National Trade Corridor Highway Investment Program

Report and Recommendation of the President to the Board of Directors

Project Number: 40075 October 2007

Proposed Multitranche Financing Facility and Technical Assistance Grant Islamic Republic of Pakistan: National Trade Corridor Highway Investment Program

CURRENCY EQUIVALENTS (as of 18 September 2007)

Currency Unit – Pakistan rupee/s (PRs)

PRe1.00 = $0.0165 $1.00 = PRs 60.55

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund CAPE – country assessment program evaluation EA – executing agency EIRR – economic internal rate of return EMP – environmental management plan FFA – framework financing agreement FIRR – financial internal rate of return GDP – gross domestic product JBIC – Japan Bank for International Cooperation LIBOR – London interbank offered rate MFF – multitranche financing facility MTDF – Medium-Term Development Framework NHA – National Highway Authority NHDSIP – National Highway Development Sector Investment Program NTC – National Trade Corridor NTCIP – National Trade Corridor Improvement Program NWFP – North-West Frontier Province OCR – ordinary capital resources PC-1 – Planning Commission Pro-forma Report 1 PFR – periodic financing request PIU – project implementation unit PPP – public-private partnerships PRC – People’s Republic of China RSDF – road sector development framework SAPE – sector assessment program evaluation TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of Pakistan and its agencies ends on 30 June of the following year. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2006 ends on 30 June 2006.

(ii) In this report, "$" refers to United States dollars.

Vice President L. Jin, Operations 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director S. O’Sullivan, Infrastructure Division, CWRD

Team leader F. Kawawaki, Senior Investment Specialist (Infrastructure), CWRD Team members O. Norojono, Transport Economist, CWRD A. Aleem, Programs Officer, CWRD L. Blanchetti-Revelli, Social Development and Resettlement Specialist, CWRD B. Ganiev, Economist, CWRD R. Narasimham, Senior Project Management Specialist, CWRD M. Rehman, Senior Transport Specialist, CWRD R. Sanda, Investment Specialist (Infrastructure), CWRD S. Tu, Environment Specialist, CWRD V. You, Senior Counsel, Office of the General Counsel A. Silverio, Administrative Assistant, CWRD

CONTENTS

Page

NATIONAL TRADE CORRIDOR HIGHWAY INVESTMENT PROGRAM SUMMARY i

MAPS

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3

III. THE PROPOSED INVESTMENT PROGRAM 13 A. Impact and Outcome 13 B. Outputs 13 C. Technical Justification and Selection Criteria 15 D. Cost Estimates and Financing Plan 15 E. Implementation Arrangements 17

IV. TECHNICAL ASSISTANCE 22

V. BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 22 A. Investment Program Benefits and Beneficiaries 23 B. Overall Economic Analysis 23 C. Economic Analysis for Tranche 1 Projects 23 D. Financial Management and Financial Analysis 24 E. Environmental Assessment 25 F. Social Safeguards 25 G. Poverty and Social Impact 26 H. Potential Risks and Assumptions 26

VI. ASSURANCES 27 A. Specific Assurances 27 B. Condition for Loan Effectiveness 30

VII. RECOMMENDATION 30

APPENDIXES 1. Design and Monitoring Framework 32 2. Road Sector Analysis 35 3. Summary Investment Program and Projects 40 4. External Assistance for the Road Sector 42 5. Road Sector Development Framework 43 6. Status of Preparation of Proposed Projects 45 7. Selection Criteria and Approval Process for Projects 46 8. Cost Estimate and Financing Plan 49 9. Implementation Arrangements for the Investment Program 50 10. Project Implementation Arrangements 51 11. Implementation Schedule 52 12. Procurement Plan and Tentative Contract Packages 53 13. Summary of Economic Analysis of National Trade Corridor Highways 57 and Projects in Tranche 1 14. Summary of Social Safeguards 63 15. Summary Poverty Reduction and Social Strategy 68

SUPPLEMENTARY APPENDIXES (available on request) A. Design Approach and Technical Standards B. Terms of Reference for Capacity Building at the National Highway Authority C. Terms of Reference for Road Sector Policy and Institutional Strengthening of the National Highway Authority D. Terms of Reference for National Trade Corridor Highway Business Plan E. Terms of Reference for Construction Supervision Consulting Services F. Financial Management Analysis (Confidential) G. Environment Assessment Review Framework H. Cumulative Impact Assessment I. Terms of Reference for Social Safeguards Capacity Building Program J. Land Acquisition and Resettlement Framework K. Land Acquisition and Resettlement Plan L. Indigenous People Development Plan

NATIONAL TRADE CORRIDOR HIGHWAY INVESTMENT PROGRAM SUMMARY

Borrower Islamic Republic of Pakistan

Classification Targeting classification: General intervention Sector: Transport and Communications Subsector: Roads and highways Themes: Sustainable economic growth, capacity development Subthemes: Fostering physical infrastructure development, institutional development

Environmental Tranche 1 – Category A. Environmental impact assessments have Assessment been conducted for the Peshawar–Torkham Expressway (E-1) and Faisalabad–Khanewal Expressway (E-4) projects. Summaries were disclosed publicly on 30 May 2006 and 4 April 2007, respectively.

Investment Program Under the strategic framework “Vision 2030” the Government of Description Pakistan (the Government) plans to raise the trade to gross domestic product (GDP) ratio from 30% to about 60%. This would be equivalent to $600 billion by 2030. To achieve this target, key actions under the strategy will be improving trade competitiveness and export diversification. Logistics are currently seen as a key constraint to raising competitiveness and attracting private sector investment. They are also a bottleneck to increasing productivity as well as to deepening and diversifying the industrial base both of which are necessary to provide sustainable jobs for a growing population. Several actions are planned or underway to address the logistics and investment gap. One of these is a comprehensive road network investment program. An enhanced road network will cut the time and cost of moving goods and services along the entire logistical chain. Specifically, the Government intends to double the road density from 0.32 kilometers per square kilometer (km/km2) at present to 0.64 km/km2 by 2030. In addition to improvements to physical infrastructure, the initiative includes meaningful policy and institutional actions aimed at providing a better enabling environment for investment, for industrial diversification, and for the logistics industry as a whole.

Pakistan’s domestic trade flows are concentrated in one major north–south transport corridor. The proposed actions, while aimed at making this corridor more efficient, will also have a major and broader impact on the performance of the entire transport sector and thus on the economy overall. This comprehensive approach is embodied in a special initiative called the National Trade Corridor Improvement Program (NTCIP). The Government views NTCIP as a key success factor to the country’s growth prospects, to inclusiveness, to employment creation and social service renewal, and to the execution of second generation sector and macroeconomic reforms. NTCIP represents a flagship endeavor by ii

the Government and the private sector to bring about better connectivity and trade facilitation. Beside roads, the initiative covers ports, railways, airports, customs clearing procedures, tariffs, and the trucking industry. The rationale for NTCIP is embedded in and emanates from plans for growth, job creation, and trade. When fully implemented, these efforts will save $5 billion–7.5 billion per annum that are currently lost because of inefficient logistics. The latter will thus increase in terms of its contribution to GDP, bringing the country closer to other benchmark countries in Asia.

The National Highway Authority (NHA) is responsible for the operation, maintenance, and development of the national highway system. NHA manages 11,400 km of roads, of which 30% are already toll roads. The efficiency of the road network has been constrained by slow moving traffic, poor quality surfaces, and non- vehicular traffic. Currently, it takes 72 hours to travel between Peshawar and Karachi, a distance of about 1,700 km. The investment in the backbone of the national trade corridor is expected to reduce this travel time to 36 hours after completion.

As a core component of NTCIP, NHA has developed the National Trade Corridor highway investment plan (NTC highway investment plan). It covers the corridor backbone from Peshawar to Karachi and the outlying links that connect Pakistan to the People’s Republic of China and Gwadar Port in Baluchistan. The initiative includes not only new road construction but also the improvement of over 3,500 km of roads, national highways, expressways, and motorways. The Asian Development Bank (ADB) is an active partner of the Government in the road sector and is involved in policy formulation including the National Transport Policy. ADB is currently supporting the engagement of an advisor to formulate a national trade corridor strategy. In view of this long-standing relationship in the sector, the Government has approached ADB along with other financing agencies to finance the investment plan for the medium term. ADB’s proposed share of the NTC highway investment represents about 20% of the total. Key sections of the motorway and expressway network will be financed through the National Trade Corridor Highway Investment Program (the Program), and key sections of highways will be financed through the National Highway Development Sector Investment Program (NHDSIP) approved in 2005. The NTC highway investment plan has an estimated economic internal rate of return of 39% and a total average economic savings estimated at PRs200 billion per year.

A road sector development framework (RSDF) was agreed with the Government in 2005. This road map addresses major policy and institutional issues. Some targeted milestones have been completed, others are on schedule, and some have faced delays. RSDF has been updated to reflect current concerns and lessons learned from those delays and from other ADB projects in the iii

sector. The sequencing of interventions is well focused, the package of modalities includes private and public sector actions, and the policy framework is defined and endorsed by the authorities.

The support components of the Program are needed not only for best practice purposes in safeguards but also to underpin the reform momentum for the sector and for the RSDF. Specifically, under the Program assistance will be provided to enable NHA’s experienced team to manage the expanded portfolio of assets planned under the NTC highway investment plan. Various actions are also included to reinforce capacity development and thus the implementation of the RSDF. The non-investment measures are (i) policy reforms and implementation, (ii) road management, (iii) human resource development and management in NHA, (iv) project preparation and implementation, (v) safeguards, and (vi) private sector participation. The support component is estimated to cost $12.5 million.

To advance the concept of industrial diversification and commercial activity along the national trade corridor and to maximize traffic flows, a framework for spatial planning and investment planning along the corridor is required. An NTC team with representatives from the private sector (e.g., business groups and chambers of commerce), government agencies, and academia will be established for this purpose. This team would coordinate the development of an NTC highway business plan. ADB will provide a technical assistance grant of $500,000 equivalent in conjunction with the Program to develop a business plan for the motorways and expressways between Peshawar and Khanewal.

Private sector participation is an integral part of the RSDF. ADB is providing support for private sector involvement in the road sector by pursuing pilot projects and advisory work. In this support and other interventions, ADB’s private sector operations department and public sector department will work together to assist the Government. Pilot projects will incorporate lessons learned in structuring and implementation from the recent public-private partnership (PPP) projects in the road sector in Pakistan. ADB will work with the Government and NHA’s private-public partnership unit to strengthen the approach to selecting, structuring, bidding, and negotiating PPP transactions.

Multitranche Financing The Government has requested ADB to partially finance the Facility investment program through a multitranche financing facility (MFF). The amount requested is $900 million. It will target parts of the NTC highway investment plan related to expressways and motorways over a 10-year period and represents 16.6% of the overall NTC highway investment plan. The MFF has a maximum utilization period of 10 years. Under the MFF, periodic financing

requests (PFRs) will be converted into separate loans.

The Government has entered into a framework financing agreement (FFA) with ADB with a set of representations and warranties related, among others, to technical, operational, financial, safeguard, governance, capacity, and fiduciary oversight matters. The FFA satisfies the relevant requirements for ADB’s pilot financing instruments and modalities. It will represent the basis for ADB to monitor adherence to policies and procedures and best practices in key areas.

The MFF is the most suitable modality for ADB’s intervention in the NTC highway investment plan because of several key success factors: (i) there is a strategic framework and strong economic rationale for the NTC in general and for the road network in particular, (ii) NHA has a well-structured investment program blending physical and technical support components phased over time and incorporating a range of interventions, (iii) the sector is underpinned by the RSDF combining sector and thematic issues, and (iv) NHA has a phased implementation plan.

The MFF blends project readiness with financial, technical and thematic considerations and enables ADB to maintain an active policy dialogue throughout the life of the Program. ADB support for the NTC highway investment plan builds the foundation for network connectivity by providing financing for key road sections. The MFF provides comfort to the private sector not only for those considering investment in road projects but most of all for industrial investment. Flexibility of timing and products under the MFF will ensure that the projects are structured to fit the existing market environment for PPPs and to maximize benefits to the country.

A program loan approach for the reform agenda is not appropriate since disbursements for road construction cannot be conveniently linked to satisfying policy conditions. A sector loan would have been suitable had the program comprised a larger number of smaller road sections, a scenario more typically associated with rural road networks. Considering the need to fulfill safeguard concerns for larger projects, the time required to prepare projects cannot be constrained by financial concerns. A sector loan committing the entire amount for the investment plan at the outset would leave NHA with a large contingent liability and undisbursed loan amount should extra time be needed to fully prepare the projects and would also lead the Government to incur additional commitment fees.

The Government has submitted the first PFR to ADB for a loan of $545 million to be financed from ADB’s ordinary capital resources (OCR). The package includes a loan of $10 million equivalent from Asian Development Fund (ADF) resources to fund the v

support components. The first PFR is presented to the ADB Board of Directors, together with this document and the FFA.

Rationale The Government views investment and trade as key success factors to growth, employment, inclusiveness, and overall poverty reduction. Pakistan’s domestic investment and trade flows are concentrated along one major transport corridor. The corridor connects not only key business centers in the country but also connects Pakistan to the outside world. It is a key exit route for trade coming from Central Asia. The network is supported by national highways and feeder roads, ports, and airports, but the expressway backbone network is incomplete. The proposed program targets the completion of this network.

Impact and Outcome The proposed Program is derived from Pakistan’s long-term transportation strategy and is an integral part of the NTCIP. The impact of the Program will be trade growth and the outcome will be a more efficient NTC highway network. The Program will improve Pakistan’s competitiveness and link the country more effectively to the outside world. It will also provide trade routes for others in the region.

Investment Program The total investment cost of the NTC highway investment plan for 2007–2014 is estimated at $5.36 billion.

National Trade Corridor Highway Investment Plan Program Total $ million Share $ million Share Government 210 20% 1,632a 30% ADB 890 80% 1,082b 20% Other IFIs or BFIs 1,547 29% Other 1,102 21% Total 1,100 100% 5,363 100%

ADB = Asian Development Bank, IFI = international financial institutions, BFI = bilateral financial institutions, NHDSIP = National Highway Development Sector Investment Program, Program = National Trade Corridor Highway Investment Program. a Government component for NTC includes roads to be financed by Water And Power Development Authority. b 16.6% from the Program and 3.4% from NHDSIP Source: Asian Development Bank and National Highway Authority estimates.

Tranche 1 ($ million) Projects (OCR) Program Support (ADF) Amount Share Amount Share ADB 545 77% 10.0 80% Government 164 23% 2.5 20% Total 709 100% 12.5 100% ADB = Asian Development Bank, ADF = Asian Development Fund, OCR = ordinary capital resources. Source: Asian Development Bank estimates.

Multitranche Financing The maximum financing amount available under this MFF is $900 Facility–Amount and million. The MFF comprises $890 million from OCR and $10 Terms million equivalent from ADF resources. The MFF is designed to finance part of the NTC highway investment plan through individual loans. The first tranche will be funded from OCR resources, and the ADF loan will also be provided to address non- physical investment needs and the support component.

