ASIAN DEVELOPMENT BANK RRP:IND 29250

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

TO THE

NATIONAL HIGHWAYS AUTHORITY OF INDIA

FOR THE

SURAT–MANOR TOLLWAY PROJECT

IN

INDIA

June 2000 CURRENCY EQUIVALENTS (as of 15 May 2000)

Currency Unit – Rupee/s (Re/Rs)

Re1.00 = $0.022 $1.00 = Rs43.97

In this report, an exchange rate of $1.00 = Rs42 is used.

ABBREVIATIONS

ADB – Asian Development Bank EIRR – economic internal rate of return FIRR – financial internal rate of return JBIC – Japan Bank for International Cooperation km – kilometer MOST – Ministry of Surface Transport NHAI – National Highways Authority of India NH – national highway PAP – project-affected person PIU – project implementation unit RAP – Resettlement Action Plan TA – technical assistance VOC – vehicle operating cost

NOTES

(i) The fiscal year (FY) of the Government ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends. For example, FY1998 begins on 1 April 1997 and ends on 31 March 1998.

(ii) In this report, “$” refers to US dollars. CONTENTS

Page

LOAN AND PROJECT SUMMARY ii

MAP vi

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. BACKGROUND 1

A. Sector Description 1 B. Government Policies and Plans 6 C. External Assistance to the Sector 7 D. Lessons Learned 7 E. ADB’s Sector Strategy 8 F. Policy Dialogue 9

IV. THE PROPOSED PROJECT 11

A. Rationale 11 B. Objectives and Scope 12 C. Cost Estimates 13 D. Financing Plan 13 E. Implementation Arrangements 14 F. The Executing Agency 15 G. Social and Environmental Impacts 16

V. PROJECT JUSTIFICATION 18

A. Financial and Economic Analyses 18 B. Poverty Impact 19 C. Risks 19

VI. ASSURANCES 20

A. Specific Assurances 20 B. Condition of Award of Civil Works Contract 21

VII. RECOMMENDATION 21

APPENDIXES 22 LOAN AND PROJECT SUMMARY

Borrower National Highways Authority of India (NHAI)

Guarantor India

Project Description The Project will improve to four-lane standard (construction of two lanes and pavement strengthening of the existing two lanes) about 180 kilometers (km) of National Highway Number 8 (NH8) in the states of Gujarat (largely) and Maharashtra. The Project will remove a critical bottleneck in the movement of freight and passengers from the industrial and agricultural areas of Gujarat to the ports, including Mumbai on the west coast of India.

Classification Economic growth

Environmental Assessment Category B

An initial environmental examination was undertaken and the summary is a core appendix.

Rationale A large portion of the national highway network in India is in urgent need of improvement. Large traffic volumes to a mainly two-lane national highway network inflict heavy social and economic costs on the country. The western transport corridor, the NH8 and NH4, which connects Delhi, Mumbai, Bangalore, and Chennai, is the busiest corridor in India, particularly in the section between Ahmedabad and Mumbai where it passes through an industrial belt with connections to several major and minor ports on the west coast. The section between Ahmedabad and Mumbai is 528 km, of which 348 km has been or is being widened to four-lane standard. There remains a section of about 180 km (between Surat and Manor), which is now a severe bottleneck for the efficient movement of goods and passengers between the industrial heartland of Gujarat and the port of Mumbai on the west coast of India.

The Asian Development Bank’s (ADB) involvement with the Project will provide an opportunity to advance policy dialogue with the Government on road sector reform issues. The commercialization of the completed project facility through a private iii

sector operation and maintenance toll concession will represent a significant step in increasing private participation in national highway development. Efforts to introduce private financing for highway development, particularly for long interurban stretches, which have long payback periods and higher risks, are continuing with ADB assistance under the Project and separately through technical assistance.

Objectives and Scope The objectives of the Project are to remove capacity constraints and improve road safety on critical sections of the western transport corridor from Delhi to Mumbai. The completed project highway will be operated and maintained by the private sector through a toll concession. The commercialization of the operation and maintenance of the Project represents a significant step in increasing private participation in national highway development in India and will have a demonstration effect on the management of other national highway sections.

The Project will comprise (i) widening to four lanes (including the strengthening of the existing two- lane pavements) about 180 km of NH8 between Surat and Manor, and (ii) provision of consulting services for construction supervision and for the development of private participation and toll operations.

Cost Estimates

($ million) Foreign Local Total Item Exchange Currency Cost

Base Cost 134.0 84.0 218.0 Contingencies 28.6 16.0 44.6 Interest during Construction 17.4 0.0 17.4

Total 180.0 100.0 280.0 iv

Financing Plan

($ million)

Foreign Local Total Source Exchange Currency Cost Percentage

ADB 180.0 0.0 180.0 64 NHAI 0.0 100.0 100.0 36

Total 180.0 100.0 280.0 100 ADB = Asian Development Bank; NHAI = National Highways Authority of India.

Loan Amount and Terms $180 million from ADB’s ordinary capital resources, with a repayment period of 25 years including a grace period of 5 years and with interest at ADB’s pool-based variable lending rate for US dollar loans.

Period of Utilization Until 30 September 2004

Executing Agency NHAI

Implementation Arrangements The Project will be implemented by a separate project implementation unit within NHAI.

Procurement The civil works contract packages will be procured in accordance with ADB’s Guidelines for Procurement following international competitive bidding procedures.

Consulting Services International and domestic consultants will be required for construction supervision and to assist with the process of encouraging private participation in the financing of highways and expressways. The consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB on the engagement of domestic consultants.

Estimated Project Completion Date 31 March 2004 v

Project Benefits and Beneficiaries The main quantifiable benefit accruing from the Project consists of savings in vehicle operating costs, which will lead to a reduction in transport costs. The economic internal rate of return of the Project is estimated at 25 percent, while the financial internal rate of return is estimated at 14 percent. The Project will also improve road safety and reduce travel time between Ahmedabad and Mumbai. Operation and maintenance of the completed project facility by the private sector through a toll concession will bring efficiencies from entrepreneurial skills and superior management practices. The direct beneficiaries of the Project are road users, transport operators, and importers and exporters who will benefit from lower transport costs, faster travel time, and improved safety. The Project’s influence area has a population of about 14 million, of which 30-50 percent, depending on district, are poor. The people in the project influence area will benefit from increased agriculture-related activities, like horticulture, poultry, and dairy farming, as the produce will now be able to reach markets at reduced cost and time. The Government of Gujarat has began a program of improving rural roads that will provide the rural population in about 1,000 villages with access to the project road and thereby to markets and employment opportunities. A road safety campaign and activities to improve road safety, particularly among school children, will be carried out along the project road as part of the resettlement activities. vi I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on a proposed loan to the National Highways Authority of India (NHAI) for the Surat-Manor Tollway Project.

II. INTRODUCTION

2. A large portion of the national highway network in India is in urgent need of improvement. Large traffic volumes on a mainly two-lane national highway network inflict heavy social and economic costs, and adversely affect all levels of society and all sectors of the national economy. During the 1998 Country Programming Mission, the Government requested Asian Development Bank (ADB) assistance in developing the national highway network along the high-density western transport corridor that connects the cities of Delhi, Mumbai, Bangalore, and Chennai. The feasibility study for the proposed Surat-Manor Tollway Project was prepared by domestic consultants funded by the Government. The ADB Fact-Finding Mission1 visited India from 4 to 20 May 1998, to formulate the Project on the basis of discussions with the Government, other agencies active in the road sector, and the project feasibility report. The Appraisal Mission completed the review and analysis of all aspects of the Project and the sector from 27 July to 7 August 1998. Loan negotiations with representatives of the Government and NHAI were held in Manila from 28-29 January 1999. The project data and sector analysis were updated by a Project-Specific Contact Mission in December 1999 and through regular contact with NHAI officials. The project framework is shown in Appendix 1.

III. BACKGROUND

A. Sector Description

3. India has an extensive and diversified transport system, comprising about 3,290,000 kilometers (km) of roads, 62,570 km of rail, 12 major and 139 minor ports, four major international airports, 86 domestic airports, and about 14,500 km of navigable inland waterways. The modal mix between road and rail transport has been continuously shifting away from rail to road because of underfunding of the Government-owned rail system; the road transport industry is largely private sector operated. Consequently, road transport is now the dominant mode, accounting for 60 percent of freight movement and 80 percent of passenger traffic, with rail transport accounting for much of the remaining. The generally poor transport infrastructure is inflicting severe economic costs on the country in terms of high transport and inventory costs. A profile of transport in India is given in Appendix 2.

4. Responsibility for transport is shared by the Government and the private sector. The central Government administers the roads, railways, airports and civil aviation, major ports, and national inland waterways, and owns the major shipping corporations. The state and union territory governments are responsible for intermediate and minor ports, other inland waterways, state highways and other state roads, and urban and intercity passenger transport. The private sector dominates the trucking industry, coastal shipping, and the majority of inland water transport.

1 The project processing team comprised T. Kandiah, Senior Financial Analyst/Mission Leader; N. Patel, Senior Implementation/Programs Officer, India Resident Mission (INRM); S. Nanwani, Senior Counsel; A. Akanda, Senior Project Specialist; M. Minc, Project Economist; M. Alam, Project Officer, INRM; and P. Vallely, staff consultant. 2

5. Transport planning, coordination, and policy setting at the central Government level are handled by six central ministries, with the Planning Commission having an overall coordination role. The Ministry of Surface Transport (MOST) is vested with duties relating to the development and maintenance of national highways, and rules and regulations relating to road transport, major ports, inland water transport, and shipping. In addition, MOST performs a coordinating role for state roads and issues guidelines on highway planning, design, and construction. Since March 1995, NHAI has taken over the functions relating to the development of national highways and expressways on the primary arterial road transport corridors (referred to as the golden quadrangle) previously handled by MOST. All railway planning and operations are under the Ministry of Railways. The monitoring and coordination of the rural roads program is vested with the Ministry of Agriculture. Airports and civil aviation are the responsibility of the Ministry of Civil Aviation and Tourism.

1. Vehicle Fleet and Industry

6. The vehicle population has grown more than 100-fold since 1950, from 300,000 to 33.6 million in 1996. Buses and trucks accounted for 1 percent and 5 percent, respectively, cars and jeeps for 12 percent, and motorcycles and scooters (two-wheelers) 68 percent; the remaining vehicles were mostly autorickshaws (three-wheelers) and agricultural tractors. From 1981 to 1996, the overall growth of the fleet was 13 percent per annum, with the number of cars and jeeps growing at 9 percent, trucks at 8 percent, and buses at 7 percent; two-wheelers have become increasingly popular and have increased by 16 percent per annum.

7. Shortly after independence in 1947, the Government of India declared that only indigenous firms operating according to an approved plan could undertake motor vehicle manufacturing. This led to the establishment of a vehicle manufacturing industry basically using domestic capital but with some foreign technical collaboration. From 1982, the licensing system controlling association with foreign firms in the manufacturing of light vehicles and trucks has gradually been liberalized to encourage the production of more fuel-efficient, safer, and better quality vehicles at reasonable prices. In 1996/1997, 3.1 million motor vehicles were manufactured in India (an increase of 114 percent per annum over the 1992/1993 level, due to the unprecedented increase in manufacturing of two and three-wheeler vehicles from 1.1 million to 2.6 million during the same period), of which 85 percent comprised two- and three- wheelers; 10 percent, cars and jeeps; and 5 percent, commercial vehicles.

8. The commercial vehicle fleet in the country is not utilized optimally because of (i) the high proportion of overaged vehicles; (ii) absence of assured loads owing to individual truck owners being lone operators; and (iii) poor loading/unloading facilities at the terminals leading to abnormal delay and detention. To overcome these constraints, it is necessary to provide loading/unloading facilities, parking areas, and space for transport operators offices served by the banks and post offices in the outskirts of the cities. The setting up of such facilities by the state governments would facilitate the formation of cooperatives of small truck operators. An important feature of the fleet is that the bulk of the traffic is moved on two-axle rigid trucks. These vehicles are generally overloaded and cause excessive damage to the highways. It is, therefore, necessary to modernize the truck fleet by introducing multi-axle vehicles. In April 1998, the Government reduced the central excise duty on multi-axle vehicles and chassis from 17.25 percent to 10 percent. Other fiscal and monetary incentives are being considered by the Government to encourage the introduction of three-axle rigid trucks. 3

9. Passenger services through road transport are provided by the public and private sectors in the country. However, over the years, the share of the public sector in the total fleet of buses has declined. While in 1980/1981, the public sector held 45.5 percent of the total number of buses in the country, in 1995/1996 its share came down to 24.7 percent.

2. Road Network

10. The road network in India is divided into three categories: (i) the primary system of national highways serving interstate long-distance traffic, (ii) the secondary system consisting of state highways and major district roads carrying mainly intrastate traffic, and (iii) the tertiary system comprising district and rural roads. The national and state highways perform the main mobility function in the country’s transportation system. The district and rural roads provide much needed accessibility to meet social needs and to transport agricultural produce to markets. The road network in India grew by 7.5 times from 400,000 km in 1951 to 3,290,000 km in 1998. Despite the extensive length of the road network, its quality and capacity are grossly inadequate for the present and increasing future demand for freight transport and passenger traffic. Road traffic grew at about 9 percent per year from 1951 to 1995, and is expected to continue to grow at about 8 percent per year to 2001. By 2001, freight traffic is expected to be 800 billion ton-km, and passenger traffic about 3,000 billion passenger-km. The vehicle fleet is expected to grow from 27 million in 1995 to 54 million by 2001. Congestion on the country’s national road network is a severe constraint to economic development and poses serious road safety problems.

11. The national highway network of 49,585 km carries about 40 percent of total road traffic. About 20 percent of the national highway network is still of single-lane standard. In 1985, MOST identified four primary arterial national highway (NH) corridors, comprising NH8 (Delhi-Jaipur-Ahmedabad-Mumbai), NH4 (Mumbai-Bangalore-Chennai), NH5 (Calcutta- Chennai), and NH2 (Delhi-Calcutta); they provide the major interurban links and carry the bulk of the freight and passenger traffic. These corridors have traffic volumes of more than 20,000 passenger car units per day on mainly two-lane roads. Vehicles on these links travel at low speeds and have high operating costs. They inflict heavy social and economic costs, and adversely affect all levels of society and all sectors of the national economy. There is an urgent need to augment their capacity through a combination of four-lane and/or interurban expressways. Details of the road network are shown in Appendix 3.

3. Organization and Administration

12. The responsibility for development and maintenance of the national highways rests with the central Government, while all other roads are the responsibility of the state governments concerned. MOST has overall responsibility for planning, budgeting, and standardizing the road network. The execution of works on national highways was previously shared by MOST and the public works departments of the respective state governments under an agency system. Because of this arrangement, the execution of works was uncoordinated and ineffective, and a single autonomous agency with responsibility for the development, maintenance, and management of the entire national highway and expressway network was considered necessary. 4

13. In 1988, under an act of Parliament, NHAI was created and given the responsibility for the construction and maintenance of national highways and expressways. The functions relating to externally aided projects, implementation of private participation, and the development of wayside amenities along the highways were also assigned to NHAI. ADB, through policy dialogue, played a key role in the establishment of NHAI, which was staffed and became operational in March 1995. While NHAI is still dependent on Government budgetary support for its development program, it is expected to develop into a self-financing and commercially managed agency through revenues from toll charges on highways after they have been upgraded and on expressways when constructed.

4. Revenues and Expenditures

14. Funds for the development and maintenance of national highways are provided by the central Government on a yearly allocation basis, while the respective state governments provide funds for state highways, and district and rural roads. Transport investments have accounted for about 13 percent of total public sector spending under the Government’s Seventh (FY1985-FY1990) and Eighth (FY1992-FY1997) Five-Year Plan periods. Expenditure on roads increased from Rs63,350 million under the Seventh Plan to Rs160,930 million under the Eighth Plan (an increase of 250 percent), although the road sector’s share of total transport investment remained at about 22 percent under both plan periods. Under the Ninth Five-Year Plan (FY1997-FY2002), the transport budget allocation increased by about three times from the Eighth Plan to Rs2,000,000 million, of which Rs400,000 million is to be spent on roads.

15. The road sector generates substantial revenues primarily through motor vehicle tax and taxes on fuel and spares. Revenue from these sources go to the consolidated fund and expenditure for road development and maintenance is then allocated out of the consolidated fund through the annual budgetary process. In FY1997, road sector revenue was Rs172,650 million, of which Rs44,220 million (about 26 percent of the road sector revenue) was spent on the development and maintenance of the road network. Since substantial resources are required to develop the network, the Government is considering various mechanisms to raise additional resources for road development and maintenance. Currently, a small amount (equivalent to 3.5 paise2 per liter) out of the proceeds of customs and excise duties levied on motor fuel is set aside in a dedicated fund for expenditure on all roads in India. The option of increasing the dedicated surcharge on motor fuel and the creation of a formal road fund for maintenance is being discussed by the Government. A direct revenue source for the development of national highways will come from the tolling of national highways that are improved to four-lane standard. In addition, the Government’s budget for FY1999 proposed a levy of Re1 per liter of petrol to fund national highway maintenance and development. ADB and the World Bank are in dialogue with the Government about ensuring that the levy on petrol, about Rs8,200 million in FY1999, is deposited in a professionally managed and dedicated fund for road development and maintenance. In April 2000, the Government announced that a bill will be introduced in Parliament for the creation of a dedicated road fund using the petrol levy and an additional levy on diesel.

