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Rural Roads Sector II Investment Program Report And Report and Recommendation of the President to the Board of Directors Project Number: 37066 November 2005 Proposed Multitranche Financing Facility India: Rural Roads Sector II Investment Program CURRENCY EQUIVALENTS (as of 31 October 2005) Currency Unit – Indian rupee/s (Re/Rs) Re1.00 = $0.022 $1.00 = Rs44.995 ABBREVIATIONS ADB – Asian Development Bank CPF – community participation framework CSP – country strategy and program DPR – detailed project report EA – executing agency EAF – environmental assessment and review framework ECOP – environmental codes of practice EIRR – economic internal rate of return FFA – framework financing agreement ICB – international competitive bidding IEE – initial environmental examination IRC – Indian Roads Congress LCB – local competitive bidding LIBOR – London interbank offered rate MOU – memorandum of understanding MFF – multitranche financing facility MORD – Ministry of Rural Development NRRDA – National Rural Roads Development Agency OMMAS – online management, monitoring, and accounting system PFR – periodic financing request PIC – project implementation consultant PIU – program implementation unit PMGSY – Pradhan Mantri Gram Sadak Yojana (Prime Minister’s Rural Roads Program) RRSI – Rural Roads Sector I Project SRRDA – state rural roads development agency TSC – technical support consultant NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2004 ends on 31 March 2004. (ii) In this report, "$" refers to US dollars. Vice President L. Jin, Operations Group 1 Director General K. Senga, South Asia Department Director N. Patel, Officer-In-Charge, Transport and Communications Division Team leader H. Iwasaki, Project Specialist (Roads), South Asia Department Team members M. Alam, Project Implementation Specialist, South Asia Department C.N. Chong, Principal Portfolio Management Specialist, Central Operations Services Office E. Glennie, Financial Management Specialist, South Asia Department M. Gupta, Social Development Specialist, South Asia Department J. Miranda, Senior Advisor, Regional and Sustainable Development Department N. Patel, Principal Project Management Specialist, South Asia Department V.S. Rekha, Senior Counsel, Office of the General Counsel S. Tsukada, Principal Transport Specialist, South Asia Department D. Utami, Senior Environment Specialist, South Asia Department H. Yamaguchi, Transport Specialist, South Asia Department CONTENTS Page FACILITY AND INVESTMENT PROGRAM SUMMARY i MAPS I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 4 III. THE PROPOSED INVESTMENT PROGRAM 7 A. Impact and Outcome 7 B. Outputs 7 C. Special Features 9 D. Cost Estimates 11 E. Financing Plan 11 F. Implementation Arrangements 12 IV. INVESTMENT PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 17 A. Overall Impacts and Benefits 17 B. Sustainability of Investment 18 C. Sustainability of Policy and Institutional Interventions 18 D. Economic Analysis 18 E. Social Impact 19 F. Environmental Impact 21 G. Risks 22 V. ASSURANCES 22 VI. RECOMMENDATION 26 APPENDIXES 1. Design and Monitoring Framework 27 2. Subsector Analysis 30 3. External Assistance to the Road Sector 35 4. Selection Criteria and Approval Process for Subprojects 37 5. Design Features and Technical Standards 39 6. Policy Matrix 41 7. Outline Community Participation Framework 44 8. Summary Initial Environmental Examination 50 9. Cost Estimates and Financing Plan 56 10. Organizational Structure for Project Implementation 57 11. Indicative Implementation Schedule 58 12. Summary Poverty Reduction and Social Strategy 59 SUPPLEMENTARY APPENDIXES (available on request) A. Habitations Eligible for Road Connectivity Works under PMGSY B. Capacity-Building Support C. Indicative Contract Packages for Sample Subprojects D. Outline Terms of Reference for Project Implementation Consultants E. Outline Terms of Reference for Technical Support Consultants F. Financial Management Assessment G. Project Preparation and Implementation Flow H. Economic and Distribution Analysis FACILITY AND INVESTMENT PROGRAM SUMMARY Borrower India Classification Classification: General intervention Sector: Transport and communications Subsector: Roads and highways Themes: Sustainable economic growth, governance Subtheme: Fostering physical infrastructure development, civil society participation Environment Category B. Initial environmental examinations were undertaken Assessment and a summary is attached (Appendix 8). Sector Investment As one of the key features of the Government’s poverty reduction Program Description agenda for the rural sector, the Government is implementing a nation-wide rural road investment program, Pradhan