Financing from OCR resources will be subject to interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility. The first tranche loan will have a repayment period of 25 years including a grace period of 5 years, and an interest rate determined in accordance with ADB’s LIBOR-based lending facility; a commitment charge of 0.35%; and conversion options that may be exercised in accordance with the terms of the FFA, the loan regulations, and other such terms as set forth in the draft loan and project agreements. Financing from ADF resources will be in Special Drawing Rights equivalent to $10 million have an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter and a repayment period of 32 years, including a grace period of 8 years.

The Government will make the proceeds of the loans available to NHA upon terms and conditions satisfactory to ADB.

Depending on market conditions for possible public–private partnership initiatives, the proposed MFF provides ADB with the flexibility to provide loans and guarantees for amounts counter- guaranteed by NHA and the Government for commercial loans or equity investment by NHA in project companies.

Disbursement The individual loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time).

Allocation Terms The Government will provide the funds under the Program to NHA in local currency under terms and conditions satisfactory to ADB. Any foreign exchange risk will be borne by the Government.

Advance Contracting For each project and for the technical assistance support and Retroactive component, advance contracting for procurement of equipment, Financing civil works, land and consulting services will be allowed, subject to eligibility according to agreed procedures and ADB’s Procurement Guidelines (2007, as amended from time to time) and Guidelines on the Use of Consultants by the Asian Development Bank and its Borrowers (2007, as amended from time to time).

Retroactive financing may be available under individual loans for expenditures incurred 12 months prior to the signing of the corresponding loan agreement with a ceiling of up to 20% of the vii

loan amount. The Government and NHA have been informed that approval of advance contracting and retroactive financing does not commit ADB to financing any of the proposed projects.

Period of Utilization The utilization period will be for 10 years from 2007 to 2017 with the last PFR to be submitted by 30 June 2013. Each specific loan will have its own closing date to match its implementation period.

Estimated Project The estimated project completion date is 31 August 2017. Completion Date

Implementation NHA will be responsible for the implementation of the Program Arrangements and the individual projects as per the respective loan and project agreements. The Government will have overall responsibility for the MFF as per the FFA and loan agreements.

Executing Agency NHA will be the executing agency for the investment component and for the support component.

Procurement Procurement to be financed under the Program will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). International competitive bidding (ICB) will be used for goods and works funded under the investment program. Civil works contracts with an estimated value less than $5 million will be procured using national competitive bidding through ADB’s standard prequalification procedure. Supply contracts will use limited international bidding for contracts with an estimated value of $100,000 up to $1 million and shopping arrangements for contracts less than $100,000. The goods and supply contracts in excess of $1 million will be procured through ICB. ICB will be used for civil works contracts estimated to cost the equivalent of $5 million or more. A procurement plan has been prepared to ensure maximum competition under ICB.

Consulting Services Consulting services will be required for, among others, (i) construction supervision, (ii) project management support, (iii) institutional strengthening, and (iv) a NTC highway business plan. Consultants will be selected and engaged in accordance with the Guidelines on the Use of Consultants by the Asian Development Bank and its Borrowers (2007, as amended from time to time). Consulting firms will be selected through international competition using the quality and cost-based selection method. Individual consultants may be recruited for specific assignments in accordance with government procedures acceptable to ADB. It is envisioned that because of the continuation of a number of tasks during implementation, single- source selection may be used for certain assignments with the prior approval of ADB.

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Risks and Assumptions The major risks under the Program would include a material reversal of the policy framework and instability in the country’s business climate. This risk is likely to be short term in nature. General elections will bring about some short-term disruptions, but most analysts point to a continuation of the reform process including the so-called second generation reforms.

The ability to attract private sector investment to the sector is another concern. The investment program is simply too large for the public sector to execute entirely through its own resources. The Government needs to look outside for funds and partners. ADB will continue support through existing PPP technical assistance and will consider financial support through the Program and the private sector operations department.

The provincial and district roads that feed into the NTC need to be further improved to maximize the benefits of the road network. The Government at federal and local level needs to allocate adequate resources to these smaller but strategically important roads. The NTC strategy will identify appropriate industries and their advantageous locations and the logistic hubs along the NTC. This study will assist the Government to identify and concentrate resources on the key feeder roads. A coordinating entity will be established with assistance in the NTC highway business plan.

The capacity of NHA to execute investments is also a risk. NHA has been undergoing reforms initiated by Government policy. NHA’s own transformation is underway. ADB will support capacity development through the support component under the Program.

With regard to the execution of the first tranche, procurement documents have been drafted and are ready to be issued to consulting firms. Local procurement experts have been recruited to cope with the initial workload.

This is the second MFF for which NHA will be the executing agency. A foundation for implementing MFFs has been established at NHA. The teams within NHA will be strengthened to enable the efficient execution of the additional projects through the support component of the Program.

There is also potentially a fiduciary oversight risk associated with the Program. However, this will be addressed through oversight and monitoring arrangements in procurement, accounting, administration, and reporting. Financial management, better and transparent budgeting, disbursement management, management and information systems, and financial planning will be strengthened. A longer-term objective will be to leave in place systems, people, and procedures that can outlive the Program.

Technical Assistance for Technical assistance will be provided in conjunction with the Development of the Program for the development of the NTC highway business plan. National Trade Corridor The total cost is estimated at $650,000 equivalent. ADB will Highway Business Plan provide $500,000 equivalent on a grant basis. The executing agency will be the Planning Commission of the Government of Pakistan. A national trade corridor development body comprising representatives from federal, provincial and district governments, the private sector, and academia will coordinate the development of the business plan. An international consulting firm will be recruited in accordance with Guidelines on the Use of Consultants (2007, as amended from time to time).

The consultants will incorporate the results of the national trade corridor strategy formulated with ADB support.

I. THE PROPOSAL 1. I submit, for your approval, the following report and recommendation on a proposed multitranche financing facility (MFF) to the Islamic Republic of Pakistan for the National Trade Corridor Highway Investment Program (the Program). The report also describes proposed technical assistance (TA) for developing a national trade corridor (NTC) highway business plan, and, if the Board approves the proposed MFF, I, acting under the authority delegated to me by the Board, will approve the TA. The design and monitoring framework for the Program is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. For its current high level of economic growth to be sustained, Pakistan must diversify its economy and become more globally competitive. The Government’s National Trade Corridor Improvement Program (NTCIP) is a holistic approach to reduce the bottlenecks inhibiting trade and to exploit the strategic location of Pakistan as a land bridge to Central Asia and the hinterlands of the People’s Republic of China (PRC). In order to facilitate this goal, improvements to road connectivity and efficiency are essential.

1. Economy and Trade

3. Pakistan has experienced strong economic growth since the beginning of the century, reaching a peak of 8.4% in fiscal year (FY) 2005 and 6.6% in FY2006. The outlook is for continued strong growth,1 based on the assumption that Pakistan will continue to implement the macro- and microeconomic policies necessary to sustain and accelerate economic growth. Although the textile sector still dominates exports, recent export growth has been marked by increasing diversity, particularly in manufactured goods. While imports of consumer goods have also increased, their share of total imports dropped from about 15% in FY2001 to about 10% in FY2006.

4. In terms of value, about 60% of Pakistan’s imports originate from Asia. The PRC is the dominant source of non-oil imports and represents some 10% of total imports by value. Imports from Europe constituted about 19% of imports in FY2006, while imports from North America declined to about 7%. Recorded imports from neighboring countries, including Afghanistan, India, and Iran accounted for about 4.2% of the total. While Pakistan’s seaports are the closest for Central Asian countries, transit traffic from Central Asia using the Peshawar–Karachi corridor is negligible and accounts for only 1.5% of Pakistan’s total merchandise trade.

5. The current level of east–west traffic, including transit traffic using Pakistan as a land bridge between India and Iran, is low. Intraregional trade in South Asia is weak and the region is considered the least integrated in the world.2 Currently, much of the trade between India and Pakistan is routed through Dubai. Direct trade would avoid such detours and efficiency losses. India’s rapidly growing economy may have a “pull” effect not only on the economies of its direct neighbors but also on countries that would use the Pakistan east–west corridor for trade with India.

1 ADB. 2007. Asian Development Outlook 2007 Update. Manila 2 World Bank. 2004. South Asia Regional Integration: Benefits, Opportunities and Challenges. Washington DC. 2

2. Road Sector

6. The transport sector contributes about 10% of Pakistan’s gross domestic product (GDP). It is dominated by road transport which carries 91% of passenger traffic in passenger-kilometers and 96% of freight traffic in ton-kilometers. Road transport services are mainly operated by private sector enterprises with the small share of government-owned goods handled by a public sector agency.

7. Overall demand for road transport has increased rapidly in recent years. Gains in traffic on the road network have been at the expense of the railway network. Extensive investment in railways and restructuring of the industry will be needed for the network to become a viable alternative to road transport.3 In the meantime, the demand for road transport will continue to increase.

8. The total road network is about 260,000 kilometers (km), of which 11,400 km are national highways, 92,500 km are provincial highways, and 150,000 km are district or urban roads. The National Highway Authority (NHA) is responsible for national highways, including limited-access motorways, partial-access expressways and unlimited-access highways that constitute the arterial road network system. About 7,000 km of the national highway network are two-lane, undivided roads.

9. The NHA has prepared a comprehensive plan to 2015 to upgrade the national road network and extend the highway system. The cost of implementing this plan is PRs480 billion ($8.0 billion), of which about half is expected to be funded by external assistance (Table 1). The plan provides for the improvement of 6,500 km of existing roads and the construction of 2,500 km of new expressways and motorways. Parallel plans to improve 7,600 km and construct 4,500 km of provincial roads and special-area roads are also proposed in the Medium- Term Development Framework (MTDF).

Table 1: National Highway Development Cost Estimates and Financing Plan (2006–2015) a

Financing Source Cost Estimates % PRs million $ million Government (ongoing and new) b 184,440 3,074 38.33 Private Sector 34,623 577 7.19 Development Partner ADB 122,228 2,037 25.40 Other IFIs 94,927 1,582 19.73 Bilateral Financial Institutions 44,994 749 9.35 Total 481,212 8,019 100.00 ADB = Asian Development Bank, ERA = Earthquake Reconstruction Agency, IFI = International Financial Institutions, MTDF = Medium-Term Development Framework, WAPDA = Water and Power Development Authority. a Government budgetary allocations from 2011 are carry forwards. Both this and a portion of the development partner amounts have not yet been approved. b ERA, MTDF, WAPDA, private sector counterpart and securitization. Source: National Highway Authority, March 2007.

3 Through the National Trade Corridor Improvement Program, the World Bank is supporting the reforms of the rail sector.

10. The road maintenance investment budget increased from PRs2 billion in 2000 to PRs7 billion in 2006 (about 22% per year). This investment improved the pavement international roughness index from 8.9 in 2000 to 4.7 in 2006 (Appendix 2).

B. Analysis of Key Problems and Opportunities 1. Road Sector 11. Road Assets. Travel on roads is severely constrained by non-motorized and slow- moving motorized traffic. As a result, transportation is inefficient, travel and delivery times for goods are uncertain, and transport costs are higher than they should be. Road safety is also compromised. The existing roads must be improved and new roads built to segregate traffic. The Government intends to double the road density from 0.32 kilometers per square kilometer (km/km2) in 2006 to 0.64 km/km2 2030 (Vision 2030).

12. Sustainability (Road Funding). NHA has a development budget and a maintenance budget. Development funds are in the form of government cash loans and are currently PRs25 billion per year, which is below the PRs40 billion per year needed to satisfy the government plan for highway construction and to meet the needs of the growing economy.

13. NHA has a Road Asset Management Directorate, which has achieved positive results in planning and implementing road maintenance. For FY2007, the funding requirement for the national highway network and motorways was estimated at PRs14 billion for periodic maintenance and rehabilitation, with an additional PRs3 billion for routine maintenance. The available total budget for the year was under PRs7 billion,4 and a maintenance program was prepared according to this budget. Without maintenance, these roads will require more expensive improvements in the future.

14. Road Safety. Since 2000, reported road accidents have averaged over 10,000 per year and resulted in about 5,150 fatalities. The rate of about 10 fatalities per 10,000 vehicles is very high when compared with rates in developed countries but low for developing countries. The main causes of road accidents are driving at speeds inappropriate for vehicle and road conditions, lack of safety awareness, poor discipline, and poor enforcement of regulations.

15. Public–Private Partnership (PPP). PPP for roads in Pakistan is at an early stage and the Government has been considering various ways of attracting private funding. The main restraints have been the enabling environment, lack of track record for traffic volumes, and the length of time for selection of and negotiation with the private sector partner. To enable widespread use of PPP, the Government has established an infrastructure project development facility. If expertise is developed at the national level, it will benefit all stages, including planning, promotion, selection, negotiation and implementation and can be used to form partnerships at provincial and local levels where capacity is limited.

4 Annual maintenance, repair, and operational expenditures for existing motorways and national roads are funded from several sources: government grants (about PRs1.4 billion), road tolls net of collection costs (about PRs4.5 billion), and miscellaneous income from right-of-way leases, police fines for traffic infringements and overloading, and advertising for the current year.

2. National Highway Authority

16. NHA is responsible for the operation, maintenance, and development of the national highway system. It is an autonomous agency with a functional structure and decentralized implementation arrangements through regional provincial offices. The Asian Development Bank (ADB) and the World Bank have provided assistance to NHA.5 Policy dialogue and financial support from ADB and the World Bank have contributed to: (i) preparing a rolling 5-year medium-term investment and maintenance plan; (ii) increasing the sections of the national highway network that charges tolls and using toll receipts for road development and maintenance programs; (iii) setting up the Road Asset Management Directorate (which has been fully functional since 2003); (iv) enforcing the National Highway Safety Ordinance and extending it to cover additional road lengths in each subsequent year; (v) collecting monetary penalties since 2003 for violations of traffic ordinances and allocating the collections to road development and maintenance programs; (vi) introducing standard operating procedures for financial management and an accompanying financial manual; (vii) recruiting financial experts for NHA and independent auditing of financial statements; (viii) installing and activating weighing stations to control axle loads; (ix) establishing a public–private partnership cell in NHA, (x) establishing a highway safety unit in NHA; and (xi) annual consultations with stakeholders to develop the road maintenance plan. These reforms must be sustained and capacity added to enable NHA to plan, implement, and maintain its expanding portfolio of roads.

17. Sustainability (Road Funding). There is a framework in place that allows NHA’s financial performance and sustainability to be assessed, but the application of rigorous financial standards is unlikely to provide a true reflection of its current status. When the NHA was established, the capital investment grants given to its predecessor, the National Highway Board, were converted into cash development loans that NHA is now required (but is unable) to repay or service. The arrears are substantial. Although tolls are the main NHA revenue source, only 30% of the roads it supervises are toll roads. Current revenues cover about 32% of operation and maintenance costs for the current year. Provincial roads that are often in a very poor condition have been brought under federal control and the maintenance budget of NHA has been increased. A policy decision is needed on the resolution of cash development loans and on whether road-user charges should be set with a view to recovering the full costs of road provision, including capital costs.6

18. Accountability and Transparency. NHA has an action plan to improve its financial management. Fixed asset registers and adjustments of land acquisition advances have been prepared, staff members with professional qualifications have been hired, and financial statements have been independently audited. As it is a public service provider, the performance of NHA can not be monitored simply through financial statements. Other performance standards will need to be developed, monitored, and disclosed.