2 100 paise = Re1. 5

5. Road Safety

16. The number and severity of road accidents in the country have been increasing steadily. The 1995 fatality rate of 2.4 per 1,000 vehicles3 has doubled since 1982. Road fatalities on the country’s national highways account for 34 percent of the total. The sharp increase in the volume of traffic, the growth of vehicle population, particularly heavy and overloaded commercial vehicles and overcrowded buses, have aggravated the problem. In 1993, under ADB technical assistance (TA)4 a system for the identification of black spots on national highways was devised, and an accident investigation and prevention manual for highway engineers was prepared. Following this, the Road Safety Cell was established in MOST to collect, analyze, and interpret road accident statistics. This initiative is being continued through an ongoing World Bank-administered TA that will (i) produce a comprehensive road safety manual covering the planning, design, construction, and maintenance aspects; (ii) review the Indian Road Congress norms related to road safety and recommend improvements; and (iii) draw up safety guidelines for traffic operations during road construction. The Government is also addressing road safety issues through public information campaigns and road safety education programs conducted by the road safety councils in the respective states. For the first time, the Government’s Ninth Five-Year Plan has a dedicated budget provision for road safety, including specific allocations for engineering improvements, traffic control, wayside amenities, and highway patrolling schemes. India was among the countries included in the ADB regional TA on road safety.5 The TA assessed regional initiatives in road safety and recognized that significant institutional progress has been made in India with the inclusion of road safety as a priority area for activity within the New Delhi regional infrastructure.

6. Maintenance

17. Over the years, maintenance of the national highway network has not received adequate attention because of a lack of fund allocation and proper management systems to accurately predict maintenance strategies, determine optimal interventions, and support budgetary requests. In the Ninth Five-Year Plan, the budget allocation for national highway maintenance was doubled from the previous plan period. The maintenance shortfall, which was up to 48 percent in FY1993, was reduced to about 40 percent in FY1998. The levy of Re1 per liter of petrol from FY1999 (para. 15) will provide adequate budget allocation for maintenance. ADB has provided TA6 to develop maintenance management systems in two states, Tamil Nadu and Karnataka, which were to serve as models for the development of similar systems in other states, and for national highways. MOST is currently developing an integrated highway management system that will generate highway improvement and maintenance options based on a complete inventory of highway length and conditions. The integrated national highway management system, when completed, will provide the basis for fully funded annual maintenance programs. This is expected by FY2002.

3 Fatality rates for Japan, United States, and Western Europe range between 0.2 and 0.6. Among ADB’s developing member countries, the People’s Republic of China’s fatality rate is 4.9; Pakistan, 3.3; Sri Lanka, 2.0; and Malaysia 0.7. 4 TA 2001-IND: Road Safety, for $210,000, approved on 29 November 1993. 5 TA 5620-REG: Regional Initiatives in Road Safety, for $600,000, approved on 4 January 1995. 6 TA 1058-IND: Pavement Management, for $490,000, approved on 3 January 1989; and TA 1402-IND: Pavement Management for National Highways, for $760,000, approved on 30 October 1990. 6

7. Environmental Issues

18. ADB has been working with the Government to address environmental issues relating to the road sector such as the prevention of environmental degradation during the construction and operation of highways, and urban traffic pollution controls. An ADB TA7 on environmental management prepared environmental guidelines for highway projects; these are now being used on all highway improvement and reconstruction projects in India. The guidelines ensure that ADB’s environmental standards are being complied with. Under ADB’s Second Road Project,8 a study on traffic pollution control measures in urban areas was carried out. Consequently, the Central Pollution Board updated its regulation for mass emissions, and enforcement of these regulations became more stringent. Recently, the Government introduced several anti-pollution measures. Leaded fuel will be gradually phased out of metropolitan cities beginning from the end of 1998 with the introduction of unleaded fuel. Commercial vehicles over 15 years have been banned from Delhi center from December 1998.

B. Government Policies and Plans

19. The Government’s strategy for the road sector under its Ninth Five-Year Plan (FY1997- FY2002) is to improve the quality of the national highway network to provide safe, efficient, and economic carriage of goods and people. The road network also needs to be expanded and strengthened to improve accessibility of the hinterland, especially the rural areas and to facilitate the integration of isolated parts of the country. The Government’s medium-term strategy for managing the national highway network is to upgrade all priority arterial national highways to a four-lane standard. The emphasis will be on the high-density quadrilateral corridors connecting Delhi, Mumbai, Chennai, and Calcutta. The program to improve these high-density corridors by widening the existing two-lane sections to four lanes is estimated to cost Rs220,000 million ($5,500 million). In December 1998 the Government announced the National Highway Development Project as national priority, which includes the quadrilateral corridors as well as north-south and east-west corridors.

20. National expressways (multilane facilities on largely new alignments) will be constructed as corridor elements where the demand and available resources make this practicable. In the long run, constructing the expressways is the only way to substantially increase the capacity of these heavily used corridors. In 1991, a study on expressway planning, prepared with ADB assistance,9 envisaged an expressway network of about 10,000 km, to be established by 2015 through a phased construction program. At Rs50-60 million per km, this program will cost about Rs600 billion ($15 billion).

21. Budgetary constraints and the size of the total highway and expressway program have compelled the Government to seek private sector participation in the development of highways and expressways. Private participation will not only reduce the burden of financing these highways and expressways, but will also bring the managerial expertise of the private sector into the financing, construction, operation, and maintenance of highways and expressways. It is expected that the private sector’s involvement will shorten project implementation, and encourage greater efficiency in the construction and operation of highways and expressways.

7 TA 2002-IND: Environmental Management of Road Projects, for $240,000, approved on 29 November 1993. 8 Loan 1041-IND: Second Road Project, for $250 million, approved on 30 October 1990. 9 TA 1059-IND: Expressway System Planning Project, for $260,000, approved on 3 January 1989. 7

C. External Assistance to the Sector

22. Since 1988, ADB has extended three loans totaling $693 million, one TA loan for $12.7 million and 16 TAs amounting to $7.325 million to the road sector in India. Apart from ADB, the World Bank and the Japan Bank for International Cooperation (JBIC)10 are also involved in the road sector. The World Bank has provided financing for eight projects amounting to about $1,500 million for construction and rehabilitation of rural roads, improvement of state highways, and widening national highways to four lanes. JBIC has provided five loans amounting to $263 million equivalent to upgrade NH2 and NH5 to four lanes and to construct a bridge across the Yamuna River at Allahabad-Naini. The World Bank is currently processing loans of $275 million for state highway development in Haryana, and $425 million for the improvement of national highways to four-lane standard. ADB’s assistance to the road sector is well coordinated with the World Bank and JBIC through regular consultation. Details of external assistance to the road sector in India are given in Appendix 4.

D. Lessons Learned

23. ADB’s first loan project11 to improve highways in the states of Andhra Pradesh, Haryana, Karnataka, Tamil Nadu, and Uttar Pradesh was completed in March 1998, while the second loan project12 to improve highways in the states of Andhra Pradesh, Karnataka, Kerala, Orissa, Rajasthan, Uttar Pradesh, and West Bengal was completed in December 1999. Both projects, which were implemented by the respective state public works departments, experienced long delays. Because of lengthy Government procedures and the differences between the Government and ADB’s procedures at that time, there were delays in the recruitment of supervision consultants and the procurement of civil works. The large number of civil works contract packages, about 16 under each project, further delayed the procurement process and made project monitoring difficult.

24. ADB’s third project13 to improve national highways in the states of Andhra Pradesh, Bihar, Haryana, Rajasthan, and West Bengal was designed to overcome the problems experienced by the state public works departments in the earlier projects by making a especially created project unit within MOST responsible for project implementation. Project implementation responsibility was to be transferred to NHAI, at a later date, once it became fully functional. The number of civil works contract packages was reduced to five and made sufficiently large to attract the more experienced and better capitalized contractors. Despite these measures the third project also experienced start-up delays. The lack of Government budgetary allocation meant that NHAI only became fully functional in March 1995. In addition, the award of civil works contracts was delayed because of litigation by some unsuccessful bidders. When the contracts were eventually awarded, the project sites were not cleared of utilities and trees for the contractors to commence work immediately. After these initial delays, construction work is now progressing with completion expected in June 2001. The TA loan14 for the engineering design of an expressway lapsed without loan signing in June 1995, because

10 The work was initially supported by the Overseas Economic Cooperation Fund of Japan, which was merged with the Export-Import Bank on 1 October 1999 to form the Japan Bank for International Cooperation. 11 Loan 0918-IND: Road Improvement Project, for $198 million, approved on 10 November 1988. 12 Loan 1041-IND: Second Road Project, for $250 million, approved on 30 October 1990. 13 Loan 1274-IND: National Highways Project, for $245 million, approved on 29 November 1993. 14 Loan 1279-IND: Bombay-Vadodara Expressway Technical Assistance Project, for $12.7 million, approved on 2 December 1993. 8 the Government was having difficulty with the funding for land acquisition for the ensuing project.

25. Of the 16 TAs, seven (totaling $3.025 million) were for project preparation and nine (totaling $4.3 million) were advisory in the areas of pavement management, expressway planning, construction standards, environmental management, road safety, facilitation of private participation, and construction management. Apart from the TA15 for facilitating private participation in the financing, construction, and operation of highways and expressways, which is being implemented, all the other TAs have been completed.

26. Careful attention has been paid to overcome the shortcomings of previous ADB projects in the road sector through the following project implementation arrangements: (i) start- up delays will be reduced by approving advance action for the procurement of the civil works contracts and the recruitment of supervision consultants; (ii) land acquisition (for the toll plazas) and the clearance of trees and utilities from the right-of way will be a condition for contract award; (iii) ambiguities in the tender documents, which led to court actions under ADB’s third project, will be removed through the use of the Government’s standard bidding documents to ensure consistency in the bid evaluation process; (iv) the prequalification criteria will be tightened and the contract package size made large enough to attract contractors with international experience; (v) the project management arrangements within NHAI will be strengthened; and (vi) acceptance by NHAI of the role of the supervision consultants as “engineer” in accordance with international best practice in contract management.

E. ADB’s Sector Strategy

27. ADB’s sector strategy is to reduce road infrastructure bottlenecks on the key transport corridors to support India’s efforts to achieve higher sustainable economic growth. ADB’s approach is to promote efficiency in the delivery and maintenance of road infrastructure through appropriate policy measures and maximizing, where feasible, private participation in the financing, construction, and operation of highways and expressways. The sector strategy supports ADB’s operational strategy for India. The focus of ADB’s assistance to the road sector is on the western transport corridor, comprising NH8 (Delhi-Jaipur-Ahmedabad-Mumbai) and NH4 (Mumbai-Bangalore-Chennai). The other five major road transport corridors (Delhi- Calcutta, Mumbai-Nagpur-Calcutta, Delhi-Nagpur-Bangalore, Calcutta-Chennai, and Chennai- Madurai) are being developed with assistance from the World Bank and JBIC.

28. ADB’s involvement in the Project will, in addition to reducing a key infrastructure bottleneck, enhance efficiency in public sector operations and introduce private participation. This will be achieved by (i) assisting the transition of NHAI into a fully autonomous and commercially managed institution by providing long-term funds required for highway development, and promoting cost recovery through toll operations; and (ii) developing a model for the commercialization of operation and maintenance of national highways through a private toll concession. Efforts to encourage full private participation in the financing, construction, operation, and maintenance of national highways and expressways through various public- private partnership schemes (such as build, operate, and transfer; concessions; and leases)

15 TA 2986-IND: Western Transport Corridor—Facilitating Private Participation Project, for $1.0 million, approved on 9 February 1998. 9 are being pursued separately through an ADB TA.16 ADB will continue to assist NHAI with its medium-term strategy to complete widening the western transport corridor to four lanes, by maximizing private participation for the financially attractive sectors and providing long-term funds to develop the less viable sections. About 60 percent (1,675 km) of the western transport corridor (NH8 and NH4) is still a two-lane facility, and needs to be upgraded to four-lane standard.

F. Policy Dialogue

29. ADB has, since 1988, conducted policy dialogue with the Government on various major road sector issues. ADB’s involvement in the road sector has resulted in (i) increased attention to road maintenance; (ii) improved design, construction, and contract management standards, now at international practice levels; (iii) improved road safety and environmental impact awareness; (iv) the establishment of NHAI as a single autonomous agency responsible for the development, maintenance, and management of the entire national highway and expressway network; and (v) initiatives to increase private participation. The policy impacts of ADB’s involvement in the road sector in India are detailed in Appendix 5. ADB review missions have continued to closely monitor the status of various road sector reform issues that are Government assurances under ADB’s ongoing projects. Involvement with the proposed Project will provide ADB with the opportunity to continue this process and to advance policy dialogue on the following issues.

1. Institutional Development of NHAI

30. Although NHAI was legally constituted in 1988, it only began operation in March 1995. ADB played a significant role in ensuring the initial budget allocation for NHAI, which allowed it to be staffed and operational. NHAI is expected to take over entire responsibility for the development, maintenance, and management of the national highway network in a phased manner. However, initially, NHAI is to focus on (i) developing national highways on the four highest density corridors (NH8, NH4, NH5, and NH2), (ii) implementing national highway projects funded by multilateral and bilateral agencies, and (iii) facilitating private investment in the development of national highways and expressways.

31. NHAI is still dependent on Government budgetary support for the management of the national highway and expressway network. In the medium to long term it needs to build up its revenue base from the tolling of upgraded (to four lanes) national highways and newly constructed expressways. Once a reliable and stable stream of revenue from operations is established, NHAI will be able to augment its resource mobilization by borrowing directly from domestic and international capital markets. Initially, it will need the longer maturities provided by loans from multilateral agencies. The proposed ADB loan will be the first direct borrowing by NHAI. It will encourage prudent financial management, provide the discipline of meeting debt– service requirements, and ensure full cost recovery through direct user charges. ADB will continue to maintain an active role in the development of NHAI as an institution through policy dialogue during project implementation.

16 TA 2986-IND: Western Transport Corridor–Facilitating Private Participation, for $1.0 million, approved on 9 February 1998. 10

2. Private Participation in the Financing of Highways and Expressways

32. In 1991, an ADB TA for private participation in expressway financing, construction, and operation17 identified constraints to the development of expressways through private financing. The major recommendations of the study were that (i) an appropriately organized and funded NHAI should be responsible, as an apex agency, for overseeing private participation; (ii) Government incentives and guarantees are needed to attract the private sector; and (iii) the land acquisition process should be accelerated. Following this study, the National Highways Act was amended in 1995 to permit private participation in the development of highways and expressways. Private enterprises can now develop new and existing roads, levy tolls, and regulate traffic on these routes. In addition, the Government also issued broad guidelines for private investment in national highway projects. These guidelines provide the general framework for private participation and specifically provide for (i) Government funding for project preparation work, including land acquisition; (ii) simplification of the land acquisition process; (iii) various incentives, guarantees, and fiscal concessions to the private sector; (iv) foreign direct investment of up to 74 percent of project cost; (v) NHAI participation in equity of up to 30 percent; and (vi) Government grant financing of up to 40 percent of the project cost to enhance viability. Several state governments (Gujarat, Madhya Pradesh, Maharashtra, and Tamil Nadu) have since introduced amendments to state legislation to allow private participation in the financing of state highways, bridges, bypasses, and rail overpasses. As a result, 11 smaller build, operate, and transfer concessions (for urban bypasses, bridges, and rail overpasses) have been awarded; two are complete and operational.

33. Private financing of longer stretches of interurban highways and expressways are more difficult to develop, typically because of (i) high capital cost and long payback periods, (ii) noncaptive traffic with alternative free routes, (iii) land acquisition requirements, (iv) lack of Government incentives and fair risk allocation, and (v) lack of a long-term domestic debt market.18 It is necessary to create the right environment and identify the right project configuration so that private funding in the public interest can happen on a sustainable basis. ADB is supporting this objective through TA19 to facilitate private participation in the financing, construction, operation, and maintenance of national highways and expressways by developing the enabling environment for private participation and preparing a model public- private partnership highway project for implementation. The TA will develop a transparent and fair private participation framework, (including a model concession agreement and mechanisms for tariff setting and adjustment) in relation to a specific project that meets with international best practice to attract private investment.

17 TA 1403-IND: Private Sector Participation in Expressway Financing, Construction and Operation, for $500,000, approved on 30 October 1990. 18 ADB is assisting with the development of the domestic capital market through Loan 1408-IND: Capital Market Development Program, for $250 million, approved on 28 November 1995. ADB support for private sector participation in infrastructure under Loans 1480/1481/1482-IND: Private Sector Infrastructure Facility Project, for $300 million, approved on 7 November 1996 are intended for smaller scale projects such as bridges and urban bypasses. 19 TA 2986-IND: Western Transport Corridor–Facilitating Private Participation, for $1.0 million, approved on 14 February 1998. 11

3. Commercialization of Highway Operation and Maintenance

34. Private financing of highway improvement and expressway construction is being pursued as a longer term objective because of the higher risks involved and the reluctance of the private sector to assume such risks without the appropriate enabling environment. The Government however recognizes that private sector involvement in the operation and maintenance of highways will bring immediate efficiencies associated with private sector entrepreneurial skills and management practices. An 85 km stretch of the national highway between Jaipur and Kotputli20 has been let as an operating concession (with toll collection responsibility only) to the private sector on a short-term (two-year) lease. Tolling operations commenced on 30 March 1998. The success of this experiment is vital for the development of highway infrastructure as it establishes the willingness of road users to pay direct charges for better facilities and services. Longer term concessions that include maintenance responsibility need to be developed, and the arrangements for the operation of the completed project facility will provide such a model for use on other improved national highways.

IV. THE PROPOSED PROJECT

A. Rationale

35. The western transport corridor, comprising NH8 and NH4, which connects Delhi, Mumbai, Bangalore, and Chennai, is the busiest corridor in India, particularly in the section between Ahmedabad and Mumbai where it passes through an industrial belt with connections to several major and minor ports on the west coast. The section between Ahmedabad and Mumbai is 528 km of which 348 km has been or is being widened to four-lane standard. There remains a section of about 180 km (between Surat and Manor), which is now a severe bottleneck for the efficient movement of goods and passengers between the industrial heartland of Gujarat and the ports (including Mumbai) on the west coast of India.

36. Because of the scale of the overall highway improvement program and the high costs involved, the Government is conscious of the need to mobilize private financing to develop the highway system. While the private sector has come forward and taken up projects with relatively short payback periods, such as those for bridges and bypasses, so far, they have not been willing to take on the larger capital costs and higher risks associated with financing long stretches of interurban highways until the right environment, incentives, and long-term debt market is developed. While these requirements are being addressed separately, private participation will be introduced through the commercialization of the operation and maintenance of the completed project facility. The Project will be publicly funded but privately operated and maintained under a toll concession. The project operation and maintenance concession to the private sector will serve as a model for use on other highway sections that are improved to four-lane standard. ADB’s involvement with the Project will provide an opportunity to advance policy dialogue with the Government on road sector reform issues, including the commercialization of operation and maintenance.

