 Satisfactory Moderately Satisfactory 20.83 4 10/05/2005 Satisfactory Satisfactory 33.39 5 04/05/2006 Satisfactory Satisfactory 72.67 6 06/16/2006 Satisfactory Satisfactory 82.04 7 01/05/2007 Satisfactory Satisfactory 105.88 8 07/03/2007 Satisfactory Satisfactory 133.70 9 01/03/2008 Satisfactory Satisfactory 181.23 10 08/05/2008 Satisfactory Satisfactory 196.92 11 02/10/2009 Satisfactory Satisfactory 240.86 12 08/05/2009 Satisfactory Satisfactory 281.88 13 01/11/2010 Satisfactory Satisfactory 303.35 14 03/16/2010 Satisfactory Satisfactory 313.96 15 05/30/2010 Satisfactory Satisfactory 325.66 16 12/03/2010 Satisfactory Satisfactory 345.26 17 04/10/2011 Satisfactory Satisfactory 349.93 18 11/28/2011 Satisfactory Satisfactory 403.05 19 06/21/2012 Satisfactory Satisfactory 457.53 20 12/11/2012 Satisfactory Satisfactory 482.15 21 05/21/2013 Satisfactory Satisfactory 507.39

H. Restructuring (if any)

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions 12/06/2005 S S 42.32

vi I. Disbursement Profile

vii

1 Project Context, Development Objectives and Design

1.1 Context at Appraisal

1.1.1 Sectoral Context: Pakistan’s transport sector is the fourth largest sector contributing 12% to the Gross Domestic Product (GDP). It accounts for over 21% of gross fixed capital formation. The sector constitutes 12 to 15 percent of the annual federal Public Sector Development Program (PSDP), and provides about 2.3 million jobs (6% of employed labor force). It imposes huge demand on Pakistan’s total energy supply, consuming about 35% of total energy annually.

1.1.2 Pakistan’s economy relies almost entirely on road transportation to carry the inland freight. Roads carry 96% of the inland freight annually. Pakistan’s traffic movements are primarily concentrated along the north-south “Peshawar-Lahore-Karachi” corridor which serves domestic needs, and also links the main industrial centers in Punjab and neighboring countries in the north-west (Afghanistan) and north (China) with international markets through the southern Karachi area ports. Together the ports, road and railways along this north-south corridor handle 96% of external trade, 65% of total inland freight and serve the regions of the country which contribute 80 to 85 percent of GDP. The total road network is about 260,000 km of which about 60% is paved, and primarily comprises single and two lane roads. National Highway Authority (NHA) is responsible for about 11,000 km long National Highways, Motorways and Strategic Roads System. NHA network consists of the main transport corridors which provide inter-provincial linkages and connections to the neighboring countries. NHA’s main artery along the north-south corridor is the 1760 km long National Highway N-5 popularly known as the Grand Trunk (G. T.) Road. It serves over 80% of Pakistan’s urban population and carries over 60% of the country’s inter-city traffic though its length is less than 1% of the total road network of Pakistan. At appraisal in 2003 the following key challenges were being faced by the National Highway system:

a. Poor investment prioritization and portfolio management – poorly justified grandiose investments, a bias towards capital constructions over asset conservation, and a proliferation of new start-ups without completing ongoing works. This had led to limited economic benefits, protracted completion delays and substantial increases in completion costs, as well as reduced head room for new high priority initiatives.

b. Maintenance neglect – at appraisal, about half of NHA’s network was in poor condition (40% good, 11% fair and 49% poor/very poor) and NHA needed to spend about Rs 3.0 billion annually to simply conserve the network in its present condition. However, over the past decade, its maintenance spending covered less than 25% of stable network needs and averaged less than 6% of total expenditures. NHA depended almost exclusively on grossly inadequate and unpredictable transfers from Government’s recurrent budget to finance road maintenance. The persistent bias in favor of capital programs, together with the modal shift from rail to road and significant increases in vehicle axle loads, caused a rapid and premature deterioration of its road assets. The National Highway network developed a huge maintenance backlog, which at appraisal required an investment of the order of Rs 35 billion, to restore it to acceptable condition. Alternative financing arrangements were clearly needed to ensure that network maintenance was fully funded on a timely and sustainable basis.

c. Weak institutional capacity of NHA – the authority was created in 1991 with Bank assistance, as an autonomous highway agency with a functional structure and decentralized implementation through regional offices at the provincial level. As it continued to evolve in response to emerging sectoral demands, NHA needed to significantly realign its staffing levels, skills mix and businesses processes, to prepare it as a corporatized entity.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

1.2.1 Sustainable delivery of a productive and efficient national highway network, contributing to lower transportation costs.

1.2.2 Expected outcome was improved traffic flow on the network monitored through improvements in the following key outcome indicators relating to: (a) road network condition; (b) travel time; and (c) road safety:

a. Reduction in average Vehicle Operating Costs by 5% [average network-level roughness reduced from 5.4 IRI5 to 4.4 IRI; NHA network in poor condition reduced from 49% to 35%];

b. Reduction in travel time (growth adjusted) on National Highway N-5 (between Peshawar and Karachi) by 10%;

c. Improvement in the road safety situation along the National Highway N-5 corridor [growth adjusted reduction in road fatalities by 10%].

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

Not applicable.

1.4 Main Beneficiaries

1.4.1 Benefits: The project, which formed a part of NHA’s multi-year National Highway Improvement Program (NHIP), helped improve the condition of the national highway network, lowered transportation costs and travel times. The network level economic analysis (based on the Highway Design and Management [HDM-IV] module) indicated that the proposed Rs 5.0 billion/year road asset preservation program will reduce the average network roughness from about 5.4 IRI to 4.4 IRI, over six years, resulting in a 5% decrease in road user costs, amounting to a savings of Rs 189 billion (over US$ 3.0 billion) over this period.

1.4.2 Target Population: Road users and inhabitants/businesses along the densely populated National Highway N-5 corridor were identified as direct beneficiaries of the proposed investments under the project. In addition, given the competitive market structure of road transport in Pakistan, the benefits of lower transport costs and improved network operations over the entire national highway network will be passed on to the users (shippers and passengers) over the medium term, with benefits for the entire economy.

5 International Roughness Index – a measure of pavement ride quality

1.5 Original Components (as approved)

1.5.1 The Project had the following original components:

Component – I: Network Conservation – this consisted of civil works along the National Highways N-5 and comprised:

a. Rehabilitation and Improvement of about 550 km of highway (including structures).

b. Resurfacing and Strengthening of 306 km of highway.

c. Safety Improvement works at 15 - 20 locations.

d. Resettlement & Land Acquisition.

e. Relocation of utilities.

f. Afforestation (tree planting) along the Project corridors for a length of about 2,500 avenue km.

g. Consultancy Services for design, contract administration and construction supervision.

Component – II: Policy Support and Institutional Development – this included technical assistance, training, equipment support and incremental operating costs:

a. to help implement improved sub-sectoral policies (Medium Term Budget Framework [MTBF] - to improve targeting of public sector resources; Road Maintenance Account [RMA] - to provide stable and secure funding for maintenance).

b. to strengthen NHA institutional capacity, improve performance and efficiency (Corporate Strengthening Program: business process re-engineering, improved road asset management; improved road safety practices; enhanced environmental management and resettlement practices; sector studies and future project preparation).

1.6 Revised Components

1.6.1 The earthquake of October 8, 2005 badly damaged two national highways in the province of Khyber-Pakhtoonkhwa (KP), namely N-15 (Kaghan Valley Road – KVR), and N-35 (Karakoram Highway – KKH) that link the rest of Pakistan to the disaster areas. The earthquake also very badly damaged a highway in Azad Jammu & Kashmir (AJ&K) called Jhelum Valley Road (JVR) that links Muzaffarabad (capital of AJ&K) with Chakothi at the line of control between Pakistan and India. Component III was added through an emergency additional financing operation in December 2005.

Component – III: Reconstruction and Rehabilitation of Earthquake Damaged Roads – this consisted of:

a. Carrying out of civil works for reconstruction and rehabilitation of earthquake damaged roads including:

(i) Reconstruction of about 44 km of National Highway N-15.

(ii) Rehabilitation of about 25 km of National Highway N-35.

(iii)Rehabilitation of about 59 km of Jhelum Valley Road.

(iv) Relocation of utilities, and resettlement and land acquisition.

b. Provision of technical assistance for design & feasibility, environmental & social safeguards, contract administration and construction supervision.

c. Incremental operating costs.

d. Front end fee.

e. Physical & price contingencies.

1.7 Other significant changes

1.7.1 Additional Financings: The project was approved on December 23, 2003 with a Credit (Cr. 3846-PK) amount of Special Drawing Rights (SDR) 105.9 million (US$ 150.0 million equivalent), and a Loan (Ln. 7212-PK) amount of Japanese Yen ¥ 5,605.5 million (US$ 50.0 million equivalent) with a Closing Date of June 30, 2009.

a. An additional loan amount of US$ 100.0 million was approved on December 1, 2005 for reconstruction and rehabilitation of three strategic roads of national importance that were damaged by the earthquake of October 8, 2005. There were no changes in the PDO and outcome indicators. There were no complementary changes applicable to the institutional arrangements, financial management, disbursement arrangements, implementation schedule and closing date.

b. Another additional loan amount of US$ 65.0 million was approved on March 29, 2006 to help finance the costs associated with cost overrun resulting from significantly higher than expected bid prices for phase-II civil works contracts. There were no changes in the project’s DO, outcome/output indicators, design and closing date.

c. And, additional credit amount of SDR 85.7 million (US$ 130.0 million equivalent) was approved on September 28, 2010 with a Closing Date of June 30, 2012 for cost overrun related to unforeseen and unprecedented market price escalation6 and repair of damages caused by 2010 floods (the worst flooding in over 80 years in Pakistan) and landslide remediation works. There were no changes in the PDO and outcome/output indicators.

1.7.2 Closing Date Extensions:

a. In March 2009, the Closing Date of original Financings (Cr.3846-PK, Ln.7212-PK) and the first and second Additional Financings (Ln.7341-PK and Ln.7376-PK) was extended by 18-months to December 31, 2010.

b. In August 2010, the Closing Date for the original Financings (Cr.3846-PK, Ln.7212- PK) and the first and second Additional Financings (Ln.7341-PK and Ln.7376-PK) was extended by five and half months from December 31, 2010 to June 15, 2011.

6 The project significantly underestimated the price contingency (7.5% at appraisal versus 64% actual), and this partly explained the need for additional financing.

c. In April 2011, the Closing Dates of the original Financings (Cr. 3846-PK, Ln. 7212- PK) and the first and second Additional Financings (Ln. 7341-PK and Ln. 7376-PK) were made coterminous with the third Additional Financing (Cr. 4816-PK).

d. In June 2012, the project was restructured to extend the Closing Date of the third Additional Financing (Cr. 4816-PK) by a period of twelve (12) months from June 30, 2012 to June 30, 2013. This extension took the third Additional Financing (Cr. 4816- PK) more than 3 years beyond the original planned Closing Date. It was a Level 2 restructuring since the PDO remained unchanged, the environmental assessment category of the project also remained unchanged, and no new safeguards policy was triggered.

2 Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

2.1.1 Project Preparation: The project concept was reviewed in January 1999 and the appraisal was completed in April/May 2003. During preparation phase, the Bank’s decision to “pause” preparation7 resulted in a nearly 2-year delay and discontinuity in the project preparation. In spite of that, at appraisal, detailed engineering designs and environmental and social safeguards instruments for phase-1 civil work contracts were complete. NHA had received the bids for 8 phase-1 contract packages (the cost estimates in the Project Appraisal Document – PAD – were based on actual bid prices). NHA had also received the technical and financial proposals for construction supervision consultant services.

2.1.2 Design: The project design was fairly simple with manageable components and a single implementing agency. The design envisaged that the Bank would finance reduction of maintenance back-log while the Government and NHA implemented key road sector reforms. In specific terms, the project design sought to address the following core challenges, namely, (i) reduction of maintenance backlog  Network Conservation, (ii) sustainable financing of maintenance  Road Maintenance Account – RMA, (iii) a bias towards capital constructions over asset conservation, and a proliferation of new start-ups without completing ongoing works  Medium-Term Budget Framework – MTBF, (iv) progressive commercialization with a focus on network operator/service provider role  Corporate Strengthening Program. The identified core challenges were sought to be addressed through two designated project components: Component I: Network Conservation and Component II: Policy Support and Institutional Development. The early phase of project preparation took a programmatic approach to addressing the rehabilitation and resurfacing needs of the entire NHA network. However, the results of the network level economic prioritization showed that network needs were dominated by the requirements of National Highway N-5 by virtue of the high traffic levels along this north-south corridor. The project physical works were therefore restricted to the rehabilitation and/or improvement of specific sections of National Highway N-5 only.

2.1.3 The key lessons learned from previous highway projects, and reflected in the project design, included: (i) keeping project design simple and flexible; (ii) implementation readiness – improving project preparation to include complete detailed engineering designs and bid documents, contractor pre-qualification, and essential pre-construction

7 Due to sanctions in response to detonation of nuclear devices by both India and Pakistan in May 1998

activities prior to contract awards; (iii) holding the highway agency accountable for performance to external clients/road users to ensure institutionalization of sound maintenance management practices; (iv) the need for measures to minimize the adverse impact of vehicle overloading to sustain highway network improvements; and (v) the need for stronger financial systems and controls.