19. Efficient Service Provider. NHA has made significant progress toward its goal of becoming an efficient service provider; however, it is still in transition and has limited in-house capability in strategic planning, project and asset management, and network operations. Further progress will be needed if it is to manage existing and new roads and to implement its

5 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Islamic Republic of Pakistan for the Road Sector Development Program. Manila (Loan 1891-PAK, approved on 19 December 2001, for $50 million) and World Bank-financed highway rehabilitation project. 6 ADB. 2007. TA 4400-PAK: Transport Policy Support. Discussion Paper No. 4. Road Funds–Provisional Views. Islamabad.

5 aggressive plans for expansion. Measures need to be taken to attract and retain talented qualified staff.

20. Vehicle overloading is a major cause of premature pavement deterioration and of road accidents. There are now 54 weighing stations throughout the country. Fines are low (about PRs100 per excess ton) and insignificant in relation to haulage revenues and load value. Where overloading is extreme, many drivers are unable to pay and the fine is overlooked. Neither unloading facilities nor storage spaces are available at the weighing stations; therefore, offloading to achieve legal limits is not possible. The number of weighing stations needs to be increased and limits implemented more rigorously.

21. Safeguards. The Government has put in place new procedures for acquiring land, relocating services, and planning resettlement. A planning document for land acquisition must be submitted and approved before any other project activity can be approved. This is because in the past land acquisition in major projects caused delays and significantly increased costs. NHA’s experience of its own projects and those of other agencies has demonstrated the need to strengthen capacity for preparing and implementing safeguard requirements. The safeguard function in NHA needs to be upgraded and mainstreamed. However, there is a shortage of qualified and experienced social safeguards experts in Pakistan so training of staff will be essential for implementation and monitoring. Environmental laws have been in place since 1997 and are consistent with ADB’s environmental policy.

22. Public-private partnership (PPP). NHA has successfully encouraged private sector participation by outsourcing maintenance, operation of tolls, and planning (detailed design, feasibility study). Implementing the highways components of the MTDF and national trade corridor highway investment plan will require a major increase in funding and PPP financing is proposed for at least 7% of the 2006–2015 funding requirement. Given the limited progress with PPPs to date, this target will place a considerable demand on NHA's management capabilities. Significant increases in private sector participation need to be managed effectively; poorly executed PPP projects not only fail to realize their potential benefits, they may discourage future initiatives. NHA identified projects valued at approximately PRs80 billion in the National Highway Development Plan; however, it has had difficulty in attracting private sector investments because of the lack of an enabling environment and traffic track record to underpin private sector transactions. Only PRs7 billion has been invested.7 Build operate and transfer schemes, management contracts, and concession contracts are being explored.

3. National Trade Corridor Improvement Plan

23. If Pakistan is to achieve the Government’s “Vision 2030” it will have to improve its trade to GDP ratio from 30% in FY2005 to 60% by FY2030, or from $14 billion to about $600 billion.8 To achieve this target, the government plans to improve the country’s trade competitiveness and diversify exports. The Government has identified logistical barriers to trade as a key constraint on competitiveness and has formulated a comprehensive program aimed at reducing

7 Of the seven projects planned for PPP, concession agreements have been signed for two: the Karachi–Hyderabad motorway M-9 (PRs6.3 billion) and Lakpass Tunnel (PRs679 million). Negotiations for the concession on Shahdara Flyover (PRs3.5 billion) are underway. A proposal was submitted for Faisalabad–Khanewal Expressway E-4 but was not accepted by the Government. M-9 concession has been cancelled due in ability of the sponsors to arrange financing within the deadline. 8 Pakistan in the 21st Century: Vision 2030 (Working Draft). http://www.pakistan.gov.pk/ministries/planningand development-ministry/vision2030/Pak21stcentury/Chapterwise.htm

6 time and cost along the whole logistical chain. In addition to improvements to physical infrastructure, the action program includes policy and institutional measures to provide an enabling environment for the logistics industry.

24. Because Pakistan’s domestic trade flows are concentrated in one major north–south transport corridor, the proposed measures, while aimed at making this corridor more efficient, will have a major impact on the performance of the entire transport sector and on the economy overall. Because of its comprehensive scope and expected far-reaching impact, the Government views the NTCIP as a key factor in promoting growth and reducing poverty. The NTCIP is a flagship endeavor by the Government and the private sector to improve trade facilitation, ports, railways, airports, highways, and the trucking industry.

25. The NTCIP’s overall objective is to foster trade and economic growth through increased competitiveness. Consistent with the concept of trade logistics (defined as a chain of services supported by infrastructure, policies, and procedures), the NTCIP addresses constraints posed by individual components. While an analysis of the transport cost chain indicates that Pakistan compares quite favorably against international benchmarks, this masks major external diseconomies that jeopardize the long-term sustainability of the system. The NTCIP therefore combines investments in physical infrastructure with policy and institutional reforms. When fully implemented, it is estimated that NTCIP will save $5 billion–$7.5 billion per annum currently lost because of the inefficiency of the transport sector.9

4. National Trade Corridor Highway Investment Plan 26. The proposed national trade corridor highway investment plan (NTC highway investment plan) will reduce travel and transit costs and times both on new roads and on the existing road network. It will also improve road safety. The current average travel times between Karachi port and industrial centers in Punjab (about 48 hours) and the city of Peshawar (about 72 hours) will be reduced by about half.

27. The NTC highway investment plan covers 3,500 km of road construction and improvements along the backbone of the corridor from Peshawar to Karachi, connections with the PRC, and connections to the sea port in Gwadar (Appendix 3).

5. Maximizing the Impact of National Trade Corridor Improvement 28. The NTC highway investment plan will have to ensure a rational allocation of resources to individual projects and modes of transport. Decisions will need to be based on comparative costs and sound investment analysis, especially for motorways, to avoid the problems faced by other motorway projects in Pakistan. The Islamabad to Lahore motorway (M2) has been in operation since 1997. While toll rates have been adjusted 10 over time and revenues have increased, the M2 has so far been unable to cover even operating and maintenance costs, not to mention capital costs. There has been little development along the road, so the envisioned economic benefits have not been realized either. The unsatisfactory performance of the M2, which at its conception was considered a prime candidate for private sector involvement, is rooted in two factors: an alignment that is substantially longer than the competing national road

9 Pakistan Development Forum 2007 Background Briefs. April 2007. Islamabad. Available: www.pakistan.gov.pk/PDF/index.jsp. 10 To boost traffic, tolls were reduced 2 years after the opening of the M2.

7 and relatively high tolls. 11 Complementary measures such as spatial planning, supporting infrastructure, and tax or regulatory incentives to encourage private investment activity that could have boosted traffic were not undertaken. A business plan and a coordinating body that could have brought together public and private stakeholders to implement it would have improved development along the road.

6. External Assistance 29. Since the inauguration of the NTCIP in 2005, the Government has interacted closely with multilateral and bilateral agencies. ADB, the World Bank, the Japan Bank for International Cooperation (JBIC), and other bilateral financial institutions are considering assistance. The World Bank is processing a NTCIP development policy loan. Potential projects include policy reform in rail, road, port and shipping services; trucking and trade facilitation; and civil aviation.

30. For the road sector, Pakistan has received substantial assistance from ADB, JBIC, and World Bank (Appendix 4), since 2000. ADB’s provincial project financial assistance began with Sindh (2001) 12 , Punjab (2002) 13 , Baluchistan (2003) 14 , and North-West Frontier Province (2004).15 The projects concentrated on provincial highways and farm-to-market roads. For the Baluchistan and North-West Frontier Province (NWFP) projects, ADB financed sections of the national highways that form part of a network with Afghanistan and associated civil works for border facilities at Chaman in Baluchistan (for $3.5 million) and Torkham in NWFP (for $2.3 million). In 2005, a National Highway Development Sector Investment Program (NHDSIP) was approved for continued support for national highway development and regional connectivity.16

31. Since 2001, JBIC has financed the construction of the Kohat Tunnel for a total of $79 million and the Indus Highway Construction Project (III) for $166 million. In 2001, the World Bank financed the Trade and Transport Facilitation Project for $3 million and the Highway Rehabilitation Project for $200 million in 2003. During the last 4 years (2003–2007), the Trade and Transport Facilitation Project has been actively assisting the Ministry of Communication to review, improve, and provide institutional capacity building for all major agencies associated with the logistical chain. Under this project, the Government introduced a single administrative document and a goods declaration form, both of which constitute major steps toward trade facilitation. The World Bank is preparing a project to follow the Trade Facilitation Project. In addition, the National Logistics Cell, a government agency, is undertaking border improvements. Pakistan Railways is authorized to move transit goods to Afghanistan. Overall, trade facilitation of freight traffic is adequately covered by the Government and the World Bank project. The

11 Benefits accrue mainly to passenger cars that can drive at the allowable maximum speed of 120 km per hour. 12 ADB. 2001. Report and Recommendation of the President to the Board or Directors on Proposed Loans to the Islamic Republic of Pakistan for the Road Sector Development Program. Manila (RRP: PAK 32058, approved on December, for $150,000,000) 13 ADB. 2002. Report and Recommendation of the President to the Board or Directors on a Proposed Loan to the Islamic Republic of Pakistan for the Punjab Road Sector Development Project. Manila (RRP: PAK 32058, approved on October, for $150,000,000) 14 ADB. 2003. Report and Recommendation of the President to the Board or Directors on a Proposed Loan and Technical Assistance Loan and Technical Assistance Grant to the Islamic Republic of Pakistan for the Balochistan Road Sector Development Project. Manila (RRP: PAK 34333, approved on October, for $185,700,000) 15 ADB. 2004. Report and Recommendation of the President to the Board or Directors on Proposed Loans to the Islamic Republic of Pakistan for the North-West Frontier Province Road Development Sector and Subregional Connectivity Project. Manila (RRP: PAK 36052, approved on October, for $243,200,000) 16 ADB. 2005. Report and Recommendation of the President to the Board or Directors on a Proposed Multitranche Financing Facility and Proposed Loan to the Islamic Republic of Pakistan for the National Highway Development Sector Investment Program. Manila (RRP: PAK 36052, approved in 22 November, for $770,000,000)

World Bank’s ongoing Highway Rehabilitation17 Project focuses on about 856 km of highway improvements along national highways N5 and M9 with implementation over 5 years.

7. Lessons Learned 32. Before 2000, ADB-financed road projects focused on local and regional farm-to-market needs with only selective interventions in national highways. Subsequently, ADB’s investment strategy shifted toward general provincial rural access roads. Since 2002, the Government has sought greater integration with Pakistan’s international neighbors, so ADB and other development partners have concentrated on improving the capacity and quality of essential road sections. Initially, ADB assistance was directed at road links with Afghanistan.

33. ADB’s experience in supporting the road sector indicates a need for: (i) advance procurement of civil works and recruitment of supervising consultants; (ii) early establishment of project implementation units (PIUs) with clear, unambiguous roles and responsibilities; (iii) strict pre-qualification criteria for contractors and supervising consultants; (iv) advance actions and close monitoring with respect to land acquisition, resettlement, relocation of utilities, and clearance of rights-of way; and (vi) a fast disbursement mechanism. NHA and ADB have worked together to shorten the procurement schedule for supervision consultants and civil works for the first batch of NHDSIP projects. However, approval for contract signing within the Government took 3 months and delayed mobilization. Coordination with all relevant government parties is the key for fast tracking the recruitment process. Recruitment of NHDSIP’s project manager and support consultants was delayed, which resulted in a lack of coordination in the early stages of project implementation. Establishing a project management unit with a full staff early on is, therefore, crucial. In general, a clear understanding of the land acquisition and resettlement plan and close and methodological monitoring by the executing agency is necessary to ensure compliance with ADB policy. To assist the Government to implement the Road Sector Development Framework and to prepare for subsequent tranches under the MFF, close and frequent coordination by ADB staff will be essential.

34. The Pakistan country assessment program evaluation (CAPE)18 suggested that ADB should continue supporting the transport sector. The CAPE findings support the current strategy of province-specific projects, increased use of MFFs, a network approach to road development rather than a focus on selected elements of the network, increased emphasis on the soft components of road sector performance, and a strategy of fostering regional connectivity. The use of MFFs allows for long-term engagement in the sector which supports reforms in tandem with flexible timing for project financing. The CAPE further recommends that ADB should separate policy conditions and soft components from investment projects. Soft components should, if necessary for the success of the investment project, be undertaken first, because if their implementation is slow this may delay the implementation of the physical components and therefore increase costs substantially during implementation.

35. Moreover, the sector assessment program evaluation (SAPE)19 for the Pakistan road sector suggested the following: (i) ways must be found to address the defects noted in the planning and design of previous road projects, (ii) a sector road map needs to lay out a clear set of steps to be taken by the Government, ADB, and other development partners to improve road maintenance; (iii) the sector road map should include a time-bound series of actions that the

17 A World Bank-financed project, Highway Rehabilitation Project, approved on 10 November 2003, for $200 million. 18 ADB. 2006. Country Assessment Program Evaluation Pakistan. Manila. 19 ADB. 2006. Sector Assessment Program Evaluation for the Road Sector in Pakistan. Manila.

Government, ADB, and other development partners will take to improve traffic safety and should involve working with non-road related agencies of government to enhance traffic management and safety practices; and (iv) the sector road map should include policy and institutional support as well as lending to encourage greater private sector involvement. The public and private sides of ADB must work together to help achieve this objective. The Program addresses the lessons learned and the recommendations of the CAPE and SAPE.

8. Asian Development Bank Operations and Sector Strategy 36. Sector strategy. ADB’s focus has shifted from rural roads to major highways over the past 20 years. ADB’s support for national highways in the country strategy and program update for Pakistan (2005–2006)20 concentrated on supporting government initiatives to strengthen subregional cooperation, improve cross-border facilities and agreements, strengthen trade facilitation, and enhance transport efficiency in the main transport corridors. Support for subregional cooperation and cross-border agreements is part of the ADB-sponsored Central and South Asian Transport and Trade Forum.21 The World Bank has also undertaken trade facilitation activities in Pakistan. However, evaluating such multinational initiatives is complicated because it is often difficult to assign benefits to individual economies and to collect reliable and comparable data. For its part, the Government of Pakistan has also initiated a number of programs to meet subregional objectives. ADB has, therefore, shifted its strategy toward assisting NHA to support of its overall plan to contribute to subregional connectivity. The ongoing MFF for NHDSIP and this proposed MFF for the Program conform to this strategy.

37. In addition, ADB is financing technical assistance to help the Government formulate a national transport policy. Such a policy will provide a stronger strategic direction for transport infrastructure and an enabling environment for sustainable transport operation and financing.22 ADB has also worked with NHA to encourage private sector participation in motorway and national highway investment, operation, and maintenance.23 The result of this work has been used for smaller PPP projects and will be the basis for further assistance for a pilot project.

38. In the long term, the shared aim of the Government and ADB is to create a self- sustaining and efficient highway system that enables the people of Pakistan and their neighbors to enjoy greater mobility and trade at the lowest possible cost. ADB strategy is, therefore, to continue to fill financing gaps in road development and to emphasize institution building and policy reform as these are linked to the sustainability of investments and to better economic returns. Since there is potential large-scale lending for the highway system, ADB will continue to adopt a programmatic 24 approach, and projects will be developed in a sequential and progressive manner together with support components.