20 Improved to four lanes under ADB’s Second Road Project, Achrol-Kotpuli, and by the Government, Jaipur- Achrol. 12

B. Objectives and Scope

37. The objectives of the Project are to remove capacity constraints and improve road safety on critical sections of the western transport corridor connecting Delhi to Mumbai. The completed project highway will be operated and maintained by the private sector through a toll concession. The commercialization of operation and maintenance of the project highway represents a significant step in increasing private participation in national highway development in India.

38. The Project will comprise (i) the widening to four lanes (including the strengthening of the existing two-lane pavement) of about 180 km on NH8 between Surat and Manor, (ii) consulting services for construction supervision of road improvement, and (iii) consulting services for the development of private participation and toll operations.

39. The Project will widen the existing two-lane single carriageway highway to a four-lane divided highway. In the urban areas, the Project will provide a six-lane divided highway with service roads. The geometric design of the highway is based on a design speed of 100 km/hr, although for limited sections this had to be reduced to 80 km/hr. The traffic loading on the pavement was derived from traffic projections and field investigation work conducted during the feasibility study for the Project. The proposed design is based on the concept of staged construction, with an initial pavement life of 10 years, which is extended to 20 years through overlay of the pavement after the tenth year. Safety issues were addressed in the design through geometric standards, road stripping, road signing, and the use of service roads in urban areas. Four toll plazas—barrier-type open toll collection system—will be constructed at locations that will avoid disruption to local traffic between urban centers and ensure that long- haul traffic is captured because alternative routes involve significant time and distance penalties. The design of the highway pavement is in accordance with international design guidelines. A further design review will be carried out by the supervision consultants in relation to updated traffic and loading factors prior to the commencement of road improvement. A technical description of the scope of works is given in Appendix 6.

40. Consulting services will be provided for construction supervision of the highway improvement. Consulting services will also be provided to assist NHAI in its efforts to improve the enabling environment to promote private participation in the development of national highways and for backstop services relating to toll operations. The identification and development of the demonstration process for private participation requires a broad range of studies covering project feasibility, financing modalities, legal framework, risk allocation, and institutional reform. While the thrust of this effort is being provided through an ongoing ADB TA,21 which is focused on developing a demonstration project, it will be necessary to supplement this effort through other studies and institutional reform measures to ensure that private participation in highways (construction, maintenance, and operation) is sustainable. As more sections of the national highway are tolled after being improved to four-lane standard, there will be a need to review and restructure the toll rates and to set up proper regulatory mechanisms. Assistance will also be required in preparing the operation and maintenance concession agreement for the completed project highway. The scope of these studies and the detailed terms of reference for the consulting services will be agreed upon with ADB prior to undertaking them.

21 TA 2986-IND: Western Transport Corridor–Facilitating Private Participation Project, for $1.0 million, approved on 9 February 1998. 13

C. Cost Estimates

41. The total cost of the Project is estimated at $280 million equivalent, of which the foreign exchange cost is estimated at $180 million representing about 64 percent of the total cost. The local currency cost, including taxes and duties, is estimated at $100 million equivalent representing about 36 percent of the total cost. The project cost estimates are summarized in Table 1 and detailed in Appendix 7.

Table 1: Summary of Cost Estimates ($ million)

Foreign Local Total Item Exchange Currency Cost

A. Base Costs Right-of-Way 0.0 12.0 12.0 Civil Works 114.0 66.5 180.5 Consulting Services 20.0 4.5 24.5 Project Management 0.0 1.0 1.0

Subtotal 134.0 84.0 218.0

B. Contingencies 28.6 16.0 44.6

C. Interest During Construction 17.4 0.0 17.4

Total 180.0 100.0 280.0 Percent 64 36 100

D. Financing Plan

42. It is proposed that ADB provide a loan of $180 million from its ordinary capital resources to finance the entire foreign exchange cost of the Project (representing 64 percent of the total cost). The local currency cost amounting to $100 million equivalent (representing 36 percent of the total cost) will be met by NHAI from its own resources.

43. The proposed ADB loan will have a repayment period of 25 years including a grace period of 5 years, with interest determined in accordance with ADB’s pool-based variable lending rate for US dollar loans. The Borrower will be NHAI, and India will be the Guarantor. The financing plan for the Project is given in Table 2. Commercial cofinancing for the Project was explored by the Mission. Without the private participation framework, which is being developed separately under an ADB TA, long-term commercial cofinancing on a project financing basis was not feasible because of the high risks and long payback period involved. 14

Table 2: Financing Plan ($ million)

Foreign Local Total Source Exchange Currency Cost Percentage

ADB 180.0 0.0 180.0 64

NHAI 0.0 100.0 100.0 36

Total 180.0 100.0 280.0 100

ADB = Asian Development Bank; NHAI = National Highways Authority of India.

E. Implementation Arrangements

1. Project Management

44. NHAI will be the Executing Agency for the Project. NHAI has adequate experience gained from the implementation of ADB’s third project in the road subsector.22 The Project will be implemented by an especially created project implementation unit (PIU) within NHAI. The PIU will be staffed with experienced personnel both at the management level at NHAI’s headquarters and at the project site. The PIU will be delegated sufficient administrative authority for effective and timely decision making on project implementation matters. Operation and maintenance of the completed project highway will be commercialized through a toll concession to be awarded to the private sector.

2. Implementation Schedule

45. The Project will be implemented over 70 months, inclusive of preconstruction activities. It is expected to be completed by March 2004. A summary project implementation schedule is given in Appendix 8. The implementation schedule allows for land acquisition and resettlement activities, and the clearance of all utilities and trees from the right-of-way. These are to be undertaken prior to the award of the civil works contracts. An outline of the arrangements for the operation and maintenance of the completed project facility is given in Appendix 9. Consultants will assist NHAI in drawing up the operation and maintenance concession agreement and the tender documents for the selection of the operator.

3. Procurement

46. Procurement of civil works for three contract packages has been undertaken in accordance with ADB’s Guidelines for Procurement following international competitive bidding procedures. The contractors were selected from prequalified bidders. ADB has approved

22 Loan 1274-IND: National Highways Project, for $245 million, approved on 29 November 1993. 15 award of contract subject to the conditions in para. 79. Based on the experience of ADB’s earlier road projects, the contract packages were made sufficiently large to attract capable contractors with international experience. At NHAI’s request, ADB approved advance procurement action for the civil works procurement on the understanding that such approval would not commit ADB to finance the Project. Advance procurement action would allow NHAI to commence work on preconstruction activities and will shorten the implementation period. A list of contract packages and the mode of procurement are given in Appendix 10.

4. Consulting Services

47. International consultants working with domestic consultants will assist NHAI with construction supervision of highway improvement to be carried out under the Project. The outline terms of reference and the person-month requirements for the construction supervision services have been agreed with NHAI and are given in Appendix 11. Consulting services will also be required to assist NHAI in its efforts to promote private participation and mobilize private financing for the development of national highways and for backstop services relating to the operation and maintenance of the completed project facility (including the toll structure). The terms of reference for these services will be subject to prior ADB approval. The consultants will be recruited by NHAI in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB on the engagement of domestic consultants. At NHAI’s request, ADB approved advance action for the recruitment of construction supervision consultants on the understanding that such approval would not commit ADB to finance the Project. ADB has approved NHAI’s evaluation ranking for the supervision consultants.

5. Project Supervision

48. A project inception mission will be fielded soon after approval of the proposed loan to initiate the project implementation process. In addition, NHAI and ADB will review the overall progress of the Project annually. Should the results of such reviews indicate serious implementation problems, NHAI and ADB will agree on appropriate measures, including changes to implementation arrangements, to ensure that the project objectives are met.

6. Progress Reports and Project Benefit Monitoring

49. To monitor the execution of the Project, NHAI will submit to ADB quarterly progress reports on project implementation. Within three months of the physical completion of the Project, NHAI will prepare and furnish to ADB a project completion report covering details of project implementation costs and benefit monitoring and evaluation activities. NHAI will, with the assistance of the supervision consultants, undertake project performance monitoring and evaluation in accordance with ADB’s Project Performance Management System Handbook. The performance indicators to be measured have been agreed to by NHAI.

F. The Executing Agency

50. NHAI was set up under an act of Parliament as a corporate body having perpetual succession and a common seal. NHAI is managed by a board consisting of a chairperson, five full-time members, and four part-time members, all appointed by the central Government. The organization chart of NHAI is shown in Appendix 12. 16

51. NHAI is entrusted with the responsibility to develop, operate, and maintain the national highway network and other facilities vested in it by MOST. NHAI’s immediate mandate is to execute national highway improvement projects funded by multilateral and bilateral agencies and to promote private participation in the financing, operation, and maintenance of national highways. To carry out these activities, NHAI has established separate divisions to implement publicly funded projects and to conduct project development activities, including the identification and formulation of projects, prefeasibility studies, land acquisition, and preliminary clearances for private participation.

52. NHAI is a relatively new institution and over time is expected to take on the entire responsibility for planning, designing, financing, and managing the national highway network. In preparation for this, capacity building is being addressed through TA funded by the Government of Japan and administered by the World Bank. The TA will review, identify, and recommend (i) an effective organizational structure, (ii) skills requirement and a human resource development plan, (iii) opportunities for outsourcing of activities, (iv) procedures for procurement and contract management, and (v) a management information system, including financial management and accounting systems. NHAI has agreed to keep ADB informed of the progress of the study and to provide ADB with the opportunity to comment on developments thereon through policy dialogue.

53. NHAI prepares its financial statements using commercial accounting principles and practices. Its accounting policies are being developed, with the assistance of consultants, to accurately reflect the nature of its operations and assets. The financial statements of NHAI are audited annually by the Government’s auditor general. NHAI became operational in March 1995 with a capital grant of Rs7,000 million as its initial capital base. It will be dependent on capital grants from the Government for its highway development program until such time as it establishes a reliable revenue source from its tolling operations. The Government has also given NHAI the option of raising funds from the domestic capital market through the issuance of bonds; it plans to do so when conditions are right. Revenue from the tolling of the completed project facility is expected to be sufficient to meet NHAI’s repayment obligations under the proposed ADB loan. The financial statements of NHAI are presented in Appendix 13.

G. Social and Environmental Impacts

54. The project highway passes through the districts of Surat and Valsad in the state of Gujarat and the district of Thane in the state of Maharashtra. The project influence area has a population of about 14 million of which nearly 60 percent are engaged in agriculture, with the remaining largely in the service sector. Major agricultural market places are located at Chikali, Dharampur, Ganderi, Navsari, Pardi, and Valsad. Industries are located at Atul and Vapi where there are about 1,500, mostly small-scale industries specializing in the production and processing of chemicals, petrochemicals, pharmaceuticals, fertilizer, and electronics. The Project will improve the transport linkages between the agricultural and industrial areas and the ports of Mumbai and Kandla. The Project will result in the direct employment of about 4,200 person-days per km (skilled and unskilled labor) during the construction period. When the project facility is completed, there will be small-scale business and employment opportunities through the provision of the various services (such as service stations, repair shops, restaurants, and motels) required by vehicle operators and travelers. Road users will benefit from the advantages of increased comfort, safety, and reduced travel time. 17

55. A detailed social analysis was carried out during the project feasibility study in accordance with ADB’s guidelines. Participatory processes were applied, with project-affected persons (PAPs), local community leaders, village panchayat heads, state officials, and a sample of persons in the project influence area consulted about the proposed highway improvements. The communities were all supportive of the Project owing to the significant economic benefits that would be generated with improvement to the highway. The social impact analysis indicated that the adverse impacts of the Project would be minimal. As the Project will be operated as an open toll system, nonmotorized23 and local traffic will not be required to pay any tolls. Nonmotorized traffic, largely found in built-up areas, will continue to have access to the improved highway. Service roads will be provided in urban areas to separate through traffic and improve road safety.

56. As the Government already owns the right-of-way required to widen the highway to four lanes, land acquisition will only be required at one of the toll plazas and minor strip acquisition of agricultural lands at a few points along the alignment. A resettlement action plan (RAP) has been prepared and accepted by NHAI, and will be implemented in consultation with state authorities and the PAPs in accordance with ADB’s policy on involuntary resettlement. The RAP is based on a full census of the PAPs through a socioeconomic survey carried out in March-April 1998 and updated in February 1999. The RAP identifies 3,896 PAPs and total land acquisition of 107 ha. The PAPs are primarily vendors and petty shopkeepers whose businesses will not be affected as they will be allowed to relocate their activities to the edge of the widened lanes. There is virtually no displacement except at the toll plaza in Section II, where the Project will require the rebuilding of a girls’ hostel at a school that will lose part of its courtyard, and a dhaba (wayside guest/eating house) that will be relocated to adjoining private lands. The residents of the hostel will not be moved until the new hostel is constructed. The northern part of the alignment runs through degraded forestlands in which there are some settlements of tribal origin. However, within the project zone of influence, there are only itinerant casual laborers with no clear settlement patterns who will stand to gain from construction-related employment opportunities, particularly as the RAP provides for preferential employment for qualified PAPs. The funds for compensation have been placed with NHAI, which will implement the RAP with the assistance of a competent implementing agency. All compensation will be made at current market (replacement) rates. The total expenditure for the RAP is estimated at Rs550.0 million. A summary of the RAP is presented in Appendix 14.

57. The environmental category of the Project is B. An initial environmental examination was conducted during the feasibility study based on ADB’s Environmental Guidelines for Selected Infrastructure Projects, and its summary is presented in Appendix 15. The findings indicate that the Project will not cause any significant adverse environmental impacts as the proposed highway improvements will not involve realignment or major earth works. There will be no disturbance to cultural or heritage areas, protected areas, wetlands, or other environmentally sensitive areas. Construction-related environmental impacts will be minimized by adopting good construction site management and engineering practices. Air quality and noise levels along the improved project road are expected to improve because of the smoothness of the traffic flow. The State Forest Department and the Office of the District Collector will be involved in the plans for tree felling and compensatory afforestation, and disbursal of compensation, respectively.

23 Bicycles, rickshaws, animal-drawn vehicles, and handcarts. 18

V. PROJECT JUSTIFICATION

A. Financial and Economic Analyses

1. Financial Analysis

58. The completed project highway will be operated as a toll concession. The financial internal rate of return (FIRR) of the Project was calculated on the basis of the project capital costs, operation and maintenance costs, and net revenues from the toll operations over an assumed 20-year period. The toll rate and structure for interurban highways were established by NHAI after detailed vehicle operating cost (VOC) savings studies and cost–recovery considerations. Willingness-to-pay surveys carried out on the project highway indicate that road users are prepared to pay the proposed tolls for better service and facilities. The FIRR of the Project is estimated to be 14 percent, which is above NHAI’s weighted average cost of capital of 10 percent. This means that the estimated revenues from the Project will result in full cost recovery, and provide NHAI with surplus funds to develop other less viable sections of the national highway network. Details of the FIRR calculation, including the assumptions used are given in Appendix 16.

2. Economic Analysis

59. The economic evaluation of the Project is based on the comparison of the with- and without-project situations. Without the Project, the existing two-lane road will become even more heavily congested and vehicle speeds will fall to lower levels. Conflicts between fast- and slow-moving vehicles will lead to an increasing number of accidents. Accelerated pavement deterioration through increased use raises road maintenance costs. It is expected that the existing two-lane facility will reach capacity in 2001. With the Project, the highway will be widened to four lanes, which will increase capacity, resulting in VOC savings, and shorten travel time. The option to widen the project highway to six lanes was also investigated during the feasibility study, but the four-lane option was found to be the least-cost solution.

60. Economic evaluations were carried out for the three project analysis sections, as well as for the Project as a whole; the analysis sections are homogeneous in terms of traffic flows. For estimation of the economic internal rate of return (EIRR), benefit streams were calculated for 20 years, which is the estimated economic life of the improvements under the Project. Costs and benefits were estimated net of duties and taxes, and are expressed in constant 1998 prices. Improvement costs include provision for civil works by contract, acquisition of right-of-way, and construction supervision. The base EIRR for the Project is estimated at 25 percent, while the EIRRs for the analysis sections vary between 22 and 27 percent. Details of the traffic analysis and projections are given in Appendix 17, while the EIRR calculation is given in Appendix 18.

61. The reduction of VOCs resulting from the highway improvement will initially benefit vehicle owners and road transport operators. The VOC savings for light commercial vehicles are likely to be partially passed on to road users, as there is free competition between operators of such vehicles. As bus transport is carried out under fixed tariff regulations, savings might also be passed on to the passengers if tariffs are revised on the basis of the reduced transport cost. The portion retained by private cars will be widely distributed within the 19 road transport sector. The Project will also benefit importers and exporters by decreasing the inland transport costs from and to Mumbai and Nava Sheva ports. Shippers will benefit from the reduction of travel delays and thereby inventory and storage costs. This could also result in the promotion of exports by making them more competitive in the global market.

62. Besides VOC savings, the Project is expected to contribute a number of nonquantifiable benefits including the provision of more reliable transport services. This will enable the more efficient distribution of goods and services, including industrial and agricultural inputs and outputs; provide easier access to social services and markets; and increase the mobility of people and their employment opportunities. Specifically, the Surat, Valsad, and Thane districts, which are in the area of influence of the project highway, are agricultural producers with important markets.24 These markets are connected to NH8 through an existing network of feeder roads.

B. Poverty Impact

63. Improvement of the project road will bring significant benefits to the national economy as well as social and economic benefits to the 14 million people living in the project influence area. Improved access will help reduce poverty by: (i) increasing labor mobility, particularly to distant markets; (ii) increased employment opportunities offered by accelerated industrialization; (iii) reducing loss of perishables, thereby allowing for increased farmgate prices; (iv) improving access to rural areas by health, school, veterinary, and rural development workers; (v) providing greater opportunities for tribal members, mostly itinerant casual workers, to access income and employment opportunities; and (vi) generating transport-associated small businesses such as service stations, wayside foodstalls, and guesthouses.