2.1.4 Risks Analysis: At appraisal, the project was assigned a rating of “Substantial Risk” based on identification and analysis of a total of six critical risks. Of these, four risks were rated as “Substantial”, viz, (i) absence of competent, professional management in NHA; failure to provide strong leadership, good governance and transparent decision making; (ii) no improvement in enforcement of axle-load control over network; (iii) GOP/NHA non-compliance with agreed MTBF & Highway Investment and Maintenance Program; and (iv) NHA not operating the RMA according to agreed Rules and Standard Operating Procedures (SOP). The remaining two risks were rated as moderate, viz, (i) ineffective Traffic Management and Enforcement along N-5 due to inadequate collaboration between NHA and National Highway and Motorway Police (NH&MP) Force; and (ii) lack of timely site-readiness, including land acquisition and Resettlement Policy Framework (RPF) and Environmental Management Plan (EMP) implementation. In reality, there was little improvement in axle-load control over network. This risk should have been rated “High”. Major unforeseen risks included: (i) enormous increase in the road construction costs driven by sharp oil price increases in the world market; (ii) shortages in supply of bitumen; and (iii) adverse security situation. These could not have been predicted at the time of project appraisal.

2.2 Implementation

2.2.1 The project was declared effective on February 27, 2004 and notices to commence civil works for 8 phase-I contracts were issued during June-October 2004. Notices to commence civil works for 7 phase-II contracts were issued as follows: 4 contracts in August 2005 and the remaining 3 contracts during February-August 2006. Notices to commence civil works for 3 earthquake damaged roads contracts were issued in May 2007. Implementation started on a satisfactory track but slipped into slow track due to cash flow problems caused by unprecedented increase in international oil prices and shortages of bitumen. Three contracts8 were completed in 2006, three in 2007 and two each in 2008 and 2009 before the original Closing Date. The remaining eight contracts required extension of time. The following paragraphs summarize the major events which had a significant impact on implementation of the project as well as the remedial actions taken to mitigate these impacts:

a. International Oil Price Hike & Increase in Road Construction Costs: There were enormous increases in the road construction costs driven by the unprecedented oil price increase in the world market – US$ 35 per barrel in 2003 peaking at US$ 148 in July 2008. The oil price hike had a global multiplier effect on the price of bitumen – an oil based binder used in the construction of asphalt concrete pavements 9 . A

8 The contractors earned bonus for early completion. 9 According to the State of New Jersey Department of Transportation, the price of bitumen increased by 252% from US$ 177.5 per metric ton in 2003 to US$ 625.0 per metric ton in March 2012 – US$ 447.5 per metric ton increase over the past 11 years.

comparison of commodity costs over the project implementation period is presented below: PAK Rs. Global Iran & % Floods in % % % Appraisal Financial Greece Increase Pakistan Increase Increase Increase Crisis Crisis 2003-2008 2008-2010 2010-2013 2003-2013 Item 2003 2008 2010 2012/13 Cement 3,965 6,800 +72% 4,650 -32% 8,300 +78% +109% Steel 21,375 45,840 +114% 66,355 +45% 71,875 +8% +236% Labor 90 300 +233% 313 +4% 400 +28% +344% Diesel 22.97 57.14 +149% 73.03 +28% 116.95 +60% +409% Bitumen 13,601 42,857 +215% 52,232 +22% 80,890 +55% +495%

Severe cash-flow problems necessitated insertion of price escalation clauses in phase-I contracts10 and rationalization of the fixed and variable ratios in phase-II contracts for better alignment with the market dynamics.

b. Shortages in Supply of Bitumen: In 2006, the two local refineries, which produce bitumen in Pakistan, were utilizing only about 25% of their capacity for bitumen production and the remaining 75% for furnace oil production for electricity generation (to meet the increasing energy crisis). Exports to Afghanistan further reduced the limited local supplies. The GOP/NHA took some pro-active measures to ensure un-interrupted supplies of bitumen including direct purchase of special quota for the Project contracts from both the refineries and facilitating the contractors to import bitumen. The Government reduced the Custom Duty from 25% to 5%; and abolished the Federal Duty of Rs 2,000 per ton to bring price of imported bitumen at par with the locally produced bitumen. NHA provided additional advance to the HRP contractors for import of bitumen. An analysis of time-overrun indicates that shortage of bitumen accounted for about 37% of Extensions of Time (EOT) on civil works contracts.

c. Adverse Security Situation: The US/NATO led post-9/11 war against terror in Afghanistan also impacted the Federally Administered Tribal Areas (FATA) and Khyber-Pakhtunkhwa (KP) Province. Two civil works contracts under the Project which were located in KP province directly suffered from the adverse security conditions; namely Contract 14: Peshawar-Nowshera, and Contract 15: Batgram- Thakot. Contract 14 was awarded to an international construction firm. Their expatriate staff had to be relocated to Islamabad from Peshawar for their personal security and they were forced to abandon their quarry site near Peshawar and had to transport construction materials from a quarry site near Islamabad with much longer haulage distance. On Contract 14, security problems accounted for about 40% of Extension of Time (EOT). On Contract 15, the militants blew two bridges resulting in additional cost and time for reconstruction. Security problems forced some expatriate staff of the supervision consultant (SMEC)11 to leave Pakistan and made it difficult to make alternate arrangements.

10 NHA had experienced recurrent cost overruns on works awarded on detailed design, ad-measured, item rate basis due to design changes during implementation. Some contracts therefore were on design-build, lump-sum, fixed price basis and phase-I rehabilitation contracts were without price escalation. 11 Snowy Mountain Engineering Corporation – an Australian consulting firm

2.2.2 Notwithstanding the above external events that were clearly outside the control of the implementing agency and the borrower and impeded the project implementation progress, NHA, contractors and construction supervision consultant displayed resilience and commitment and ensured that the works were completed with quality. As a result, the Implementation Progress (IP) and Output Indicators remained on track and IP was rated ‘Satisfactory’ almost throughout project implementation – 1,035 km (100%) of the project length was reopened to traffic a few months prior to the project extended closing date.

2.2.3 The Policy Support and Institutional Development Component was implemented largely along the lines envisaged at the time of appraisal.

a. The Ministry of Finance (MOF) and NHA adopted a mutually agreed Medium- Term Budget Framework (MTBF) to improve targeting of scarce public sector resources, by rationalizing allocations across construction, rehabilitation and maintenance. The MTBF included an indicative highway investment and maintenance program and prioritization criteria. Prioritization criteria required that there is a progressive increase in the share of expenditures on network conservation. The Government has managed to increase the share of total expenditure on network conservation to about 66% – 20% higher than the target of 55%.

b. NHA enhanced resource mobilization through creation and operation of a dedicated Road Maintenance Account (RMA), financed from earmarked road user revenues (including enhanced tolls) to provide an adequate, secure and stable source of funding for maintenance of the national highway network. RMA receipts have gone up from Rs 3.91 billion in FY 02-03 to Rs 17.78 billion in FY 11-12 (a Compound Annual Growth of about 354%).

RMA Receipts

c. NHA undertook a Corporate Strengthening Program:

(i) A Human Resource Development (HRD) Strategy & Action Plan (inter alia defining the Authority’s overall HR framework and priorities) was established; intensified recruitment actions achieved some new staffing in

key NHA areas; the Authority secured a combination of the ‘HRD Adviser’ and ‘HRD/Training program delivery’ consultancy services; a Training Needs Assessment (TNA) was carried out and a special 2-year Catch-up Training Program was implemented; and the rate of participation by middle and senior level NHA staff in specialist external training/development programs was considerably increased.

(ii) A Business Process Re-engineering (BPR) study was undertaken. An IT consultant was hired to act as “Change Agent” in NHA for the introduction of advanced Financial Management and comprehensive Management Information System (MIS) facilities to support the rapidly evolving NHA accounting and business management demands. However, NHA decided to terminate the services of the BPR consultants, in reflection of various unsatisfactory aspects of their capabilities and performance.

(iii) An Action Plan to improve financial management and internal controls was implemented – audited12 NHA financial statements are current and show a progressive decline in the number of qualifications.

(iv) A modern ‘Road Asset Management System (RAMS)’ was developed and is under implementation. A full-time Director (RAMS) was notified who is now being supported by 1 x Deputy Director (Bridges); 4 x Assistant Director (Engineering); 1 x Assistant Director (Computer Programming); 1 x Data Base Officer; and 8 x Enumerators.

(v) A National Highway Safety Council Secretariat was set up/staffed and housed in the Ministry of Communications (MOC). The Secretariat developed a National Road Safety Plan. Safety Awareness Campaigns were conducted in nineteen cities along the project reaches. Three road safety awareness seminars were also arranged. Media Campaign was launched under the Project. Driver and school children education pilots were also launched. Extensive stakeholder meetings were held for the enforcement of safety plan. The Project conducted road safety audits along its corridor and implemented black-spot improvements. Appropriate engineering measures were implemented under the project to improve safety of road sections through urbanized areas and in construction/maintenance work zones.

(vi) The Effective Weight Control Management Study was completed, which documents the extent of the overloading problem on the network - which has significant implications for the overall road network condition and annual maintenance funding needs. The study discusses the complex set of underlying causes for this behavior and includes recommendations on specific mitigation measures and their sequencing to address this challenge over the medium term.

12 At appraisal audited NHA financial statements were available up to FY 97-98 only; NHA fixed asset accounting was incomplete/un-reconciled

(vii) The research for developing improved pavement design procedures for Pakistan got underway. A state-of-the-art laboratory has been set up at the Highway Research and Training Centre (HRTC) under the Project.

2.2.4 A Mid-Term Review (MTR) was conducted in December 2006. The MTR confirmed that the Government remained committed to the project and the PDO remained relevant and on track. The Project Outcome Indicators continued to be achievable. The likelihood that the Project would achieve its PDO was thus rated as ‘Satisfactory’. The MTR established that the project implementation and Monitoring and Evaluation (M&E) arrangements were adequate. The Project Management Unit (PMU) at Islamabad continued to function well and all the Project Coordinators, Deputy Project Coordinators and supporting staff were in place in the regions. NHA was regularly furnishing the Bank with monthly progress reports and quarterly Financial Management Reports (FMRs).

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

2.3.1 M&E Design: The project included performance monitoring indicators to monitor progress and the extent of achievement of the PDO during implementation. The project envisaged to monitor the achievement of the PDO through measuring the benefits to road users in terms of reductions in: (a) vehicle operating costs (i.e. reductions in fuel and oil consumption and vehicle maintenance costs due to better quality of the road network), (b) travel time and (c) fatal road accidents along the project corridor. The overall monitoring and evaluation (M&E) function was the responsibility of NHA with the assistance of consultants in various aspects of data collection. The institutional strengthening component was monitored through progress defined by consultant reports. However, the indicators for some of the activities under the institutional strengthening component could have been more precise. For example, completion of axle load management study. Mere occurrence of such event/output may not be a sufficient evidence of tangible improvement in the overload control. A more effective approach could have been to specify percentage reduction in overloading.

2.3.2 M&E Implementation and Utilization: The project monitored indicators for outcomes, intermediate results and outputs, which included baseline data at appraisal. Data on network-level road condition and roughness (ride quality) was collected every year while travel time data was collected at mid-term and at the end of the project. The PDO indicators were sufficiently appropriate for broad decision making and resource allocation purposes.

2.4 Safeguard and Fiduciary Compliance

2.4.1 Environmental Aspects: Satisfactory.

a. The project undertook an Environmental Impact Assessment (EIA) for both phase-1 and phase-II of the Project. The analysis therein indicated an increase in long-term economic activity and the improvement in the standard of life of the people as the major positive impacts of the proposed Project. The assessment also presented the negative impacts of the project, which were mostly related to the construction stage only and included soil erosion, air quality deterioration, improper disposal of spoil, contamination of soil and water, loss of vegetation, displacement of population, disturbance to people, disruption of traffic and some possible impacts on the health and safety of general public and workers. During the operation phase, the impacts

included increase in greenhouse gasses emissions due mainly to the increased volume of traffic. Recommendations to offset these effects included planting trees along the road to work as carbon sinks. About 837,000 trees were planted along the project corridor on a length of about 2,500 roadside kilometers under the Network Conservation Component.

b. In terms of implementation challenges of Environmental Management Plan (EMP) there were initial slippages due mainly to capacity limitations. However, the project put in relevant measures to address institutional capacity and implementation constraints to ensure compliance with the EMP. Environment focal persons were nominated in the Project Management Unit (PMU) as well as with the contractors. These measures also included conducting trainings on EMP implementation both for the project field staff and contractors’ environmental staff. Further, soil, air and water testing was carried out in the project impact zone to monitor any potential impacts. The project conducted a biannual third party audit to assess EMP implementation effectiveness and was found compliant on most parameters. NHA set up an Environmental Management Unit which provides environmental safeguards support on other non-Bank funded projects.

c. The overall Environmental Safeguards Management for the Earthquake Damaged Roads Component was very challenging. The three roads which were damaged by the earthquake of October 8, 2005 are located in extremely in-hospitable mountainous terrain with very harsh weather environments. These conditions posed serious issues of stability of hill slopes given the immature geology of the project area. Some 100 plus vulnerable locations prone to landslides and high erosion potential were identified. Disposal of landslide debris posed a significant challenge due to space constraints. The project introduced soil bio-engineering measures to stabilize mountain slopes in Pakistan and employed innovative techniques that included terracing slopes with plantation (trees, shrubs and grasses) and engineering measures (check-damming, cutoff drains, retaining walls).

2.4.2 Social Safeguards: Moderately Satisfactory.

a. At the time of appraisal in 2003, the magnitude of land acquisition and displacement triggered by this project was negligible – 6 hectares of land13 and impact on about 350 project affected persons (PAPs). Social Impact Assessments (SIAs) were carried out for both phase-I and phase-II of the project accompanied by the Resettlement Policy Framework (RPF). Extensive stakeholder consultations were carried out while conducting SIA studies for the project. The key social impacts of the project included land acquisition, loss of trees, loss of income of the local businesses, noise and vibration, safety hazards and relocation of public infrastructure. All PAPs were eligible for compensation and rehabilitation assistance, irrespective of land ownership status, to ensure that those affected by the project were at least as well off, if not better off than they would have been without the Project. The compensation packages reflected replacement costs for all losses (such as lands, crops, trees, structures, businesses and income).