20 ADB. 2005. Country Strategy and Program Update (2005–2006). Pakistan. Manila. 21 An ADB-sponsored initiative began in 2003 to facilitate transport connectivity and trade in the subregion by focusing on (i) customs harmonization, (ii) law enforcement to counter drug and human trafficking, (iii) border crossing facilitation and (iv) regional transit trade agreements. 22 ADB. 2004. Technical Assistance to the Islamic Republic of Pakistan for Transport Policy Support. Manila (TA 4400, approved on 30 September, for $290,000). 23 ADB. 2005. Report and Recommendation of the President to the Board or Directors on Proposed Technical Assistance Loan and Technical Assistance Grant to the Islamic Republic of Pakistan for Infrastructure Development. Manila (RRP: PAK 38458, approved on 28 July, for $25,000,000). 24 The approach should be distinguished from a program loan lending modality that is essentially based on policy reform. The loans are designed as investment projects but with the policy reform elements to be implemented in a systematic, sequential, and coherent manner.

9. Policy Dialogue 39. ADB has been engaged in policy dialogue with the Government and NHA since 2001 and has provided loans and technical assistance in support of critical policy and institutional reforms. Following extensive policy dialogue, agreement was reached on a road sector development framework (RSDF) in 2005 for NHDSIP. It contains recommendations for major policy reforms and sets implementation target dates in five policy areas: (i) promulgating the national transport policy; (ii) facilitating PPPs in road construction, maintenance, and toll collection; (iii) developing the NHA as an institution and improving its strategic focus; (iv) embedding concern for road safety in decision making; and (v) ensuring sustainable funding of road maintenance. Significant progress continues to be made on the major policy and institutional issues targeted in the RSDF.

40. The RSDF has been updated to include additional policy milestones for the Program (Appendix 5). Using lessons learned from NHDSIP and other projects with NHA, additional capacity-building measures have been added. The RSDF’s objectives have been reorganized under (i) sustainability, (ii) accountability and transparency of NHA, (iii) efficient service provision by NHA, (iv) highway safety, (v) safeguards, and (vi) private sector participation in NHA roads. The progress against the policy reform milestones in the RSDF will be reviewed as part of the review process for all individual periodic financing requests (PFRs) scheduled to be completed before 30 June 2013. To implement the RSDF, NHA will be assisted by NHDSIP consultants and additional support has been included in the Program. Implementation of the key element of the RSDF has been agreed with the Government to be assurances for the Program.

a. Sustainability of Road Sector (Road Funding)

41. Short-term financial sustainability for NHA can be achieved through government endorsement of (i) a 5-year business plan and (ii) a 5-year maintenance plan (RSDF M251-1, 1- 2). The business plan should include an investment plan, financial forecasts, and a budget. Although the grant for highway maintenance has been increased by the Government, the actual amount allocated cannot be predicted under the current system of annual allocations. Government endorsement of the business and maintenance plans will assure allocations and allow for further detailed planning. In addition, NHA is unable to service its accumulated cash development loans. The resolution of these debts is being discussed with the Government and a decision on the available options is expected by September 2008 (RSDF M1-3).

42. A national transport policy is being developed with technical assistance provided by ADB.26 The policy will establish the foundations for the long-term sustainability of the transport sector. The overriding objective will be to improve economic welfare by providing transport services at minimal cost. Other objectives relate to equity (including poverty alleviation), safety, and environmental and strategic considerations. The general principle of the policy is that operations and services should be left to the private sector except in cases where the private market fails and government intervention in some form may be appropriate. Other principles in the draft national transport policy include: (i) competition within and between modes should generally be encouraged; (ii) minimum pricing (setting fares and charges) at marginal cost should be the aim; (iii) there should be clear separation between the entity responsible for policy and regulation and the operations or executive entity; and (iv) investments should be

25 This is in reference to the milestones set in the Road Sector Development Framework. (Appendix 5) 26 ADB. 2004. Technical Assistance to the Islamic Republic of Pakistan for Transport Policy Support. Manila (TA 4400, approved on 30 September, for $290,000).

11 economically viable. The new target date for government promulgation of the national transport policy is June 2008 (RSDF M1-5).27

43. A toll policy that balances economic benefits to society with financial benefits to NHA is needed. The policy should be approved by the Government (RSDF M1-6) by December 2012 for implementation in line with the national transport policy. Because the revenues from toll charges will be limited, a new study28 is needed to examine the current set of road-user charges and to make recommendations that will enable some of the income from the charges to be allocated to NHA.29 The timing of this study will depend on the Government’s decision on whether to pursue road-user charges. The Government will determine and adopt policies to ensure the financial sustainability of NHA by December 2009 (RSDF M1-7).

b. Accountability and Transparency of NHA

44. Road users and taxpayers should have a role in reviewing the needs, priorities, and effectiveness of road system management. NHA has been improving its disclosure and public accountability practices. Financial, performance, and commercial audit reports and information on procurement will need to be disclosed to stakeholders. A management information system is being procured to improve transparency and accountability. A website to enable reporting of grievances has been functioning since 30 June 2007 (RSDF M2-1). A review of key performance indicators and reporting mechanisms for NHA will be undertaken to clarify how accountability can be strengthened. Standard operating procedures will be adopted in accordance with the new indicators by December 2009 (RSDF M2-2). The qualifications in the auditor’s letter for the audited financial statements of NHA will be addressed and rectified by September 2008 (RSDF M2-3).

c. Efficient Service Provider

45. NHA is in the process of transforming itself into a service-driven organization with a strong service base. A network optimization plan is being developed with the help of ADB (footnote 16). Revisions to the guidelines for network planning will be made by July 2008 (RSDF M3-1).

46. NHA has outsourced an increasing number of functions to the private sector. Performance-based concession contracts for operation and management should be in place by March 2010 (RSDF M3-3). To alleviate overloading, more weighing stations will be built, incorporating storage spaces with off-loading facilities. Portable weighing stations will be used where heavy construction temporarily increases truck traffic. ADB will consider providing financial support for such initiatives.

47. NHA needs to attract, develop, and keep talented staff. A human resource policy based on performance indicators, evaluation, and compensation will be formulated and adopted by December 2009 (RSDF M3-4). A training institute is being established.

27 The original target date in RSDF 2005 was June 2007. 28 The last comprehensive road-user charge study was undertaken by the National Transport Research Centre in 1987. 29 The user charges may include fuel duties and vehicle license fees. Such charges should reflect the relative contributions of different vehicle categories to congestion, environmental pollution, or road damage. NHA would be given access to a portion of such charges.

d. Road Safety on the National Highway Network

48. NHA has established clear responsibility for a national highway safety program and for closer liaison with the National Highway and Motorway Police. A road safety unit has been established in NHA. Under the NWFP Road Development Sector and Connectivity Project (footnote 15), the National Highway and Motorway Police is undertaking a pilot safety study on sample sections of the national highway. An action plan acceptable to ADB in response to the pilot study’s recommendations will be prepared by December 2008 (RSDF M4-2).

e. Safeguards

49. The Government has identified land acquisition as a cause of project delays and cost escalations. Careful monitoring of compliance with ADB safeguard policies will be needed in the preparation and implementation of land acquisition and resettlement plans and an environment impact assessment that is acceptable to ADB. By December 2007, NHA will establish a unit with a dedicated general manager and adequate staffing for environmental and social safeguards. Preliminary land acquisition and resettlement and environmental assessment guideline for NHA headquarters will be adopted by June 2008 (RSDF M5-1). Guidelines for regional offices and for coordinating with local government entities will be adopted by November 2008 (RSDF M5-2).

f. Enhancing Private Participation

50. The Government intends to improve the enabling environment for private participation in infrastructure, supported by a cluster of ADB program loans that will help to establish the overall policy framework and reforms. 30 Previous ADB technical assistance 31 has helped NHA to (i) revise a draft policy and regulatory framework for private sector participation in national highways, motorways, tunnels, and bridges (to be confirmed by the cabinet committee for investments); (ii) prepare an action plan to improve the legal and regulatory framework for private sector participation; (iii) develop comprehensive PPP tender documents for future projects; (iv) undertake a preliminary review and improvement of NHA’s proposed build-operate- transfer projects over the next 5 years; and (v) review the institutional arrangements needed to carry out PPP projects, including creating a PPP cell at NHA.

51. ADB is also helping to finance two of the proposed PPP pilot projects (footnote 23). ADB assistance will cover identification of projects, preparation of projects for bidding, and negotiation of contracts. The consultants have been selected. A full review of the current PPP financing plan is expected by 31 March 2008 (RSDF M6-1). NHA is targeting bidding of the ADB PPP pilot projects by September 2008 (RSDF M6-2). Based on the experience of the pilot projects, a revised pipeline of PPP projects is targeted to be available by December 2008 (RSDF M6-3). Such projects will require expected financial internal rates of return (FIRRs) that are sufficiently attractive to the private sector.

52. NHA is considering how projects with less attractive FIRRs or untested revenue forecasts may be financed. ADB may consider assistance for these projects through either loans for equity contribution by NHA or guarantees.

30 ADB. 2006. Report and Recommendation of the President to the Board of Directors on Proposed Cluster of Program Loans and Technical Assistance Grant to the Islamic Republic of Pakistan for Private Participation in Infrastructure Program. Manila (RRP: PAK 36155, approved 31 October for $1,000,000,000). 31 ADB. 2004. Technical Assistance to the Islamic Republic of Pakistan for Facilitating Public-Private Partnership Initiatives in National Highway Development. Manila (TA 4508, approved on 20 December for $150,000).

III. THE PROPOSED INVESTMENT PROGRAM A. Impact and Outcome 53. The proposed Program is closely linked to Pakistan’s long-term transportation strategy and is an integral part of the NTCIP. The impact of the Program will be trade growth, and the outcome will be a more efficient NTC highway network.

B. Outputs 54. The Program will have two components: (i) investment projects covering over 346 km of the NTC highway network to be funded through two tranches, and (ii) program support focusing on institutional strengthening of NHA. The proposed program is consistent with the CAPE and SAPE recommendations that ADB should adopt a network investment approach and continue support for policy reforms and institutional strengthening (paras. 34–35). An MFF will be used so tranches can be prepared as projects become ready for implementation. The roads selected (new, expansion, or existing roads) will be in the main backbone of the NTC (Peshawar– Karachi) and those providing connections to the PRC and to the seaport in Gwadar. Technical assistance will also be provided in conjunction with the Program to develop an NTC highway business plan for the pilot section of the Peshawar–Khanewal (M1-E4) motorways and expressways and to enhance the economic and financial sustainability of the roads (paras. 95– 97).

55. Depending on needs, ADB may facilitate financing of PPP initiatives through the Program by: (i) funding NHA’s equity portion, (ii) guaranteeing any minimum traffic guarantee or annuity given by NHA, and (iii) providing political risk guarantees for commercial loans. Providing equity or debt to a project company through ADB’s private sector window will be considered separately from the Program.

56. The Program will implement policy reform actions agreed with NHA and the Government in the RSDF (paras. 39–40). Policy reforms to be undertaken during the later phase (2012– 2017) will include a review of the outcomes from the first phase, updating the RSDF, and formulating the next generation of reforms.

1. Road Investment

57. The Government has asked ADB for support in building new roads and expanding existing roads to achieve the goals set out in the National Trade Corridor Investment Program. Some of the highways will be funded through the ongoing NHDSIP (footnote 16) and expressways and motorways through the Program. NHA has prepared two projects under tranche 1: (i) the Peshawar–Torkham section 1 (E-1), and (ii) the Faisalabad–Khanewal section (E-4). The total length of these two sections is 218 km. NHA has finalized preparatory works, including traffic and economic analyses; environmental, social, land acquisition, and resettlement assessments; detailed engineering designs; and bidding documents. NHA has prepared the procurement plans and is proceeding with advanced action allowed by ADB.

58. The proposed projects are the construction of four-lane highways with partially limited access for section 1 of E-1 and E-4. Full-depth asphalt pavement, long-span bridges, flyovers, and interchanges will be constructed in both projects. There will be significant earthworks for section 1 of E-1 as it crosses a mountainous area. Fewer earthworks are expected on the relatively flat terrain for the E-4 project.

59. Three projects for tranche 2, totaling about 125 km, are being prepared by NHA. Due diligence will be conducted by ADB when preparatory works have been completed. The criteria for selecting the roads for tranche 2 and other additional road sections during implementation and the status of the preparatory work for the tranche 2 projects is in Appendix 6.

60. The Program will provide vehicle parking and service areas along project highway corridors. It will also provide equipment to control pavement overloading by domestic and international traffic. This component will include serviced parking areas and wayside facilities and will cover consulting services for design, supervision, and civil works. The facilities to be provided include (i) paved parking, (ii) emergency repairs, (iii) restaurants, (iv) refueling, (v) prayer areas, (vi) overnight accommodation, (vii) weighing stations, (viii) emergency medical services (ix) toll plazas, and (x) a building for operations. The design approach and technical standards are in Supplementary Appendix A. The facilities will be leased out to private operators on a long-term basis or developed through PPPs.

2. Institutional Strengthening

61. Institutional strengthening will be continued in line with the RSDF. The design of interventions has taken into account ongoing and planned support from ADB and other bilateral and multilateral financial institutions and therefore not all the milestones in the RSDF are covered. Under the ongoing NHDSIP, NHA has established a policy coordination unit to coordinate and monitor progress on institutional and policy reforms. Outline terms of reference for the components summarized below are in Supplementary Appendix B.

62. The Government is considering financing options for capital development and maintenance of roads (para. 39). A road sector policy study will help NHA to rationalize expenditures and ensure stable and predictable revenues. It will also review road user charges should the Government decide to pursue this option.

63. The Program has several components designed to help NHA become an efficient service provider (paras. 45–47). Road corridor management using performance-based contracts has improved road maintenance practices in many countries and the Program will support NHA to determine the model best suited for Pakistan. Assistance will be provided for a pilot application of performance-based contracts on a road to be selected during the study. Efficient management will be promoted through intelligent transport systems such as card readers and electronic notification. Portable weighing stations will be piloted to control overloading of trucks at temporary locations such as construction sites.

64. If NHA is to become an efficient service provider, it will need highly motivated and qualified staff. Consultants will develop a human resource development strategy. Proposals will be made for work performance indicators for units and departments and for advanced training and education to upgrade the skills of staff.

65. As part of the ongoing NHDSIP, a core team of experts has been funded for a 2-year period for capacity development, project management, contract management, and safeguards. The services of these consultants will be extended for another 3 years under the Program, further strengthening NHA’s capacity to prepare, implement, and monitor the projects. To encourage quality at entry, the Government has requested funding for project preparation. The consultants will prepare feasibility studies and detailed designs using the latest technologies for alignment selection and construction.

