State Roads Project III (RRP IND 43063)

ECONOMIC ANALYSIS (Madhya Pradesh State Roads Project III)

A. Introduction

1. The proposed rehabilitation and upgrading of selected state highway sections under the Madhya Pradesh State Roads Project III will improve the accessibility of rural areas; reduce vehicle operating costs, and thereby transport costs; and stimulate economic growth. The Madhya Pradesh Road Development Corporation (MPRDC) has short-listed 15 road sections (i.e., subprojects), totaling 1,080 kilometers (km), for inclusion in the proposed project and has undertaken project preparation studies for them.

2. An economic evaluation of these road sections was also conducted based on the estimated savings in vehicle operating costs and travel time against the investment needed for the proposed project. The improvement option was defined based on a traffic capacity analysis and pavement condition assessment. The subprojects were selected based on economic performance, regional development considerations, and connectivity.

3. The economic analysis of the proposed subprojects was carried out using the Highway Development and Management (HDM-4) model. The model required data on traffic, geometry, condition, pavement structure, and material characteristics of the existing road as well as maintenance and improvement costs and vehicle operating cost parameters for representative vehicles in Madhya Pradesh. The basic inputs needed for the economic analysis were taken from consultants' reports and other previous studies conducted by MPRDC. The results of the economic analysis are presented in this appendix.

B. Project Road Details

4. The list of subprojects is presented in Table A7.1. The majority of these road sections are single-lane roads in poor condition. Two-wheeler traffic constitutes about 40%–60% of their motorized traffic. Base-year traffic volumes were obtained from classified traffic counts carried out on the sections from March to July 2009. Weeklong counts were averaged to obtain the average daily traffic, which was then used with a seasonal variation factor to attain the average annual daily traffic.1

Table A7.1: Project Road Sections and Base-Year Characteristics Average Road Daily Traffic Road Length Average Road Condition (no. of No. Road Name (km) Width (m) Rating vehicles) 1 Bhind–Ater–Porsa (SH-2) 60.85 3.50 Fair–poor 1,630 2 Mihona–Lahar–Daboh–Bhander– 87.70 3.75 Fair–poor 1,222 Chirgaon (SH-45) 3 Pichore–Chanderi–Mungawali– 146.50 7.00 (61.0 km) Fair 1,471 Ondere–Kurwal (SH-19) and 4.00 (85.5 km) 4 Manwar–Mangod (SH-38) 49.63 3.75 Very poor 1,710 5 Sardarpur–Rajgarh–Bagh 50.43 3.50 Very poor 1,665 (SH-35) 6 Agar–Barod–Alot–Jawra 108.70 3.50 Poor 2,791 (SH-41)

1 Monthly fuel sales data for the state and monthly traffic on seven toll roads were used to obtain the seasonal variation factor. 2

7 Pachor–Chapikheda–Jirapur– 86.70 3.50 Very poor 2,974 Machalpur–Soyat (SH-51) 8 Badi–Baktara–Dobi–Shahganj– 58.78 3.50 (32.8 km) Fair–poor 2,607 Budhni (SH-15) and 7.0 (26.0 km) 9 Silwani–Udayapura (SH-44) 28.58 3.50 Very poor 1,689 10 Rahatgarh–Khurai–Khimlasa (SH- 47.48 3.50 Very poor 2,070 42) 11 Damoh–Hata–Gasiabad i/c Hata 62.66 3.50 Very poor 3,339 Town Portion Road (SH-47) 12 Hata–Patera–Kumhari and Raipura– 91.28 3.50 Poor 1,542 Salaiya–Bahuribandh–Sihora Road (SH-48) 13 Amarpatan–Gorsari–Badera Road 46.50 3.50 Fair–poor 1,584 (SH-11) 14 Sundara–Singhpur–Kothi–Jaitwara– 85.29 3.50 Poor 1,441 Birsinghpur–Semaria Road (SH-52) 15 Sidhi–Beohari Road (SH-55) 71.29 3.50 Poor 2,243 Total Road Length 1,082.37 SH= State Highway Source: Detailed Project Consultant reports, MPRDC

C. Traffic Growth Forecast

5. Traffic growth on a road is generally estimated on the basis of historical trends and growth potential of both the economy and population. However, for this economic analysis, in the absence of established time series data on traffic volume on the proposed subprojects, the growth forecast was made based on data available on vehicle growth, gross domestic product (GDP) growth, and transport GDP growth.