13 Primarily, the construction works were confined within the NHA’s existing Right-of-Way (RoW).

b. A grievance redressal system managed by NHA’s Project/Deputy Project Coordinators maintained a community complaints-management register to record grievances brought forward by affected communities, and ensured that those were timely and appropriately addressed. Limited capacity within NHA to understand and address social development issues was addressed through a social development training plan. The project achieved its Social Development Outcomes satisfactorily. Land was acquired following the Land Acquisition Act (LAA), 1894 and the agreed upon RPF ensuring payment of compensation in a fair and transparent manner. Livelihoods of PAPs were preserved by resettling them as quickly as possible at a nearby location within the Right of Way (RoW); livelihood assistance was provided when the relocation was delayed.

c. However, management of social safeguards became a significant challenge once the Earthquake Damaged Roads Component was included in the Project. This Component involved acquisition of about 1,007 Kanals of land valued at about Rs 108 million (US$ 1.1 million). Of which, Rs 76.5 million (US$ .78 million) i.e. 72% compensation has been paid to the PAPs. The balance amount of about Rs 31 million (US$ 0.32 million) is with the Land Revenue Departments (LRDs) of the province of KP and the state of AJ&K. This balance amount pertains to persons who died during the earthquake or have left the disaster areas and have moved to other parts of the country (and are not traceable), disputed claims in the courts, shamlat land cases (i.e. multiple joint land owners with entitlement amounts less than US$ 100 who are unwilling to open a Bank account). The court cases are unlikely to be resolved in the near future. However, the compensations shall eventually be paid upon settlement of court cases since the compensation amounts are already deposited and held in escrow accounts with the LRDs.

2.4.3 Procurement: Satisfactory

a. The project had 15 civil works contracts under the Network Conservation Component and 3 civil works contracts under the Earthquake Damaged Roads Component. The 15 civil works contracts under the Network Conservation Component were procured in accordance with the provisions of Section I of the “Guidelines for Procurement under IBRD Loans and IDA Credits” January 1995, and revised in January and August 1996, September 1997 and January 1999. Eight “Rehabilitation” contracts were procured as lump-sum, design-build contracts on the basis of outline designs prepared by NHA through design consultants. One “Rehabilitation” contract which also involved upgrading a 50 km contract length from 4 to 6-lanes, and the six “Resurfacing and Recycling” contracts were procured as admeasured, item rate contracts on the basis of detailed design prepared by NHA through design consultants. The fifteen civil works contracts were procured in two phases, staggered by about 14-months (eight contracts in phase-1 and seven contracts in phase-2).

b. All 3 civil works contracts under the Earthquake Damaged Roads Component were procured under “Direct Contracting” (DC) method – Para 3.6(e) of the Bank’s Procurement Guidelines – using the Bank’s standard ICB large works contract document14.

14 The permission was obtained from Vice President & Head of Network, Operations Policy and Country Services (OPCS).

c. In addition, there were several packages of consultancies, some related to civil works (such as supervision) and the balance under the institutional strengthening component. Some goods were also procured under the institutional strengthening component. Despite some delays, the procurement aspects, in general, were effectively managed and made significant positive contribution to the preparation (e.g., pre-qualification for 8 phase-I contracts) and implementation (e.g. pro-active contract management) of the project. On the whole, the procurement of works, goods, and services was carried out in accordance with Bank guidelines and the procurement plan was updated each year and also as and when necessary. The procurement process was conducted in a fair and transparent manner. No complaints were received concerning the procurement process.

d. Initial procurement plan for NHA was made keeping in mind that the packages be large enough to warrant response from international bidders. As the response was almost nil, packages were amended to widen the market base. In this round, generally local firms participated, but given the limited number of local contractors in road sector, the competition was not robust. The potentially qualified market players reached the ceiling of their bid capacity, leaving a smaller market to respond to the next round of bidding.

2.4.4 Financial Management: Satisfactory.

a. At appraisal in 2003, NHA’s audited financial statements were available up to FY 98 only with unverified closing balance; fixed asset accounting was incomplete/unreconciled; and RMA accounts not audited. To address these issues a “Financial Management Improvement Plan (FMIP)” was agreed with NHA. Under the FMIP, NHA's financial management capacity was enhanced by engaging qualified professional staff, the entity’s books of account for FY’s 91-98 were re- written, opening balance of FY 91 was verified and was incorporated in accounts of FY 98, accounts for the FY 99 through FY 04 were not only prepared as per International Accounting Standards (IAS) but also got audited by the commercial auditors. As a result of FMIP, commercially audited NHA agency level financial statements and audited RMA accounts are current.

b. Accrual accounting was implemented with effect from July 1, 2003 to reflect the true position of liabilities and assets in the monthly/periodic accounts. Effective internal controls were introduced by adequate segregation of duties. Internal controls were further strengthened with the induction of accounting staff with commerce and accounting background. A Standard Operating Procedure (SOP) was issued for processing payments to contractors and suppliers. The SOP lays down in detail the steps to be followed for verification and checking of bills.

2.5 Post-completion Operation/Next Phase

2.5.1 The ICR mission discussed and agreed with NHA a post-completion sustainability plan. NHA is currently focussing on completion of post-construction activities such as issuance of Taking Over Certificates (TOCs) and Defect Liability Certificates (DLCs). The Project reaches/corridor(s) have been taken over by the Operations Wing of NHA. The Operations Wing is managing the Road Maintenance Account (RMA) and is responsible for Operations & Maintenance (O&M) of the NHA network. A Road Asset Management Directorate (RAMD) under the Operations Wing prepares Annual Maintenance Plans

(AMP) using a modern ‘Road Asset Management System (RAMS)’ which was developed under the Project. The AMPs are based on detailed condition surveys and HDM-4 network-level strategy and programme analyses, and allocate substantial resources on preventive maintenance activities (functional and structural overlays). The total share of AMP expenditures spent on network preservation (routine maintenance, functional and structural overlays) has progressively improved15, and accounted for about 88% of the maintenance activities during FY 11-12.

2.5.2 NHA has also procured a multi-year slope stabilization maintenance contract for the three highways damaged by the 2005 earthquake. This maintenance contract shall be financed from RMA. Similarly, NHA has a contract with a consulting firm for maintenance of about 837,000 trees planted along the National Highway N-5 till 2016.

3 Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

3.1.1 The PAD correctly identified the key constraints and opportunities of the National Highway system. The PDO of sustainable delivery of a productive and efficient national highway network, contributing to lower transportation costs was relevant and continued to be valid throughout project implementation.

a. The Government recognizes that transport and trade logistics efficiencies are a must for economic stabilization, sustained growth and international competitiveness. Supportive transport infrastructure remains one of the pre-requisites for sustained high economic growth. This was identified by the Government as a priority in the 2003-06 Poverty Reduction Strategy Paper (PRSP-I) and confirmed in the PRSP-II for 2006-11 which envisaged a National Trade Corridor Improvement Program (NTCIP) with the objective of reducing the cost of transport and trade logistics and bringing services' quality to international standards in order to reduce the cost of doing business in Pakistan, enhance the country’s exports competitiveness, and accelerate its industrialization, thus contributing towards achievement of middle income country status by 2030. The Project is also aligned with the current government priorities. The new Government16 has announced up-gradation of road infrastructure as one of its top priorities.

b. At appraisal the Country Assistance Strategy (CAS) covered the period FY 03-06, and it identified three pillars of Bank assistance strategy: (i) strengthen macroeconomic stability and government effectiveness, (ii) improve the business environment for growth, and (iii) improve equity through support of pro-poor and pro-gender equity policies. The Project supported items (i) and (ii) of Bank assistance strategy. The reforms supported by the Project aimed to improve governance, enhance resource mobilization and improve targeting of NHA's considerable share of the overall public sector expenditures. The physical works

15 Asset preservation as a share of total AMP: In 2003-04: 31% In 2004-05: 52% In 2005-06: 70% 16 Came to power in July 2013

financed by the Project were aimed at lowering transportation costs and improving traffic safety on the national highway network. Improvements in transport are essential to achieving Pakistan’s economic growth and poverty reduction objectives.

c. The operation was also fully consistent with the strategic objective of the FY 06-09 CAS to remove infrastructure bottlenecks, support sustained economic growth and improve competitiveness. The CAS identified the need for significant investment in Pakistan's infrastructure, in particular for the modernization of the National Trade Corridor, to support Pakistan's growth and service delivery goals.

d. Finally, the Project was fully aligned with the current FY 10-14 Country Partnership Strategy (CPS), falling under Pillar 2 – ‘Improving Infrastructure to Promote Growth’. Under Pillar 2, the current CPS seeks to ‘improve efficiency and reliability of the transport and logistics network’.

e. In view of the above, the relevance of the PDO was substantial/significant.

3.1.2 The Project design had a balanced mix of civil works and institutional strengthening component, which were closely aligned. The Projects results framework is found to be logically consistent as the selected set of outcome and output indicators provided a fair measure of the achievement of the overall PDO. The Project design also remained largely relevant throughout the life of the project, although it underwent several amendments at the request of the Borrower to facilitate project implementation under deteriorating macroeconomic and security conditions e.g. changes to disbursement percentages. The other amendments involved changes to the project components and extensions of the closing date in response to natural disasters (2005 earthquake, 2010 floods, 2011 monsoon rains), showing an appropriate level of flexibility by the Bank. However, in hindsight, given the unforeseen and unprecedented international oil price hike and its adverse impact on road construction costs and contractors cash-flow, and resultantly somewhat slower than expected implementation progress, the original implementation period of five-and-a-half years ending in June 2009, was too short. However, given the fact that 1,035 km (100%) of the project length was reopened to traffic a few months prior to the extended closing date of the project, the overall design rating for relevance and implementation is Satisfactory.

3.2 Achievement of Project Development Objectives

3.2.1 The project achieved its objective of sustainable delivery of a productive and efficient national highway network, contributing to lower transportation costs, through improved traffic flow measured by improved ride quality (reduced vehicle operating costs) as well as reduced travel time between Peshawar and Karachi. The project achieved – and in some cases, exceeded – the targets with regard to all the four outcome/impact indicators as detailed below. Major achievements include:

a. The road network in poor/very poor condition reduced from 49% to 35% against an end of project (EOP) target of 35%.

b. Average network-level roughness reduced from 5.4 IRI to 4.49 IRI17 against an EOP target of 4.4 IRI – this 17% reduction represents about 5.0% decrease on the vehicle fleet road user costs.

c. Peshawar-Karachi travel time reduced by 16% from 47 hours to 39 hours exceeding the EOP target of 42 hours.

d. Fatalities per 100 km on N-5 decreased by 63% from 107 to 39 fatalities far exceeding the EOP target of 96 fatalities.

3.2.2 The first two outcomes were facilitated by increasing the: (a) share of total expenditure on network conservation from 38% to 66% – 20% higher than the EOP target of 55%, and (b) annual maintenance financing from Rs 5.0 billion in FY 02-03 to Rs 17.3 billion in FY 12-13 – a 247% increase.

Annual Maintenance Funding

3.2.3 The last two outcomes are directly linked with rehabilitation and improvement works on National Highway N-5 between Peshawar and Karachi – 907 km of N-5 rehabilitated/resurfaced/recycled.

3.2.4 The project also laid a good foundation for sustaining these outcomes as evidenced from 247% increase in maintenance funding. This is due to significant increase in NHA direct receipts. As mentioned in paragraph 2.2.3 b RMA receipts have gone up from Rs 3.91 billion in FY 02-03 to Rs 17.78 billion in FY 11-12 (a Compound Annual Growth of about 354%).

3.3 Efficiency

17 Last ISR reports IRI = 4.7 – this is based on 2012 survey. The above value is based on 2013 survey.

3.3.1 The efficiency in achieving the PDO is Satisfactory. The cost-benefit analysis of the 18 civil works contracts under the Project was undertaken. The economic analysis followed exactly the same methodology adopted at appraisal. It was carried out using the Highway Development and Management Model (HDM-IV), taking into account the estimated economic cost, current road condition, traffic volume and its projected growth. The results indicate that the investment on the 18 contracts is economically justified, with the Economic Internal Rate of Return (EIRR) ranging from 13% for Contract 15 and 51% for Contract 12D. With these rates of return, the overall economic rationale of the project remains strong with an overall EIRR of 26% as against the threshold of 12%.

3.3.2 EIRR at appraisal was 33%. Comparison of current EIRR with appraisal estimates shows a decrease of 18% in Project rate of return. However, this decrease is marginal. The current EIRR is 117% above the cutoff EIRR.

3.3.3 These results are in line with the sensitivity analysis/switching values at Appraisal, which showed that for phase-I contracts, costs would have to increase by 227 percent or benefits reduced by 69 percent to yield the cutoff 12% EIRR. And, for phase-II contracts, costs would have to increase by 191 percent or benefits reduced by 65 percent to yield an IRR equal to 12%. The impact of higher prices on the rates of return has been moderated by the significant growth in traffic volumes and a significant reduction in maintenance costs and traffic delays. Details are at Annex-3.

3.4 Justification of Overall Outcome Rating

3.4.1 The overall outcome is rated Satisfactory taking into account the substantial /significant relevance of the PDO and achievement of Outcome Indicators, satisfactory overall design rating for relevance and implementation progress notwithstanding the Closing Date extensions which were necessitated due to natural disasters/external factors outside the control of the Project (such as 2005 earthquake, 2008 international oil price hike, 2010 floods, adverse security environment), and satisfactory/robust economic efficiency in achieving the PDO.