66. NHA established unit for environmental and social safeguards under NHDSIP. These will be upgraded and a dedicated general manager assigned, with adequate support staff. A methodical approach will be taken to building capacity and maintaining sustainability (para 42). Capacity development for land acquisition and resettlement under NHDSIP has been redesigned to utilize the funds to fit the current needs of NHA, and a detailed assessment of current bottlenecks will be carried out to enable the unit to become efficient and effective. Funding from the Program will help to eliminate these bottlenecks and to improve coordination between NHA headquarters and regional offices and among NHA, the boards of revenue in the four project provinces, and local governments in land acquisition and resettlement and indigenous people issues (Supplementary Appendix C). Guidelines for environmental assessment will be adopted by June 2008.

C. Technical Justification and Selection Criteria

67. The projects proposed under the Program cover key sections of the NTC. The Program is divided into tranches, with tranche 1 covering two projects and the institutional strengthening component. The following criteria were used to identify the projects: (i) technical justification, (ii) economic viability, and (iii) minimal environmental and social impacts (Appendix 7). These criteria will be applied to all subsequent tranches.

D. Cost Estimates and Financing Plan 68. The total cost of NTC highway investment plan is $5.36 billion. The financing plan is a combination of funds from the Government, ADB, and other financiers. It was agreed that NHA would provide at least 20% from its own resources and that ADB could fund up to 80% of the total cost for components under each tranche (Table 2).

Table 2: National Trade Corridor Highway Investment Plan

Program Total Amount Share Amount Share

($ million) (%) ($ million) (%) Government 210 20 1,632 a 30 ADB 890 80 1,082 b 20 Other IFIs or BFIs 1,547 29 Other 1,102 21 Total 1,100 100 5,363 100 ADB = Asian Development Bank, IFI = international financial institutions, BFI = bilateral financial institutions, Program = National Trade Corridor Highway Investment Program. a The Government component for NTC includes roads to be financed by the Water and Power Development Authority. b About 16.6% from the Program and 3.4% from NHDSIP. Source: Asian Development Bank and National Highway Authority estimates.

69. The Government has requested funds up to the equivalent of $900 million to help finance part of the NTC highway investment plan for motorways and expressways. This is in addition to $175 million proposed to be allocated to highways from the NHDSIP. The financing will be provided under an MFF in accordance with ADB policy.32 The implementation period will be 10 years. The MFF will consist of individual loans subject to the submission of a related PFR by the Government and execution of loan and project agreements. The Government has

32 ADB. 2005. Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities. Manila.

16 entered into a framework financing agreement (FFA) with ADB. The loans under the MFF will finance civil works, equipment and goods, and consulting services. The Government will make the proceeds of the loans available to NHA upon terms and conditions satisfactory to ADB.

70. ADB will use its ordinary capital resources (OCR) to finance the projects up to a maximum amount of $890 million. Each loan will have a repayment period of 25 years, including a grace period of 5 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.35%, conversion options that may be exercised in accordance with the terms of the ordinary operations for loan regulations, and such other terms set forth in the draft loan and project agreements. The foreign exchange risk will be borne by the borrower. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility and (ii) an undertaking that these choices were its own independent decision and did not rely on any communication or advice from ADB.

71. The support component (institutional strengthening) amounting to $12.5 million will be funded by ADB in the amount of $10.0 million equivalent (80%) through its Asian Development Fund (ADF) resources. The terms and conditions will include interest at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter and a repayment period of 32 years including a grace period of 8 years. The foreign exchange risk will be borne by the borrower. The borrower will make the proceeds of the loan available to NHA upon terms and conditions satisfactory to ADB.

72. The first PFR to ADB for tranche 1 is for $555 million, comprising a loan of $545 million from OCR to finance two projects and a loan from ADF resources of $10 million equivalent to finance the support component (Table 3). The first PFR has been prepared by the Government and is presented to ADB’s Board of Directors together with this document and the FFA. The cost of the two projects identified under tranche 1 is estimated at 2007 current prices to be $709 million. The Government and NHA requested ADB to finance up to 77% of the total cost which amounts to $545 million. The remaining portion will be met by a government allocation to NHA. The cost estimates per project are provided in Appendix 8.

Table 3: National Trade Corridor Highway Investment Program Financing Plan Tranche 1 ($ million)

Tranche 1 OCR ADF Item Amount Share Amount Share ($ million) (%) ($ million) (%) ADB 545 77 10.0 80 Government 164 23 2.0 20 Total 709 100 12.0 100 ADB = Asian Development Bank, ADF = Asian Development Fund, Program = National Trade Corridor Highway Investment Program, OCR = ordinary capital resources. Source: Asian Development Bank estimates.

E. Implementation Arrangements 1. The Executing and Implementing Agencies

73. NHA will be the executing agency and the implementing agency for the investment and support components. The proposed organization structures are in Appendix 9 and 10. An NTC Highway Investment Program coordinating committee chaired by the chairperson of NHA will be responsible for monitoring the use of loan funds and for overall implementation performance. The committee will meet at least quarterly. A policy formulation and coordination office headed by the NHA member for planning was established under NHDSIP, and the Program project management office (PMO) under the NHA member for operations is to be set up at NHA headquarters in Islamabad. A general manager for ADB projects in NHA headquarters has been appointed and is in place.

2. Management

74. Under NHDSIP, NHA has established a project coordinating committee (PCC) chaired by the chairperson of NHA to provide guidance on the overall implementation and performance of the project. NHA will introduce management information systems in the office of the general manager (ADB) to manage the Program and other projects under its responsibility. A core team of consultants has been provided under the NHDSIP to further develop capacity for project preparation and implementation. The general manager oversees all activities for ADB projects, including preparing projects, writing reports, and monitoring implementation of on-going projects. A principal coordination officer has been assigned to the general manager to coordinate work being done in different departments of NHA. A safeguard unit is responsible for the processing and implementation of environmental and social safeguards. For the implementation of the E-4, a project management unit is located in the field (near Faisalabad) and a general manager and principal coordinating officer will directly control and monitor the project. Project directors for each package head their respective PIUs. For section 1 of E-1, the general manager for ADB projects in NWFP will head the project management unit and will have a project director who will head the PIU. Project directors will be supported by deputy project directors and adequate support staff as per NHA’s standard complement (NHA will provide such information to ADB). The supervising consultant for construction will assist the PIU. Each PIU will be adequately staffed and working at least 2 months before the award of civil works contracts.

75. Independent teams of international and domestic consultants will be provided for each civil works contract (supervision consultants) and they will be headed by chief resident engineers. Each team will report to the assigned project director or general manager. NHA will be provided with the necessary expertise from the consulting team supervising construction or from NHA staff resources for projects involving land acquisition, resettlement activities, and environmental impacts. An accountant or administrative specialist will be assigned to each PIU. The team will provide NHA with periodic reports on the progress of the project, including safeguard issues. Sufficient administrative authority will be delegated to the PIUs for effective and timely project implementation.

76. For subsequent tranches, NHA will appraise all projects and will be responsible for their preparation and implementation. Appraisal, processing, and implementation will include the development and completion of technical reports (feasibility studies, preliminary design reports, environmental assessment reports, resettlement and indigenous people development plans, and detailed design reports) to ensure compliance with government and ADB requirements.

PFRs will be submitted to ADB when they have been approved by NHA and have received the required government clearances (PC-1s). Detailed timetables for implementation will be set out in the facility administration memorandum.

77. NHA will submit progress reports to ADB every quarter. Environmental checklists will be completed as an early warning system for projects that are environmental or social category A or B. NHA will submit other required performance and monitoring reports twice a year. Overall progress and compliance with conditions of the FFA and individual loan and project agreements will be monitored regularly, with periodic reports to ADB, consistent with existing project implementation requirements. Reports will include evaluations of issues or problems faced by NHA and will recommend remedial actions. Overall progress will be considered as new financing requests are submitted.

3. Implementation Period

78. The Program will be implemented over 10 years (inclusive of procurement and construction activities) and is expected to be completed by 31 August 2017. The loan agreements are expected to have implementation periods of 3–6 years. The last PFR should be submitted no later than 30 June 2013. Civil works are expected to be bid out in two tranches. The tranche 1 projects are at an advanced stage of preparation, and mobilization of consultants to supervise construction and civil works is expected to begin in July 2008. For tranche 2 projects, NHA will develop detailed implementation plans when it submits the PFR. The implementation schedule will allow for the acquisition of land free from encumbrances; for resettlement; for clearance of all utilities; and for trees from the land to be used for construction. For the support component, implementation will be staged from 2008 to 2014. The implementation schedule is in Appendix 11.

4. Disbursement Arrangements

79. Loan disbursements will be in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). Direct payment procedures will generally be used for large civil works contracts and consulting services. NHA will establish imprest accounts for the investment at the National Bank of Pakistan, with an initial advance equivalent to estimated eligible project expenditures for the next 6 months or 10% of the loan amount, whichever is less. The imprest accounts (one for each OCR and ADF loan) will be established, managed, and liquidated in accordance with ADB’s Loan Disbursement Handbook and detailed arrangements agreed by the Government and ADB. Statement of expenditure procedures will be used to reimburse eligible expenditures, or to liquidate and replenish the imprest account for any individual payment under $100,000 for the OCR loan and $50,000 for the ADF loan.

5. Advance Contracting and Retroactive Financing

80. ADB Management has approved a request for advance contracting for procuring goods and services for each tranche. The Government has also requested retroactive financing of up to 20% of the loan amount for each tranche under the Program. ADB Management has agreed to seek Board approval for retroactive financing provided that expenditures are in accordance with agreed procedures and they took place during the 12 months before the signing of the corresponding individual loan agreement under the MFF. Retroactive financing is sought for eligible expenditures, including civil works, goods, and consulting services. Such financing will be subject to compliance with any involuntary resettlement requirements stated in a project resettlement plan. Furthermore, NHA has been informed that approval of advanced contracting

19 and retroactive financing does not commit ADB to finance any of the proposed projects. The procurement department in NHA will mainly be responsible for the advance action. PIUs will be established for each project.

6. Procurement

81. Procurement of goods, civil works, and related services financed from the ADB loan will be done in accordance with ADB’s Guidelines for Procurement (2007, as amended from time to time). To ensure competition, international competitive bidding contract packages will be encouraged. Civil works contracts will be procured through international competitive bidding among pre-qualified bidders. Civil works contracts with an estimated value less than $5 million will be procured using national competitive bidding through ADB’s standard prequalification procedure. Supply contracts will use limited international bidding for contracts with an estimated value of $100,000–$1,000,000, and shopping arrangements for contracts of less than $100,000. Before the beginning of national competitive bidding procurement, ADB and the Borrower will review the Borrower's procurement procedures to ensure consistency with ADB requirements. Any modifications or clarifications to the Borrower's procedures will be documented in the procurement plan. 33 Goods in excess of $1 million will be procured through international competitive bidding. The Government has agreed to include the relevant sections of ADB’s Anticorruption Policy (1998, as amended to date) in all bidding and contractual documents.

82. The projects in the two tranches will involve about seven international competitive bidding contract packages for road improvement and construction civil works. The packages take into account the need for a balance between (i) minimizing administration by consolidating works in larger contracts, and (ii) designing package sizes that will enable international contractors to participate. The thresholds for each type of procurement plan and indicative contract packages are in Appendix 12. Finalization of the civil works packages for tranche 2 will be done during project implementation. Furthermore, to shorten processing, the bidding period has been reduced to 45 days.34

83. If ADB and the borrower later agree to adopt post-qualification procedures based on the success of the exercise initiated under the NHDSIP, such procedures can be tried for some tranche 2 packages. If a post-qualification procedure is adopted in accordance with ADB’s guidelines, no prior review and approval will be required; however, ADB will review the procurement documents and respond as soon as practicable but no later than 6 months after their receipt.

7. Consulting Services

84. Tranche 1 will require about 1,207 person-months of consulting services (128 international and 1,079 national). Tranche 2 will require about 1,080 person-months (171 international and 909 national); however, this figure will be finalized during implementation of tranche 1. The consultants will help NHA to implement the Program. The terms of reference for all loan-financed consultants will be subject to prior ADB approval. International consultants recruited as consulting firms will be selected and engaged using ADB’s quality- and cost-based selection procedures in accordance with ADB’s Guidelines on the Use of Consultants (2007, as

33 ADB. 2006. Treatment of National Competitive Bidding Procedures in Loan Processing. Manila. 34 Requests for extensions from bidders up to 60 days will, however, will be favorably considered if the bidders find the shortened timeline difficult to meet.

20 amended from time to time). Individual international and national consultants will be recruited in accordance with Guidelines on the Use of Consultants.

85. For tranche 1 projects, two ADB-financed consulting firms will support bidding and supervising of the construction of civil works for highway improvements. The consultants will help with supervising construction of the four civil works packages. Terms of reference for the consultants for tranche 2 projects will be finalized during the implementation of tranche 1. Detailed engineering design and feasibility studies for tranche 2 projects are being undertaken by locally recruited consultants and financed from NHA resources. Consulting services packages are summarized in Appendix 12 and an outline of the terms of reference for consultants supervising construction is in Supplementary Appendix E.

86. In addition to recruiting consultants through firms, NHA will engage the following individual consultants to provide project management support: (i) a local resettlement specialist to review resettlement plans for all projects and to train NHA staff to strengthen capacity for overall planning and implementation of land acquisition and resettlement activities; (ii) an international social monitoring specialist for independent monitoring, evaluation, and reporting on the progress of land acquisition and resettlement activities (Supplementary Appendix C); (iii) an international environmental expert to oversee compliance with ADB’s Environment Policy (2002) and safeguard measures for all projects; and (iv) a contract specialist to help NHA engage consultants and procure civil works.

8. Anticorruption Policy

87. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government and NHA. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate either directly or through its agents any alleged corrupt, fraudulent, collusive, or coercive practices relating to projects under the Program. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents. In particular, all contracts financed by ADB in connection with the Program shall include provisions specifying the right of ADB to audit and examine the records and accounts of NHA and all contractors, suppliers, and consultants and other service providers.

88. The independent audit of the NHA financial statements and the Road Maintenance Account has been a notable step in promoting transparency and governance. Annual public consultations have taken place on the road maintenance plan. A grievance website has been established to enable anonymous or signed complaints. A policy coordination unit has been established to assist with the implementation of agreed reforms.

9. Accounting, Auditing, and Reporting

a. Accounts and External Audit

89. NHA shall maintain its financial statements in double entry accrual accounting in accordance with the International Financial Reporting Standards followed in Pakistan. 35 Its financial statements shall comprise its balance sheet, income statement, and cash flow

35 Where for any particular disclosure the prevailing accounting standard in Pakistan differs from the International Financial Reporting Standard, the financial statements shall, in a note to the accounts, explain the divergence.

21 statement accompanied by their respective schedules and notes to accounts as may be necessary. NHA’s financial statements shall be audited annually in accordance with International Standards of Auditing by an external auditor acceptable to ADB. NHA annual financial statement shall be accompanied by the auditors’ letter to NHA management and management’s response to it. Most importantly, NHA’s external auditors’ report will contain the auditors’ opinion on whether ADB’s loan funds were used for the purposes specified in ADB’s loan and project agreements. NHA will submit to ADB its audited annual reports in English within 6 months of the close of every financial year.

