National Capital Region Urban Infrastructure Financing Facility (RRP IND 41598-01)

ECONOMIC ANALYSIS

A. Overview of the Economy of National Capital Region

1. The National Capital Region (NCR) comprises Delhi and subregions of the states of Haryana (seven districts), Rajasthan (one district), and Uttar Pradesh (five districts). The background information on these states in the context of the NCR is depicted in Table 1.

Table 1: Background Information of States in the National Capital Region GSDP Projected GSDP at growth State Population NCR NCR current rate over literacy below NCR population population prices previous rate poverty line area 2001 2021 FY2007a Yeara 2001a FY2000a State (km2) (million) (million) (Rs billion) (%) (%) (%) Delhi 1,483 13.7 23.0 1,252.8 18.4 82.0 8.2 Haryana 13,413 8.7 16.0 1,264.8 18.9 67.9 8.7 Uttar 10,853 11.6 19.8 3,128.3 11.8 57.4 31.2 Pradesh Rajasthan 7,829 3.0 4.8 1,420.4 14.3 60.4 15.3 GSDP = gross state domestic product, km2 = square kilometer, NCR = national capital region, Rs = rupees. a For the entire state. Source: Government of India.

2. State domestic product. National Capital Territory (NCT) Delhi and the other NCR states hold a considerable position of importance in the Indian economy. On an average, the region contributes about 20% of the Indian gross domestic product (GDP). When all the states and the union territories of the country are ranked according to their share in the total GDP of India (on the basis of the figures for FY2007), Uttar Pradesh ranks second after Maharashtra, Rajasthan ranks eighth, and Haryana ranks 11th; NCT Delhi, though small in size, ranks 13th. During FY2000–FY2007, the compounded annual growth rate (CAGR) of the Indian GDP was approximately 6.98% per annum. Both Haryana and Delhi witnessed intense economic activity during this period and registered CAGRs of 8.72% in the case of Haryana and 7.21% per annum in Delhi, which were both substantially higher than the national average. During the same period Rajasthan had a CAGR of 5.07% and Uttar Pradesh had a CAGR of 4.35%, both below the national average. In terms of the net state domestic product (NSDP) at constant prices, both Delhi and Haryana showed considerable growth during FY2000–FY2007. For both NCT Delhi and Rajasthan, the per capita NSDP was well above the net national product per capita of the Indian economy as a whole. During FY2006 Delhi ranked third among all the states and the union territories in terms of the NSDP; Haryana was ranked fifth. These figures demonstrate the importance the region has with respect to the economic performance of the country as a whole.

3. Structure of the economies. The economy of NCT Delhi is primarily a nonagricultural economy, with almost 99% of its GSDP being generated by activities in the industry and service sectors. For the other states in the NCR region, agriculture contributes substantially to the GSDP and is well above the national average. In all these states industry activities also play a crucial role and contribute approximately 25% of the GSDP. The contribution of the services sector in these states, however, is about 40.0%, which is below the national average of 50.6%.

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B. Economic Analysis of Indicative Subprojects

1. Demand Analysis

4. Anand Vihar Multimodal Transit Center. The requirement for various components of the multimodal transit center (MMTC) which includes bus bays for interstate and local buses, parking space for private vehicles, and parking for taxis and autorickshaws is analyzed based on the demand survey data with comparison of the requirement and design provisions made in the detailed project report. Bus bay requirements are assessed based on dwelling time of the buses and the total number of trips. Parking demand was assessed based on parking surveys.

5. Sarai Kale Khan Multimodal Transit Center. Assumptions were made to estimate the demand for intercity buses at the Sarai Kale Khan terminal. Also considered is the decision to shift interstate bus terminals to the periphery of Delhi and terminate intercity buses at the periphery. The assumptions made are as follows: (i) the growth rate of the Delhi population would be 35% per decade, i.e., approximately 3% per annum; (ii) the growth rate of bus numbers in Delhi would be 3% annually till 2018, 2.5% till 2028, and 2% from thereon; (iii) all the intercity buses currently using National Highway (NH) 8 and NH10 will terminate or originate at the proposed Dwarka terminal; and (iv) local bus routes will continue to originate from the Sarai Kale Khan terminal. Bus bay requirements are assessed based on the dwelling time of buses and the total as well as peak hour number of trips.

6. Pataudi Water Supply and Sewerage. The water supply service levels for the urban population has been considered at 135 liters per capita per day (lpcd) and for the rural population at 70 lpcd. The total production demand for urban areas has been calculated considering a 20% floating population, fire fighting requirements, and 15% unaccounted-for water. For rural areas, separate provision for only the unaccounted-for water of 15% is made.