3.4.2 The Project met all its physical targets – 1,035 km (100%) of the project length was reopened to traffic a few months prior to closing-out of the project. Similarly, the Project substantially met its policy and institutional development targets as explained in paragraph 2.2.3 above.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

3.5.1 There was no study on poverty impacts or gender aspects undertaken during the preparation of the Project.

(b) Institutional Change/Strengthening

3.5.2 As seen in Section 2.2.3 achievement of the policy support and institutional development has been largely satisfactory. Notable progress was achieved in: (i) road asset management system, (ii) financial management improvement plan, (iii) human resource development strategy and action plan, (iv) road safety, and (v) environmental and social safeguards. All of these good practices have already been mainstreamed. There

are several other notable positive directional changes, viz.; (i) widespread use of computers/IT systems in day-to-day working, (ii) introduction of electronic tolling (e- tolling) to minimize/eliminate toll leakages, (iii) a strong emphasis on environment friendly roads (tree plantation, soil bioengineering for slope stabilization, recycling of pavements, etc.), (iv) regular stakeholder consultations and reports in public domain, (v) dissemination of procurement-related information on NHA’s website, and (vi) increased use of external experts to bridge the skill/resource gaps within NHA, especially in the areas of detailed engineering design, traffic studies, and preparation of technical and/or feasibility reports.

3.5.3 There were no noticeable/irreversible negative impacts and on the positive side, at least three practices from the Project – namely, road safety audit/awareness campaigns & black-spot improvements along with commercial/day-lighted pedestrian underpasses (clean and safe for use by women), mainstreaming of good environmental practices, and private negotiations for land acquisition – have received wide recognition by road users and public at large.

3.5.4 In addition, NHA has introduced several technologies worthy of note: Solar and wind powered street lighting and vehicular underpasses at the Lahore-Gujranwala section and in-situ hot and cold pavement recycling on National Highway N-5. Other innovations include state-of-the art structural (avalanche galleries) and soil bioengineering applications for slope stabilization in mountainous terrain, especially in rock strata disturbed by the 2005 Earthquake. This experience has been transferred to Timor Leste under a grant from the South-South Exchange Facility. Better management of landslides will ensure more reliable operations on the recently-opened trade corridor between the Pakistani- and Indian–administered parts of Kashmir, as well as on the alternate Kaghan Valley Road link to the Karakoram Highway.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

Not Applicable.

4 Assessment of Risk to Development Outcome Rating: Moderate

4.1 The risk that the achieved development outcomes may not be sustained is Moderate. Note that the project formed part of the GOP’s/NHA’s National Highway Improvement Program (NHIP) which is aimed at increasing the quality and reliability of the national highways, through phased improvement of about 11,000 km national network using both GOP’s own, RMA and multi/bi-lateral donor resources. The Bank financed a segment of NHIP works.

4.2 The RMA revenues are sufficient enough to finance about 80% of stable network needs. In addition, other development partners (ADB, JICA and Government of China) are also actively supporting NHA’s network conservation and improvement efforts.

4.3 With regards to sustaining the policy and institutional reforms, the NHA appears to be committed as evidenced by its persistence with adopted reforms under the Project and senior management deep understanding of the issues. However, the risk of roll back

remains present, in case of significant turnover/political appointments at top management level. However, the risk appears to be ‘low’ given the strong commitment shown by the new government to good governance and strong/professional leadership.

5 Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry – Satisfactory

5.1.1 The Bank’s performance during the preparatory period was satisfactory with regard to strategic relevance and approach, technical, financial and economic analysis, and paying adequate attention to fiduciary and safeguards and monitoring & evaluation arrangements. The team’s interaction and inputs at this phase played a significant role in arriving at a project design that was focused on key challenges at that time and choice of components that directly addressed the challenges within the project’s budget and time limitations. The project design was kept fairly simple with manageable components and a single implementing agency. In hindsight, the Policy Support and Institutional Strengthening component was a bit too ambitious, though very relevant to the project design.

5.1.2 At effectiveness, the detailed engineering designs and environmental and social safeguards instruments for phase-1 civil work contracts were complete. NHA had received the bids for 8 phase-1 contract packages. NHA had also received the technical and financial proposals for construction supervision consultant services. Advance completion of these pre-construction activities helped timely commencement of civil works on a satisfactory/fast track.

(b) Quality of Supervision – Satisfactory

5.1.3 The quality of the supervision is rated satisfactory. The Bank had been fully engaged with the client during the implementation of all planned activities, paying due attention to the client’s priorities and preferences as well as the Bank’s fiduciary and safeguards requirements. Adequate numbers of staff with requisite skills and expertise in technical and safeguards’ functions were engaged in supporting implementation including through regular monthly/bi-monthly meetings (as needed) and formal missions at regular intervals. In addition to in-country staff, the Bank mobilized services of reputed international experts in the areas of road asset management, road safety, human resource development and business process re-engineering. Their input was deeply appreciated by NHA. The team provided high-quality advice and proposed solutions to remove implementation bottlenecks (e.g. introduction of price adjustment clause in phase-I contracts, increase in price adjustment ceiling in phase-II contracts, additional advances to contractors secured through Joint Escrow Accounts, reduction in retention money amounts, payments for materials at site as secured pay items, arrangements of a special quota for bitumen from refineries for the project, reduction in duties and taxes on imported bitumen, taking over of parts etc.).

5.1.4 The mission management letters and aide-memoires suggest comprehensive attention to all the three components, duly highlighting the achievements as well as areas of concern, along with suggestions for addressing the proximate challenges. It is particularly noteworthy that the supervision has been fairly alert and responsive to unforeseen

developments such as the need for addressing road sections damaged on account of 2005 earthquake, 2010 floods, and 2011 monsoon rains and also to other project needs such as extending the closing date and additional financings. Major problem areas such as, delays in according approvals to design changes/variation orders and in land acquisition (earthquake damaged roads) were identified early on and persistently followed up through to their satisfactory resolution. The key issues in implementation were also regularly and candidly brought to the attention of the sector and country management through the Implementation Status Reports (ISRs) and the guidance received was promptly acted upon. The ISR ratings assigned to the quality of implementation provide a fairly accurate reflection of the project’s performance in the corresponding periods, e.g., safeguards rating downgrade in 2013. Overall, the Task Team showed profound knowledge of the client’s needs, developed goodwill and productive engagement, and appropriately adapted the project to ensure maximum relevance and achievement of PDO in light of changing macroeconomic conditions (e.g. level 2 restructuring to increase the Banks disbursement percentage to 100%). Finally, the level and quality of the Bank team’s support during the implementation was uniformly appreciated by the NHA/PMU, contractors and consultants. In view of this, the Bank’s performance during the implementation is rated as “Satisfactory.”

5.1.5 The Bank assisted the Borrower in the adequate preparation of the project. The Bank also actively addressed implementation problems through proactive and intensive supervision. The Bank showed responsiveness and flexibility to help adapt the project to changing circumstances and that resulted in substantial achievement of the PDO, outcome indicators and outputs.

5.1.6 Overall, Bank performance is therefore rated Satisfactory.

5.2 Borrower Performance

(a) Government Performance – Satisfactory

5.2.1 The GOP demonstrated a strong level of commitment and ownership toward the project design, preparation and implementation through a number of actions such as: (i) full agreement with the policy support and institutional development component, (ii) amended the NHA Act to restore central review and approval of all NHA programs and projects (exceeding Rs 100 million) through the Central Development Working Party/Executive Committee of the National Economic Council (ECNEC) mechanism, (iii) expanded the role of very successful National Highway and Motorway Police (NH&MP) from the Motorway System to the National Highways N-5 and M-9 – NH&MP teams were deployed for traffic and road safety enforcement, on about 1700 km of the project corridor, (iv) government agreed to take a decision regarding treatment of the existing stock of NHA debt and the mode of all future funding for its capital development program – the government agreed to on-lent World Bank financing to NHA as a grant; and conducted a study that identified various sustainable options for financing

NHA’s capital program, and (v) provided adequate counter-part funds from FY 03/04 to FY 07/08 during the original five year project implementation period18.

(b) Implementing Agency or Agencies Performance – Satisfactory

5.2.2 The Project was implemented by a dedicated Project Management Unit (PMU) at Islamabad which functioned well under the General Manager (HRP). All the Project Coordinators, Deputy Project Coordinators and supporting staff were in place in the regions. NHA regularly furnished the Bank with monthly progress reports and quarterly financial management reports (FMRs). The Project was exposed to ‘new’ norms/processes for managing fiduciary and safeguards aspects as well as outline-based design-build, lump-sum contracts. Consequently, the NHA staff, consultants and contractors had to go through a rather steep learning curve. NHA’s Planning Wing responsible for project design and preparation performed their duties well. The prequalification and procurement of contractors was done in a transparent manner.

5.2.3 Considering that the performance of both the Government and its implementing agency is satisfactory, overall performance of the Borrower is rated as Satisfactory.

6 Lessons Learned

6.1 The main lessons from the HRP include:

6.1.1 Lump-Sum contracts were a success

a. Ad-measured, item-rate civil works contracts frequently encountered major cost over-runs, due to significant variations in final work quantities and delays in project implementation. To minimize this risk and benefit from contractor innovation and efficiencies during construction, rehabilitation contracts under the Project were invited on a “lump-sum” basis using outline designs provided by NHA, which prescribed a minimum pavement thickness.

b. This approach shifted some of the construction phase risks to the contractor, where they can be better managed. Overall construction completion costs remained much lower (see Table below) – only 5% increase in cost compared to 17% increase in the traditional item-rate contracts – even though bid prices were on average about 11% higher than the Engineer’s Cost Estimate.

18 In 2008, macro-economic condition of the country starting deteriorating resulting in budgetary cuts, that, in turn, caused some delays in release of counter-part funds.

Contract No. Bid Price (Rs Million) Variation Amount (Rs Million) Final Cost (Rs Million) % Change CP1 772,957,568 13,503,386 786,460,954 2% CP2A 623,337,561 2,968,971 626,306,532 0% CP2B 549,000,000 (485,651) 548,514,349 0% CP3 1,110,200,060 97,401,172 1,207,601,232 9% CP5 1,199,892,556 15,159,377 1,215,051,933 1% CP7 863,345,000 9,973,975 873,318,975 1% CP9 1,193,765,515 222,827,573 1,416,593,088 19% CP10 572,882,000 25,195,355 598,077,355 4% Total 6,885,380,260 386,544,158 7,271,924,418 5%

6.1.2 The HRP experience shows that addressing sector policy reforms in investment operations is a rather difficult undertaking

a. Successful implementation of reforms requires a long term government commitment and ownership and cannot be achieved through ‘dated legal covenants.

b. Since its establishment as an authority in the early 1990s, GOP has been providing loans to NHA to finance its capital program. As NHA’s own revenue base (primarily tolls) is barely sufficient to cover the costs of operations and maintenance of the existing road network, it has built up a huge and growing stock of debt to GOP. This practice is clearly unsustainable, and undermines NHA’s financial standing. To help address this problem (i) World Bank financing for the project was provided by GOP to NHA as a grant; and (ii) a study was completed under the project to identify sustainable options for financing NHA’s capital program, and several options were discussed. However, the government’s resolution of this issue was delayed and remains outstanding. The delay stemmed from government concerns about the implications of any decision in terms of the budget, as well as the precedent it would create for the treatment of government debt to similarly established authorities in other sectors.

c. This legal covenant was waived in May 2012 through a Level 2 restructuring of the project.

6.1.3 Inadequate price adjustment mechanism

a. The omission of price escalation clause in phase-I contracts critically impacted the cash-flow and implementation progress of the civil works contractors. The situation was somewhat rectified by introduction of this clause in phase-I contracts in 2005.

b. The NHA and Bank agreed to enhance the price adjustable portion (Factor C) from 40% to 55% in phase-II contracts. However, this enhancement was arbitrary. The Factor C is a percentage of the total contract price representing the sum of the estimated proportion of each specified cost element; therefore, the price adjustable portion should have been different for HRP contracts since proportions of specified cost elements varied from contract to contract. As a result of this flaw, the contractors were not properly compensated for increases in price of inputs.

6.1.4 Construction industry constraints

a. The local contractors’ capacity is heavily overstretched – there are only about 15 medium sized firms and about 3 large contractors in highway sector in Pakistan.

b. Number of bids received generally decreased from phase-I to phase-II contracts due to: (1) reduced interest of foreign contractors caused by security and law and order concerns and what they perceived as unfavorable business environment; and (2) number of qualified domestic contractors was limited and there were other contracting opportunities in Pakistan and Afghanistan.

c. There is a dire need to: (i) create an enabling environment that can attract international contractors to shake poorly performing local contracting industry, and (ii) implement the recommendations of the World Bank Report No. 41630-PK entitled “Infrastructure Implementation Capacity Assessment (PIICA)” dated November 22, 2007.

6.1.5 South-South technology transfer

Green slope stabilization and management technologies utilizing soil bioengineering developed and applied under this project were transferred to Timor Leste under a South- South Exchange Facility Grant. Where a project successfully introduces innovation in project design and implementation, there is significant scope for transferring such innovation to other Bank borrower countries. The project’s experience in soil bioengineering has been also reviewed and documented in the National Cooperative Highway Research Program (NCHRP) Synthesis 430, “Cost Effective and Sustainable Road Slope Stabilization and Erosion Control”, a report of NCHRP of the Transport Research Board of the US National Academy of Engineering.