90. NHA will maintain separate project records and accounts adequate to identify the goods and services financed from the loan proceeds, financing resources received, expenditures incurred for the project and use of local funds. These project accounts and financial statements will be audited annually in accordance with sound auditing standards by an independent auditor acceptable to ADB. External auditors for the projects will be recruited in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). The audit of the imprest accounts and statement of expenditure will be carried out as part of the regular annual audit. The auditor’s opinion of the examination of the imprest accounts and statement of expenditure should be separately set out in the auditor’s report. NHA will submit to ADB the audited project annual reports in English within 6 months of the close of every financial year.

b. Internal Audit

91. NHA has an internal audit department headed by a general manager. The remainder of the staff consists of a director, two deputy directors, four assistant directors and a junior accounting and audit member of staff. The eventual staff size is 40 but not all positions have been filled. NHA’s internal audit department general manager, deputy director and assistant directors are seconded from the Office of the Auditor General of Pakistan (the country’s supreme audit institution). The director is seconded from the Income Tax Department. NHA’s internal audit department reports to its chairperson. Any abnormalities detected by the internal audit department are forwarded to the concerned operational general manager and the internal audit department recommendations are followed up by the compliance committee established within NHA. The internal audit department audits NHA twice a year and coordinates efforts with the external auditor. With the help of consultants, it is preparing an internal audit manual that is expected to be ready in 6 months. Overall, NHA’s internal audit system appears to be satisfactory and commensurate with its role as an EA.

c. Investment Program Performance and Monitoring Report

92. Quarterly progress reports will be prepared for individual projects for review by ADB. NHA has been developing a systematic investment program performance monitoring and analysis system, integrated with its management information system for NHDSIP. Baseline data for performance monitoring have been established and are being refined. They will be applied to Program. The key indicators and assumptions outlined at the impact and outcome levels in the design and monitoring framework (Appendix 1) will be used for rapid assessment. The policy coordination unit is monitoring progress on the road sector development framework and will continue to report on progress as part of the periodic reports. The procurement schedule for consultancy services under the support component and progress reports by the consultants will be closely monitored by the policy coordination unit.

10. Investment Program Review 93. ADB will field an inception mission within 3 months of the first loan approval. The mission will review implementation and operations, including resettlement and environmental aspects, based on quarterly progress reports. Subsequent missions will meet with the Government and NHA twice a year to discuss implementation progress. A midterm review will be carried out 2 years after each loan becomes effective. This will focus on the engineering, resettlement, environmental, and social aspects of ADB-supported investments and will also review the financial status of NHA. Representatives of ADB and NHA will take part in the review. The midterm reviews will evaluate compliance with warranties and representations contained in the FFA and with assurances in individual loan agreements. The review will allow for any mid- course corrections to ensure successful implementation and the achievement of objectives. A project completion report will be submitted within 3 months of the completion of individual projects. A completion report will be prepared after the completion of all ADB-supported activities and projects under the Program.

IV. TECHNICAL ASSISTANCE 94. A technical assistance grant will be provided to develop a pilot highway business plan for the E1-E4 (Peshawar–Khanewal) road. The impact and outcome of the TA is consistent with the Program (para. 53) and will help to maximize the benefits from the NTC. A team of business consultants will be hired to (i) identify industries that would be attracted to particular areas along the road in line with existing spatial plans (if any) and in consultation with the private sector; (ii) draft recommendations for government action (e.g., on infrastructure and incentives needed) to attract priority sectors, and (iii) develop a marketing plan (Supplementary Appendix D). The consultants will work in concert with the NTC strategy being developed with ADB support, which will establish a strategic framework for new business development along the NTC.

95. Cost and Financing. The total cost of the technical assistance is estimated to be $650,000 equivalent. ADB has been asked by Government to provide $500,000 equivalent. The TA will be financed on grant basis from ADB’s TA funding program. The Government will provide $150,000 equivalent to finance counterpart staff, office facilities and other expenditures.

96. Implementation Arrangements. Input from private and public stakeholders will be essential if the business plan is to be successful. An NTC development body with representatives from the private sector (e.g., business groups and chambers of commerce), government agencies, and academia will be formed under the Planning Commission to develop and implement the recommendations from the technical assistance grant. The executing agency (EA) will be the Planning Commission headed by the member for infrastructure. The TA is expected to engage international consultants for 11 person-months and national consultants for 15 person-months. Consulting services will be recruited through ADB’s quality- and cost-based or quality-based selection procedures and its Guidelines on the Use of Consultants (2007, as amended from time to time). The terms of reference are in Supplementary Appendix D. In addition, individual expertise will be recruited in accordance with ADB guidelines. The TA is expected to begin in September 2008 and completed by January 2009.

V. BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS A. Investment Program Benefits and Beneficiaries 97. The Program is designed to increase trade growth by making road traffic along the NTC more efficient. Increased competitiveness will contribute to greater GDP growth and enhance

23 employment opportunities. The road projects will provide employment for skilled and unskilled labor during their implementation.

B. Overall Economic Analysis 98. The urban centers of Lahore, Karachi, and Islamabad–Rawalpindi are the main origins and destinations for domestic trade and attract over 33% of traded goods. The north–south roads have played a significant role in accommodating increases in freight movement.

99. Under a “do-minimum” scenario where the ongoing road works and other rehabilitation works were taken into account, the vehicle and capacity ratios of N5 road sections in 2015 were estimated at about 0.7 or above which is theoretically reaching road capacity. The “do-minimum” was compared with a “with development” case in which all the proposed works in the NTC highway investment plan were included. The total financial cost of about 3,700 km of roads was estimated at PRs264 billion (exclusive of land acquisition and price contingency). It is assumed that this expenditure will be incurred over the period 2008–2014. Subsequent increases in maintaining the road network were estimated at an average of PRs3.7 billion per year.

100. The economic internal rate of return (EIRR) for the NTC highway investment plan overall is estimated at 39%. To begin with the benefits are mainly associated with savings in vehicle operating costs but benefits from time savings grow over time. The total savings were estimated to average about PRs200 billion per year or about 3% of Pakistan’s 2005 GDP.

101. Benefits accruing from savings in vehicle operating costs grow more slowly than benefits associated with time savings. The underlying reason is that renewed congestion occurs toward the end of the investment period (requiring a new round of capacity expansion at a later stage). This conclusion was supported by the Pakistan Transport Plan Study36 which suggested that plans for the motorway system should include two parallel north–south motorways, one on each side of the Indus River.

102. A preliminary computable general equilibrium model was used to estimate the indirect benefits of the NTC highway investment plan for the economy. The indirect benefits were much greater than the direct benefits. Improvements in feeder roads to the NTC highways and production and logistics hubs along the highway would increase the distribution of benefits further to secondary cities and rural areas.

C. Economic Analysis for Tranche 1 Projects 103. The overall economic viability of NTC highways was estimated, taking into account the overall investment not only in the highways but in other investments currently in the pipeline. A sensitivity test was performed to assess the worst-case scenario in which only the individual projects under tranche 1 are constructed. Individual project evaluations do not encompass all the benefits that overall network improvement would bring, such as a cleaner environment and fewer accidents (Appendix 13).

104. Peshawar–Torkham Section 1 (E-1). The project will provide an alternative route to the existing two-lane, undivided road for traffic between Peshawar and Afghanistan and intermediate locations within Pakistan. A four-lane divided configuration that avoids urban areas will permit higher travel speeds and will include road safety measures. As a result, vehicle

36 Japan International Cooperation Agency. 2006. Pakistan Transport Plan Study.

24 operating costs and travel time for users of the new road will be reduced. The new road will probably divert about 60% of the traffic from the existing road. The substantial bus traffic will be split between the existing road and the new road.

105. Under the worst-case scenario, only this road is built. The EIRR was estimated at 11% and the project is only marginally viable because of the high capital cost. The likelihood that only this project will be implemented is very small, given that both sections 1 and 2 of Peshawar– Torkham (E-1)37 and all of Faisalabad-Khanewal (E-4) will be financed by ADB. Construction of these sections (which will provide shorter connections between Peshawar and Multan) will result in higher benefits to society and an EIRR of 14%.

106. Faisalabad–Khanewal (E-4). The project will provide an alternative to several existing routes between Faisalabad and the Khanewal–Multan–Muzaffargarh area. The existing roads are narrow and congested more because of the vehicular characteristics of prevailing traffic (i.e. non-motorized vehicles) rather than traffic volume. It will also extend the E-1, M-2, and M-3 motorway network southward, thus offering a higher speed link for through traffic between the north of Pakistan and its neighbors to the north and northwest and to southern Punjab, Sindh, and the ocean ports of Pakistan.

107. Traffic diverted to the new road will be able to travel at higher speeds. No account has been taken of any changes in the distances to be traveled between the new road and the existing roads.

108. E-4 provides the missing link between the existing motorway (M-1, M-2, and M-3) and the heart of Punjab (Lodhran–Sukkur, N-5). Under the worst-case scenario in which only this road is built, the project is economically viable given the estimated EIRR of 15%. It will generate a high economic return even with pessimistic assumptions regarding traffic volume, economic growth, and construction costs. These results do not include benefits from reduced traffic on roads from which traffic is diverted. Such reductions would relieve congestion and reduce the rate of road deterioration.

D. Financial Management and Financial Analysis 109. A financial management assessment found that NHA had enough capacity to fulfill ADB’s fiduciary requirements. Questionnaires and field interviews were used to review current practices. NHA is in transition, and the assessment was designed to determine its potential to achieve greater financial and operational autonomy. Accounting diagnostic tools such as the World Bank’s comprehensive country financial accountability assessment 38 and public expenditure review39 were used (Supplementary Appendix F).

110. A financial analysis of the proposed investments for tranche 1 was carried out in accordance with the Guidelines on the Financial Governance and Management of Investment Projects Financed by ADB (2005). All financial costs and benefits were expressed at constant 2006 prices. Cost streams used to determine the FIRR (i.e., capital investment, operations and

37 Peshawar–Torkham Section 2 will be implemented under batch 2 of the MFF for the National Highway Development Sector Investment Program under preparation by NHA. 38 World Bank. 2003. Islamic Republic of Pakistan, Country Financial Accountability Assessment. Washington, DC (December). 39 World Bank. 2004. Pakistan Public Expenditure Management, Strategic Issues and Reform Agenda. Washington, DC (January).

25 maintenance, and taxes) reflect the costs of delivering the estimated benefits. The current toll rate was used to estimate revenue, while incremental operation and maintenance costs were charged for each year.

111. Calculated using conservative traffic estimates and current toll rates as a basis for affordability, the FIRR for section 1 of E-1 and E-4 compares unfavorably with the estimated weighted average cost of capital. If NHA or a commercial operator is to fully recover the capital costs, revenues must be increased (e.g., non-toll user charges), since the potential to increase tolls is limited by the adverse impact of higher tolls on traffic volume.

E. Environmental Assessment 112. Both the tranche 1 projects under the PFR are category A under ADB’s Environmental Assessment Guidelines (2003). Environmental impact assessments (EIAs) were carried out for each project and their summaries disclosed publicly on the ADB website in May 2006 (E-1) and April 2007 (E-4). The EIAs reported that the potential adverse impacts of the construction and implementation stages could be manageable with adequate mitigation and monitoring programs as prescribed in the environmental management plans (EMPs). No component of any project falls in an environmentally sensitive or protected area.

113. Environmental assessments for all the ensuing projects under future tranches will be conducted in accordance with the Environmental Assessment Review Framework, prepared by the Government and agreed with ADB in compliance with ADB’s Environment Policy (2002) and the Government’s environmental assessment regulations and guidelines (Supplementary Appendix G).

114. The cumulative impacts of the proposed tranche 1 projects may be significant if they are taken together with other interventions in the NTC to 2030. During that period, the trade volume is expected to grow exponentially. To address the potential cumulative impacts on land use, air quality, water resources, and public health, policy dialogue will be carried out and recommendations made at the strategic and cross-sector level by ADB. A cumulative impact assessment has been initiated and its terms of reference agreed with the NHA. The target completion date will be September 2008 (Supplementary Appendix H).

115. NHA will implement the EMPs. NHA will ensure that bidding documents and contracts include the mitigation measures required in the EMPs, that the mitigation measures are implemented by the contractors, and that supervision is adequate. An adequate budget for implementation has been provided in the EMPs and capacity building for the NHA safeguard unit in environmental management has been included in the Program (Supplementary Appendix I).

F. Social Safeguards 116. Substantial land acquisition and resettlement impacts are expected for those projects that will require the construction of new roads. Full implementation of the land acquisition and resettlement plan will be a condition for initiating civil works. NHA, with the affirmation of the Ministry of Communication, has prepared a land acquisition and resettlement framework specifying compensation provisions and preparation and implementation procedures for the whole Program. The framework also covers land acquisition and resettlement plans for the projects under tranche 1, E-4 and section 1 of the E-1. The land acquisition and resettlement framework is in Supplementary Appendix J and the land acquisition and resettlement plans are in Supplementary Appendix K. Appraisal of subsequent tranches will require a review of the

26 resettlement plan and preparation of land acquisition and resettlement plans for all projects with land acquisition and resettlement issues (Appendix 14).

117. Indigenous people will be affected only by projects in NWFP tribal areas. NHA has prepared an indigenous peoples development framework for the Program (Supplementary Appendix L) and has included appropriate actions in the land acquisition and resettlement plan for section 1 of E-1. Appraisal of subsequent tranches will require a review of the indigenous peoples development framework and the preparation of indigenous peoples development plans or actions for all projects with issues relating to indigenous peoples. Full implementation of indigenous peoples development plans will be a condition for initiating civil works. The indigenous peoples development framework for the whole the Program is an appendix to the FFA.

G. Poverty and Social Impact 118. Given the type of roads (expressways and motorways) to be financed by the Program, the direct benefits for the poor will not be substantial. The projects will, however, create an enabling environment for poverty reduction. The major indirect poverty reduction impacts will include (i) lower prices for transport services, food, and other daily necessities because of lower transport costs and higher travel speeds; (ii) jobs and income generated from construction and maintenance of the project; and (iii) better access to markets in large cities where goods may be cheaper (Appendix 15).

H. Potential Risks and Assumptions 119. The major risk under the investment program would a material reversal of the policy framework and instability in the country’s business climate. This risk is likely to be short-term in nature. The general elections process will bring about some short term disruptions but most analysts point to a continuation of the reform process, including the so-called second generation reforms.

120. Improving the transit route between Afghanistan and Pakistan will help remove constraints to stability and promote subregional cooperation. By developing these roads the Government is demonstrating its wish to managing the political stability risk in the area. To avoid the risk that the Program will not be sustainable because of inadequate maintenance, for each road improvement the Government will be required to enter into long-term operation and maintenance contracts to be awarded to commercial contractors on the basis of competition.

121. The ability to attract private sector investment to the sector is another concern. The NTC highway investment plan is simply too large for the public sector to execute entirely through its own resources. The Government needs to look outside for funds and partners and this will be supported by the Program. (paras. 50–52)

122. The provincial and district roads that feeds into the NTC needs to be further improved to maximize the benefits of the network. The Government, at federal and local level, needs to allocate adequate resources to these smaller but strategically important roads. The NTC Strategy will identify the industries, advantageous location of these as well as logistic hubs along the NTC. This study will assist the Government to identify and concentrate on the key feeder roads.