64. In Gujarat, the project road passes through the Dhangs and Valsad Districts. In both Dhangs and Valsad the incidence of poverty is high at about 50 percent compared with the Gujarat state average of 30 percent. The government of Gujarat is placing special emphasis on reducing poverty in Dhangs and Valsad by greatly increasing allocations for village housing and infrastructure. The state will spend about $2.5 billion during the Ninth Plan period on rural development and social sector programs. Of this, $336 million has been allocated for improving rural roads and providing access to about 1,000 villages. In Maharashtra, the incidence of poverty was estimated at 44 percent in 1993/1994. High incidence of rural poverty (51 percent) and extreme interregional inequalities characterize poverty in the state. In the coastal Maharashtra Region, in which the Thane District is located, the incidence of poverty is about 15 percent.

C. Risks

65. The potential delays in project implementation have been minimized through measures such as advance procurement action, improved tender documentation, and strengthened project management arrangements. The prequalification criteria and packaging of the civil works contracts will ensure that experienced contractors are selected. The operation and maintenance of the completed project facility through a toll concession managed by the private sector will ensure efficient management of the facility and full funding for maintenance. The operation and maintenance concession will have mechanisms for periodic performance

24 The markets include Palghar, Talsari, and Vasai in Thane District; Dharampur, Nasvari, and Valsad in Valsad District; and Bardoli, Mangral, and Surat in Surat District. 20 reviews, and extensions to the concession period will depend on performance of the operator. The basic assumptions on costs and benefits for the FIRR and EIRR calculations were subjected to sensitivity tests under various adverse scenarios. The results indicate that the project FIRR and EIRR are fairly robust in relation to changes in the basic assumptions. Sensitivity tests were also carried out to determine the impact of real currency depreciation on the foreign debt repayment capacity of the Project. The results indicate that with assumptions of a real currency depreciation of 30 percent upon completion of the Project and a real currency depreciation of 5 percent per annum over the life of the Project, the debt service coverage ratios of the Project remain comfortable.

VI. ASSURANCES

66. The Government and NHAI have given the following assurances, in addition to the standard assurances, which have been incorporated in the legal documents

A. Specific Assurances

67. Commercialization of Operation and Maintenance of Project Highway. NHAI will ensure that upon completion of the project highway, the operation and maintenance is commercialized through a toll concession to be awarded to the private sector under arrangements satisfactory to ADB. NHAI will submit the terms and conditions of the proposed concession to ADB for review and comment prior to inviting bids from the private sector. NHAI will ensure that the completed project highway is operated and maintained in accordance with sound engineering and safety standards under the concession.

68. National Highway Maintenance Management System. By 31 December 2000, NHAI will develop and implement a highway maintenance management system for the national highway network vested in NHAI, which will be used to prepare annual maintenance budgets on the basis of the physical measurement of roads, maintenance standards, and recorded traffic volumes and axle-loading. NHAI will take these maintenance plans into account when allocating funding for annual maintenance budgets as of FY2002.

69. Capacity Building within NHAI. NHAI will discuss the findings and recommendations of the ongoing capacity–building TA study with ADB and will take into consideration ADB’s views when implementing any recommendation.

70. Accounting Standards. NHAI will review its accounting policies and practices, and by 31 March 2001, will adopt standards that are appropriate to its operations and consistent with international practice.

71. Toll Review. NHAI will periodically review its toll structure by taking into account (i) VOC savings and time savings; and (ii) cost recovery to ensure its long-term financial viability.

72. Private Participation in the Financing of Highway Development. NHAI will continue to actively encourage the enabling environment for private financing of national highways and with support provided by TA 2986.25 By 31 December 2000, NHAI will develop a private sector

25 TA 2986-IND: Western Transport Corridor-Facilitating Private Participation Project, for $1.0 million, approved on 9 February 1998. 21 participation framework, acceptable to ADB, in relation to a model privately financed highway project based on the findings of this TA.

73. Environment. NHAI will ensure that all environmental mitigation measures identified in the summary initial environmental evaluation report are incorporated into the detailed project design and are followed during construction, operation, and maintenance of the project highway. NHAI will also ensure that the Project is designed and constructed in accordance with ADB’s Environmental Guidelines for Selected Infrastructure Projects.

74. Resettlement Plan. NHAI will implement the RAP agreed upon with ADB in consultation with state authorities concerned and with persons affected by the Project in accordance with ADB’s policy on involuntary resettlement. NHAI will ensure that persons who will be relocated as a consequence of the Project are consulted and fairly compensated such that their living standards are not adversely affected by the Project.

75. Benefit Monitoring and Evaluation. During project implementation, NHAI, through the PIU, will carry out benefit monitoring and evaluation activities under the Project and will include these activities in its quarterly progress reports on project implementation and in the project completion report before submitting them to ADB. The PIU will use key indicators agreed upon by NHAI and ADB as the baseline data in these activities.

76. Land Acquisition. NHAI will make available on a timely basis all land and rights in land, free from encumbrances, for toll plazas and other purposes required under the Project.

B. Condition of Award of Civil Works Contract

77. NHAI will not award any civil works contract until after (i) acquiring or making available on a timely basis the land and rights in land, free from any encumbrances, required for the execution of the contract; and (ii) clearing, on a timely basis, the utilities, trees, and any other obstruction from the land to be used for construction activities relating to the contract.

VII. RECOMMENDATION

78. I am satisfied that the proposed loan would comply with the Articles of Agreement of ADB and recommend that the Board approve the loan of $180,000,000 from ADB’s ordinary capital resources to the National Highways Authority of India, to be guaranteed by India, for the Surat-Manor Tollway Project, with a term of 25 years, including a grace period of 5 years, and with interest to be determined in accordance with ADB’s pool-based variable lending rate system for US dollar loans, and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Guarantee Agreements presented to the Board.

TADAO CHINO President

23 June 2000 22

APPENDIXES Cited on Number Title Page (page, para.)

1 Project Framework 23 1,2

2 Transport Profile 24 1,3

3 National Highway Network 25 3,11

4 External Assistance to the Road Sector 26 7,22

5 Policy Impact of ADB’s Involvement in the 27 9,29 Road Sector

6 Detailed Description of Road Improvement 30 12,39

7 Project Cost Estimates 32 13,41

8 Summary Implementation Schedule 33 14,45

9 Outline of Operation and Maintenance 34 14,45 Arrangement

10 List of Contract Packages and Mode of 37 14,46 Procurement

11 Summary Terms of Reference for Construction 38 15,47 Supervision

12 Organization Chart of the National Highways 41 15,50 Authority of India

13 Financial Statements of the National Highways 42 16,53 Authority of India

14 Summary Resettlement Action Plan 45 17,56

15 Summary Initial Environmental Examination 49 17,57

16 Financial Analysis 55 18,58

17 Traffic Analysis and Projections 58 18,60

18 Economic Analysis 62 18,60 SUPPLEMENTARY APPENDIX (available on request) A Resettlement Plan PROJECT FRAMEWORK

Design Summary Project Targets Project Monitoring Mechanisms Risks / Assumptions

Goal Reduce transport cost and promote Increase competitiveness of Indian industry and agriculture. economic growth. Increase gross domestic product. Improve social indicators.

Purpose Remove capacity constraints and Efficient movement of freight and passengers: Government economic data Traffic forecast and vehicle mix on project improve road safety on National Increase capacity of Project highway from 45,000 passenger car Project completion report highway remain valid Highway 8 units (PCUs) to 45,000 PCUs - by supervision consultant Reduce travel time by 34 percent - by ADB after loan closing Decrease in congestion will result in lower Reduce vehicle operating costs by 15 percent Economic internal rate of return pollution and noise caused by changes in vehicle Decrease congestion in urban areas analysis speed Reduce accidents by separating through and local traffic in Benefit monitoring and evaluation Separation of traffic will reduce movement urban areas - with assistance from supervision conflicts consultants

Commercialize operation and Efficient management and administration of tollway facility Award of concession contract Concession agreement is technically sound maintenance of project road Fully funded maintenance program Financial internal rate of return and commercially viable. through private toll concession Generation of funds for National Highways Authority of India analysis Concession is either extended/renewed such (NHAI) from commercialization. Audited NHAI financial statements that commercialization is ongoing. Sources and uses of cash are clearly

identified in NHAI's accounts. 23

Outputs Road improvement Four-laning (including pavement strengthening of existing two lanes) of about Monthly progress reports No delay in procurement activity 180 km of National Highway 8 between Surat (Km 263) and Manor (Km 442) Early clearance of utilities and trees from project Physical inspection by review missions highway Construction of 42 bridges including 15 major multispan bridges Good progress by civil works contractors Service roads in urban areas. Project completion report Availability of counterpart funds for capital costs Toll plazas and bus bays at various locations All physical work completed by December 2003 Continued Government support in the form of Capacity building in private Creation of enabling environment for private participation including private participation policies and incentives participation and toll operations - preparation of private participation framework - preparation of model concession agreement Development of long-term domestic debt market - review of toll structure to support private financing needs of highway development

Inputs Appendix 1

1.Detailed engineering and Project costs preparation of tender documents. - Civil works and consulting services $280 million Audited project accounts 2. Procurement of civil works and recruitment of consultants. Financing Plan ADB review and approval of procurement, 3. Road improvements - ADB financing $180 million recruitment of consultants, and disburse- 4. Construction supervision - Government $100 million ments. 24

Appendix 2

TRANSPORT PROFILE

Item 1950/1951 1960/1961 1970/1971 1980/1981 1990/1991 1991/1992 1995/1996

Railways Route length kms 53,596 56,247 59,790 61,240 62,367 62,458 62,915 Electrified route length kms 388 748 3,706 5,345 9,968 10,653 12,306 Freight traffic million ton 93 156 197 220 341 360 406 Net tonne (kms) billion ton kms 44 88 127 158 243 257 274 Passengers millions 1,284 1,594 2,431 3,613 3,858 4,049 4,018 Passenger kms millions 66,517 77,665 118,120 208,558 295,644 314,564 341,999

Roads Total length 000 kms 400 525 915 1,485 2,350 2,486 3,289 National highways 000 kms 22 24 24 32 34 34 34 Percentage of village percent NA NA NA 29 46 47 86 with 1000 + population connected with all-weather roads Surfaced length 000 kms. 156 234 398 684 1,113 1,160 1,462

Road Transport No. of goods vehicles In '000 82 168 343 554 1,356 1,514 1,785 No. of passenger buses In '000 34 57 94 162 331 358 450

Major Ports No. of major ports numbers 5 9 10 10 11 11 11 Traffic handled tons 19 33 56 80 152 157 215

Minor Ports Traffic handled tons NA NA 7 7 11 13 24

Civil Aviation Domestic airlines Indian airlines Available tonne kms million NA 113 208 663 927 1,090 1,046 Revenue tonne kms million NA 83 161 420 699 761 723 No. of airports and civil enclaves numbers NA NA NA 84 117 117 120

Inland Water Transport Length of navigable waterways kms 14,544 14,544 14,544 14,544 14,544 14,544 14,544

Pipelines Length kms NA NA NA NA 9,945 10,260 12,367

B.T. = billion ton; NA = not calculated. 25

Appendix 3 NATIONAL HIGHWAY NETWORK

Table A3.1: Road Network, 1998 (length in '000 km)

Growth Category 1951 1998 (percentage per annum)

National Highways 20 49.6 5.2

State Highways 60 118.8 4.2

Other Roads 320 3,121.6 20.7

Total 400 3,290.0 17.5

Table A3.2: National and State Highways, 1998 (length in kms)

Category of Road National State (surfaced) Highways Percentage Highways Percentage

Below Standard 1,446 2.9 25,945 21.8 Single Lane

Single Lane 6,700 13.5 80,674 67.9

Double Lane 39,595 79.9 10,555 8.9

Multilane 1,844 3.7 1,639 1.4

Total 49,585 100.0 118,813 100.0

Source: Government of India. Ninth Five-Year Plan (1997-2002), Delhi. 26 Appendix 4

EXTERNAL ASSISTANCE TO THE ROAD SECTOR A. Asian Development Bank

Date TA No. Technical Assistance Project Name Type Amount Approved 0955 Road Improvement PP 75,000 24 Feb 1988 1058 Pavement Management A&O 490,000 3 Jan 1989 1059 Expressway System Planning A&O 260,000 3 Jan 1989 1325 Vadodara-Bombay Expressway PP 600,000 15 Jun 1990 1402 Pavement Management for National Highways A&O 760,000 30 Oct 1990 1403 Private Sector Participation in Expressway Financing, Construction and Operation A&O 500,000 30 Oct 1990 1404 Road Construction Industry A&O 340,000 30 Oct 1990 1325 Vadodara-Bombay Expressway (Supplementary) PP 250,000 19 Mar 1991 1678 Third Road PP 250,000 26 Mar 1992 1942 Faridabad-Noida-Ghaziabad Expressway PP 550,000 27 Aug 1993 1951 Bombay-Vadodara Expressway TA Project Environmental Impact Assessment PP 90,000 10 Sep 1993 2001 Road Safety A&O 210,000 29 Nov 1993 2002 Environmental Management of Road Projects A&O 240,000 29 Nov 1993 2003 Technical Standards of Highway Concrete Structures A&O 350,000 29 Nov 1993 2986 Western Transport Corridor-Facilitating Private Participation PP 1,000,000 9 Feb 1998 3142 North-South Corridor Development in West Bengal PP 1,000,000 23 Dec 1998 3361 Capacity Building for Contract Supervision and Management in the National Highways A&O 600,000 22 Dec 1999 Loan Date No. Ordinary Capital Resources Project Amount Approved 0918 Road Improvement 198.00 10 Nov 1988 1041 Second Road 250.00 30 Oct 1990 1274 National Highways 245.00 29 Nov 1993 1279 Bombay-Vadodara Expressway Technical Assistance (Lapsed) 2 Dec 1993

B. Other Funding Sources Project Loan $ Region/ Length Amount Equivalent State Name (km) (Y million) (million) 1. Japan Bank for International Cooperation

Uttar Pradesh (NH2) Mathura-Agra (four-laning) 51 4,855 43.3 Uttar Pradesh (NH27) Allahabad-Naini Bridge (over Jamuna Bridge) 5 10,037 89.6 Andhra Pradesh (NH5) Chilakaluripet-Vijayawada (four-laning) 83 11,360 101.4 Orissa (NH5) Jagatput-Chandikhol (four-laning) 33 5,836 52.1 Uttar Pradesh (NH24) Ghaziabad-Hapur (four-laning and Hapur bypass) 33 4,827 43.0 Amount ($ million) Date IBRD IDA Approved 2. The World Bank Group

Countrywide Roads 72.11 1 Jun 1961 Bihar Bihar Rural Roads 35.00 1 Nov 1980 Countrywide National Highway 200.00 1 May 1985 Gujarat Gujarat Rural Roads 119.60 1 Feb 1987 Countrywide State Roads 80.00 1 Oct 1988 Countrywide State Roads 170.00 1 Oct 1988 Countrywide Second National Highways 153.00 1 May 1992 Countrywide Second National Highways 153.00 1 May 1992 Countrywide State Road Infrastructure Development Technical Assistance 51.50 1 Dec 1996 Andhra Pradesh State Highways 350.00 1 Jun 1997

A&O = advisory and operational; IBRD = International Bank for Reconstruction and Development; IDA = International Development Agency; PP = project preparatory. POLICY IMPACT OF ASIAN DEVELOPMENT BANK’S INVOLVEMENT IN THE ROAD SECTOR

Issue Intervention Impact Status

1. Axle-Load Control i. Excessive pavement Asian Development Bank (ADB) Procured portable weigh station equipment under ADB Enforcement of maximum axle loads ongoing. damage axle-load survey on highways financing. Two sets of equipment were provided for each of Excessive heavy loads reduced since ii. High maintenance costs selected for loan project1 the state governments of Andra Pradesh, Haryana, approval of legislation iii. Obsolete road transport Study on road user charges1 Karnataka, Tamil Nadu, and Uttar Pradesh. Ministry of Surface Transport (MOST) fleet technology Heavy fines for overloading incorporated in the Motor Vehicle proposing fiscal policy reform for vehicle Act of 1988 and Central Motor Rules of 1989 taxes. Ministry of Finance (MOF) has reduced excise duty on multi-axle vehicles World Bank study on Vehicle Fleet Identified that tax structure requires bias toward multi-axle Government has commissioned Modernization vehicles comprehensive study on Trucking Operations Fleet study recommended: in India – Problems and Potential. The terms 1. Enforcement of axle load limits of reference for this study reflects issues 2. Upgrading of truck technology identified by both ADB and World Bank 3. Promotion of multi-axle trucks through tax incentives Appropriate distribution of road taxation to reflect relative damage caused by each truck category 2. Maintenance

i. Poor maintenance ADB technical assistance (TA) for TA established pavement management systems in Andra MOST extending pilot scheme nationwide as 27 planning Pavement Management System2 for Pradesh and Tamil Nadu. GIS based system to cover highway planning, ii. Underfunded maintenance State and District Roads in two Government appreciation of consequences of different design, and maintenance that will allow states maintenance funding strategies. different investment scenarios to be studied ADB TA for Pavement Management National Highways TA: System for National Highways3 as 1. Developed computerized pavement management National Highways Authority of India (NHAI) to pilot project in two states system for national highway system develop maintenance management system for 2. Implement pilot system in Karnataka and Uttar Pradesh national highways by December 2000 States. Maintenance funding changing from norms based to needs based. 3. Expressway Planning i. Highway capacity ADB TA to study expressway TA developed: Expressway system on hold while critical restrictions planning4 1. Network of 10,000 km to be implemented by 2015 as bottlenecks eased through 4-laning ii. Conflict between local and phased construction. Cost estimated as Rs600 billion long distance traffic ($15 billion) 2. Revised indigenous highway design standards to develop standards for use on expressways 3. Models to predict both potential expressway traffic and diversion of traffic from other highways 4. Estimates of financial viability of various toll regimes