7 Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies

7.1 No issues were raised.

(b) Co-financiers

7.2 Not Applicable

7.3 Not Applicable

Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent) Appraisal Revised Latest Estimate Estimate Estimate Percentage Components (USD (USD (USD of Appraisal millions) millions) millions)

Network Conservation 218.2 303.2020 139% Component19 Policy Support & Institutional 14.07 14.07 100% Development Component Reconstruction and Rehabilitation of Earthquake Damaged Roads - 90.8 - Component21 - 130.022 - Total Baseline Cost 232.3 538.07 232% Physical Contingencies 10.40 14.875 143% Price Contingencies 18.20 22.675 125% Total Project Costs 260.90 575.62 221% Front-end fee PPF 0.00 0.00 - Front-end fee IBRD 0.50 0.9125 183% Total Financing Required 261.40 576.53 221%

(b) Financing Appraisal Actual/Latest Type of Co- Estimate Estimate Percentage of Source of Funds financing (USD (USD Appraisal millions) millions) Borrower 61.40 62.20 101% International Bank for Reconstruction 50.00 223.36 447% and Development International Development 150.00 291.00 194% Association (IDA)

19 Original Financing for Network Conservation & Policy Support Components approved on December 13, 2003 (Bank Share US$ 200.0 million, GOP Share US$ 61.4 million) 20 This estimate includes Additional Financing for Cost Overrun approved on March 29, 2006 (Bank Share US$ 65.0 million, GOP Share US$ 20.0 million) 21 Additional Financing – October 8, 2005 Earthquake – approved on December 1, 2005 22 Additional Financing – 2010 Floods & International Oil Price Hike – approved on September 28, 2010

Annex 2. Outputs by Component

Output Indicators Component End of Project Target Achievement Status Component – I: Network a. 856 km of highways a. 907 km rehabilitated/ Conservation Component rehabilitated/resurfaced resurfaced/recycled b. Safety improvement works b. Deleted23 at 15-20 locations c. Trees planted in about c. About 837,000 trees 2,500 avenue km in RoW planted Component – II: Policy 1. MTBF Support and Institutional development Component a. MTBF in place a. An agreed 5-year MTBF (FY 03/04 – FY 07/08 adopted and implemented.

b. Annual throw-forward of b. By Mid-Term (FY 06/07 – NHA PSDP reduced from December 2006) throw- 4.2 years24 to 2 years forward was reduced to 3.8 years; however, end of project target could not be achieved due to the expanded capital development program. FY 12/13 throw-forward is 5.0 years.

c. Share of expenditure on c. Share of total expenditure network conservation on network conservation increased from 38% to 55% is above 66% – 20% higher than MTBF target of 55%

2. RMA

a. RMA Operational and a. Institutionalized financing AMP

b. Routine and periodic b. Funding increased from maintenance funding 25% to 88% of stable increased from 25% to network needs 100% of stable network needs

c. Allocations based on c. Institutionalized

23 Instead these works were included in the main civil works contracts through variation orders (grade- separated interchanges, vehicular underpasses, pedestrian under- and over-passes etc. 24 Ratio of aggregate value of commitments carried forward from previous financial year and budgetary allocation.

RAMS; regular consultation with Road Users.

d. Publication of RMA d. Institutionalized Annual Reports in public domain

3. Corporate Strengthening Program

a. Phase-1 of BPR program a. Phase-I completed; Phase- completed; Phase-II II terminated25 underway

b. Action plan to improve b. Audited NHA agency financial management and level financial statements internal controls and audited RMA implemented accounts current, albeit with some qualifications; fixed assets accounted and reconciled

c. Modern road asset c. Developed and management system operational operational

d. Axle Load Management d. Study completed program initiated in partnership with trucking industry and other stakeholders

e. Improved pavement e. A state-of-the-art management systems and laboratory supplied with standards developed and latest Strategic Highway piloted Research Program (SHRP) equipment established and procedures under development

f. Highway safety component f. Implemented implemented (safety audits, accident reporting, investigation and analysis, community safety awareness programs

25 Due to non-performance of the consulting firm.

g. Satisfactory compliance g. Satisfactory compliance; with EMPs, RPF and good practices RAPs; Environment and mainstreamed – a social management dedicated environmental capacity enhanced and social safeguards unit (improved practices established adopted, dedicated professional staff engaged, grievance redressal system established)

h. HRD plan implemented (in- h. HRD strategy and action country training, overseas plan developed; a training, scholarships) dedicated HR unit established, training imparted Component – III: 128 km of highways Completed and re-opened to Reconstruction and reconstructed/rehabilitated traffic Rehabilitation of Earthquake Damaged Roads

Annex 3. Economic and Financial Analysis

1. Cost-benefit analyses were undertaken for the 18 civil works contracts under the Project. The economic analysis followed exactly the same methodology adopted at appraisal. It was carried out using the most recent version of Highway Development and Management Model (HDM-IV), which simulates highway life cycle and vehicle operating conditions and costs for multiple road design and maintenance alternatives.

2. The table below summarizes the results of the economic analysis. The results indicate that the investments are economically justified, with the Economic Internal Rate of Return (EIRR) ranging from 13% for Contract 15, to 51% for Contract 12D.With these rates of return, the project as a whole continues to remain economically viable.

Investment NPV Length Traffic EIRR Contract No. Civil Works Cost Rs (km) (AADT) (%) Rs million million Contract 1 47 10,452 Rehabilitation 1,186 1,744 31% Contract 2A 40 8,309 Rehabilitation 769 934 25% Contract 2B 39 5,961 Rehabilitation 683 502 20% Contract 3 86 6,964 Rehabilitation 1,757 1,910 27% Contract 5 50 5,502 Rehabilitation 1,557 319 15% Contract 7 47 6,905 Rehabilitation 1,195 259 15% Contract 8 100 24,439 Widening to 6-lanes 7,657 12,055 27% Contract 9 57 21,855 Rehabilitation 2,043 1,750 31% Contract 10 48 10,781 Rehabilitation 762 2,081 35% Contract 11B 123 7,036 Recycling26 2,235 624 17% Contract 12A 30 13,791 Resurfacing 360 548 27% Contract 12C 26 11,813 Resurfacing 255 423 28% Contract 12D 36 15,143 Resurfacing 251 1,435 51% Contract 13 111 13,474 Recycling 1,518 1,105 20% Contract 14 68 21,855 Resurfacing 1,532 1,405 22% Contract 15 25 10,047 Reconstruction 1,098 41 13% Contract 16 44 2,083 Reconstruction 2,926 2,206 18% Contract 17 59 2,357 Reconstruction 2,901 2,188 17%

3. The above results are consistent with switching value analysis conducted at appraisal, which showed that for phase-I contracts, costs would have to increase by 227 percent or benefits reduced by 69 percent to yield the cutoff 12% EIRR. Phase-2 analysis showed that costs would have to increase by 191 percent or benefits reduced by 65 percent to yield the cut-off 12 percent EIRR. Total increase in cost due to design changes27 is Rs 5.16 billion28 (US$ 48.1 million) i.e. 26% much below the calculated switching value. High rates of return are maintained on account of two factors: (a) increased cost of vehicle input parameters (e.g. 409% increase in cost of diesel) resulting in higher vehicle operating costs savings, and (b) current traffic being much higher than estimated at appraisal resulting in, at least, proportionately higher vehicle operating costs savings.

26 A pavement reconstruction technique involving reuse of existing pavement materials after rejuvenation 27 Network Conservation Component 28 US$ = Rs 107.2856 – November 5, 2013

4. Traffic has grown at much higher rates than forecast at appraisal due to strong economic growth in recent years. In FY 04 the economy grew at 6.4%, and in FY 07 the GDP growth reached 7.0%. Another reason for higher traffic is the introduction of car leasing schemes in Pakistan resulting in a large increase in the number of small and mid-size cars. Comparison of traffic estimates used in the appraisal and current economic analysis is as follows:

Contract No. 2003 Traffic 2013 Traffic % Increase Contract 1 5,820 10,452 80% Contract 2A 4,716 8,309 76% Contract 2B 3,383 5,961 76% Contract 3 3,899 6,964 79% Contract 5 3,167 5,502 74% Contract 7 3,873 6,905 78% Contract 8 13,621 24,439 79% Contract 9 12,170 21,855 80% Contract 10 6,003 10,781 80% Contract 11B 3,845 7,036 83% Contract 12A 8,395 13,791 64% Contract 12C 7,679 11,813 54% Contract 12D 9,185 15,143 65% Contract 13 6,818 13,474 98% Contract 14 13,207 21,855 65% Average 7,052 12,285 75%

5. Comparison of current EIRR with appraisal estimates shows a decrease of 18% in Project rate of return.

Contract No. 2003 EIRR 2013 EIRR % Change Contract 1 36% 31% -14% Contract 2A 29% 25% -12% Contract 2B 24% 20% -16% Contract 3 30% 27% -11% Contract 5 27% 15% -45% Contract 7 25% 15% -40% Contract 8 36% 27% -26% Contract 9 54% 31% -42% Contract 10 23% 35% +51% Contract 11B 24% 17% -29% Contract 12A 26% 27% +5% Contract 12C 33% 28% -15% Contract 12D 42% 51% +23% Contract 13 51% 20% -61% Contract 14 35% 22% -36% Average 33% 26% -18%

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Responsibility/ Names Title Unit Specialty Lending

Supervision/ICR Javaid Afzal Senior Environmental Specialist SASDI Zia Al Jalaly Senior Social Development Spec SARDE Anwar Ali Bhatti Financial Analyst SACPK Anthony G. Bliss Consultant SASDT Road Safety Ghulam Farid Program Assistant SASDO Ernst-August Huning Consultant SASDT HRD Abid Abrar Husain Consultant SASDT BPR Shaukat Javed Program Assistant SASDO Mohammad Omar Khalid Consultant SASDI Environment Riaz Mahmood Financial Management Analyst SARFM Syed Sada Hussain Shah Temporary SASDI Naqvi Nabin Pradhan Consultant EASNS RAMS Navaid A. Qureshi Principal Industry Specialist CNGTR Original TTL Zafar Iqbal Raja Sr Highway Engineer SASDT Current TTL Uzma Sadaf Senior Procurement Specialist SARPS Hasan Saqib Sr Financial Management Specia SARFM Anil H. Somani Consultant EASNS Environment

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY94 12.54 FY95 2.63 FY96 62.09 FY97 51.75 FY98 57.51 FY99 34.58 FY00 32 17.29 FY01 30 35.00 FY02 40 119.92 FY03 41 157.62 FY04 16 59.07 FY05 0.00 FY06 0.00

FY07 0.00 FY08 0.00

Total: 159 610.00 Supervision/ICR FY94 0.00 FY95 0.00 FY96 0.00 FY97 0.00 FY98 0.00 FY99 0.05 FY00 0.43 FY01 0.00 FY02 0.00 FY03 0.00 FY04 28 71.44 FY05 49 103.16 FY06 45 142.99 FY07 36 68.81 FY08 39 66.70 FY09 23 0.00

Total: 220 453.58

Annex 5. Beneficiary Survey Results

Not Applicable

Annex 6. Stakeholder Workshop Report and Results

Not Applicable

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

The draft ICR was shared with NHA. In response, NHA stated that it agrees to the evaluation of the Project as provided in this ICR.

Please see Attachment-I for Borrower’s ICR.

Annex 8. Comments of Co-financiers and Other Partners/Stakeholders

Not Applicable

Annex 9. List of Supporting Documents

1. Project Appraisal Document for Highways Rehabilitation Project – Report No: 27281-PAK 2. Aide Memoires and Management Letters – Implementation Support Missions: 2004 to 2013 3. Implementation Status Results Report – Sequence 1 to 21 4. Government Poverty Reduction Strategy Paper (PRSP-I), 2003-06 5. Government Poverty Reduction Strategy Paper (PRSP-II), 2006-11 6. Country Assistance Strategy FY 03-06 7. Country Assistance Strategy FY 06-09 8. Country Partnership Strategy FY 10-14

Attachment-I

NATIONAL HIGHWAY AUTHORITY

WORLD BANK ASSISTED HIGHWAY REHABILITATION PROJECT & EARTHQUAKE DAMAGED ROADS

PROJECT IMPLEMENTATION REPORT

MINISTRY OF COMMUNICATIONS GOVERNMENT OF PAKISTAN

PROJECT IMPLEMENTATION REPORT BACKGROUND

1. The NHA under the Federal Ministry of Communications (MOC) is responsible for about 12000 km long National Highway and Motorway network which carries 75 to 80 % of Pakistan's total commercial traffic. The national highways were inherited from provincial departments in the form of poorly maintained, low capacity surface treated roads. The poor road condition coupled with maintenance neglect due to inadequate resources, and significant increase in axle loads caused rapid deterioration of the roads leading to a colossal maintenance backlog which required huge investment to restore it to acceptable conditions.

2. NHA initiated a multiyear, National Highway Improvement Program in 2002, to enhance the efficiency of the network, covering rehabilitation, resurfacing and improvement of 2700 km of the national highway network based on a comprehensive condition survey and network prioritization study. The program is being financed through GOP PSDP, NHA’s toll revenue and multi-lateral financial institutions. The World Bank agreed to finance segment of the national highway improvement program focusing on N-5 / M-9 by virtue of the high traffic levels along this north south corridor. In the aftermath of the earthquake of October 8, 2005, the rehabilitation & reconstruction of four severely damaged roads was also included in the scope of the project.

DESCRIPTION OF THE PROJECT

3. Assessment of the Project Design. The project included (i) an investment component for rehabilitation and resurfacing of key sections of the Karachi – Lahore – Peshawar corridor of N- 5/M-9 and earthquake damaged roads and (ii) a comprehensive package of institutional strengthening measures, to build capacity of NHA in the development, management and maintenance of highways with enhanced performance and improved governance. The project was well designed to ensure the achievement of the development objective.