Mantri Gram Sadak Yojana (PMGSY). PMGSY aims to provide all-weather road connectivity to currently unserved habitations in India’s rural areas, where 70% of the population live. PMGSY is in its fifth year of implementation and has successfully improved, through participating states, 66,000 kilometers (km) of rural roads with an additional 47,000 km nearing completion, connecting 34,000 habitations (20% of eligible habitations under PMGSY) nationwide to a greater transportation network. PMGSY also includes noninvestment interventions to strengthen the capacity of state level agencies for the implementation of the program in the area of project planning and design, management oversight for construction activities, safeguards, procurement and fiduciary arrangements. The latest estimate for the overall PMGSY financing requirement is about $30 billion. Currently available financing sources include a portion of the excise tax (cess) on high-speed diesel oil ($0.9 billion annually), ADB ($0.4 billion committed under the first loan), and the World Bank ($0.4 billion under its first loan-credit). The financing gap is huge. While exploring the possibilities of domestic borrowing, the Government approached ADB and World Bank for additional financial assistance. ADB has been requested to provide assistance to the Investment Program through a multitranche financing facility (MFF). The MFF is most appropriate in this instance. The Government has a well- defined program with clear program goals, well-structured standard operating procedures based on an annual program implementation cycle, and the long-term need for co-financing. Involvement of multiple state level agencies with different levels of absorption capacity will require flexible financing arrangements ii that allow fund allocation on the basis of progress achieved and readiness for new investment in each participating state. The MFF caters well to these two sets of needs: one for predictable financing sources, and the other for flexible financing arrangements. The Investment Program is expected to construct or upgrade about 30,000 km of rural roads connecting about 19,000 habitations. For the investments in physical infrastructure to be effective, the Investment Program will also focus on capacity building, especially in relation to planning, design, operation, safeguard, financial, road safety, and maintenance matters. The financing plan for the Investment Program currently includes ADB and the cess proceeds allocated to the Investment Program states. Multitranche Financing The Government asked ADB to extend financing through an MFF. Facility The requested MFF is for $750 million over 5 years. It represents 36% of the total financing plan for the identified Investment Program. The MFF has a maximum utilization period of 5 years. Individual and periodic financing requests will be converted into individual or separate loans. The Government has entered into a Framework Financing Agreement (FFA) with ADB. The FFA satisfies the requirements set forth in Appendix 4 of the Pilot Financing Instruments and Modalities. Pursuant to the FFA, the Government has submitted to ADB the first Periodic Financing Request (PFR) in the amount of $100 million. The first PFR is presented to the Board together with the FFA. Prior to ADB acceptance of a PFR, ADB will ensure that the Government and the participating states comply in full with the terms and conditions of the FFA. ADB teams will conduct due diligence on these to ensure that they are being satisfactorily adhered to. The minimum loan size will be $30 million. Rationale Poor road infrastructure affects economic growth in rural areas. It impacts negatively on domestic and local trade, on the final cost of goods, competition and competitiveness, logistics in general, movement of people, inward investment opportunities, and ultimately on employment. Poor road connectivity has a strong link to poverty. Past neglect of the rural road network has cut off rural communities from mainstream economic centers in the country and even locally. Poor connectivity has resulted in slow development, and in some cases a faster than needed exodus of iii young people to cities. The Government is trying to redress this problem under PMGSY. Assam, Orissa, and West Bengal, which are first targeted under the Investment Program, are among the 10 states with large rural populations that lack adequate coverage in terms of all-weather road connectivity. The poverty head count rates in these states are among the highest in India. Impact and Outcome The overall objective of the Investment Program is to help reduce poverty and deprivation, and support economic growth of rural
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