5. Management and operations institutional framework Appendix 5,page1 together with staffing, equipment, and facilities

1 Loan 918-IND: Road Improvement Project, for $198 million, approved on 10 November 1988. 2 TA 1058-IND: Pavement Management, for $490,000, approved on 3 January 1989. 3 TA 1402-IND: Pavement Management for National Highways, for $760,000, approved on 30 October 1990. 4 TA 1059-IND: Expressway System Planning, for $260,000, approved on 3 January 1989. POLICY IMPACT OF ASIAN DEVELOPMENT BANK’S INVOLVEMENT IN THE ROAD SECTOR

Issue Intervention Impact Status

4. Road Sector Planning i. Planning process being ADB study to address gaps in data ADB data study: Priority allocation for upgrading work based on hampered by serious data for planning including road user cost 1. Updated vehicle operating cost (VOC) for use in rational assessment of predicted needs gaps in road transport data5 economic evaluation of projects Government has proposed removal of octroi database 2. Developed computer-based model to allow cost data to duty barriers at state borders on National ii. Restrictions on free ADB study on interstate octroi and be updated annually Highways (octroi duties are state prerogative); movement of goods and entry duties6 3. Prepared table to use in economic analyses some have been removed, others have yet to traffic Government has completed study on passenger and freight be movement and origin-destination (OD) surveys of both national and interstate traffic

5. Road Safety i. Rapid rise in accidents, ADB TA to address safety issues7 TA completed the following: Higher awareness of safety issues increase of 8% per annum 1. Collection of accident data in terms of accident rates for Use of safety features in highway design over the 10 years to 1995 individual sections of major highways MOST has undertaken a research study into ii. Accident “black spots” 2. Identification of traffic accident black spots for priority road safety with particularly high action to reduce accidents through introduction of safety 9th Five Year Plan contains separate provision accident rates features for road safety works 3. Training in safe highway design and low cost accident countermeasures 28

6. Development of Road Construction Industry i. Deterioration of ADB TA to address construction Revision of India Roads Congress standards Revised documentation adopted construction work in terms standards8 Application of international standards to construction Size of contract packages increased to attract of quality ADB TA to address factors Construction industry TA proposed: international contractors ii. Time and cost overruns hampering growth and development 1. Revised prequalification and bid documents together Ongoing use of international consultants for of construction industry9 with evaluation criteria construction supervision Use of international consultants for 2. Introduction of international construction methods in MOST preparing proposals for duty construction supervision10 terms of both modernization of construction plant and rationalization project management through both strengthening of local capacity and introduction of international contractors 3. Rationalization of import duties on construction equipment to allow import of machinery to optimize construction practice in terms of quality and production rates Appendix 5,page2

5 Loan 918-IND: Road Improvement Project, for $198 million, approved on 10 November 1988. 6 Loan 1041-IND: Second Road Project, for $250 million, approved on 30 October 1990. 7 TA 2001-IND: Road Safety , for $210,000, approved on 29 November 1993. 8 TA 2003-IND: Technical Standards of Highway Concrete Structures , for $350,000, approved on 29 November 1993. 9 TA 1404-IND: Road Construction Industry , for $340,000, approved on 30 October 1990. 10 Loan 1041-IND: Second Road Project, for $250 million, approved on 30 October 1990. POLICY IMPACT OF ASIAN DEVELOPMENT BANK’S INVOLVEMENT IN THE ROAD SECTOR

Issue Intervention Impact Status

7. Environmental i. Environmental TA on Environmental Management TA prepared environmental guidelines appropriate to projects Appreciation of need to plan for environmental degradation during of Road Projects11 in India covering new highways and upgrading impacts construction/operation of ADB study on traffic pollution highways control measures in major urban Central Pollutions Board (CPCB) preparing/updating ADB’s environmental standards being ii. Urban traffic pollution areas12 regulations for mass emissions on an ongoing basis; complied with regulations are becoming increasingly stringent Leaded fuel to be phased out of metropolitan areas by end 1998.; vehicles over 15 years old to be banned from Delhi 8. Institutional Strengthening i. Implementation delays ADB proposed a national authority Establishment of NHAI as autonomous agency responsible NHAI now operational and has assumed ii. Protracted procurement for construction and operation of for highway and expressway development functions of MOST, except planning and and cumbersome contract national highways13 coordination administration 9. Private Financing of Highways Budget constraints to ADB TA to address use of private Private sector funding TA proposed: Privatization of small projects under build- highway construction sector financing for expressways14 1. NHAI be responsible for private sector participation operate-transfer introduced 2. Government incentives and guarantees be provided Awaiting development of suitable financial 3. Land acquisition be simplified and processing framework to allow larger projects to be 29 accelerated considered The Government has responded by 1. Amending legislation to allow private sector funding up to 74 percent and NHAI equity up to 30 percent 2. Issuing guidelines on simplifying land acquisition and on providing incentives, guarantees, and fiscal concessions to the private sector ADB TA to address private Private sector participation TA will develop: Ongoing participation in Western Corridor15 1. Strategy for development of Western Corridor through public and private funding 2. Private participation policy framework that complies with international best practice A project using public-private partnership for a tollway in the Western Corridor 10. Commercialization of Operation and Maintenance ADB’s proposal is to gain Capacity constraint to NHAI ADB proposal for completed project 1. Efficient management and administration of tollway Ongoing facility to be operated and facility maintained under a toll concession 2. Fully funded maintenance program by the private sector16 3. Generation of funds for NHAI from commercialization Appendix 5,page3

11 TA 2002-IND: Environmental Management for National Highways, for $240,000, approved on 29 November 1993. 12 Loan 1041-IND: Second Road Project, for $250 million, approved on 30 October 1990. 13 Loan 918-IND: Road Improvement Project , for $245 million, approved on 10 November 1988. 14 TA 1403-IND: Private Sector Participation in Expressway Financing, Construction and Operation , for $500,000, approved on 30 October 1990. 15 TA 2986-IND: Western Transport Corridor-Facilitating Private Participation Project , for $1.0 million, approved on 9 February 1998. 16 Proposed Surat-Manor Tollway Project. 30 Appendix 6, page 1

DETAILED DESCRIPTION OF ROAD IMPROVEMENT

The detailed description of the road improvement is as follows:

(i) Approximately 175.6 kilometers (km) of a new two-lane carriageway will be built and the existing two-lane carriageway commencing at km 263.4 near Surat in Gujarat State and ending at km 439.0 near Manor in Maharashtra State will be rebuilt. The terrain varies from flat to gently rolling with short sections of hilly terrain toward the end of the project highway. The alignment passes through mixed rural and urban development; the area around Vapi at km 364 is particularly heavily developed.

(ii) Of the total 175.6 km, approximately 26 km will be constructed as 6-lane divided highway through urban areas.

(iii) The design speed for the highway is 100 km per hour (km/hr). Due to constraints in the right-of-way (ROW), the design speed had to be reduced to 80 km/hr and 60 km/hr for about 43 percent and 17 percent of the road length. The vertical sight distance on the existing carriageway at km 378 will be improved.

(iv) New carriageway will consist of two 3.5 meter (m) wide lanes in the rural areas and three 3.5 m wide lanes in the urban areas. In rural areas the carriageway will include a 3.5 m paved outer shoulder and will be separated by a 5 m wide median from the existing carriageway. In urban areas the median will typically be 1.2 m wide but will vary from 5 m wide to 1.2 m wide.

(v) The existing carriageway consists of two 3.5 m wide lanes. In rural areas, this is to be widened by the addition of a 3.5 m paved outer shoulder. In urban areas, there will be three 3.5 m lanes and no outer shoulder.

(vi) The pavement for the new carriageway will consist of 450 millimeters (mm) of granular subbase (GSB), 350 mm of wet mix macadam (WMM), 160 mm of dense bituminous macadam (DBM), and 50 mm of asphaltic concrete (AC). The pavement will be continuous across the outer shoulder.

(vii) Reconstruction work for the pavement for the existing carriageway will consist of a leveling course and an overlay. The leveling course is required to correct minor defects in the pavement surface and to reverse a crown camber to a fall to the outer edge of the pavement. The leveling course will consist of a layer of bitumen macadam (BM) of varying thickness but with a minimum thickness of 40 mm. The overlay will vary, depending on the condition of the existing pavement, but will consist of 50, 65, or 80 mm of DBM and 50 mm of AC.

(viii) Road junctions will be at-grade except for the major junction at km 364.5 in Vapi. A flyover will be constructed here to create a grade-separated junction. Paving will be continuous between National Highway 8 and joining roads.

(ix) Service roads will be constructed in urban areas on one or both sides of the highway but within the ROW. These service roads will consist of two 2.75 m wide lanes with 1.5 m wide shoulders. 31 Appendix 6, page 2

(x) The pavement for the service roads will consist of 350 mm GSB, 300 mm WMM, 80 mm DBM, and 50 mm AC.

(xi) Typically the highway will be constructed on a low embankment, although minor cuts will be required in rolling terrain. Excavation will be in common material. Embankment slopes will be 2 horizontal:1 vertical (2H:1V).

(xii) Existing culverts and syphons will be extended across the new carriageway and the new outer shoulder for the existing carriageway. Head walls and parapets will be dismantled and reconstructed.

(xiii) There are 42 bridges in the Project, of which 15 have been classified as major, i.e., they have total spans exceeding 60 m. All major bridges are multispan bridges such that no single span exceeds 42 m. New bridges will be required at all existing locations to carry the new carriageway. Work required on existing bridges vary from minor repairs to complete reconstruction.

(xiv) Truck facilities will be constructed at km 298.0, km 313.7, km 371.0, km 393.0, and km 417.8.

(xv) Toll plazas will be constructed at km 296.7, km 344.5, km 377.5, and km 433.7.

(xvi) Bus bays will be constructed at km 302.5, km 317.8, km 333.0, km 337.1, km 342.0, km 389.2, and km 394.0.

(xvii) Connections will be made to the existing Gujarat State Government checkpoints at km 375.8 and the existing Maharashtra State Government checkpoints at km 381.6.

(xviii) Traffic signs, kilometer posts, and road markings are included. 32 Appendix 7

PROJECT COST ESTIMATES ($ million)

Foreign Local Total Item Exchange Currency Cost

A. Base Cost a Right-of-Way 0.0 12.0 12.0 Civil Works Section I 51.3 29.2 80.5 Section II 28.6 17.3 45.9 Section III 34.1 20.0 54.1

Consulting Services Construction Supervision 10.0 2.5 12.5

Private Participation and 10.0 2.0 12.0 Tolling Operations

Project Management 0.0 1.0 1.0

Subtotal (A) 134.0 84.0 218.0

B. Contingencies Physical b 13.5 7.5 21.0 Price c 15.1 8.5 23.6

Subtotal (B) 28.6 16.0 44.6

C. Interest During Construction 17.4 0.0 17.4

Total 180.0 100.0 280.0 a In March 2000 prices, inclusive of taxes and duties. b At 10 percent of base costs, excluding right-of-way costs at 2 percent. c At 3.2 percent annually of foreign exchange and local currency costs. Source: Feasibility Study and Mission. SUMMARY IMPLEMENTATION SCHEDULE

1998 1999 2000 2001 2002 2003 Activity Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Preconstruction

Right-of-Way Clearance

Prequalification for ICB (Advance Action)

ICB Tender (Advance Action) C 33 Recruitment of Supervision Consultants (Advance Action)

Construction

Civil Works

Ancilliaries

Supervision Appendix 8

C = contract award; ICB = international competitive bidding 34 Appendix 9, page 1

OUTLINE OF OPERATION AND MAINTENANCE ARRANGEMENT

1. This appendix provides an outline of the proposed operation and maintenance arrangements for the Project. A variant of private participation in infrastructure development is for the facility to be financed and built by the public sector, leaving the private sector to operate and maintain the facility through a concession.

A. Concept

2. An operation and maintenance concession is an agreement between a government department or state enterprise, and a private enterprise whereby, in return for an agreed fee, the private enterprise will

(i) collect toll charges on a highway used by the public, and

(ii) maintain the tollway facilities. The maintenance requirement will include all maintenance of the highway and bridges in addition to the toll collection facilities.

3. The terms of the concession are set out in a concession agreement, which will, among other items, set out the extent of the concessionaire’s rights and duties and the fee to be received for performing these duties. Payment of the fee may be defined in terms of a percentage of the toll revenue or a fixed periodic amount.

4. Under a concession agreement, ownership of all assets will remain with the Government. During the concession period the concessionaire is only granted the right to collect tolls from users of the assets.

B. Why Use an Operation and Maintenance Concession?

5. An operation and maintenance concession can be justified for a number of reasons:

(i) Budget constraints may restrict funding of maintenance activities. By including maintenance work in the toll concession the maintenance will be funded out of toll revenues without requiring funds to flow through the Government’s budgeting process.

(ii) An experienced private concessionaire will be able to operate the system at a lower cost to the Government than for the Government to operate the system directly.

(iii) A private operation will bring efficiencies to the operation as it will be able to operate outside of public sector regulations for work practices, management, and funding.

C. Scope of Work for the Concession

6. The scope of work will normally consist of two major components:

(i) supply and installation of toll collection equipment; and (ii) operation and maintenance services for all toll, roadway, bridges, and drainage assets. 35 Appendix 9, page 2

7. The civil and structural works for the toll plazas will be constructed by the owner and handed over for use by the concessionaire at the start of the concession. The concessionaire will be responsible for the design of the toll collection systems in terms of both equipment and software. The concessionaire will then supply and install the entire system in the facilities provided.

8. The operation of the system will largely consist of the day-to-day operation of the toll collection facilities at the toll plazas. The concessionaire will be required to provide all staff and to manage all monetary transactions from the collection of toll payments to depositing monies in a bank.

9. The objective of the maintenance strategy must be to minimize the life-cycle costs of all components of the tollway consistent with achieving specified performance standards. These performance standards will be set out in the concession agreement. Performance standards can be defined in terms of measurable indicators, such as limits on highway pavement roughness and deflections, or in terms of detailed work process specifications for any maintenance activity. The use of performance standards based on measurable indicators is preferred, as the owner requires significantly fewer resources to monitor conformance.

10. The maintenance strategy will be proposed by the concessionaire but will be required to take into account the differing needs of both routine and periodic maintenance and the different maintenance needs of the toll, road, and bridge components.

D. Legal Authority for Granting a Toll Concession

11. Because publicly owned assets are involved, the legal authority must exist that will allow for a concession to be issued. For the Surat-Manor Tollway, enabling legislation is already in place1 that identifies the National Highways Authority of India (NHAI) as authorized to grant toll concessions for national highways.

E. Concessionaire Selection Criteria

12. The following criteria may be used in prequalifying potential bidders for the concession:

(i) technical, financial, commercial, and management track record of similar projects,

(ii) willingness to proceed on the basis of the Government’s requirements, as set out in the prequalification documents; and

(iii) avoidance of arrangements that may be considered to constitute a conflict of interest.

13. The concession period is established in the concession agreement. The length of the concession period needs to be long enough to allow the concessionaire to recover any investment but not so long that the concessionaire looses the incentive to perform optimally. The concession term will have renewable options and conditions.

1 National Highways Act as amended in 1995. 36 Appendix 9, page 3

14. Circumstances under which the concession may be terminated will be written into the concession agreement.

F. Obligations and Control of the Concessionaire

15. The obligations of the concessionaire will be set out in the concession document. These obligations will relate to (i) legal liabilities, (ii) risks to be shouldered by the concessionaire, and (iii) services to be provided.

16. Control of the concessionaire will be through performance targets. The variables to be measured against targets include

(i) vehicle throughput at the toll plazas;

(ii) fraud, whereby toll revenue collected is fraudulently misplaced or payment of the toll is fraudulently avoided;

(iii) waiting time at toll plaza;

(iv) revenue leakage, whereby potential revenue is lost through the use of alternative routes or use of other legitimate means of avoiding the payment of tolls;

(v) time for detection and intervention of incidents affecting safety and use of the tollway; and

(vi) maintenance standards.

G. Toll Structure

17. The toll structure will be prescribed by NHAI and will be based on the national toll structure. The toll structure would be reviewed annually and adjusted for inflation in accordance with the wholesale price index. 37 Appendix 10

LIST OF CONTRACT PACKAGES AND MODE OF PROCUREMENT

Approximate Contract Value Procurement Number Contract Details ($ million) Mode

1 Civil Works (Section I Km 263.4 to 80.5 ICB Km 343)

2 Civil Works (Section II Km 343 to 45.9 ICB Km 381.6)

3 Civil Works (Section III Km 381.6 to 54.1 ICB Km 439)

4 Consulting Services (construction 12.5 International supervision) Recruitment

Various Consulting Services (private participation, 12.0 International toll operations) Recruitment

ICB = international competitive bidding; Km = kilometer chainage. 38 Appendix 11, page 1

SUMMARY TERMS OF REFERENCE FOR CONSTRUCTION SUPERVISION

A. Objectives and Scope

1. Objectives

1. The objectives of the consulting services are to assist the National Highways Authority of India to implement the Project as follows:

(i) to ensure high standards of quality assurance in the execution of work and completion of work within the stipulated time limit; and

(ii) to promote technology transfer through joint ventures between international and local firms.

2. Scope

2. The scope of the consulting services includes the following activities:

3. The consultant will be responsible for the supervision of all construction work. As the engineer, the consultant will administer the construction contracts for Packages I, II, and III and ensure that the contractual clauses for both quality and quantity of work are respected and the works are constructed in accordance with the provisions of the construction contracts. The consultant will be required to nominate an engineer’s representative who will be a full-time resident on the Project.