2. Least-Cost Approach to Design

7. Alternative designs were assessed on three aspects: cost-effectiveness, operation and maintenance capacity of the implementing agencies (IAs), and safety to beneficiaries.

8. Multimodal transit centers. The project is designed in phases to accommodate the demand for the first 15 years in phase 1 and provision for expansion later, thus minimizing the initial investment. The project implementation design ensures sufficient revenue for operation and maintenance as well as professional management of the operation. The project design incorporates the principle of separation of pedestrians and vehicles and conflicting movements, thus ensuring safety in operation.

9. Roads. The project design includes capacity augmentation based on the capacity analysis and rehabilitation to provide acceptable level of service to road users based on the forecast traffic. The pavement design is carried out for 10 years with overlays planned after 10 years. The Badli Bypass is planned in two phases, with a two-lane carriageway built in the first phase and second carriageway planned for the future. The project design includes provision for road signs and markings as well other features to ensure safe operation.

10. Pataudi Water Supply and Sewerage. The proposed design of the project includes (i) service coverage limited to municipal areas, (ii) selected optimum network with least-cost options including size and material for pipes, (iii) decision on rehabilitation of the existing system, (iv) selection of water treatment plant locations, (v) selected optimum technology for

3 water treatment plant operation, (vi) selected technologies that meet geographical restrictions and can be operated and maintained by the asset owners with minor training, and (vii) materials and equipment that are locally available and incur the least cost during construction and maintenance, but are internationally accepted as free of health hazards.

C. Cost–Benefit Analysis

11. In calculating the economic internal rates of return (EIRRs) for the subprojects, the estimated costs and benefits were valued at their economic prices using the domestic price numeraire. This methodology converts border price equivalent values to their equivalent domestic price levels by applying shadow prices. The factors used in water supply projects are as follows: (i) foreign costs 1.04, (ii) unskilled labor 0.75, (iii) skilled labor 1.00, and (iv) local materials 1.00. For transport projects, a standard conversion factor of 0.9 was used as generally adopted for similar projects in India. The economic costs excluded applicable taxes and duties. The economic costs were based on detailed engineering designs and estimates prepared for the subprojects. Recurrent costs relating to the operation and maintenance of the site were calculated annually in respect of proposed subprojects. Water under the project is proposed to be drawn from the dedicated drinking water supply canal of the Haryana Public Health Engineering Department (PHED). However, for the purpose of analysis, the economic cost of alternate use of water for irrigation was assessed separately based on the government of Haryana irrigation water rates.

12. Multimodal transit centers – Anand Vihar and Sarai Kale Khan. The major economic benefits of the MMTCs comprise (i) vehicle operating cost saving for passengers shifting from private modes to public transport with upgrading of the interstate bus terminal, (ii) time savings for passengers with easy transfer between different transit modes, (iii) improved circulation with well-maintained roads compared to deteriorated roads at present, and (iv) additional employment. Other benefits are envisaged to accrue but have not been quantified. These include transit passenger satisfaction due to significant environmental improvement, environment and health benefits due to reduced emissions and reduced conflict, and improved travel on metrorail due to better connectivity.

13. Badli Bypass. The major economic benefits comprise (i) vehicle operating cost savings to diverted traffic due to improved surface and free traffic flows, (ii) vehicle operating cost savings to traffic on road through the town due to improved surface and reduced congestion, and (iii) travel time savings to all traffic due to improved speeds. Other benefits are envisaged to accrue but have not been quantified. These include reduced emissions due to reduced congestion and improved road safety in the town sections due to diversion of all truck traffic.

14. Sonepat and Jhajjar district roads. The major economic benefits comprise (i) vehicle operating cost savings to traffic on the project roads due to improved surface and capacity, and (ii) travel time savings to all traffic due to improved speeds. Other benefits are envisaged to accrue due to better access but have not been quantified. These include reduced emissions due to better level of service, social benefits, and improved road safety in the town sections.

15. Pataudi water supply incremental benefit. This component has a positive effect on total consumption due to the proposed subproject. The benefit has been evaluated by using the willingness to pay for additional consumption in the present analysis. The survey adopted the contingent valuation method to elicit the willingness to pay of the households on water supply and sewerage services since the households are not exposed to the type of services proposed. The samples were distributed in both the municipalities and a few villages. The population was

4 stratified based on income levels of people with input from PHED officials, and within each strata samples were chosen randomly in proportion to the size of the strata. The average amount each household is willing to pay for water supply is Rs60.26 per month.