123. Implementation delays are a risk to the Program. For land acquisition and resettlement activities, delays will be minimized by providing consulting services to support NHA’s implementation of the resettlement plan. A new position of director of resettlement will be created and the safeguard focal point position will be upgraded from director to general

27 manager. The early appointment of the project director has allowed for advanced work to commence in land acquisition. The risk of delays because of slow procurement is being addressed by (i) early ADB approval of tranche 1 project documents for recruiting project supervision consultants and bidding documents for civil works, (ii) early commencement of advance recruitment and advance procurement actions, (iii) establishment of the project management offices, and (iv) appointment of the general manager and the project directors for the tranche 1 projects. In addition, NHA has obtained internal approval of the project pro forma document, thereby ensuring early loan effectiveness.

124. An economic analysis of tranche 1 projects suggests there are no significant economic risks. Sensitivity tests and risk analysis show that the projects will be economically viable even under a combination of adverse scenarios. The risk of adverse social and environmental impacts has been addressed through the mitigation measures in the resettlement plan, the EIA, and the EMP and through associated conditions and assurances in the project loans. The Program projects will be required to comply with all eligibility criteria before receiving ADB financing.

125. The use of a new financing modality over the 10-year implementation period poses a risk for both Pakistan and for ADB. Dedicated ADB program teams will be available to offer advice and guide NHA on specific issues and problems pertaining to operations under the MFF. The Government and NHA are providing ADB with a set of warranties and representations and may need real-time support before formally submitting PFRs under the MFF. A core team of consultants will be on board to help NHA throughout the PFR process. This is clearly one of the advantages of the MFF. NHA has the capacity and willingness to adhere to the MFF understandings, but from time to time the team in Pakistan will require special assistance.

126. In the areas of procurement, accounting, and reporting, capacity will be built in financial management, budgeting, management and information systems, and financial planning. The longer-term objective, however, will be to leave in place systems, people, and procedures that can outlive the Program. The Government and NHA are especially keen on this approach and will work with ADB toward this goal.

127. The fiduciary risk under the Program will be addressed mainly through the arrangements made (paras. 109–111). The financial sustainability of NHA needs to be addressed so that the highway network can be maintained and expanded (paras. 41 and 43).

VI. ASSURANCES A. Specific Assurances 128. In addition to the standard assurances, the Government and NHA have given the following assurances, which have largely been incorporated in the FFA, and will be incorporated in the individual loan agreement (s) and project agreement (s) as applicable and mutually agreed among the Government, NHA, and ADB for each project under the MFF.

1. Resolution of Cash Development Loans 129. To ensure the long-term financial sustainability of NHA, the Government will take necessary actions to resolve NHA’s accumulated cash development loans by 30 September 2008

28 by converting the debt to equity and/or grant, or entering into alternative financial arrangements such as leasing NHA assets transferred by NHA to the Government (RSDF40 M1-4).

2. National Highway Authority Business Plan 130. NHA will prepare and submit to the Government a 5-year business plan, including a financing plan, an investment plan, and a budget. The Government will endorse the business plan by 31 January 2008 (RSDF M1-2).

3. Highway Toll Revenue Policy 131. To balance the economic benefit to society and the financial benefit to NHA, NHA will, in consultation with ADB, prepare a highway toll revenue policy for consideration by the Government in line with the National Transport Policy; the policy will be approved by 31 December 2012 (RSDF M1-6).

4. Contracting of Operation and Maintenance 132. Prior to completion of each highway project in this Program, NHA will enter into a contract or concession for the operation and maintenance of each highway with a commercial entity awarded a contract following a competitive bidding process.

5. Safeguard Strengthening 133. In consultation with ADB, NHA will prepare an action plan for safeguards by 31 March 2008. NHA will also adopt (i) preliminary guidelines for land acquisition and resettlement by 30 June 2008 and (ii) guidelines for land acquisition and resettlement to be applied at all NHA offices nationwide by 30 November 2008. By 31 December 2007, NHA will upgrade the existing environmental and social safeguard unit to be headed by a senior officer at the general manager or equivalent level, with a director for environment and a director for resettlement and adequately staffed with qualified personnel (RSDF M5-1, M5-2).

6. Financial Management 134. NHA will ensure that its internal controls are adequate for preparation of financial statements in accordance with International Financial Reporting Standards, and for annual independent audit in accordance with International Standards of Auditing. NHA will ensure that all qualifications to the audited financial statements will be rectified by 30 September 2008 (RSDF M2-3).

7. Land Acquisition and Resettlement 135. NHA will ensure that (i) all land and rights of way required by projects are made available in a timely manner; (ii) the provisions of the resettlement plans are implemented promptly and efficiently according to their terms, applicable laws and regulations of Pakistan, ADB’s Involuntary Resettlement Policy (1995), and the land acquisition and resettlement framework agreed with ADB; (iii) the resettlement plans are updated based on detailed designs, are prepared in full consultation with affected persons, and are disclosed to them prior to submitting the resettlement plans to ADB; (iv) the finalized and updated resettlement plans are reviewed and approved by ADB prior to contract award and compensation paid prior to the

40 Refer to the Road Sector Development Framework in Appendix 5.

29 commencement of civil works; (v) contractors’ activities are in compliance with requirements of the resettlement plans, the land acquisition and resettlement framework, applicable domestic laws, and ADB’s Involuntary Resettlement Policy; and (vi) an independent monitor acceptable to ADB is engaged to carry out monitoring and evaluation and to report to ADB in accordance with the requirements of the resettlement plans.

8. Private Sector Participation 136. The Government will ensure that the Cabinet Commission on Investment confirms the revised “Policy Framework and Package of Incentives for Private Sector Participation in Highway and Bridge Projects” by 30 December 2008 (RSDF M6-3).

9. Indigenous Peoples 137. NHA will ensure that all projects affecting ethnic minorities are constructed and operated in accordance with the requirements of ADB’s Policy on Indigenous Peoples (1998) as specified in the indigenous peoples’ development framework agreed with ADB and the detailed indigenous peoples development plans (or resettlement plans). NHA will ensure that the indigenous peoples development plans (or resettlement plans) are monitored and evaluated by an independent agency.

10. Environment 138. NHA will ensure that (i) the projects are constructed and operated in accordance with national and local environmental procedures and guidelines and with ADB’s Environment Policy (2002) and Environmental Assessment Guidelines (2003); (ii) the projects are selected, designed, constructed, and operated in accordance with the EIAs or IEEs and the environmental assessment review framework; (iii) the EMPs as reflected in the EIAs and IEEs will be incorporated in bidding documents and civil work contracts and will be implemented; and (iv) environmental performance reports will be submitted to ADB twice annually during the construction period, including progress made on mitigation measures, monitoring, problems encountered, enforcement plans, and any violations.

11. Social Impacts 139. Gender. NHA will follow the principles of ADB’s Policy on Gender and Development (1998) during the implementation of each project, including taking all necessary actions to ensure that (i) equal opportunities are provided to women for road construction activities; (ii) there is no differential payment between men and women for work of equal value; and (iii) women living in the project area are encouraged to participate in planning and implementation of project activities. NHA will monitor project effects on women during implementation of each project through, where relevant, gender-disaggregated data collected pursuant to the monitoring and evaluation system referred to in the Project Performance Monitoring System.

140. Sexually transmitted infections. The Government will ensure that all projects financed under the Program include appropriate measures to mitigate the potential risk of sexually transmitted diseases (STDs) such as HIV/AIDS. These measures will include carrying out public awareness programs on the risks and prevention of the transmission of HIV/AIDS. NHA will ensure that appropriate information is posted in selected areas along the project roads (e.g., border areas, gas stations, restaurants, and weighing stations) and transport workers and their families, motorway personnel, relevant police offices, and people in the project areas are

30 trained. Civil works bidding documents and contracts for each project will include provisions requiring contractors to (i) disseminate information at work sites on the risks of STDs and HIV/AIDS as part of the health and safety measures for those employed during construction and (ii) take measures to protect workers from potential exposure to STDs and to provide them with testing and treatment if needed. Similarly, the civil works contracts will also include clauses to regulate the behavior of workers in relation to the local communities in project areas.

141. Working conditions and child labor. NHA will ensure through the civil works bidding documents and contracts that (i) contractors follow legally mandated provisions on health, sanitation, and appropriate working conditions including accommodation where appropriate for construction workers at construction campsites; (ii) contractors do not employ child labor in construction and maintenance activities; and (iii) appropriate facilities are provided for children of laborers in construction campsites, all in accordance with the relevant laws and regulations of the Government.

142. Human trafficking. The Government will ensure that public awareness campaigns on human trafficking, particularly of women and children, are carried out to reduce the risk of trafficking around construction camps and bus and other transport facilities.

12. Execution of Civil Works Contracts 143. NHA will ensure that, subsequent to awarding civil works contract under any project, no section or part thereof will be handed over to the contractor until the applicable provisions of the land acquisition and resettlement framework and resettlement plans (including in particular the timely delivery of compensation to affected families), indigenous peoples’ development framework and indigenous peoples’ development plans, and the Environmental Assessment Review Framework and EMPs have been complied with.

144. Any changes to the location, land alignment of roads, or environmental impacts on account of detailed designs of related projects will be subject to prior approval by ADB and the relevant government agency in accordance with the project selection criteria and approval procedures in the FFA.

13. Project Selection Criteria 145. The Government and NHA will ensure that all projects are selected and approved in accordance with the agreed criteria and procedures set out in the FFA. NHA will monitor the implementation of projects through completion.

B. Condition for Loan Effectiveness 146. The effectiveness of the ADF and OCR loan agreements will be subject to a cross- effectivity provision.

VII. RECOMMENDATION 147. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $900,000,000 equivalent to the Islamic Republic of Pakistan for the National Trade Corridor Highway Investment Program comprising

(i) the loans not exceeding $890,000,000 equivalent from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)- based lending facility; and

(ii) the loan in various currencies equivalent to Special Drawing Rights 6,451,000 from ADB’s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the Framework Financing Agreement presented to the Board.

Liqun Jin Vice President

22 October 2007

Appendix 1 32

DESIGN AND MONITORING FRAMEWORK

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks

Impact By 2022: Assumption Increased trade • Increased gross domestic • National socioeconomic Government continues with growth product from $114 billion statistics from the Central policies conducive to economic (2006 estimate) to $336 Statistics Office growth billion Risk • Increased trade from Political instability $35 billion (2006) to $170 Geopolitical instability billion

Outcome By 2017: Efficiency gain for • Traffic volume. • ADB’s PCR and PPER Assumptions road traffic Peshawar–Torkham • NHA ‘s periodic traffic • All other NTC highway operation along the 5,000 vehicles per day counts and surveys investments are implemented National Trade (diverted traffic) and • Freight Forwarder as scheduled Corridor 8,000 per day Association statistics • Capacity building support for (induced traffic) • NHA financial statement NHA provided by previous • Reduced average • Central Statistics Office interventions successfully travel time. From implemented Peshawar to Karachi • Improved road safety from 72 hours (2006) to regulations in place 36 hours • Rational road user charge • Reduced transport policy in place cost for freight. From • Rolling 5-year maintenance 7% of total cost plan updated and carried out (2006) to 5% • Cost recovery principles Risk implemented for NTC Inadequate financial resources highways. Deficit on road for road maintenance maintenance cost reduced from 40% (2006) to 0% • Fatality rate. Reduced by 50%

Outputs By 2014: 1. Newly • 346 km road • ADB loan review missions Assumption constructed constructed on time, • PCR and PPER • Sufficient counterpart budget and upgraded within budget, and available on time roads and meeting technical bridges specifications • Tranche 1 roads completed 2012 • Tranche 2 roads completed 2014 • Pavement international roughness index of less than 4 m/km.

33 Appendix 1

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks 2. NTC Business • NTC highway business plan • Annual Report of NTC Assumption Plan and o Peshawar–Khanewal development body • Coordination of federal, coordinating expressway portion provincial, local body implementation started government and entities by 2008 as well as private sector o Establishment of successful. coordination body by 2008 o Terms of reference and operational guidelines for coordination body determined by 2008

3. Institutional • At least one performance- • ADB loan review missions Assumptions Capacity based contract for • PCR and PPER • Government remains Development operation and management • NHA statistics committed to reform of highways by 2009 • Full support from • Pilot intelligent highway stakeholders including system operational by 2009 private sector (e.g., electronic notification • Implementation of National boards for accident Highway Safety Ordinance information and electronic on axle load limits improveda tolling system) • Government committed • Sustainable funding to institutional capacity mechanism for highways enhancement adopted by Government by • Full support from NHA 2009 Executive Board and • Feasibility study and staff bidding documents • Previous capacity prepared for at least 3 building assistance projects by 2011 implementedb • Framework for inter-agency • Financial management coordination for social and information system environmental issues operational by 2008c developed by 2009 • Human resource development • Representative staff from strategy and action plan each regional office and implementedd headquarters (at least 20 in total) NHA staff trained on social and environmental issues • Human resources policy endorsed by NHA by 2010 • Project implementation • ADB loan review missions management strengthened • PCR and PPER • Strengthening of Land • Planning Commission Acquisition and Proforma-1 for Land Resettlement Acquisition o Dedicated staff (2 persons) o Training of regional staff and regional and local entities (4 sessions) • Regional commission established

Appendix 1 34

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Activities with Key Milestones Inputs

1.0 Newly constructed and upgraded roads and bridges 1. ADB Total $900 million 1.1 Recruitment of project management specialist by March 2008 Project - $890 million OCR 1.2 Recruit consultants for tranche 1 projects by July 2008 divided into two tranches 1.3 Award of tranche 1 civil works contracts by September 2008 Support - $10 million ADF 1.4 Completion of tranche 1civil works by December 2012 2. Government counterpart 1.5 Completion of civil works for all tranches by December 2014 budget of $223 million.

2.0 NTC Strategic Business Plan and Coordination Body 2.1 Consultants recruited to develop strategic business plan for expressways from TASF Peshawar to Khanewal (E-1 to E-4) by June 2008 2.2 NTC development body established by December 2008 1. ADB total $500,000. 2.3 Recommendation for NTC development body submitted by September 2008 2. Government counterpart 2.4 Draft Final Report on E-1 to E-4 strategic business plan completed by December budget of $125,000. 2008 2.5 E-1 to E-4 highway business plan adopted by NTC development body and implementation starts by December 2008

3.0 Institutional Capacity Development 3.1 Recruitment of consultant Road Sector Policy Study (1Q 2009) (Sustainable Road Sector) Road Corridor Management (2Q 2008) (Efficient Service Provider) Human Resources Development (3Q 2008) (Efficient Service Provider) Project Preparatory and Management Assistance (2Q 2009) (Efficient Service Provider) Social and Environmental Management Phase 2 (2Q 2009) (Safeguards) 3.2 Consulting services completed Road Sector Policy Study (3Q 2010) Road Corridor Management (2Q 2011) Human Resources Development (3Q 2010) Project Preparatory Assistance (2Q 2011) Social and Environmental Management Phase 2 (4Q 2010)

ADB = Asian Development Bank, ADF = Asian Development Fund, ADBI = Asian Development Bank Institute, E = expressway, km = kilometer, NHA = National Highway Authority, NTC = National Trade Corridor, OCR = ordinary capital resources, PCR = project completion report, PPER = project performance evaluation report, PPP = public-private partnership, Q = quarter. a Ministries and departments are considering the report submitted by World Bank consultants on a strategy to improve enforcement of axle load limits. b The following capacity building components for NHA under National Highway Development Sector Investment Program (NHDSIP) are currently being implemented: (i) a policy formulation and coordination office has been established and international consultants are being procured, and (ii) a consultancy team on environmental and social assessment team has been formulated as part of the project management office. c The World Bank has given assistance to hire a business system specialist to support procurement of management information system. d The human resources development strategy and action plan have been developed by NHA and implementation begun in 2006. An international expert has been engaged and mobilized with World Bank support.