10. Components. The project has following components:

a. Network Conservation Component. This component consisted of civil works along the national highway N-5 and earthquake damaged roads as tabulated below. The table also indicates the cost at appraisal and completion. The detail of contract packages is attached as appendix 1.

1) N-5 Corridor

S.No Item Appraisal / Completion Status PC-I Cost Cost a) Rehabilitation of 550 kms Roads 9,207.54 18,891.960 Completed (Original) b) Resurfacing of 306 kms Roads (Original) 2,479.62 7,572.036 Completed c) Safety oriented / traffic Engineering 225.42 - Works d) Contract Administration & Const 584.36 1069.67 Appointed Supervision e) Relocation of Utilities 28.90 87.601 Completed f) Afforestation 283.22 243.024 Completed

g) Land Acquisition & Resettlement 57.80 186.734 Completed h) Safety Improvement Works 1,184.90 - Deleted i) Other Construction from Saving 197.10 5.007 -- Sub – Total (i) 14,248.86 28,056.032

2) Earthquake damaged Roads

S.No Item Appraisal / Completion Status PC-I Cost Cost a) Reconstruction of about 44 km of National Highway: N-15 (Basian- 1,813.87 3,869.049 Completed Balakot-Mahindri-Naran section). b) Rehabilitation of about 25 km of National Highway: N-35 (Battal-Batgram-Thakot 1,727.681 1,364.961 Completed section) c) Rehabilitation of about 59 km of Jhelum 1,528.205 4,292.89 Completed Valley Road d) Land Acquisition - 122.128 Completed e) Relocation of utilities 60.00 73.079 Completed f) Technical Assistance 258.00 585.511 Completed g) Incremental operating cost 70.00 23.269 Completed h) Front End Fee 15.00 15.108 Paid i) Physical Contingencies Included in 146.17 Serial a, b Completed and d j) Price Contingencies 341.40 6,621.578 Completed Sub – Total (ii) 5,960.326 16,967.573

b. Policy Support and Institutional Development. This component comprised technical assistance, training, equipment support and incremental operational costs for the implementation of improved sub-sector policies and institutional capacity. The details with cost is as follows:-

S.No Item Appraisal / Completion Status PC-I Cost Cost Project Component – 2 a. Business Process Re-engineering 231.20 11.723 Completed Asset Management b. RAMS Implementation 104.04 138.583 Implemented c. Improved Payment Systems & 86.70 68.224 Implemented Standards d. Axle Load Management 21.96 39.718 Implemented Highway Safety e. Technical Assistance for National 12.72 12.920 Implemented Highway SCS

f. Environment & Social Management 31.21 110.422 Implemented g. Institutional Training and HRD 52.60 78.588 Implemented Sub-Total (iii) 540.43 460.179 h. Sector Studies and Future Project 124.27 54.554 Completed preparation j. NHA’s Incremental Operating Cost 195.36 538.599 Completed Sub-Total (iv) 319.63 593.153 Grand Total (i + iii + iv) 15,108.92 29,109.364

5. Financing of the Project. The total project cost was estimated at US$ 261.40 million. The project cost was to be shared in the ratio of 76:24% by World Bank and GOP respectively. Out of GOP share of 24%, 14% was to be allocated out of PSDP and 10% out of RMA of NHA. Initially World Bank provided US $ 200 million. The details of additional financing are as follow;

a. First Additional Financing. In the aftermath of earthquake of October 8, 2005, the GOP requested World Bank to finance the damaged roads in N.W.F.P and Azad Jammu & Kashmir. The World Bank agreed to finance the roads at a cost of US$ 100 million as part of the ongoing Highway Rehab Project. The loan agreement for US$ 100 million was signed which became effective on 23rd January 2006.

b. Second Additional Financing. The Procurement for the Phase I & Phase II civil works contracts was completed in September 2005. The bids prices of each contract substantially exceeded the engineer estimates. The increase in cost was mainly due to, outdated cost estimates based on CSR-2000, unprecedented price hike of oil related products & other construction material, and changes in design. The World Bank was requested to share the increased cost in the same ratio of 76:24 %. The World Bank approved an additional loan of US$ 65 million in May 2006.

c. Third Additional Financing.

1) The project experienced an unanticipated increase in cost primarily due to the enormous raise in the amount of price escalation being paid to the contractors resulting from the swelling cost of the road construction material driven by the unprecedented increase in the oil prices.

2) The majority of the area affected by the earthquake became unstable due to 2010 floods. Slides continued to remain active during the construction and the clearing of these slides to maintain access not only to enable road works to progress, but also to ensure rehabilitation works, resulted in additional costs with extended treatment works.

3) The World Bank agreed to provide an additional financing of US$ 130 million to meet the cost overruns and repair of damages caused by the floods of 2010.

4) The total cost of the loan / credit is US$ 495 million.

6. Duration of the Project. The project was originally designed for completion by December 2009. However for reasons of change in scope of work, rains/ floods and delays in

implementation of civil works contract the duration of the project was extended up to 30th June 2013.

Development Objective

7. The project development objective is “the sustainable delivery of a productive and efficient national highway network contributing to lower transportation cost.” The achievement of development objective is to be judged on the basis of performance indicators.

8. Output Indicators. The output indicators specified for the projects have been achieved, as discussed below;

a. 550 km of N-5/ M-9 corridor has been rehabilitated. b. 128 km of earthquake damaged roads have been completed. c. 393 km of N-5 length has been resurfaced.

9. Impact Indicators. The specified impact indicators have been satisfactorily achieved as follow;

a. The road network in poor condition was reduced from 49% to 35% against a target of 35%. However 793 km of national highway network was extensively damaged due to super floods of 2010, which is now being rehabilitated under ADB loan and Chinese grant.

b. Average network-level roughness is reduced from 5.4 IRI to 4.49 IRI against the target of 4.4.

c. The travel time on N-5 has been reduced by 16% from 47 hours against targeted reduction of 10% of 42 hours.

d. Fatalities on N-5 have been reduced by 63% against targeted reduction of 10%.

10. Achievement of Development Objective. The status of the above achievement of the performance indicators shows that the development objective has been satisfactorily achieved.

IMPLEMENTATION OF THE PROJECT

Overview

11. Investment Component.

a. The initial scope of civil works for rehabilitation and resurfacing was simple and straight forward as it did not involve any land acquisition and major resettlement or relocation of utilities. However the works were spread over a distance of 1700 km requiring a dedicated organization for monitoring and supervision. The only complexity of the project in the original scope was visualized to be compliance with the environmental & social safeguard, as this was the first project subjected to the World Bank Operational policies.

b. The complexity of the project was compounded by the inclusion of reconstruction of earthquake damaged road which not only involved reconstruction but also the traffic had

to be kept open for the relief and reconstruction of the affected population. The environmental and social safeguard became more intricate as the reconstruction involved land acquisition and slope stability measures and disposal of surplus material.

c. The implementation became more challenging in the wake of unforeseen rise in the cost of construction material and limited financial and management capability of the contractor.

12. Institutional Strengthening Component. The project included multifaceted policy reforms, institutional strengthening, and capacity building measures which were to be implemented with the limited institutional capacity for which it was designed to improve. Hence from hindsight this institutional development program proved ambitious and unrealistic.

13. Implementation. The vast scope of the project for investment component comprising of 18 civil works contracts and multifaceted institutional strengthening was very comprehensive and rather than a project should have been named as a program. This program has been implemented with good results in challenging environments. The challenges and measures to overcome are discussed in this report.

Project Preparatory Activities

14. Establishment of PMU. A dedicated project management unit under a General Manager was established at Islamabad. The PMU was adequately staffed. Experienced Project Coordinators at the regional level and Deputy Project Coordinators for each contract were appointed. The PMU functioned well and effectively monitored the wide range of construction and institutional strengthening activities. The PMU acted as Secretariat to the Project Steering Committee. The PMU satisfactorily performed its functions.

15. Engineering Designs. The rehabilitation and resurfacing of various sections was based on proven engineering specifications and construction techniques, which were well within the capability of NHA and the contractors. NHA acquired the services of National Consultants for designs and technical specifications. The rehabilitation works were procured on the basis of outline designs prepared by the consultants, specifying the minimum thicknesses. This was done with a view to shift some of the construction phase risks to the contractor.

16. Procurement.

a. Bid documents. The bid documents were prepared by well experienced Consultants, following the Bank’s Standard Bidding Documents for ICB contracts for Rehabilitation and World Bank sample bidding documents for small works NCB contracts. 10 contracts for rehabilitation works were procured on the basis of lump sum fixed price contracts, and the 6 x resurfacing packages as measured contracts. Bid packages were suitably sized for NCB as well ICB contracts to allow adequate participation of the national and international firms.

b. Procurement. The procurement of works, services and goods was carried out in accordance with World Bank Procurement Guidelines. For the Earthquake Damaged Roads the World Bank allowed direct contracting of works to Frontier works Organization and services to SMEC through a variation order. The prequalification and the bidding process was conducted in a fair / transparent manner and was well done. Procurement arrangements were well defined, contract packaging was straight forward

and no significant problem was encountered. Overall the procurement processes were well managed and no major delay occurred in the award of works and services.

17. Preparation of detailed engineering design by the Contractors.

a. The rehabilitation contracts for both phases were procured on the basis of a hybrid Design & Build concept. An outline design was prepared by the consultants specifying the pavement thicknesses and geometric design criterion. The contractor’s responsibility, design requirements & methodology and liability were not well defined in the contract agreement.

b. The contractors were required to acquire the services of design consultants for topographic survey and preparation of plan & profile drawings and obtain the approval of NHA through the design review consultants, within four months of the agreement. Most of the contractor acquired the services of consultants who did not demonstrate enough capacity to complete the designs within the prescribed time of four months, leading to design by parts. In some cases the contractors were unable to fulfill the design obligations till the completion of the project.

c. The design for Recycling Contracts and specifications was carried out by the local consultants, which required recycling of pavement up to 30 cm depth. The consultants ignored the capability of the available recycling machine and requirement of heavy rollers to compact 30 cm deep layers. This design and specification posed problem in implementation, for which fresh designing was carried out through international consultants, thus delaying the execution. However the works were satisfactorily executed.

18. Environmental and Social Impact Assessment Impact Assessments. NHA prepared the EIA and SIA for rehabilitation & resurfacing contracts through consultants and obtained regulatory clearance from the EPA. EMP was evolved to mitigate the adverse environmental impact. The EMP was made part of the civil works contract, based on which the contractors developed site specific mitigation plans. The supervision consultants were responsible for monitoring the implementation of EMP. A Resettlement Policy Framework was agreed with the Bank to compensate the PAPS for mitigation of the impacts. This was the first ever project in the road sector subjected to the environmental & social safeguard policies.

Civil Works Implementation

19. Capacity of Construction Industry. The contract award demonstrated limited in country capacity of the construction industry. The total 18 contracts were awarded to four national contractors (i) Husnain Cotex Limited – 7 (ii) Saad Ullah Khan & Brothers -3 (iii) Lilley International -3 (iv) Frontier Works Organization -3, through direct contracting (v) SAMBU -1 and (vi) Put Sarajevo -1. The international contractors did not participate due to perceived security situation in the country. The non-participation of the international contractors in the bidding and limited number of local contractors not only restricted the competition but also led to delays in the execution of the projects. The shortage of qualified contractors also inhibited NHA to impose penalties or terminating the contracts for re-bidding with consequences of higher cost and not necessarily better new contractors.

20. Contractor’s capacity. The rehabilitation and resurfacing works were based on construction techniques which were well within the capability of the contractors. The contractors mobilized adequate equipment for the execution of the sub projects including acquisition of new asphalt

plants, concrete batching plants, earth work equipment, pavers and cold recycling machines. However most of the contractors demonstrated poor management capacity in (i) timely preparation and revision of work programs (ii) inadequate submission on contractual issues to the engineer and (iii) management of cash flows, which resulted in the implementation delays.

21. Price Adjustment. The rehabilitation works were procured as Fixed Price Lump Sum contracts, with no provision for price adjustment. In 2005 unprecedented hike occurred in prices of crude oil in the international market and the Government withdrew subsidy on the diesel oil. The prices of fuel, bitumen, labor and other construction input increased manifold, which adversely impacted on the cash flow of the contractor posing great risk for the completion of the projects. With a view to ensure timely completion of the projects amendment to the contracts was incorporated introducing price adjustment. Though the introduction of the price adjustment considerably impacted the cost of the project, but helped in timely completion of most of the contracts.

22. Rationalization of Adjustable Portion of Contract. Pakistan Engineering Council has issued the Document Standard procedure & Formula for Price Adjustment” Aug 2002 revised Nov 2005. The stated objectives of this document are to make price adjustment as real as possible, set out a simple procedure, and make the contracts equitable. The document specifies typical elements for price adjustment for Highway Projects as Cement, Steel, POL, and skilled / unskilled Labor & Bitumen. The coefficient for each specified item is required to be calculated proportionate to its ratio in the contract value and given in the bid document. The sum of all coefficients shall form the adjustable portion of the contract or factor C. The adjustable portion of the contract shall generally be fixed between 35% - 65%, depending on the nature of project. However the adjustable portion on the contracts was arbitrarily fixed as 40%. The contractors raised the disputes that since escalation is paid on specified items only, the price adjustment provisions have become inequitable in case of unprecedented rise in prices of the cost element like fuel which shall have a spiraling effect on the non-recoverable escalation. Resultantly Factor- C was rationalized number of times by the Engineer, Dispute Resolution Expert and Arbitrator, leading to delays on the projects. It is therefore important that the adjustable portion is accurately worked out to ensure equitable payment of escalation.