16. Nonincremental benefit or loss is evaluated by the differential price paid by the number of households presently drawing water from other sources of water and standposts that will have a water service connection. Other nonincremental benefits are resource cost savings in tanker water, storage tanks, water purification, and time. Time savings resulting from water collection are more acute in the dry season and are quantified using the opportunity cost of unskilled urban women laborers. Valuation of savings in time and the costs of water purification, storage tanks, and tanker water purchase was done by using data and information available for the time taken to fetch water, the amount spent on water purification, the cost of storage tanks, and the amount paid for purchasing water through tanker from the socioeconomic survey, secondary data, and physical enquiries.

17. Pataudi sewerage. The survey results indicate that the potential beneficiaries are prepared to pay for improved sewerage services. The economic benefits considered are (i) savings in septic tank capital costs, (ii) savings in septic tank maintenance costs, (iii) savings in days lost due to sickness and household expenditure on treatment of waterborne diseases (both considered based on discussions with PHED and government of Haryana officials and other similar projects), (iv) savings in cost of flooding (covering population in Haily Mandi including Jatauli town), and (v) user charges. Poor households have been defined in terms of those living below poverty line and poor. The analysis shows that the poverty impact ratio for the water supply and sewerage subprojects in Pataudi is 65%.

D. Economic Internal Rate of Return Calculation and Sensitivity Analysis

18. The results of the EIRR calculation and sensitivity analysis are summarized in Tables 2 and 3. The base case EIRR range from 12.7% (Sarai Kale Khan MMTC) to 64.8% (Kharkhauda - Assaudha Road) for the subprojects, exceeding the economic opportunity cost of capital which is 12%,1 confirming the economic robustness of the proposed subprojects, indicating that they are economically viable for the country as a whole. Sensitivity analysis, undertaken to further test the economic viability of the subprojects and the project, ascertained the consequences of changes in the following variables: (i) a 15% increase in investment cost possibly arising from a delayed implementation schedule or higher than estimated bid; (ii) a 15% increase in operations and maintenance costs; (iii) a 15% decline in benefits (20% in the case of the water supply and sewerage subproject for all three tests); (iv) a combination of scenarios (i), (ii), and (iii); and (v) a delay in subproject benefits by 1 year. The results of the sensitivity analysis show that the EIRRs are highly sensitive to a reduction in benefits.

1 ADB. 2003. Economic Analysis of Projects. Operations Manual. OM G1/OP. Manila (para. 2[vi]b).

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Table 2: Economic Internal Rate of Return and Sensitivity Analyses for the Pataudi Water Supply and Sewerage Project Water Supply Sewerage Switching EIRR Valueb Sensitivity EIRR Switching Sensitivity Details (%) (%) Indicator (%) Valueb Indicator Main evaluation (base case) 15.4 15.9 a Capital cost overrun 13.2 70.8 1.4 13.0 54.0 1.9 c O&M cost overrun 15.0 431.9 0.2 15.1 228.9 0.4 d Decrease in project benefits 12.6 54.7 1.8 11.7 32.8 3.0 One-year delay in implementation 15.2 15.8 All four tests combined 10.4 8.9 EIRR = economic internal rate of return, O&M =.operations and maintenance. a 20% increase in capital cost estimates b Calculated as the percentage change in a variable required for EIRR to reduce to 12% c 20% increase in O&M cost d 20% decrease in project benefits Source: Asian Development Bank.

Table 3: Economic Internal Rates of Return and Sensitivity Analyses of Other Identified Projects Scenario Cost Benefit Cost increase by Construction Base increase by decrease by 15% and benefit delayed by 1 Project case 15% 15% decrease by 15% year Anand Vihar MMTC (%) 17.7 15.7 14.9 13.1 17.3 Switching value (%) 91.4 62.3 33.8 Sensitivity Indicator 1.1 1.6 3.0 Sarai Kale Khan MMTC 12.7 12.1 10.3 9.9 12.3 Switching value (%) 262.9 53.6 42.4 Sensitivity Indicator 0.4 1.9 2.4 Badli Bypass, Haryana (%) 25.2 22.6 22.2 19.8 24.3 Switching value (%) 104.3 88.8 44 Sensitivity Indicator 1.0 1.1 2.3 Sonepat Roadsa Jagsi–Gangana (%) 28.1 24.9 24.4 21.6 27 Switching value (%) 93.4 79.1 39.9 Sensitivity Indicator 1.1 1.3 2.5 Jhajjar Roadsa Badli Iqbalpur (%) 14.4 12.4 12.1 10.3 14.2 Switching value (%) 74.4 63.1 30.1 Sensitivity Indicator 1.3 1.6 3.3 MMTC = multimodal transit center. a Only selected roads presented due to space limitation. Source: Asian Development Bank.