6. The Madhya Pradesh state economy grew at an average rate of 6.0% during 2002–2008, compared to 8.9% growth for all of . Madhya Pradesh has been lagging in economic development, but has been showing more growth potential in the past few years. In the last 5 years, large-scale investments have been made, with all state highways expected to be rehabilitated by 2013 and major initiatives are under implementation for rehabilitation of Major District Roads (MDRs) and Other District Roads (ODRs). With major national highway development, the state will have an excellent road network in the next few years.

7. Further, based on data on industrial entrepreneurs' memoranda2, Madhya Pradesh has attracted 7.2% of the country's total industrial investments since 1992, with only Andhra Pradesh, Gujarat, Maharashtra, Uttar Pradesh, and West Bengal having realized more investment. In all of these states, almost 70%–80% of the investment was realized prior to 2007; in Madhya Pradesh, almost 60% of those investments occurred since 2006. Looking at the investment intentions as per the industrial entrepreneurs' memoranda filed from 2006, Madhya Pradesh has cornered 7.3% of total investment intentions and is only behind states like Andhra Pradesh (9.7%), Chhattisgarh (16.1%), Gujarat (with 10.3% of total investment intentions), Karnataka (9.5%), and Maharashtra (7.4%). In addition, the Delhi–Mumbai Industrial Corridor3 will boost the industrial development in the western parts of Madhya Pradesh (nodes include Nimach–Nayagaon, Pitampura–Dhar–Mhow, –, and Shajhapur–). The

2 Industrial Entrepreneurs Memoranda (IEM’s) are filed by Industries to the Secretariat for Industrial Assistance (SIA) when establishing new industries. The data compiled by Ministry of Commerce and Industry on IEM’s provide information on industrial investment in the country. 3 Delhi-Mumbai Industrial Corridor is a mega infrastructure project of USD 90 billion with the financial & technical aids from Japan, covering an overall length of 1483 kms between the political capital and the business capital of India, i.e. Delhi and Mumbai.

3

Madhya Pradesh government is also investing in agriculture, which has a lot of potential for irrigating 57% of its area against the current 29% that is irrigated. With these considerations, Madhya Pradesh is expected to achieve a realistic GDP growth of 7.5% in 2010–2015, rising to 8.0% for the following 5 years.

8. For Madhya Pradesh, vehicles growth on road for 2002–2007 was 8.7% for goods vehicles and 10.8% for cars against GDP grow of 6%. This indicates an elasticity of 1.45 and 1.80. The elasticity is slightly higher compared to national level estimates but is expected considering the lower base and increased economic activity in that period. The growth of registered vehicles on roads (Table A7.2) gives an indication of the traffic growth in the state.

Table A7.2: Growth of Motor Vehicles on Roads in Madhya Pradesh Two- Three- Car, Jeeps, Goods Year Wheelers Wheelers and Vans Buses Vehicles Tractors Total 2000 1,761,211 35,376 126,058 34,190 69,964 245,180 2,271,979 2001 1,968,393 37,762 137,448 36,485 69,073 261,220 2,510,381 2002 2,163,145 39,469 147,009 36,800 70,136 284,142 2,740,701 2003 2,399,433 42,253 159,940 36,869 71,629 304,227 3,014,351 2004 2,676,143 43,593 177,228 40,121 78,439 327,408 3,342,932 2005 2,986,307 45,525 198,823 44,244 86,178 351,535 3,712,612 2006 3,328,439 48,004 220,785 52,746 93,949 371,161 4,115,084 2007 3,699,629 52,687 245,637 58,054 106,282 390,635 4,552,924 Growth Rate (%) 2000–2007 11.2 5.9 10.0 7.9 6.2 6.9 10.4 2002–2007 11.3 5.9 10.8 9.5 8.7 6.6 10.7 Sources: Madhya Pradesh government, Transport Department; and India Statistics. http://www.indiastat.com.