4. The supervision consultant will make all necessary measurements and control the quality of works. The consultant will make all engineering decisions required for the successful and timely implementation of the construction contracts, and have all the powers that are defined as those of engineer with the exception of the following, for which prior approval of the employer must be sought:

(i) issuing the order to commence the works;

(ii) issuing/approving variation orders that have financial implications; except in an emergency situation as reasonably determined by the supervision consultant;

(iii) issuing/approving significant variations in quantities (more than 15 percent of Bill of Quantities), that attract refixation of rates;

(iv) issuing/approving/sanction of additional items, sums or costs, and variation of rates and prices;

(v) approving subletting of any part of the works; and

(vi) approving any extension of contractual time limits. 39 Appendix 11, page 2

5. The supervision consultant will undertake a review of the construction contracts to identify any defects or omissions that compromise the completeness or consistency of the design. In addition, the consultant will review the pavement design for traffic loading and update the design to reflect changes in the assumed traffic at the commencement of construction and actual traffic. This part of the review will be based on traffic and axle-load surveys to be performed by the consultant. This review will be carried out immediately after the services commence and will be completed within three months. On completion of the review, the supervision consultant will prepare a report on this review, setting out all findings and recommendations for correcting any defects or omissions identified. Notwithstanding these, the supervision consultant will immediately inform the employer of any defect or omission that may have a substantial impact on the Project at the time the defect or omission is uncovered. The consultant will submit four copies of the review report to the employer and two copies to ADB.

6. In addition to or as an expansion of the activities and responsibilities required of the engineer as detailed in the construction contracts, the responsibilities of the supervision consultant will include the following:

(i) Ensure that the construction methods as proposed by the contractor for carrying out the works are satisfactory, with particular reference to the technical requirements of sound environmental standards on the basis of ADB’s Environmental Guidelines for Selected Infrastructure Development Project (Highways & Roads); inspection of contractor’s construction equipment; and safety of the works, property, personnel, and general public. The schedule of mitigation measures for adverse environmental impacts to be monitored by the consultant will be provided.

(ii) Undertake project performance monitoring and evaluation of the Project in accordance with ADB’s Project Performance Management System (PPMS) Handbook. Performance indicators to be measured will be provided.

(iii) Prepare and issue the following reports, the format and content for each report is to be acceptable to the employer: an inception report, a brief monthly progress report, a detailed quarterly report, a detailed contract completion report.

7. The supervision consultant will process interim and final payments to the contractor(s).

8. The supervision consultant will, if so required by the employer, provide any of the following services as additional services: (i) prepare reports, including technical appraisals, additional contract documentation, and/or reviewing and commenting on the contractor’s proposals, as may be required for any additional work required for the successful completion of the Project; and (ii) provision of any other specialist services as may be required from time to time.

9. All additional services, other than minor extras that do not materially affect the scope of work, will be authorized by the employer at the rates established in the construction supervision contract, or, when services require the use of specialists not listed in the contract, as mutually agreed upon. 40 Appendix 11, page 3

B. Timing of Services

10. It is anticipated that the consulting services defined under the terms of reference will be for 52.5 months. The actual commencement date will be confirmed during negotiations and will be dependent upon progress in awarding the contract with the contractor(s) for construction of the Project.

11. The period of services has been derived on the basis of the consulting services commencing 1.5 months prior to commencement of construction and extending three months beyond substantial completion. It is estimated that about 520 person-months of international consultants and about 1,400 person-months of domestic consultants will be required to complete the tasks. 41 Appendix 12 General Manager (Technical) MEMBER INF. TECH) (CORPORATE FINANCE AND General Manager (Inf. Tech) n General Manager Administratio ( MEMBER (FINANCE AND ADMINISTRATION) General Manager (Finance) (West) General Manager (JBIC) NHAI General Manager CHAIRPERSON MEMBER (PI-II) ORGANIZATION CHART OF THE General Manager (PRIVATE INVESTMENT) NATIONAL HIGHWAYS AUTHORITY OF INDIA (PI-I) General Manager General Manager (World Bank) MEMBER (East) General Manager (TECHNICAL) (ADB) General Manager ADB = Asian Development Bank; Inf. Tech. Information Technology; JBIC = Japan Bank for International Cooperation; PI Private Investment. 42 Appendix 13, page 1

FINANCIAL STATEMENTS OF THE NATIONAL HIGHWAYS AUTHORITY OF INDIA

1. The National Highways Authority of India (NHAI) became operational in February 1995 with a Government grant of Rs7,000 million, which formed its initial equity base. Of this, Rs2,000 million was paid in FY1997 and Rs3,000 million in FY1998.

A. Mandate

2. NHAI’s immediate mandate is to develop the quadrilateral transport corridor comprising National Highway 2 (NH2) (Delhi-Calcutta); NH5 and NH6 (Calcutta-Chennai); NH4, NH7 and NH46 (Chennai-Mumbai); and NH8 (Mumbai-Delhi). These corridors are to be developed by upgrading the national highways to four-lane standards and constructing new expressways, where feasible. The development will be funded by the private sector through build-operate-transfer (BOT) projects for commercially viable sections (bridges and bypasses), multilateral and bilateral development agencies, and the Government. The Government will provide capital grants of up to 40 percent of capital costs for the projects. NHAI’s longer-term revenue source will come from the tolling of improved (four-lane) highways and newly constructed facilities. NHAI will also receive dividends from its equity investment in BOT projects (NHAI is allowed to participate with up to 30 percent of total equity).

3. During its initial years of operation, NHAI will cover its operating expenses through interest income earned on its equity base. NHAI’s revenue will be built up over time as the projects are completed and toll operations commence.

B. Bases and Assumptions Used in the Financial Projections

4. The financial projections of NHAI are based on the projects being implemented and projects currently in the pipeline for implementation. These projects will be funded by multilateral and bilateral agencies, Government grants, NHAI’s own resources, and the private sector through BOT projects.

5. The financial projections have been prepared in current prices.

6. The completed projects will be operated as toll facilities. Toll revenue from these facilities has been estimated at Rs0.3 per km per passenger car unit. The toll revenue collection commenced in 1999 when the first project under the tolling scheme was s completed (NH8 between Jaipur and Kotpuli in Rajasthan). NHAI also receives a management fee of 3 percent of construction cost for the supervision of projects.

7. The number of currently approved staff positions is expected to grow at 10 percent per annum with the increase in NHAI’s operations and responsibilities. Salary levels are assumed to increase at 20 percent each year. Operation and maintenance expenses include project preparation, project implementation, and road maintenance expenses. Annual routine maintenance and periodic maintenance is assumed at 40 percent of toll revenue. Depreciation of fixed assets is provided on a straight-line basis at the following rates: equipment, computers, and motor vehicles, 25 percent; furniture and fixtures; 10 percent; and roads; 10 percent. 43 Appendix 13, page 2

8. The highway development costs include project preparation work, land acquisition, and the removal of utilities and construction. It is assumed that the Project will be implemented over 30 months.

9. The Government will provide capital grants to cover 35 percent of the capital cost of the projects undertaken by NHAI. The ADB loan for the Project is assumed to be the only borrowing during the projection period.

10. NHAI has applied for an exemption from the payment of corporate tax on its income (at the rate of 35 percent) because of the nature of its operations. It is assumed that NHAI will not have to pay corporate tax. 44

Appendix 13, page 3

Table A13: Income Statement and Cash Flow Analysis Year Ended 31 March (Rs million)

Actual Actual Actual Projected 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue Toll Operations 0.0 0.0 0.5 258.0 300.0 898.0 1,335.0 1,791.0 7,952.0 9,699.0 Management Fee 4.1 9.6 54.2 72.0 426.0 1,487.0 1,244.0 1,165.0 1,165.0 1,165.0 Total Revenue 4.1 9.6 54.7 330.0 726.0 2,385.0 2,579.0 2,956.0 9,117.0 10,864.0

Expenses Salaries and Administration 14.7 21.9 65.5 58.0 87.0 194.0 227.0 260.0 58.9 71.7 Operation & Maintenance 0.0 0.0 0.0 281.0 670.0 1,937.0 2,022.0 1,997.0 4,280.0 4,812.0 Depreciation 1.9 2.4 3.9 151.0 168.0 358.0 740.0 863.0 863.0 862.0 Total Expenses 16.6 24.3 69.4 490.0 925.0 2,489.0 2,989.0 3,120.0 5,201.9 5,745.7

Operating Income (12.5) (14.7) (14.7) (160.0) (199.0) (104.0) (410.0) (164.0) 3915.1 5118.3

Interest Income 0.8 19.9 448.8 244.0 271.0 506.0 660.0 533.0 429.0 539.0 Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 483.0 473.0 Net Income Before Tax (11.7) 5.2 434.1 84.0 72.0 402.0 250.0 369.0 3,861.1 5,184.3 Taxation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Income After Tax (11.7) 5.2 434.1 84.0 72.0 402.0 250.0 369.0 3,861.1 5,184.3

Source of Funds Net Income After Tax (11.7) 5.2 434.1 84.0 72.0 402.0 250.0 369.0 3861.1 5184.3 Depreciation 1.9 2.4 3.8 151.0 168.0 358.0 740.0 863.0 863.0 862.0 Internally Generated Funds (9.8) 7.6 437.9 235.0 240.0 760.0 990.0 1232.0 4724.1 6046.3 Government Grants 215.0 2260.4 5374.0 8600.0 14000.0 5700.0 3000.0 2000.0 1158.2 419.0 Borrowings 0.0 0.0 0.0 1134.0 1890.0 1890.0 1890.0 756.0 0.0 0.0 Total Sources of Funds 205.2 2268.0 5811.9 9969.0 16130.0 8350.0 5880.0 3988.0 5882.3 6465.3

Application of Funds Fixed Assets 10.7 10.1 2.0 2.0 2.0 160.0 2.0 2.0 2.0 2.0 Highway Development 0.0 339.3 208.0 11639.0 13881.0 5604.0 3770.0 3267.0 3309.0 1197.0 Debt Repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 611.0 615.0 Working Capital (0.3) (93.3) 238.6 6.0 6.0 6.0 6.0 6.0 6.0 6.0 Total Application of Funds 10.4 256.1 448.6 11647.0 13889.0 5770.0 3778.0 3275.0 3928.0 1820.0

Net Cash Flow 194.8 2011.9 5363.3 (1678.0) 2241.0 2580.0 2102.0 713.0 1954.3 4645.3 Opening Cash Balance 0.0 194.8 2206.7 7570.0 5892.0 8133.0 10713.0 12815.0 13528.0 15482.3 Closing Cash Balance 194.8 2206.7 7570.0 5892.0 8133.0 10713.0 12815.0 13528.0 15482.3 20127.6 45 Appendix 14, page 1

SUMMARY RESETTLEMENT ACTION PLAN

A. The Project

1. The western transport corridor, comprising National Highway 8 (NH8) and NH4, which connects Delhi, Mumbai, Bangalore, and Chennai, is the busiest corridor in India, particularly in the section between Ahmedabad and Mumbai where it passes through an industrial belt with connections to several major and minor ports on the west coast. The section between Ahmedabad and Mumbai is 528 kilometers (km), of which 348 km has been or is being widened to four-lane standard. There remains a section of about 180 km between Surat and Manor, which is now a severe bottleneck for the efficient movement of goods and passengers between the industrial heartland of Gujarat and the port of Mumbai on the west coast of India.

2. The Surat-Manor Tollway Project will improve to four-lane standard (construction of two lanes and pavement strengthening of the existing two lanes) about 180 km of NH8 in the states of Gujarat and Maharashtra. The objectives of the Project are to remove capacity constraints and improve road safety on critical sections of the western transport corridor from Delhi to Mumbai. The completed Project will be operated and maintained by the private sector through a toll concession.

B. The Project Area

3. The area in which the Project lies is primarily agricultural, with one major concentration of industrialization. The Surat-Manor stretch of NH8 is characterized by a variety of land use patterns and settlements. The project alignment begins just after the city of Surat and has agricultural areas (planted to cotton, groundnut, paddy, wheat, sugarcane) and orchards (mostly mangoes and chiku) on either side. The middle stretch of the project alignment between Valsad and Vapi is strictly industrial, primarily chemical industries. From Vapi to Bhilad, there are orchard lands and agricultural fields. From Bhilad to Charoti the land use is mixed, with agricultural fields interspersed between commercial establishments. From Charoti to Manor, the lands comprise mostly degraded forest, with a few agricultural fields.

C. Land Acquisition Policy Framework

4. The Land Acquisition Act of 1894, with amendments governs land acquisition in India overall. The act sets parameters for identifying and compensating for acquired lands. Although a national resettlement and rehabilitation policy is currently being formulated, resettlement action plans have been developed and applied in India by the central and state governments on a project-specific basis. In the roads sector, land acquisition is governed by the National Highways Act of 1956, which incorporates provisions of the 1894 act, but is considered to provide distinct legal coverage.

5. The Resettlement Action Plan (RAP) for the Project is based on ADB’s policy paper on involuntary resettlement, approved in November 1995, and on the basis of a full census of project-affected persons (PAPs) carried out by the consultants during January/February 1999, which followed a sample survey carried out during March/April 1998. The objective of the RAP is to minimize the adverse impacts of the construction and improvement of the road on the PAPs. The RAP identifies (i) the extent and nature of losses of the PAPs; (ii) the policies and legal frameworks applicable to the RAP; (iii) provisions made for compensation payments and relocation; and (iv) accountability in implementation of the RAP. The RAP has been discussed 46 Appendix 14, page 2 extensively with the PAPs and the National Highways Authority of India (NHAI), which has formally accepted the RAP for implementation.

6. The basic principles on which the RAP has been developed include (i) avoidance of involuntary resettlement wherever feasible; (ii) minimization of resettlement where population displacement is unavoidable; and (iii) ensuring that displaced people receive assistance so that they are at least as well-off as they would have been in the absence of a development project. On the basis of rules and regulations at the state and national levels as well as policies and practices for resettlement planning and management in externally financed projects, compensation for the PAPs will be provided in the form of land, cash, or both.

D. Project Impact

7. In all, 3,896 persons, 107 houses (wholly or partially), and 223 shops (wholly or partially) will be affected by the Project, which runs for 180 km along three NH8 sections. In section I, the Project will require land acquisition of about 52 hectares (ha) at one toll plaza site, rest areas, and small strips of land (ribbon type) on the entire stretch. Agricultural lands owned by private individuals surround the land required for the toll plaza at Palsana. Ten houses will be fully affected, while 30 houses and 88 shops will be partially affected; in this area, 1,798 persons have been identified as PAPs.

8. In section II, the Project will require land acquisition of 36 ha at two toll plaza sites, rest areas, and small strips of land (ribbon type) along the entire stretch. The land required for one toll plaza at Bhilad belongs to the Government. The toll plaza site at Valsad involves land acquisition of about 928,000 m2 on both sides of the alignment. On one side, a school will lose 18,500 m2 of land including a girl’s hostel. An orchard and two wayside guesthouses, a wayside restaurant, an orchard, and an automobile workshop will require acquisition. Nineteen houses will be fully affected, while 38 houses and 87 shops will be partially affected; 1,201 persons have been identified as PAPs, including employees in the wayside guesthouses.

9. In section III, the Project will require land acquisition of 19 ha at one toll plaza site and small strips of land (ribbon type) along the entire stretch of the section. The land required for one toll plaza at Palghar belongs to the Government. Along the entire stretch, three houses will be fully affected, while seven houses and 48 shops will be partially affected. 897 persons have been identified as PAPs. A wayside guesthouse (hotel) and its employees will lose income during the construction period, which has been taken into account in the RAP entitlement matrix.

E. Entitlements

10. A detailed entitlement matrix was developed setting out the losses, compensation, entitlements, and accountabilities associated with impacts under the Project. Land losses suffered by the PAPs have been categorized under two heads: (i) PAPs losing a part of their houses, and (ii) PAPs losing entire houses. Provision has also been made for loss of orchard lands and private factory lands. It should be noted that not all PAPs are entitled persons. For example, a head of family of several people may be an entitled person, who will receive benefits on behalf of the family members. In general, compensation at market rates will be paid to persons losing lands. Compensation for loss of structures has been computed at current construction (replacement) cost levels. Income losses will also be compensated. The cut-off date for eligibility for entitlements is 8 February 1999, the date of completion of the census and socioeconomic survey. 47 Appendix 14, page 3

F. Organizational Arrangements

11. NHAI is the Executing Agency for the Project. The project implementation unit of NHAI will supervise all planning, implementing, and monitoring activities associated with the RAP. The Unit will be headed by a project director/general manager, assisted by four deputy general managers, and include a resettlement group accountable to the project director/general manager, comprising a resettlement officer and a database operator, who will assist in maintaining and continuously updating the resettlement database. The database will include relevant information on individual households, PAPs, and entitled persons for disbursement of entitlements, review and monitoring, and subsequent evaluation by an external consultant.

12. The resettlement officer will be responsible for the coordination of all activities relating to the implementation of the RAP. The resettlement officer will be academically and professionally qualified; appropriately experienced in administrative activities, such as land acquisition processes; familiar with social issues; and have worked with nongovernment organizations and community organizations.

G. Implementation of the RAP

13. NHAI will engage a reputable implementing agency with experience and appropriate skills in dealing with people and communities at the grassroots level. The main task of the agency will be to assist NHAI with land acquisition and resettlement matters, particularly in disbursing compensation packages as prescribed in the entitlement matrix. The agency will play an important role in ensuring that legitimate grievances of the PAPs are redressed and vulnerable groups among the PAPs are given special attention.

14. The implementation of the RAP, including land acquisition, will be completed within 12 months from the commencement of the Project.

H. Grievance Redress

15. PAPs who have grievances at any stage of implementation of the RAP may submit their appeals to the district collector through the respective panchayat leaders, local member of the legislative assembly, or member of the municipal corporation. To expedite land acquisition proceedings, mitigate grievances, and recommend appropriate market rates, district resettlement committees will be constituted as appropriate. The district collector will look into the problems in consultation with members of the district resettlement committees. Except for civil suits, all grievances are required to be settled within three months of the lodging of complaints/grievances. The implementing agency will provide advice and guidance at all stages of the process.

I. Information Campaign and Road Safety Activities

16. Although the PAPs have been made aware of the Project and its impacts through extensive consultations, a supplementary information campaign will be conducted by NHAI with the help of the implementing agency and nongovernment offices. The purpose is to keep people fully informed of project benefits and to respond to concerns about (i) the need for land acquisition; (ii) the need for eviction of squatters and vacation of encroachments; (iii) the likely consequences of the Project on community livelihoods; and (iv) the resettlement policy and entitlement packages, including the entitlement matrix. A brochure in the local language outlining these aspects will be produced for distribution in the project area. 48 Appendix 14, page 4

17. The number and severity of road accidents in India have increased steadily. The 1995 national fatality rate of 24 per 10,000 vehicles is among the highest in Asia. The high rate of accidents along the project alignment was a common complaint brought up in the focus group discussions conducted during the consultative process for the RAP. The residents expressed serious concerns about road safety measures; while many accidents involved vehicle collisions, pedestrians—especially children—represented most of the fatalities along the project alignment.