23. Shortage of bitumen. There are primarily two oil refineries (i) Attock Refinery Limited Private at Rawalpindi and (ii) state owned National Refinery Limited at Karachi producing bitumen in Pakistan. In 2005 the government privatized the National Refinery Limited which was purchased by the Attock Group of Industries resulting in a virtual monopoly in the field. The demand for bitumen increased manifold due to the government’s ambitious program of construction of infrastructure coupled with the reconstruction of Afghanistan. The refineries preferred to supply the bitumen to the Afghan market over the local market, resulting in immense shortage in Pakistan. The shortage not only increased the prices but also led to delay in the implementation of the projects and time extension had to be notified on all contracts. NHA adopted extra contractual measure of directly purchasing bitumen for supply to the contractors, with a view to minimize delays. However the impact could not be adequately mitigated. The shortage of bitumen remained a major cause of delay and higher escalation.

24. Time & Cost Overruns. Time and cost overruns are the two macro issues on development projects in the country. NHA and the bank were aware of the two factors and therefore introduced the concept of Design, Build and Lump sum, fixed price contracts. However, the objective to control time and cost overruns could not be overcome. The project scheduled for completion in 5 years and initial cost of US $361.00 million (261 for original HRP and 100 for earthquake

damaged roads) almost doubled leading to the final completion period of 10 years and cost of US$ 495 million. The time and cost overruns occurred due to following reasons;

a. Engineer Estimates. The Engineer’s cost estimates at the time of project preparation were based on NHA composite Schedule of rates (CSR) -2000 and thus were 4-5 years outdated. Whereas the Phase-I bids were slightly lower than the Engineer Estimates the Phase-2 bids were substantially higher leading to a substantial increase in project cost by US$ 85 million, at the conclusion of bidding prices. These cost estimates should have been updated by NHA at the market rates prior to appraisal of the project.

b. Increase in Oil Prices. Due to increase in prices of oil in the international market in 2005, considerable escalation in key materials resulted. The escalation was so exorbitant that the contractors were unable to absorb the impact risking the completion of the project. Resultantly the concept of fixed price contract was not only modified and price adjustment provisions were introduced through contract amendment, but the provisions were repeatedly rationalized through revision of Factor-C. The escalation was so high that the initial amount earmarked for price contingencies proved inadequate. It clearly indicates that adequate contingencies must be built into the engineer estimates at the time of project preparation.

c. Time Extensions. Contracts 1, 2A, 2B, 5, 7, 10, 12A, 12C and 12D were almost completed as scheduled within the original completion period of the project. However the time for contracts 3, 8, 14,11B, 13, 14, 15, 16, and 17 were repeatedly extended due to following reasons;

1) Limited financial capacity of the contractor exacerbated by unusual increase in prices, and over extended on more than one project.

2) Shortage of bitumen in the country.

3) Major revision in scope of work through design changes and floods of 2010 especially on EDR contracts.

4) Delay in finalization of design.

5) Nonpayment of GOP counterpart funds.

6) Frequent landslides due to instable slopes on the earthquake damaged roads.

7) Law & Order situation in the country.

d. Based on the above factors it is concluded that the objective of controlling the time and cost overruns have not been achieved as the project was implemented in difficult physical environments of unusual increase in prices of material and factors which could not be forecasted at appraisal. There is a requirement to reduce the gestation period between project preparation and implementation, preparation of proper engineers estimates, allocation of realistic contingencies and stricter prequalification of contractors to minimize the over commitment on projects under concurrent execution.

25. Taking over of completed projects.

a. The contract through an amendment allowed the taking over of substantially completed works by NHA, after which the contractor retained the responsibility of defect liability and completion of ancillary works as per punch list but was not responsible for the routine maintenance of the works. These provisions of contract were not understood by NHA operations wing and became a major controversy which not only resulted in the taking over of project sections after the expiry of the defect liability period but also became a major factor for maintenance neglect.

b. A committee was constituted under the provision of contract for taking over of the contract section. The committee comprised of the NHA project staff, the representative of the Operation Wing (DD Maintenance concerned) and the Engineer’s & Contractor’s representatives. After the detailed inspection the Engineer issues the taking over certificates, along with the Punch List for balanced ancillary works. As per NHA’s SOP, the works were once again inspected by NHA inspection Wing on completion of the defect liability period often with a time gap of over 5 year after issuing of the Taking over certificates. The inspection team conducted inspections as for initial taking over of section rather than focusing to observe if there have been any defects due to quality of work or the design failures. This practice as per NHA, SOP is clearly a violation of the contract provisions. Considerable time was wasted in resolving this issue.

c. The contractors often delayed / failed to execute the ancillary works as per punch list. At times the punch list included major works like extension of culverts, surface treating of shoulders, construction of service roads, and plantation of grass for erosion control, pedestrian bridges and catch water drains. There is a requirement that appropriately define the “substantial completion” and “scope of ancillary works”.

26. Contract Management.

a. The concept and powers of the Engineer and Dispute Adjudication Expert were not well understood. NHA’s processes and procedures for many aspects of the contract management were in contradiction to the FIDIC based contracts. NHA at many times intervened in contract administration and technical matters which eventually place the responsibility on the Client which resultantly weakened the position of The Engineer.

b. The processing of the variation orders, extension of time, designs and processing of the Engineer’s / DRE decisions were often delayed causing retardation on the progress of projects. Prompt response to design changes and timely decisions, avoiding bureaucratic channels for EOT / VOs and processing of IPCs are essential for good contract management.

c. Due to poor management of contractors NHA adopted extra contractual measures to successfully complete the contracts on the most important heavily trafficked highway of the country. NHA issued number of amendments to the contract for, payment procedure for lump sum contracts, payment of additional mobilization advances, establishing of escrow accounts, reduction in amount of retention money, inclusion of price adjustment, direct purchase of bitumen from the refineries for supply to the contractor and revision of Factor-C, with a view to successfully complete the projects. These measures did help to accomplish the objective except few contracts where the performance of the contractor remained poor.

27. Dispute Resolution.

a. The contracts provided the mechanism for dispute resolution through adjudication and arbitration. Many of the “Engineer’s” determinations and decisions were referred to the Dispute Resolution Expert (DRE) / Adjudicator by the contractors and few by Employer. A large number of the disputes were decided by the DRE in favour of contractors. The employer perceived the DRE’s decisions to be contractor’s biased.

b. Despite the fact that the DRE’s decisions were contractually binding, the Employer did not implement these in accordance with the provision of contract due to the fear of audit objections. These decisions were either referred to arbitration without implementation or the contractor was asked to provide irrevocable bank guarantee for payment arising out of the DRE’s decisions as a safeguard in case of reversal through arbitration.

c. This practice not only prolonged the resolution of disputes but at times adversely affected the contractor’s cash flow leading to delays on site. There is a requirement for the audit authorities to understand the contractual provision and amicable settlement of disputes. Also the DRE’ must be selected on the basis of credibility and experience.

28. Performance of Pavement.

a. NHA is seriously concerned on rutting of asphalt pavement due to heavy axle loads. In order to minimise the occurrence of rutting NHA adopted coarser gradation for aggregate with reduced optimum bitumen content in the mix design for wearing course and use of polymer modified bitumen.

b. The coarser gradation of aggregate for wearing course resulted in porous asphalt which developed cracks in the pavement leading to failure particularly on Nowshera – Peshawar contract. Also the use of polymer modified bitumen resulted in more brittle mix and resulted in hairline cracks on many other contracts which were to be sealed.

c. The asphalt technologist and international lead material engineer of the supervision consultant failed to foresee that the use of coarser aggregate will affect the sealing function of the wearing course and result in failures. The failures not only lead to contractual disputes but also caused embarrassment to the organization.

d. The pavement has now sustained traffic for the past 5 -7 years and although some localised distress is evident, the pavement performance is judged, to be in overall satisfactory condition. The pavement on many sections is now due for periodic maintenance for which NHA needs to initiate a program.

29. Financial management.

a. The Project. The PMU was established as a self-accounting unit with its own finance staff. The staff was well experienced in the financial management of the foreign funded projects. Therefore the financial management of the project remained satisfactory throughout the implementation period. The financial statements and audit reports were generally timely and unqualified.

b. Entity Level Accounts. A financial management improvement action plan was agreed between the bank and NHA. The plan has mostly been implemented. NHA’s entity level

accounts have been prepared. The accrual accounting system has been adopted. Fixed assets registers duly valued has been prepared and maintained. The internal controls have been strengthened. Signed audited financial statements are regularly prepared. The numbers of audit qualifications have reduced and the qualifications are being addressed.

30. Tree Plantation.

a. A well-conceived plan was evolved for the compensatory tree plantation along the project corridor. NHA initially considered awarding the tree plantation to the respective Provincial Forest Departments. A SOP and MOU were drafted with participation of the regional forest departments. The World Bank agreed to NHA proposal but suggested to implement a pilot project through private sector. The scrutiny of the detailed proposals of the forest departments were considered very costly and NHA decided to implement the afforestation program through private sector. This considerably delayed the implementation.

b. A total of 12 contracts with implementation period of 5 plus years amounting to Rs 432 million for plantation of 800,000 trees of indigenous trees and exported species, were awarded during December 2009 – March 2010. For initial period of 8 months NHA supervised the implementation through integral qualified staff of forest range officer. However sensing the complications particularly of intimate monitoring & evaluation of survival, replacement and payment NHA procured the services of Supervision Consultants. The contracts were effectively implemented.

c. The major success has been achieved along the Karachi – Hyderabad highway. This road section lies in an arid zone with low water table and scanty water sources. Here even the bushes do not survive. The exported species of Conocarpous was introduced along this reach. 180,000 trees were planted which has survived and are blooming. This is considered an accomplishment.

d. The survival rate at the end of the project is 87% with most of the trees from 2-3 years age. The maintenance of the trees will be carried out till 2016.

31. Environmental and Social Safeguards Management.

a. Training. The HRP is considered as the pilot project in the road sector subjected to environmental & social safeguard policies of the bank. It was therefore essential that an adequate level of awareness was to be created among all the stakeholders. For this purpose the services of Leads Pakistan were acquired to conduct trainings through seminars, workshops, case studies and field visits for the contractors, consultants and NHA staff in the identifications and mitigations of environmental and social issues. The training was well conducted and not only sensitized the participants but helped in development of basic skills on monitoring and reporting of the safeguard issues management.

b. Environmental issues Management. The EMP was made part of the civil works contract agreement. The compliance with EMP in the initial stages remained problematic. Difficulties were encountered in translating the EMP to the site specific mitigation plans for establishment of camps, sanitation & hygiene within the camps, siting of asphalt plants & dust control, disposal of debris and monitoring of environmental parameters. However substantial improvements were brought in through strict monitoring by the

NHA Director Environment and Supervision Consultant Staff. The contractors employed qualified environmental staff for preparation and implementation of the site specific mitigation plans and regularly submitted the monitoring reports. The environmental audits were regularly carried out quarterly/ half yearly by NHA staff and the lead environmental engineer of the supervision consultants, which showed gradual improvement. However the restoration of borrow pits posed a challenge, which were not satisfactorily managed due to the agreement between contractor and owners. c. Although EMP were part of the contract but the agreement did not define the penalty mechanism for any non-compliance. Resultantly there were violations in the initial stages. d. Land acquisition & Social safeguards

1) N- 5 Corridor. The rehabilitation and improvement along N-5/ corridor did not involve any land acquisition except at Mitiari Bypass. The land at Mitiari bypass measuring about five acres was acquired through private negotiation on the prevailing market rate. However the NHA ROW was encroached for road side businesses by vendors and squatters. Depending on the number of affected persons RAPS were prepared in accordance with agreed Resettlement Policy Framework and satisfactorily implemented. The RAP implementation posed considerable challenge in the urban centers along Gujranwala – Lahore contract. The Deputy Project Coordinators demonstrated considerable understanding of the social issues, conducted regular stakeholder consultations, redressed the grievances and resolve the issues to the satisfaction of the affected persons.

2) Earthquake Damaged Roads. The earthquake damaged roads were required to be upgraded to national standards, which involved land acquisition. Due to emergency nature of the reconstruction, World Bank demonstrated great flexibility by relaxing operational policy and allowed land acquisition under the urgency clause of the Land Acquisition Act – 1894. The land acquisition was delayed beyond proportion to the extent of risking the suspension of disbursement due to following reasons;

a) Delay in releasing of funds by NHA despite the fact that the land acquisition was financed by the Bank.

b) Utilization of funds by AJ&K government for other purposes rather than disbursement to affected persons.

c) Non posting of the required staff and lukewarm response by the provincial revenue departments.

d) Destruction of revenue record in the earthquake and outdated records. e. Relocation of utilities. The relocation usually commences after the mobilization of contractor and hence is a major factor in impeding the progress and causing implementation delays. There were large number of utilities along Gujranwala – Lahore contract which included LT/ HT electric poles, water pipelines, sewerage lines, high pressure gas lines and domestic gas distribution lines. The quantum was enormous and posed a serious challenge for relocation. NHA recognized the challenge at an early stage and commenced efforts for relocations. However the urgency was not realized by the utility departments as the construction activities were not visible on ground. To overcome

the issue NHA created a cell under a Project Coordinator and employed retired personnel from WAPDA, SUI Gas department and Telephone department. This cell worked round the clock and successfully relocated the utilities in accordance with the contractor’s work program by ensuring that these do not become impediments.

f. Institutional Arrangements. An important aspect of the project has been to create and maintain safeguard management capacity in NHA and mainstream these processes in all NHA’s business. This posed a serious challenge as adequately qualified staff was not available. In 2008 NHA took a major step by reorganizing the “Land Management & Infra structure Section” into an “Environment, Afforestation, Land & Social safeguards (EALS) Section”. The section has been organized under a General Manager with two directors (i) Director Environment and (ii) Director Land & Social. Qualified staff has been recruited and posted. This section is now responsible for the management of safeguards on all NHA projects and operations. The section has yet to assume the leading role and build adequate capacity.