9. An attempt was made to estimate growth rates in traffic from toll revenue data from seven toll plaza sections in Madhya Pradesh, which were in operation from 2006 to 2010. The overall observed growth rate is 8.3%, after removing the toll rate increase every April. This includes goods as well as passenger vehicles, but goods vehicles are the main toll-paying traffic. Thus, this growth rate is more indicative of goods vehicle traffic growth. Toll traffic growth and registered goods vehicle growth indicate similar trends, although the economic slowdown during the last 2 years may have slightly affected toll revenue. There was a slowdown in commercial vehicle production in India during 2008–2009, but production in 2009–2010 exceeded 2007–2008 levels. Commercial vehicle production figures for the first quarter of 2010–2011 indicate 15%–20% growth in commercial vehicle production in India, reflecting a rebound in economic growth. Vehicular growth trends in Madhya Pradesh indicate strong growth, which is also reflected in the toll revenue growth, indicating an overall growth in traffic. Future traffic growth rates, derived based on economic growth outlook and indicative transport elasticities (moderated considering the higher base in 2010), are given in Table A7.3.

Table A7.3: Adopted Growth Rates for Motorized Traffic (%) Vehicle Type Two- Three- Goods Tractors and Period Cars Wheelers Wheelers Buses Vehicles Trailers 2009–2015 11.0 11.0 6.0 8.0 9.3 5.0 2015–2020 10.0 8.0 4.5 6.5 8.8 4.0 2020–2025 8.0 5.0 3.0 5.0 7.0 3.0 2025–2030 5.0 4.0 2.0 3.0 5.4 2.0 2030–2035 3.0 3.0 2.0 2.0 3.0 1.0 Source: TA Consultant’s estimate

10. The Detailed Project Consultant (DPR) reports indicate that none of the road sections have potential for significant traffic diversion; hence, no diverted traffic was considered in the 4 analysis. There is potential for generated traffic where roads are in poor to very poor condition. For all of the road sections in poor to very poor condition, 10%–15% generated traffic was considered.

D. Improvement Standards and Construction Costs

11. All of the proposed subprojects are in fair to very poor condition and need rehabilitation or reconstruction in addition to widening for capacity augmentation. Based on the pavement condition assessment and capacity analysis, an improvement option was defined. Eleven of the road sections are proposed for widening to 7.0-meter carriageways, and four roads are to be widened to 5.5-meter carriageways. Existing pavement will either retained with overlay where the pavement condition is fair, or reconstructed from subgrade where the pavement is in poor condition. The proposed upgrading formed the “with-project” case, and the “without-project” case involved minimum maintenance, including patching, to keep the road in operation. It was assumed that the road roughness will progress to about 10 international roughness index (IRI) without the project, and no further deterioration was assumed with this minimum maintenance.

12. With the project, the IRI immediately after construction would be about 2.0. It would deteriorate during operation up to an IRI of 4.2 if an overlay is provided, which will reduce the IRI to about 2.5 to 3.0. An overlay would be provided every time the IRI reaches 4.2 within the analysis period. The interval for the first overlay ranges from 7 to 9 years, and the second overlay ranges from 5 to 7 years. The pavement will require major strengthening after about 20 years, which was not included in the analysis as it was considered outside of the analysis period. The maintenance costs would include Rs145,000 per km per year for routine maintenance, including any pothole patching and edge repairs, and about Rs1.5 million per km for periodic overlay for a two-lane road.

13. Without the project, all of the roads would remain mostly in poor condition and require major rehabilitation. The major rehabilitation was the with-project case, and the alternative would be to carry out spot repairs, patching, and overlay of short sections with the available budget allocation. Such actions would be taken up every year, with the majority of road length remaining in poor condition. The funds available are only sufficient to keep the road operational. Therefore, for the analysis, an average condition was assumed in the without-project case, which is the current condition of a major length of the project roads. Construction cost estimates from detailed project reports were adopted, which range from Rs12.7 million to Rs19.4 million per km. A standard conversion factor of 0.9 was adopted to estimate the economic cost from the financial cost.

E. Economic Analysis

14. An economic evaluation was undertaken for each road section by comparing the with- and without-project options using the HDM-4 model. Information required to update the vehicle operating cost parameters was obtained from reports prepared by MPRDC and from local inquiries and secondary sources. An analysis period of 22 years, including a 2-year construction period, was adopted. A salvage value of 15% was used considering the widening involved. The output from the HDM-4 analysis, summarized in Table A7.4 (base case), gives an economic internal rate of return (EIRR) and net present value at a 12% discount rate for the proposed project. Benefits considered included the vehicle operating cost savings and value of time savings. The observations from summary table indicate that the proposed improvements of the project roads are economically viable, yielding EIRRs well above the opportunity cost of 5

capital of 12% in all cases. In most cases, it is significantly higher, indicating the high EIRR of the subprojects.