18. The RAP identities specific activities that the resettlement group will provide advice on or implement to improve road safety along the project road. The activities—driver awareness, safety education, first aid, training for road wardens—will be essential for reducing accidents likely to be caused by an increasing volume of vehicles moving at higher speeds on improved roads. The activities are expected to benefit the PAPs as well as the general public, including the drivers themselves.

J. Budget

19. The budget, which includes resettlement costs and services of the implementing agency, is estimated at Rs550 million.

K. Monitoring and Evaluation

20. Monitoring will be continuous throughout the implementation of the RAP. The implementing agency will submit regular monthly progress reports to NHAI, which will then submit them to ADB. Resettlement planning and implementation activities will be evaluated on completion of the RAP, with baseline data collected for further evaluation by an independent agency after one year. 49 Appendix 15, page 1

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction

1. The summary initial environmental examination is based on a review of the initial environmental examination prepared by the project feasibility consultants and information gathered by the Asian Development Bank (ADB) Fact-Finding Mission. The purpose of the study was to identify environmental issues that face significant impact due to widening and strengthening of the highway; assess impacts related to project location, construction, and operation; and suggest suitable mitigation measures.

B. Description of the Project

2. The Project comprises strengthening and widening of National Highway (NH) 8 between Surat and Manor (the project road) from kilometer (km) 263.4 to km 439.0. The project road passes through Palsana taluka1 of Surat District, Navasari, Chikhli, Gandevi, Valsad, Pardi, and Umbergaon talukas of Valsad District in Gujarat State and Dahanu, Palghar, and Talasari talukas of Thane District in Maharashtra State.

C. Description of the Environment

1. Physical Environment

3. There are three types of terrain: western ghat in the east, coastal plains in the west, and a rolling land between the western ghat and coastal plains. The existing alignment of the road is located in the rolling terrain. The area comprises hard rocks, mostly of basaltic nature, with a deep layer of sediments of recent and subrecent origin covering the underlying rocks. The rock formation forms part of Deccan Trap. The soil in the project area is composed mostly of residual soil, marine-estuarine clay of tropepts-aquepts, and orthids- aquepts, although patches of loamy soil of brown color also exists. The project road crosses some rainfed rivers. These are Baleshwar Khadi, Mindhola, Purna, Ambica, Dholdhara, Kaveri, Auranga, and Wanki–Khadi having an average discharge of 24,200 cubic meter (m3)/sec; Damanganga, Kolak, and Par having an average discharge of 15,000 m3/sec; and Vadoli nallah, Gulzari nallah, Suseri river, and Surya river with an average discharge of 1,100 m3/sec.

4. The region is located in a tropical monsoon climate regime. As per Indian Meteorological Department data (1931-1960), atmospheric pressure is normal throughout the year and during winter it is comparatively higher. The temperature is uniformly higher throughout the year and average maximum temperature is 33.6oC and minimum temperature is 16o C. Relative humidity is 53 percent. Generally the highest rainfall occurs in the month of July. The predominant wind direction is southwesterly during the months of May to August. The air quality monitoring and testing have been carried out in Navasari, Chikhli, Vapi, Bhilad, and Manor over a 24-hour period using High Volume Sampler for sampling of suspended particulate matter, sulfur dioxide, nitrogen oxide, carbon monoxide, hydrocarbon, and lead. It shows that the concentration of these pollutants is within the specified limits of Central Pollution Control Board. Water quality monitoring was carried out

1 Taluka refers to subdistrict. 50 Appendix 15, page 2 at the Mindhola, Purna, Ambica, Kaveri, Kharera, Auranga Damanganga, Kolak, Par, and Surya river crossings. Results show that the temperature of river water ranges from 24o- 28oC, pH value ranges from 6 to 8, dissolved oxygen varies between 7.4 and 10.1, biochemical oxygen demand ranges from 0.3 to 5.12. Concentration of dissolved solids is within safe limits for aquatic life. Monitoring of noise level was carried out at Navasari, Chikhli, Bhilad, Vapi, and Manor over a 24-hour period. Results show that along the right-of- way of NH8, noise level is between 68 and 83 decibels, which is slightly above the specified limit of Central Pollution Control Board for industrial and commercial areas.

2. Ecological Resources

5. In the state of Gujarat, the existing project road between km 263.4 and km 381.6 passes protected forests. Within Maharashtra State, the project road passes through reserve forest. The widening of the project road will be within the existing right-of-way, which is approximately 5 meters wide on each side. No adverse impact on the forest ecosystem is expected. The species of vegetation found along the existing roadside are not rare, endangered, or endemic species.

3. Human and Economic Development and Quality of Life Values

6. The distribution of population, literacy levels, and percentage of agricultural workers in the talukas through which the project road passes is given in Table A15.1.

Table A15.1: Population, Literacy Level, and Agricultural Workers Distribution

Literacy Percentage of State Taluka Population Level (%) Agriculture Workers (%)

Gujarat Palsana 85,822 46 69 Navasari 4,33,601 63 42 Gandevi 2,17,552 65.8 43.06 Chikhli 2,60,787 54.78 72.7 Pardi 2,72,219 60.43 21.9 Umbergaon 1,86,222 31.17 59 Valsad 3,29,933 66.38 43.8

Maharashtra Dahanu 2,37,461 27 20 Palghar 3,35,073 50.6 23

Taluka = subdistrict. Source: India, Government of. 1991. Census of India, 1991, Delhi.

Educational facilities, medical facilities, adult literacy center, and potable water facilities are available in the project area. There are no archaeological and prehistoric sites in the vicinity of the project road. 51 Appendix 15, page 3

D. Screening of Potential Environmental Impacts and Mitigation Measures

7. The upgrading of the project road will have a positive impact on air quality, noise level, and economic and employment opportunities. The analysis shows that implementation of the project will improve the quality of air in the region as the vehicles on the project road will be able to travel at higher speeds with less emissions. Furthermore, widening of road will allow the traffic to flow more smoothly. As a result, it is expected that traffic noise will become more a component of ambient noise, which is less offensive than frequent, erratic increases in noise of short duration.

8. There will be some impacts, though not significant, on forestland, surface drainage, land acquisition, vegetation, sanitation and waste disposal, and illegal timber cutting. The order of impact and their mitigation measures are listed in Table A15.2.

9. The proposed mitigation measures will be included in the contract bid documents as requirements to be met and in the terms of reference of the supervision consultants as conditions to be monitored. The Environment Unit of the Ministry of Transport will be responsible for overall environmental monitoring work and will consult with other authorities such as the respective state agencies. Including the Forest Department. Table A15.3 shows the monitoring program.

E. Institutional Requirement and Environmental Monitoring Program

10. The responsibility for implementation of the required mitigation measures and monitoring of the program of implementation are delegated to the project-promoting institution, which in the present context is the National Highways Authority of India.

F. Findings and Recommendations

11. On the positive side, the road widening and strengthening is likely to have significant long-term benefits for inhabitants living in settlements near the road and all road users. For local residents, these benefits include increased economic and employment opportunities, improved access to services and facilities and reliability of transport services for the freight traffic, and improvement of the regional air quality. For the road users, the benefits are in terms of reduction in travel time, vehicle operating costs, traffic congestion, road accidents and saving on fuel.

12. The road upgrading project will have few direct adverse impacts on the physical, biological, and socioeconomic environments. Adverse impacts on the biological environment include reduction of vegetation on the existing road embankment. On socioeconomic aspects, negative impacts include possible disruption of utility lines, accident risks during construction, risk of transmission of communicable disease through contact of residents with road workers and drivers of freight trucks, and disruption of community cohesion and social fabric. The majority of the mitigation measures can be addressed through techniques like engineering design, site planning, project scheduling, preparation of tender document, and supervision by the construction engineer. There are two specific areas where involvement of the State Forest Department and Office of the District Collector is required. These are the plan for tree felling and compensatory afforestation, and the plan for land acquisition and disbursal of compensation, respectively. 52 Appendix 15, page 4

Table A15.2: Environmental Impacts and Mitigation Measures Attributes Order of Impact Mitigation Measures A. Impacts from Project Location Obstruction to surface drainage Mild Provide surface drains all along the road. Reduction of forestland Moderate Provide compensatory afforestation on Number of trees to be felled – 1,527 equivalent land. On left side – 788 On right side – 739 Severance of home from work place Mild Provide adequate underpasses at required sites near the settlements. B. Impacts from Construction Camps Land acquisition Mild Acquire barren or degraded land for campsites. Destruction of vegetation Moderate Establish sites away from protected forests, reserved forests, and roadside plantation. Sanitation & waste disposal Mild Install lavatories and segregate biodegradable wastes and other wastes for separate disposal. Poaching & illegal timber cutting Mild Supply kerosene stoves to construction camps. C. Impacts from Road Construction Increased siltation/erosion in rivers Mild Construct culverts and bridges during dry season; construct soil stabilization structures. Obstruction to drainage Moderate Avoid water clogging and allow water to flow through channel. Erosion of road embankment Mild Provide lined drains at risky locations. Destruction of vegetation on the right- Moderate Use compensatory afforestation plan and of-way roadside plantation, and avoid disturbance away from right-of-way. Alteration of subsoil water table Mild Control withdrawal from local wells. Disfiguring landscape by high Mild Cut & fill in gentle slope sections and roadside Embankments & deep cuts plantation. Air-dust-fume-smoke-noise pollution Mild Avoid such sites & use pollution controllable in habitations equipment with warning devices. Creation of mosquito breeding Mild Avoid creation of roadside water pools. habitats Interference to existing traffic Moderate Provide warning signs for traffic diversion. Destruction of utility lines Moderate Avoid moving heavy vehicles over or near utility lines; raise power lines to retain vertical curves of roads. Accident risks during construction Moderate Introduce emergency plan to contain damage. Poaching & illegal timber felling Moderate Prohibit these under terms of employment. by construction workers D. Impacts from Operation of the Project Road Air pollution from increased vehicular Moderate Control emission from vehicles; and plant trees traffic capable of absorbing hydrocarbon along roadsides. Increased noise from vehicular traffic Moderate Lay vegetative sound barriers. Roadside litter Mild Provide roadside deposit facilities & campaign for disposal only at service stations. Induced roadside development of Mild As this is a limited-access road, such commercial, industrial, and residential development is unlikely should be controlled infrastructure near the exits. 53 Appendix 15, page 5

G. Conclusions

13. The widening of the project road will have a positive impact on the region by improving regional transport links, decreasing transport costs, improving environmental quality, and increasing economic opportunities for local residents. Although there will be limited adverse impacts of a moderate nature, they could be mitigated to acceptable levels if the recommended measures are implemented. Based on the initial environmental examination conducted and information gathered, it can be concluded that it is not necessary to conduct a full-scale environmental impact assessment for the proposed Project.

Table A15.3: Mitigation and Monitoring Program

Mitigation Strategy Effectiveness Means of Time Scale Indicator Verification 1. Impacts due to Project Location a. Provide surface drains all Minimal damage to Observation of degree of Construction and along the road. roadside drainage damage to surface design phases drainage b. Provide compensatory Minimal damage of Documentation Construction phase afforestation on equivalent forest land, roadside Observation land. ecology, vegetation c. Provide adequate Minimal degree of Documentation Construction and underpasses at required sites severance of home design phases near the settlements. from work place 2. Impacts from the Construction Camp Documentation Construction and a. Acquire barren land and Minimal damage to tender document degraded land for prime and sensitive preparation phases campsites. land b. Locate campsite away from Minimal damage to Documentation Construction and forest areas and roadside vegetation and tender document plantation. disturbance of ecology preparation phases c. Provide for lavatory and Minimal effect on Observation Tender document separate disposal of environmental health Documentation preparation and biodegradable wastes and and hygiene construction phases other wastes. d. Conduct a health Minimal effect on Observation of degree of Construction phase assessment program health of local health awareness periodically. population due to Documentation transmission of communicable diseases. e. Supply kerosene stoves to Minimal damage to Observation of degree of Tender document construction camp. vegetation/timber poaching and illegal preparation and timber cutting construction phases f. Abolish the camp after the Minimal impact on Documentation Tender document construction work. social & cultural life of preparation and local population construction phases 54 Appendix 15, page 6

Mitigation Strategy Effectiveness Means of Time Scale Indicator Verification 3. Construction a. Incorporate bridges, culverts, Minimal impact for Design document Design and and soil stabilization siltation/erosion in construction phases structures in the design river along the document. alignment b. Take steps to avoid water Minimal impact on Design document Design and clogging and allow water to drainage system Observation of migration construction phases flow through the channel. of water channel toward natural drainage channel c. Provide system for Minimal soil Design document Design and controlling drainage with slippage/land slides construction phases stabilizing structure. d. Control excavation by Minimal impact on Monitoring Design, construction, backfilling with waste borrow and quarry and tender document materials from cut section area preparation phases areas. e. Provide lined drains at risky Minimal impact due to Design document Design and locations. erosion of road construction phases embankment f. Control withdrawal from Minimal impact on Observation Construction phase local wells. sub-soil water table g. Provide a gentle slope in cut Minimal damage of Design document Design and and fill sections, and landscape by high Observation construction phases roadside plantation. embankments and deep cuts h. Avoid habitation sites and Minimal impact on Observation and Design and use pollution controllable habitation, air quality monitoring construction phases equipment with warning dust fumes, smoke devices. and noise. i. Avoid creation of roadside Minimal creation of Observation Design, construction, water pools. mosquito breeding and postconstruction phases j. Provide warning signs for Minimal impact on Observation and Construction phase traffic diversion. existing traffic system documentation k. Avoid moving heavy Minimal damage to Observation and Construction phase vehicles over or near utility utility lines documentation lines, raise power lines to retain vertical curves of roads. 4. Impacts due to Operation of the Highway a. Control emission from Moderate impact on Monitoring Postconstruction vehicles and roadside air quality phase plantation with trees capable of absorbing hydrocarbon. b. Lay vegetative sound Minimal impact on Monitoring Postconstruction barriers. nearby habitation phase c. Provide roadside deposit Minimal impact on Monitoring Postconstruction facilities and campaign for roadside litter phase disposal only at service station d. Introduce contingency plan Minimal impact on Observation; monitoring Construction phase for accidental spills. road users, nearby habitation, water bodies, and vegetation 55 Appendix 16, page 1

FINANCIAL ANALYSIS

A. General

1. The financial internal rate of return (FIRR) of the Project was calculated on the basis of incremental costs and benefits resulting from the Project over an assumed period of 20 years. Costs and benefits are expressed in 1998 constant prices.

B. Costs

2. The financial costs consist of capital costs, operation and maintenance costs, and toll franchise costs.

3. The capital costs comprise the cost of land, resettlement, construction, and supervision, and include taxes and duties and physical contingencies but exclude price contingencies and interest during construction. The capital costs will be incurred over a 48- month construction period. The constructed highway facility is expected to have a salvage value of 15 percent at the end of the 20-year period.

4. Operation and maintenance costs include annual routine maintenance, periodic maintenance (resurfacing) to be carried out every fifth year, and the cost associated with the operation of the toll plazas.

5. A fee of 10 percent of gross revenue to be paid to the toll franchise operator has been assumed.

C. Revenue

6. The completed project facility comprising a four-lane, 176-kilometer national highway will be tolled under a 20-year concession. The revenue from toll operations, net of the operator franchise fee and corporate tax, has been calculated on the basis of tollable traffic determined from traffic counts and growth forecast (as described in Appendix 17) and established toll rates (Table A16.1).

Table A16.1: Toll Rate per Type of Vehicle

Vehicle Type Toll Rate (Rs/km)

Car 0.40

LCV 0.70

Bus, HCV, MAV 1.40

Oversized vehicle 3.00 HCV = heavy cargo vehicle; LCV = light commercial vehicle; MAV = multi-axle vehicle. 56 Appendix 16, page 2

7. The toll rates for national highways were developed by the National Highways Authority of India (NHAI) using vehicle operating cost savings as the main indicator of what road users would be prepared to pay for improved highway facilities. The data from vehicle operation cost savings was tested through willingness-to-pay surveys on various national highway sections throughout the country, including the project highway, before the toll rates were established.

8. No real increase in the toll rate has been assumed in the FIRR calculation although the toll rate will be reviewed annually for adjustment in line with the consumer price index.

9. Advertising revenue estimated at 1 percent of the toll revenue has been included.

D. FIRR of the Project

10. Based on the above bases and assumptions, the FIRR of the Project was calculated at 14.2 percent, which is above NHAI’s weighted average cost of capital in real terms of 10.8 percent. NHAI’s weighted average cost of capital was estimated on the basis of the following assumptions: (i) long–term debt cost of 14 percent, (ii) equity cost of 20 percent, (iii) debt/equity structure of 70:30, and (iv) domestic inflation of 5 percent. Details of the FIRR calculation are shown in Table A16.2.

11. NHAI has applied for an exemption from payment of corporate tax at the rate of 35 percent. Entrepreneurs operating road infrastructure facilities are entitled to a five-year tax holiday and a 30 percent tax exemption on profits for the next five years. The FIRR of the Project on an after-tax basis was calculated at 12.3 percent.