32. Slope Stability through bio engineering solutions. The earthquake of 2005 severely jolted the sections along Battal – Batgram, Balakot – Naran and Muzaffarabad – Chakothi Roads, resulting into shallow and deep slides. The slides were persistently active and became serious impediments in keeping the road open to traffic. Numbers of civil engineering solutions were considered which were very cost intensive for shallow slides. With the technical assistance of UNDP, Bio-Engineering solutions were evolved. These methods envisage the root systems to be developed as anchors to control slides. A wide range of solutions including grassing, vegetated check damming, sowing of trees & plants, hedge layering, and semi dead fences with live hedge have been successfully implemented. The measures have proved effective, however to be sustainable would require specialized maintenance which has to be ensured by NHA through the forest department.

33. Contract Administration & Supervision’s Consultants.

a. The services of SMEC International & Louis Burger in association with a consortium of local consultants were acquired for design review, contract administration and construction supervision of the project. The consultant’s team comprised a core team of international experts located at Islamabad and the supervision staff led by a resident engineer at the project site. SMEC as a lead firm was designated as the Engineer which further delegated the powers of The Engineer and designated the Chief Resident Engineer/ Team leader as the Engineer’s Representative. The services of supervision staff for earthquake damaged road were acquired through a variation order in the original contract.

b. The consultants were selected on QCBS system under the World Bank guidelines. SMEC international was adjudged at second ranking in the technical evaluation due to fewer man months and leaner organization. However, based on the low financial proposal secured first position in the combined evaluation. The lower remuneration for the local staff, subsequently led to engagement of average quality of supervision staff on site.

c. The Team Leader, Contract Specialist, the Deputy Team leader, and the Environment Specialist were well experienced and played a proactive role contributing positively to the successful implementation of the project. However the performance of the Lead material Engineer and Lead Asphalt Technologist was not satisfactory as is evident from the failure of pavement due to inconsistent quality control.

d. The consultants commenced the services with good zeal. SMEC produced three manuals of (i) Contract Administration (ii) Construction Quality Control Manual and (iii) Laboratory Management manual. A reasonably well quality Control system was put in place with acceptable level of implementation. The consultants also prepared reasonably good documentation for contract administration.

e. However, as the work load increased the performance of the core team started declining particularly with reference to the contract administration and design reviews often delaying the Engineer’s decisions/ determination.

f. The local associates mostly proved as supplier of human resource and did not provide much of the needed institutional support to the lead firm. These firms could not attract good quality staff due to low financial proposal with consequences of low salaries charging high overheads.

g. A large number of the Engineer’s determination were disputed by both the Employer and the contractor giving perception of partiality as he was involved in the day to day management of the project.

h. The supervision consultant’s play a pivotal role in the efficient contract management and quality control of the works through intimate construction supervision. Highest weightage must be accorded to the technical proposal to ensure good quality staff and efficient organization. The engineer should be a person other than the team leader to ensure proper contract management.

Policy Reforms & Institutional Development

34. Policy Reforms and Institutional Strengthening Component. Although the need for implementing institutional strengthening measures cannot be overstated the project design ambitiously, given the known weaknesses in capacity called for rapid expansion of the institutional capacity in line with the scheduled pace of project implementation. The institutional development assignments under the project required the procurement of specialized consultants in a variety of subjects. These services were procured in accordance with Bank’s guidelines in time. The procurement was satisfactory. However difficulty was encountered in detailing the dedicated counterpart staff for supervising and vetting the consultant’s work, which did not prove very effective. The comments and feedback on consultant’s report was often delayed and of lower quality. The difficulties faced and the impact achieved is briefly discussed below;

a. Resolution of Cash Development Loan – Legal Covenant. Since establishment the GOP is financing NHA’s capital development program through loans. NHA does not have a revenue base to repay these loans. The project included a legal covenant related to sustainable financing of NHA’s capital development program through (i) resolution of the existing debt stock (ii) financing of NHA.s future program through grant funding. A study was conducted in coordination with MOF for resolution of the issue. The study recommended equity mechanism, which has been under discussion with MOF. MOF agreed with this mechanism but could not be adopted due to difficulty in maintaining the books of account. The covenant could not be compiled with since it was beyond the control of NHA. As such the legal covenant was dropped by World Bank.

b. Business Process Reengineering.

1) The assignment was aimed at creating an integrated and effective IT enabled environment covering all core functions of NHA for corporate governance and enhanced performance. The services of a national chartered accountancy consulting firm were acquired for assignment. The team included an international expert of BPR, an international highway engineer and national experts in accounting and finance.

2) The firm commenced its assignment but immediately went astray in recognizing the role, mission, and the core functions of NHA. Considerable efforts were made by NHA to steer the firm towards the objective of the assignment, however the firm could not understand the difference between the core and support functions of NHA and concentrated more on the Finance & Accounting Functions of NHA being a chartered accountancy firm.

3) The firm submitted the midterm report which was jointly reviewed by NHA with the World Bank Experts. The report was considered far below the acceptable level. Despite repeated hard work by the World Bank BPR expert with the firm, the consultants failed to improve. Resultantly the contract was terminated.

c. Effective Weight Control Management.

1) The study documenting the extent of the overloading problem and recommendations on specific mitigation measures was assigned to FINROAD. The firm mobilized an energetic and effective team leader who worked with NHA counterpart staff as a team and completed the assignment in scheduled time.

2) Although the weight control regime has been strengthened through establishment of large number of weigh bridges at strategic locations on the network the recommendations of the study could not be fully implemented for socio – politico factors. The overloading continues to be a menace for NHA network.

3) There is a need for NHA to revisit the study and develop an action plan for the implementation of the recommendations under a phased program in coordination and consultation with other Government agencies.

d. Road Asset Management System.

1) Since 1999 NHA has implemented “the fee for service concept” on NHA network and significantly increased its toll revenue. NHA established a dedicated Road Assets Management Directorate for maintenance and operational management of its network. There was a requirement to evolve a modern road assets management system and implement it on the network.

2) The services of FINROAD were acquired for crystallizing the concept of the system and implement it on ground, imparting on the job training to the NHA staff for sustainable implementation. The firm mobilized an effective team for the assignment. The assignment though suffered delays due to non-availability of adequate counterpart staff and reduced man months of the consultant’s staff, but was successfully implemented. The World Bank provided specialized input through mobilization of RAMS experts as part of the missions, who contributed significantly towards the achievement of the objective.

3) A modern Road Assets Management System has been developed under the project which is now being implemented. Comprehensive network condition surveys are carried out and annual maintenance plans are developed on the basis of HDM-4 analysis. This has greatly optimized the network maintenance expenditure.

e. Improved Pavement Standards. The empirical AASHTO specifications for design of pavements are incapable of providing reliable designs for the extreme weather and loading conditions in Pakistan. The project included research on pavement to arrive at Pakistan specific standards for design. A laboratory has been established at National Highway Research Centre under the project.

f. Human Resource Development. A large number of NHA staff has been trained under the project in country and international courses/ workshops and seminars. A HRD strategy based on Training Need Assessment has been prepared which is now being implemented.

35. Various segments of the institutional development component were implemented concurrently tying large number of counterpart staff from NHA. The input from the counterpart staff was often delayed due to their involvement in the performance of their day to day work. A better way would have been to sequentially implement the assignments which would have ensured better delivery of higher standard.

Performance of the World Bank Staff

36. The World Bank regularly fielded implementation support mission which were always of very high professional standards and were very beneficial for the implementation of the project. The Task Leader along with the support staff always provided timely input and prompt response for resolution of issues. The input provided by the World Bank’s RAMS Expert, HR Expert and BPR Expert was commendable. The Bank’s staff worked as effective team members with NHA staff towards the achievement of the common goal and objectives of the project.

Assessment of Borrowers Own Performance

37. The assessment of the NHA’s performance is outlined below;

a. Project preparation. The project was well prepared. However, problems were encountered during the implementation of the Design Built lump sum contracts being introduced for the first time. The outline design for Rehabilitation Lump Sum Fix price contract could be improved and the ambiguity arising out of specifying the pavement thickness could be avoided.

b. Procurement. The prequalification and procurement was carried out in transparent and satisfactory manner in scheduled time.

c. Implementation of Civil works. A dedicated PMU was established which was well staffed. Although frequent turnover of staff occurred the continuity was ensured. The PMU functioned well and played an effective role in the monitoring, evaluation and reporting of the project.

d. Contract management. Frequent delays occurred in obtaining of financial concurrence of contractual issues like variations, extension of time and implementation, of the Engineer’s / DRE’s decisions. This could be improved with better understanding of the FIDIC based contracts.

e. Financial management. The financial management of the project has been good. At entity account level the performance has been acceptable.

38. Given to the above mentioned factors, the overall performance of the borrower can be rated as Good.

Lessons Learnt

39. The following lessons were learnt from the implementation of the project which needs to be incorporated in the future program;

a. Engineer’s estimates. The time gap between the project preparation and implementation must be avoided to reduce the likely hood of financing gaps and bid prices. The engineers estimates must be updated at the market value at the time of appraisal and adequate premium be allowed to cover for the procurement delays.

b. Adequate Allocation for Price Contingencies. Unanticipated price hikes due to market dynamics particularly in developing countries like Pakistan must be expected and

adequate allocation for price contingencies must be built into the budget. At least 15% of contingencies should be allocated to cover the escalation. c. Rationalized Price adjustment Provision. The adjustable portion of the contract should be realistically worked out on the basis of specified input and not fixed arbitrarily. The design consultants must support the working out of Factor-C with detailed calculations which should be submitted to NHA. d. Construction Industry. The local contractors have demonstrated poor financial and management capacity in the implementation of the project. The international contractors are inhibited to participate mostly due to perceived security situation and business environment in the country. The contract packaging may be suitably enlarged to attract the international contractor. e. Contract Management.

1) The adoption of extra contractual measures practiced in this project must not become the routine processes. The contractual remedies for poor performance must be implemented to curb the tendency.

2) The role of the Engineer/ DRE must be understood. Special training of contract management may be imparted to the audit and finance staff to minimize delays in processing contractual issues and audit observations.

3) The Team leader/ CRE should not be appointed as the Engineer as he is involved in the day to day management of the project and give way to a compromised role as the engineer. f. Design Variations. Major design variations in the scope of contract must be avoided to minimize the time and cost overruns. g. Consultants Selection. The weightage for technical proposal be enhanced to ensure better quality of manpower of the consultants. The consultants should not be allowed to make frequent changes to the proposed staff. The quality of the replacement staff must be ensured. h. Institutional strengthening. The quality of institutional strengthening assignment is also dependent on the quality of counterpart staff. Ambitious program must be avoided and the program must be implemented sequentially with a view not to compound the capacity constraint.

55 60 65 70 TAJIKISTAN 75 PAKISTAN CHINA HIGHWAYS REHABILITATION PROJECT Khunjerab R.

N5 N5 HIGHWAY N55 HIGHWAY (OTHER) Kunar Chitral Gilgit M2 MOTORWAY Indus M6 MOTORWAY (PROPOSED) R. MOTORWAY INTERCHANGES KHYBER Approximate PHASE I: PAKHTUNKHWA N35 Line of Control RESURFACING AND STRENGTHENING Saidu REHABILITATION N5 M1 35 PHASE II: Nowshera Peshawar Abbottabad JAMMU 35 RESURFACING AND STRENGTHENING Bhuran and KASHMIR REHABILITATION Hassan Abdal Nowshera-Peshawar ISLAMABAD Kahat Rawalpindi SELECTED CITIES Turnol-Chablat Kharian-Rawalpindi NATIONAL CAPITAL Bannu RIVERS M2 Kharian PROVINCE BOUNDARIES Mianwali N55 . Gujranwala-Kharian m R Gujrat elu INTERNATIONAL BOUNDARIES Jh AFGHANISTAN Sargodha Gujranwala . R b D.I. Khan a Lahore-Gujranwala PUNJAB en C h M3 Lahore Faisalabad Jaranwala N5 M4 N50 R. Chaman Mian Channu-Sahiwal-Okara Ravi Sahiwal Okara Kot Addu 30 Mian N70 Channu Quetta Multan 30 M5 R. Mian Channu-Sahiwal-Okara D.G. Khan Sutlej N5 Sibi Bahawalpur N55 M6 Kalat Dera Bugti Nok Kundi N40 N65 N25 Khanpur

Jacobabad Ubauro-Shaikh Wahan BALOCHISTAN Ubauro N5 INDIA ISLAMIC Rato Dero Pano Aqil Khuzdar REPUBLIC OF Ranipur IRAN M8 M6

Panjgur Kakar Moro-Ranipur Nal R.

Awaran Moro

25 Turbat Bela Hala-Moro M7 25 Hala Liari N10 Hyderabad-Hala Hyderabad Gwadar Pasni SINDH M9 Karachi-Hyderabad

Karachi 0 100 200 300 Kilometers Thatta . R Badin s u d In 0 100 200 Miles

NOVEMBER 2013 This map was produced by the Map Design Unit of The World Bank. Arabian Sea Mouths of IBRD 32757R The boundaries, colors, denominations and any other information the Indus shown on this map do not imply, on the part of The World Bank GSDPM Group, any judgment on the legal status of any territory, or any Map Design Unit endorsement or acceptance of such boundaries.

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