15. Further, a sensitivity analysis was carried out over the base case with respect to adverse changes in the costs and benefits. The following cases were analyzed: (i) base case, (ii) cost increased by 15%, (iii) no time benefits, (iv) traffic growth rate reduced by 15%, (v) benefits decreased by 15%, and (vi) cost increased by 15% and benefits decreased by 15%. The results of sensitivity analysis, presented in Table A7.4, show that all road sections have EIRRs of more than 12% in all sensitivity tests, indicating the economic viability within the range of variability anticipated. The improvements planned for the road sections under the proposed project are therefore recommended for implementation. The improvement will increase the travel speeds from improved surface and capacity augmentation, saving travel time for all passengers. The HDM-4 model estimated the speeds and travel time for the with- and without-project cases, and the average value of time was estimated at Rs22 per hour from the per capita income per employed person. The value of work time for bus passengers was taken at the average value of Rs22 per hour, 50% more for two-wheelers at Rs33 per hour, and four times for car travelers at Rs88 per hour. The value of nonwork time was taken as 25% of the value of work time.

Table A7.4: Economic Analysis Results Base Case Economic Road Name Analysis (Case I) Sensitivity Analysis Case Case Case Case Case II III IV V VI NPV Road EIRR (Rs NPV/ EIRR EIRR EIRR EIRR EIRR No. (%) million) Cost (%) (%) (%) (%) (%) 1 Bhind–Ater–Porsa (SH-2) 21.4 509.8 0.7 19.0 13.3 19.6 18.7 16.5 2 Mihona–Lahar–Daboh–Bhander– 18.5 544.2 0.5 16.4 13.9 16.6 16.1 14.2 Chirgaon (SH-45) 3 Pichore–Chanderi–Mungawali– 18.3 798.9 0.5 16.3 14.1 16.5 16.0 14.2 Ondere–Kurwai (SH-19) 4 Manwar–Mangod (SH-38) 26.9 910.3 1.3 24.1 19.8 24.6 23.7 21.3 5 Sardarpur–Rajgarh–Bagh (SH-35) 27.3 1,042.1 1.3 24.6 21.0 25.1 24.2 21.7 6 Agar–Barod–Alot–Jawra (SH-41) 41.6 4,910.4 3.1 37.6 31.1 37.2 36.9 33.3 7 Pachor–Chapikheda–Jirapur– 42.5 4,365.4 3.1 38.3 30.4 38.2 37.6 33.9 Machalpur–Soyat (SH-51) 8 Badi–Baktara–Dobi–Shahganj– 22.6 673.7 0.9 20.3 20.0 20.5 19.9 17.8 Budhni (SH-15) 9 Silwani–Udayapura Road (SH-44) 20.8 301.7 0.7 18.6 15.8 18.7 18.2 16.2 10 Rahatgarh–Khurai–Khimlasa Road 31.0 819.8 1.7 27.8 25.7 28.8 27.3 24.4 (SH-42) 11 Damoh–Hata–Gasiabad i/c Hata 37.5 2,528.1 2.6 33.9 25.0 34.6 33.3 30.1 Town Portion Road (SH-47) 12 Hata–Patera–Kumhari and Raipura– 25.0 1,164.0 1.0 22.4 19.4 22.9 22.0 19.7 Salaiya–Bahuribandh –Sihora Road (SH-48) 13 Amarpatan–Gorsari–Badera Road 30.7 888.2 1.5 27.8 24.6 28.3 27.3 24.7 (SH-11) 14 Sundara–Singhpur–Kothi–Jaitwara– 20.2 791.9 0.6 18.0 15.2 18.4 17.7 15.7 Birsinghpur–Semaria Road (SH-52) 15 Sidhi–Beohari Road (SH-55) 45.5 2,625.4 3.2 41.2 31.1 42.3 40.5 36.6 SH = State Highway Source: TA Consultant’s estimate.