12. Several tests were carried out to determine the sensitivity of the FIRR to changes in the initial assumptions and the results, which are shown in Table A16.3, indicate that the FIRR is fairly robust in relation to changes in the basic assumptions. 57 Appendix 16, page 3

Table A16.2: Financial Internal Rate of Return Calculation (Rs million)

Toll Capital Maintenance Operation Toll Net Year Cost Cost Cost Revenue Benefit

1999 1,351.35 (1,351.35) 2000 2,252.25 (2,252.25) 2001 2,252.25 (2,252.25) 2002 2,252.25 (2,252.25) 2003 900.90 7.78 83.27 832.71 (159.24) 2004 15.55 178.32 1,783.23 1,589.36 2005 15.55 190.94 1,909.41 1,702.92 2006 15.55 201.44 2,014.43 1,797.44 2007 521.99 212.53 2,125.30 1,390.78 2008 15.55 217.42 2,174.17 1,941.20 2009 15.55 217.42 2,174.17 1,941.20 2010 15.55 217.42 2,174.17 1,941.20 2011 15.55 217.42 2,174.17 1,941.20 2012 1,190.63 217.42 2,174.17 766.12 2013 15.55 217.42 2,174.17 1,941.20 2014 15.55 217.42 2,174.17 1,941.20 2015 15.55 217.42 2,174.17 1,941.20 2016 15.55 217.42 2,174.17 1,941.20 2017 521.99 217.42 2,174.17 1,434.76 2018 15.55 217.42 2,174.17 1,941.20 2019 15.55 217.42 2,174.17 1,941.20 2020 15.55 217.42 2,174.17 1,941.20 2021 15.55 217.42 2,174.17 1,941.20 2022 (1,137.00) 521.99 217.42 2,174.17 2,571.76

FIRR = 14.2%

FIRR = Financial Internal Rate of Return.

Table A16.3: Sensitivity Analysis

Assumption FIRR (%)

1. Base Case 14.2 2. Project Cost Increased by 15% 12.5 3. Project Revenue Decreased by 15% 12.2 4. Project Start Up Delayed by 1 year 12.8 5. Combination of (2) and (3) 10.5

FIRR = Financial Internal Rate of Return. 58 Appendix 17, page 1 TRAFFIC ANALYSIS AND PROJECTIONS

A. Surveys

1. To analyze existing travel behavior and to forecast future travel patterns for the project road, which were inputs for the economic and financial evaluation, and for the pavement design, the following traffic surveys were carried out: (i) classified traffic volume counts; (ii) origin- destination (O-D) survey; (iii) axle-load survey; (iv) turning movement survey; (v) speed and delay survey; and (vi) willingness-to-pay/stated preference survey. The seven-day (24-hour, both directions) manual classified traffic volume surveys were carried out at three locations, Nasvari (km 293.3), Pandi (km 346.2), and Charoti (km 425.0) to obtain the traffic volume, hourly, and daily variation and traffic composition characteristics. The three-day continuous O-D surveys were carried out at two locations (Udwada and Charoti) to (i) study the travel pattern along the project road; (ii) identify toll plaza locations; and (iii) assess the need for bypasses around major towns along the corridor. The O-D surveys were limited to only cars in the passenger vehicle category and trucks (light commercial vehicle [LCV], 2-axle/3-axle rigid, multi-axle vehicle [MAV]) in the freight vehicle category. Information collected during the interviews included origin and destination of the trip, trip length, trip purpose, trip time, number of passengers, and commodity type and pay load. The axle-load survey was carried out in one location to obtain statistical data on axle-loading patterns for pavement design purposes.

2. The purpose of the turning movement surveys was to obtain information on directional movement characteristics at major intersections along the project road. The information was necessary for taking decisions regarding the type of improvement scheme such as, at-grade intersections with or without provisions of traffic signals, grade-separation, and interchanges. The speed and delay surveys were conducted using the moving car observer method, wherein information on journey time, number of vehicles met from the opposite direction, and number of vehicles overtaken and overtaking test car and mid-block delays were recorded.

B. Traffic Characteristics

3. For analysis purposes the traffic volumes for motorized vehicles have been developed for three sections. For section I, the average daily traffic volume (AADT) is 15,583 vehicles per day; for section II, 16,546; and for section III, 14,693. Regarding vehicle composition, for section I, passenger cars constitute about 18 percent of the traffic stream, buses 5 percent, LCVs 10 percent, and 2-axle/3-axle rigid trucks 64 percent. For section II, passenger cars constitute about 24 percent of the traffic stream, buses 5 percent, LCVs 10 percent, and 2-axle/3-axle rigid trucks 56 percent. For section III, passenger cars constitute about 17 percent of the traffic stream, buses 3 percent, LCVs 10 percent, and 2-axle/3-axle rigid trucks account 67 percent.

4. On average, the O-D data analysis shows that about 49 percent of vehicular trips traverse the full 176 km of the project road, about 42 percent of trips either originate or terminate along the project road, and about 9 percent of total trips are internal, i.e., originate and terminate within the length of the project road. The maximum through traffic has been observed for MAVs (73 percent), followed by heavy cargo vehicles (HCVs) (57 percent) and LCV (36 percent); while minimum through traffic (28 percent) has been observed for passenger vehicles (cars). The major concentration of traffic, about 27 percent of origin and destinations, is from and to Mumbai, the gateway of India for import and export movements through two major ports (Mumbai and Jawaharlal Nehru at Nava-Sheva). This is followed by Vapi with about 12 percent of total origin and destinations, Ahmedabad with about 7 percent, and Surat with about 6 percent. The survey also indicates that 25 percent of LCV and HCV travel average 250 to 500 59 Appendix 17, page 2 km. Additionally, 30 percent of MAV at the survey location of Udwada has a lead range of 1,500 km, while the average lead range at the survey location of Charoti is between 250 and 500 km. This variation may be attributed to the fact that a large number of MAVs are traveling between Vapi, which is a major industrial center, and Mumbai carrying petrochemicals.

C. Commodity Analysis

5. The O-D survey data has been analyzed to identify the commodity movement characteristics along the project road. The data shows that the major commodity types comprise machinery, chemicals and pharmaceuticals, foodgrains and cash crops, and manufactured goods. Shares of different commodities varied. At the Pardi survey location, manufactured goods1 accounted for 35 percent of total commodity types, other manufactured goods2 26 percent, chemicals and pharmaceuticals 13 percent, foodgrains3 and cash crops4 9 percent, and petroleum products 8 percent. At the Charoti survey location manufactured goods accounted for 44 percent of total commodity types, other manufacturing goods 17 percent, chemicals and pharmaceuticals 12 percent, foodgrains 9 percent, and petroleum products 8 percent.

D. Traffic Forecast

6. The traffic forecast was based on past traffic demand and economic variables, particularly the perspective growth of the economy in terms of (i) net state domestic product (NSDP) for Gujarat and Maharashtra; (ii) estimated transport demand elasticities; and (iii) changes in the structure of the vehicle fleet including productivity and changing intermodal share of passenger and freight demand. It also takes into account the findings of the willingness-to-pay survey.

1. Analysis of NSDP for Gujarat and Maharashtra

7. The past trend in average annual growth rates of NSDP at constant prices is summarized in Table A17.1.

Table A17.1: NSDP Annual Growth Rates (%) for Gujarat and Maharashtra

Period Gujarat Maharashtra

1981-1991 5.24 6.04 1991-1996 5.42 7.35 1981-1996 5.30 6.47

1 Manufactured goods include iron and steel, cement, fertilizer, sugar, textiles, and machinery. 2 Other manufactured goods include tires and tubes, salt, electronic and electrical goods, drums and containers, auto vehicles, and beverages. 3 Foodgrains include wheat and wheat products, rice and paddy, gram and pulse, and coarse grains. 4 Cash crops include jute, tea, oil seed, cotton, and tobacco. 60 Appendix 17, page 3 8. The data in Table A17.1 indicates that there was an upsurge in economic growth during 1991-1996 as compared with the past decade (1981-1991), especially in the state of Maharashtra. The long-term trend, for 1981-1996, shows a 5.3 percent annual growth rate in the NSDP for Gujarat and 6.5 percent for Maharashtra. In light of the past trend, analyzing growth rates of NSDP in real terms for different periods, it can be safely assumed that the annual growth rate of over 5.2 percent in Gujarat State and 6.0 percent for Maharashtra will be sustained on a long-term basis. This however assumes that a favorable environment for economic reforms in India will continue. The most plausible future trend will be higher growth rates in the initial years and tapering of the growth rate in later years as shown in Table A17.2.

Table A17.2: Projected Annual NSDP Growth Rates (%)

Period Gujarat (Sections I and II) Maharashtra (Section III)

1996-2001 5.60 6.50 2001-2010 5.20 6.00 2011-2020 5.05 5.75 NSDP = net state domestic product.

2. Income Elasticities of Transport Demand

9. Transport demand elasticities in relation to income were derived from the ones suggested for road improvement projects in India.5 The income elasticity for transport demand for passenger and freight vehicles tends to decline over time, irrespective of the growth in per capita income. In the case of cargo vehicles, it is brought to unity after 2005. The elasticities for passenger cars and buses traffic have been moderated taking into account local conditions, and that this will be a toll facility. The moderation factors were estimated at 0.75 for passenger cars and 0.70 for buses, to be applied to the income elasticities for passenger vehicles. These are a consequence of the project corridor being rail oriented for passenger traffic. The values adopted for the project road are presented in Table A17.3.

Table A17.3: Income Elasticities for Transport Demand

Vehicle Type Up to 2001-2005 2006-2020 2000 Passenger Vehicles Car, Jeep & Van 1.50 1.50 1.35 Buses 1.10 1.10 1.05 Freight Vehicles Truck 1.50 1.30 1.00

5 Income elasticities of transport demand utilized in the preparation of Loan 1274-IND: National Highways Project, for $245 million, approved in November 1993, and for the preparation of World Bank projects. 61 Appendix 17, page 4

3. Traffic Growth Rates

10. Based on the income elasticities for transport demand, traffic growth rates were determined for the six different motorized vehicle types, and for five periods of time (Table A17.4).

Table A17.4: Traffic Growth Rates (%) Per Vehicle Type

Vehicle Type Gujarat ( Sections I and II) Up to 2001- 2006- 2011- 2016- 2000 2005 2010 2015 2021

Car/Pickup 8.4 7.8 7.0 6.8 6.8

Bus 6.4 5.9 5.4 5.3 5.3

Trucks (LCV, HCV,MAV) 8.4 6.8 5.2 5.0 5.0

Vehicle Type Maharashtra (Section III) Up to 2001- 2006- 2011- 2016- 2000 2005 2010 2015 2021

Car/Pickup 9.7 9.0 8.1 7.8 7.8

Bus 7.4 6.8 6.3 6.0 6.0

Trucks (LCV, HCV,MAV) 9.7 7.8 6.0 5.7 5.7 HCV = heavy cargo vehicle; LCV = light commercial vehicle; MAV = multi-axle vehicle.

11. Applying the growth rates to the base year AADT (1997), traffic projections are obtained for each year of the Project’s life. The AADT for motorized traffic will double to about 28,000 vehicles per day by 2007, and will exceed 50,000 by 2020. These figures are based on normal traffic. The improved facility is expected to attract generated6 traffic that based on the perceived transport costs savings, will materialize in an additional 4 percent of cars/utilities vehicles, 6 percent of buses, and 7 percent of trucks, of the normal traffic. The existence of diverted traffic, from or to the project road, was analyzed. However, since there are no alternate routes serving the Surat-Mumbai corridor, there is no likelihood of any traffic diversion.

6 Generated traffic is traffic that did not exist before the road improvement, but will be attracted as a result of the reduction in perceived transport cost on the project road. As opposed to normal traffic that existed before the road improvement and would continue to grow with or without the Project. 62 Appendix 18, page 1 ECONOMIC ANALYSIS A. General

1. The economic evaluation of the Project was carried out for the with- and without- project scenarios. In the without-project scenario, the existing two-lane alignment would be used until the practical capacities were exceeded, which is expected to occur in 2001. This would produce an increasing level of traffic congestion with a mixture of slow- and fast- moving vehicles. In the with-project scenario, the new four-lane alignment would allow improved traffic flow conditions, higher vehicle speeds, and shorter travel time translating into lower vehicle operating costs (VOCs). A six-lane scenario was also preliminary considered as an alternative for the Project. After comparing these two mutually exclusive options it was found that the six-lane scenario had higher initial capital costs and that it will have spare capacity until 2008. Therefore the four-lane alignment proved to be the one with the least cost and, as a result, the one adopted for the Project.

B. Costs

2. The economic costs of implementing the Project were estimated from the financial costs of civil works, physical contingencies, land acquisition for the right-of-way, and construction supervision. Price escalation provisions, interest during construction, and taxes and duties were deducted from the financial costs to derive the economic costs. Goods and services were divided into tradable and nontradable groups. The financial costs of the tradables were expressed in border prices plus transport and handling costs, while the financial costs of nontradables were converted into economic costs by using the standard conversion factor of 0.9.1 Financial operation and maintenance (O&M) costs were also adjusted by the same approach to obtain economic costs. The pavement road surface will have routine and periodic maintenance during the operation of the Project. Incremental O&M costs were calculated as the difference between O&M requirements for the new four- lane alignment and the ones that the existing two-lane alignment would require. All economic costs were estimated in constant 1998 prices. A salvage value of 15 percent was introduced in 2021, at the end of the project life cycle.

C. Benefits

3. The widening to a four-lane alignment will increase the capacity, offer lower VOCs, and reduce travel time. The improvement will also attract generated2 traffic to the road. Benefits of generated traffic were calculated as half of the VOC savings per vehicle unit. Benefits accrued due to time savings were not considered for the analysis, in order to obtain conservative estimates. VOCs were calculated3 based on vehicle and road characteristics for six different vehicle types (cars, utility vehicles/minibuses, buses, light commercial vehicles, heavy commercial vehicles, and multi-axle vehicles). VOCs for the with- and without-project cases are shown in Table A18.1. It is expected that the existing two-lane alignment will reach capacity in 2001. Benefits will not increase after 2007 since the four-lane alignment is expected to reach capacity in that year.

1 SCF= 0.9 utilized in recent foreign-assisted road improvement projects. 2 Generated traffic is traffic that did not exist before the road improvement, but will be attracted as a result of the Project. As opposed to normal traffic that existed before the road improvement and would continue to grow with or without the Project. 3 VOCs were calculated using the Highway Design and Maintenance model (HDM-Manager), developed by the World Bank and used worldwide as best practice. 63 Appendix 18, page 2

Table A18.1: Vehicle Operating Costs by Vehicle Type (Rs/vehicle-km)

Vehicle Type Car Utility Bus LCV HCV MAV

Without Project 3.74 6.05 7.85 7.14 8.81 11.87

With Project 2.98 4.37 6.04 5.14 7.05 10.45

VOC Savings 0.76 1.68 1.81 2.00 1.76 1.42 HCV = heavy cargo vehicle; LCV = light commercial vehicle; MAV = multi-axle vehicle; VOC = vehicle operating cost.

4. Economic evaluations were carried out for the project analysis sections, as well as for the Project as a whole; the national highway analysis sections are homogeneous in terms of traffic flows. For estimation of the economic internal rate of returns (EIRRs), benefit streams were calculated for a period of 20 years starting in 2002, which covers the economic life of the improvements under the Project. Costs and benefits was estimated net of duties and taxes, and are expressed in constant 1998 prices in the project area. The annual benefit and cost streams for the Project are presented in Table A18.2. The base EIRR for the Project is 25 percent, while the EIRRs for the analysis sections vary between 22 and 27 percent.

5. The sensitivity of the EIRRs was analyzed for changes in the underlying cost and benefit parameters (Table A18.3). The results of this analysis show with that the adverse assumption of a 15 percent increase in project costs, the EIRR would decrease to 22 percent. If benefits only materialized to 85 percent of the original estimates, due to an overestimation of traffic growth, the EIRR would decrease to 22 percent. In the most adverse situation of a simultaneous increase in project cost by 15 percent and a reduction of benefits by 15 percent, the overall EIRR will be 19 percent. The switching value4 for cost was determined to be 129 percent, and switching value for benefits 55 percent. The scenario of a possible delay in Project implementation by one year was also considered, and in that case, the EIRR would decline to 21 percent.

Table A18.3. Sensitivity Analysis

EIRR NPV Switching Scenario (%) (Rs million) Value (%)

Base Case 25 7,768 Increase Costs by 15 percent 22 6,831 129 Reduce Benefits 15 percent 22 5,666 (55) Increase Costs by 15 percent and 19 4,651 Reduce Benefits by 15 percent Delay in Project Completion by 1 year 21 5,847 EIRR = economic internal rate of return; NPV = net present value.

4 The switching value shows the percentage increase in a cost variable (or decline in a benefit variable) required for the net present value to become zero, which is the same as the EIRR reducing to the cut-off level of 12 percent. 64 Appendix 18, page 3

Table A18.2: Economic Internal Rate of Return Calculation (Rs million)

Costs Incremental Benefits Year Capital O&M Total VOC Net Benefits w/ Project Savings

1999 1,219.2 1,219.2 (1,219.2) 2000 2,032.1 2,032.1 (2,032.1) 2001 2,032.1 2,032.1 (2,032.1) 2002 2,032.1 2,032.1 (2,032.1) 2003 812.8 9.3 822.1 1,284.9 462.8 2004 (141.4) (141.4) 2,755.0 2,896.4 2005 9.3 9.3 2,953.7 2,944.4 2006 465.0 465.0 3,121.2 2,656.2 2007 9.3 9.3 3,298.4 3,289.1 2008 9.3 9.3 3,298.4 3,289.1 2009 (141.4) (141.4) 3,298.4 3,439.7 2010 9.3 9.3 3,298.4 3,289.1 2011 1,066.8 1,066.8 3,298.4 2,231.5 2012 9.3 9.3 3,298.4 3,289.1 2013 9.3 9.3 3,298.4 3,289.1 2014 (141.4) (141.4) 3,298.4 3,439.7 2015 9.3 9.3 3,298.4 3,289.1 2016 465.0 465.0 3,298.4 2,833.3 2017 9.3 9.3 3,298.4 3,289.1 2018 9.3 9.3 3,298.4 3,289.1 2019 (141.4) (141.4) 3,298.4 3,439.7 2020 9.3 9.3 3,298.4 3,289.1 2021 465.0 465.0 3,298.4 2,833.3 2022 (1,036.3) 9.3 (1,027.1) 3,298.4 4,325.5

EIRR= 25%

NPV= 7,768

EIRR = economic internal rate of return; NPV = net present value; O&M = operation and maintenance; VOC = vehicle operating cost.