35 Appendix 2

ROAD SECTOR ANALYSIS

A. Demand for Road Transport

1. The transport sector contributes about 10% of Pakistan’s gross domestic product (GDP). It is dominated by road transport, which carries 91% of passenger traffic in passenger- kilometers and 96% of freight traffic in ton-kilometers. Road transport services are mainly operated by private sector enterprises with the small share of government-owned goods handled by a public sector agency. At the local and intra-regional level, the road transport industry is characterized by poor service quality and unreliability.

2. Overall demand for road transport has increased rapidly in recent years. Gains in traffic on the road network have been at the expense of the railway network, which will require substantial and expensive upgrading over an extensive period. In the meantime, the demand for road transport will continue to increase.

3. Trucks comprise almost half of non-urban road traffic; cars, 30%; and light vehicles and buses, 20%. The truck fleet is dominated by obsolete and underpowered vehicles and has not changed radically in the last 20 years. Changes in truck configuration have been largely concentrated in the long-haul fleet, where the number of rigid three-axle trucks and tractor-trailer units has increased much more quickly than the number of rigid two-axle units. Stringent vehicle testing and better enforcement of legislation governing vehicle conditions will be more effective at improving vehicle fleet efficiency and safety than road infrastructure upgrading.

4. The trucking industry is very competitive with minimal barriers to entry and a large number of operators. Haulage rates are low and have fallen over the last 20 years, despite increases in fuel prices.1 The long-distance trucking industry (where customers require a more reliable and secure service) is, however, less competitive. Acquisition of newer, modern vehicles is expensive and beyond the means of all but a few vehicle owners. As a result, there are few long-distance operators, and they can and do impose significantly higher haulage rates for long-distance traffic.

B. Provision of Roads

5. The total road network is about 260,000 kilometers (km), of which about 11,400 km are national highways, 92,500 are provincial highways, and 150,000 are district or urban roads. Responsibility for managing the total road network is vested in the federal National Highway Authority (NHA)2 and in provincial and district administrations. NHA is responsible for national highways, including limited-access motorways, partly-limited-access expressways, and unlimited-access highways. About 7,000 km of the national highway network are two-lane, undivided roads. Travel on roads is severely constrained by non-motorized traffic and by slow- moving motorized traffic. As a result, transportation is inefficient and travel times, delivery times

1 Transport Competitiveness in Pakistan. Report No. 36523. 2006. World Bank South Asia Region quotes annual declines in freight rates of 1.4% per year and an increase in fuel prices of 3.2 % per year. 2 The National Highway Authority (NHA) is an autonomous agency with a functional structure and regional offices for work implementation. NHA has limited capacity, particularly in strategic planning, asset management, project management and network operation. Concurrently, it is introducing modern road asset management and maintenance systems for operation and maintenance and integrating them into day-to-day operations. Under the NHA Act, 1991, NHA is permitted to receive funds from various sources, including loans and grants from the federal government, foreign aid and grants and other receipts (lease monies, fees, rentals, fines etc) and is able to float bonds and charge road user fees.

Appendix 2 36 for goods, and transport costs are higher than they should be. Road safety is also compromised.

C. Issues and Challenges

6. Accessibility. Roads are not equally distributed throughout the country. In terms of road length per capita, Sindh Province is the best served in terms of road density (0.57 km/km2) and, except for Baluchistan, is also best in terms of population per kilometer of road (2,420 km per million). Baluchistan Province is significantly better served in terms of km per capita (5,909 km per million).

7. Road conditions. A survey of road conditions was carried out on motorways and other national highways from December 2005 to March 2006.3 The results in terms of roughness of pavement are presented in Table A2.1.

Table A2.1: Condition of Motorways and National Highways in Pakistan (2006) Pavement Condition Good Fair Poor Bad Under Total construction IRI < 4 4 - 6 6 - 8 >8 Motorways km 439 21 4 0 145 608 % 72% 3% 1% 0% 24% National km 4,959 2,032 1,756 751 1,285 10,783 Highwaysa % 38% 18% 17% 7% 13% IRI= International Roughness Index; km = kilometers. a About 646 km of national highway in urban areas was not surveyed but is included in the total. Source: National Highway Authority.

8. It can be seen that 75% of the motorway network and 56% of the national highway network are in good or fair condition. This suggests there have been significant improvements in road conditions since 2000, when about 63% of the national highway network was in poor or bad condition.

9. About 75% of the network is two-lane undivided roads that are 6–7 meters wide. On these roads theoretical capacity and running speeds are largely unattainable because of the amount of non-motorized traffic and slow-moving truck traffic. Operating conditions and road safety are further undermined by the encroachment of commercial and other developments on the roadside. Only 25%of the network is either four- or six-lane roads. Overall, average travel speeds are estimated to be little more than 25 km per hour (kph) compared with 75 kph in developed countries. Accident rates are estimated to be 10 times higher than in developed countries.

10. The condition of the provincial roads is significantly worse than that of the national highway network. Many roads are either permanently impassable or subject to closure during bad weather.

3 Annual Maintenance Plan for Fiscal Year 2006-07.

37 Appendix 2

11. Road funding. The NHA development and maintenance budgets have traditionally been underfunded. Development funds are in the form of government cash loans and are currently about PRs25 billion annually, which is below the PRs40 billion per year needed to meet the government plan for motorway construction. Annual maintenance, repair, and operational expenditures for existing motorways and national roads are funded from several sources: government grants (approximately PRs1.4 billion), road tolls net of collection costs (approximately PRs4.5 billion), and miscellaneous income from right-of-way leases, police fines for traffic infringements and overloading, and advertising. Road maintenance expenditures have been increasing and represent a rising proportion of total expenditures; however they remain well below needs, which are in excess of PRs10 billion per year.

12. In all, NHA receives an annual income of PRs6–7 billion. This compares with an estimate of PRs8 billion for current expenditures, plus another PRs1–2 billion to meet the mounting backlog of road and bridge repairs. Raising maintenance funds to the level of need will require either more revenues from road users or larger government grants (increases in lease revenues or police fines are unlikely to be significant). If road tolls were to be increased, there would be a negative impact on traffic volume and in any case the Government would probably not agree to a toll increase.

13. Road maintenance. NHA has established a road asset management directorate to plan and oversee maintenance operations. Local supervision and monitoring are carried out by NHA regional offices. Surveys of road conditions are carried out annually and from these annual work programs are prepared using the HDM-4 model.4 There is also an annual consultation with stakeholders for their input on the need for maintenance. For fiscal year 2007, the funding requirement for the national highway network and motorways was estimated at PRs14 billion for periodic maintenance and rehabilitation plus about PRs3 billion for routine maintenance. The available total budget for the year was under PRs7 billion, and a maintenance program was prepared according to the amount allocated to NHA. Increases in toll fees to eliminate the government grant have been resisted but are the long-term aim. Proposals to establish a road fund are also under consideration

14. Road accidents. Since 2000, reported road accidents have averaged over 10,000 per year and have resulted in about 5,150 fatalities. At about 10 fatalities per 10,000 vehicles, this rate is very high when compared with developed countries but low for developing countries. An earlier Asian Development Bank (ADB) report estimates, however, that the actual fatality rate is over 30 per 10,000 vehicles.5 There are no official audits to support either contention.

15. The main causes of road accidents are driving at speeds inappropriate to vehicle and road conditions, lack of safety awareness, poor discipline, and poor enforcement of regulations. Under the North-West Frontier Province (NWFP) Road Development Sector and Subregional Connectivity Project,6 a pilot project on road safety will be carried out for sections of the national highway in NWFP. It is intended that the findings and recommended actions will be applied throughout Pakistan.

4 The Highway Development and Management System (HDM-4) is a software system for formulating options for investing in road transport infrastructure. 5 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Multitranche Financing Facility and a Proposed Loan to the Islamic Republic of Pakistan for the National Highway Development Sector Investment Program. Manila (RRP: PAK 37559, for $773,000,000, 22 November) 6 ADB. 2004. Proposed Loans for the Islamic Republic of Pakistan on the North-West Frontier Province Road Development Sector and Subregional Connectivity Project. Manila (Loan 2103/2104, for $296,200,000, approved on 21 October).

Appendix 2 38

16. Major initiatives to date to reduce accidents have been confined to motorways and national highways. These include providing safety barriers and creating the National Highway and Motorway Police (NHMP). In practice, the NHMP concentrate its activities on the motorways where the present force of 836 staff represents more than 2 persons per km.

17. Vehicle overloading. Vehicle overloading is a major cause of premature pavement deterioration and of road accidents.

18. There are 54 vehicle weighing stations throughout Pakistan. As in many other countries, they are ineffective in restricting axle loading and keeping truck loads to within legal limits. The levels of fines are low (about Rs100 per excess ton of load) and represent an insignificant amount in relation to haulage revenues and load value. Where overloading is extreme, many drivers are unable to pay and the fine is overlooked. Neither unloading facilities nor storage spaces are available at the weighing stations; therefore, offloading so that loads can be reduced to within the legal limits is not possible.

19. Even new trucks lack the full efficiency and performance characteristics available in other countries. About 30% of the components in locally assembled vehicles are local and have lower specifications than those available elsewhere. Imported vehicle designs are generally old technology, including, for example, the use of naturally aspirated rather than turbo-charged engines. Importing second-hand trucks is limited to dump trucks, but many are converted for general freight haulage.

20. Overloading further compounds the problem of low basic performance of trucks. As a result, truck traffic is slow and reduces the speed at which traffic in general can flow, even on motorways and other roads in good condition.

21. Private sector participation. Private sector participation will be an essential component of proposed trade and transit initiatives, including highway development. The NHA development plan identifies projects valued at PRs8.730 billion for public–private sector financing. However, difficulties have been encountered in attracting private sector interest and an appropriate legal framework has yet to be put in place. Under the current condition only a small number of projects in the pipeline would be able to attract adequate private sector interest. .

D. Road Sector Policy

22. The Medium Term Development Framework (MTDF) 2005–2010 outlined government policy for the transport sector. It included the following:7

(i) optimal utilization of existing capacity with an emphasis on rehabilitation and upgrading; (ii) selective and cost-efficient investments in economically viable new roads including expanding the rural network; (iii) developing a road network to facilitate transport and trade with Afghanistan, the Central Asian republics and India; (iv) developing innovative financing mechanisms and enhancing private sector participation;

7 The road sector policy is being reviewed under TA 4400-PAK: Technical Assistance to Pakistan for Transport Policy Support.

39 Appendix 2

(v) prioritizing road maintenance and safety; (vi) effective control of overloading on the roads; and (vii) enhancing the capacity of the road sector agencies.

E. Road Sector Development Plan

23. NHA has prepared a comprehensive plan up to 2015 for upgrading the national road network and extending the motorway system. The cost of implementing this plan is PRs480 billion ($8 billion) of which about half is expected to be funded by external assistance (Table A2.2).

24. The plan provides for improvements to 6,500 km of existing roads and the construction of 2,500 km of new expressways and motorways. Parallel plans for improving 7,600 km and constructing 4,500 km of provincial roads and special-area roads are also proposed in the MTDF.

Table:A2.2: National Highway Development Cost Estimates and Financing Plan (2006–2015)a

Financing Source PRs million $ million Percentage (%) PSDP (on-going and new)b 184,440 3,074 38.33 Private Sector 34,623 577 7.19 Development Partner World Bank 94,927 1,582 19.73 ADB 122,228 2,037 25.40 Japan 34,406 573 7.15 People’s Republic of China 4,588 76 0.95 Republic of Korea 6,000 100 1.25 Total 481,212 8,020 100 ADB = Asian Development Bank, ERA = Earthquake Relief Authority, MTDF = medium-term development framework, PRs = Pakistan Rupees, PSDP = Public Sector Development Programme, WAPDA = Water and Power Development Authority. a Amounts of Developing Partners and Government are the planned figures and not committed. b MTDF, WAPDA, ERA, private sector counterpart and securitization. Source: National Highway Authority. March 2007.

25. The road maintenance investment budget increased from PRs2 billion to PRs7 billion or by about 22% per year since 2000, and the maintenance and development budget ratio also increased from 21% to 27% from 2000 to 2006 (Table A2.3).

Table: A2.3: Road Maintenance Budget Year IRI Development Maintenance PRs million PRs million % 2000 8.9 10,575 2,171 21 2001 - 12,700 2,783 22 2002 - 14,642 3,232 22 2003 6.4 17,033 3,773 22 2004 5.8 17,715 5,713 32 2005 5.2 20,050 7,430 37 2006 4.7 25,040 6,840 27 IRI = international roughness index, PRs = Pakistan Rupees. Source: National Highway Authority

Appendix 3 40

SUMMARY INVESTMENT PROGRAM AND PROJECTS

Table A3.1: Summary of National Trade Corridor Highway Investment Plan Scope, Cost, and Financing Number Section Financed By Km PRs million $ million

E-1 Torkham-Peshawar ADB 51 13,913 230 Section II ADB/MFF1 17 6,628 110 Section I ADB/MFF2 34 7,399 120 E-2 Peshawar Northern Bypass ADB/MFF2 34 5,313 88 E-4 Faisalabad-Khanewal ADB/MFF2 184 33,602 555 E-6 Shikarpur-Ratodero ADB/MFF2 44 9,061 150 M-7 Dadu-Dureji-Hub ADB/Other 270 25,671 424 E-35 Hasanabdal-Havellian ADB/MFF2 50 6,637 110 N-35 Havellian-Manshera ADB/MFF1 47 11,965 198 Subtotal (ADB) 680 106,277 1,754 Partly M-1 Peshawar-Islamabad Govt 154 completed —

M-2 Islamabad-Pindi Bhattian Govt 243 Completed —

M-3 Pindi Bhattian-Faisalabad Govt 54 Completed —

N-85 Hoshab-Basima-Sorab Govt 454 22,916 379 N-30 Basima-Khuzdar Govt 110 6,442 106 M-8 Khuzdar-Rotadero Govt 242 5,706 94 N-35 Mansehra-Sazin Govt/WAPDA 254 13,771 228 N-35 Sazin-Raikot Govt/WAPDA 120 15,017 248 Subtotal (Govt) 1,631 63,852 1,055 E-5 Khanewal-Lodhram WB 100 19,960 330 E-5 Gujranwala-Dina WB 100 9,517 157 E-3 Kot Sawar-Hafizabad-Wazirabad WB 100 20,685 342 4 Bridges over River Indus WB/Other 19,651 325 N-5 Lodhran-Sukkur WB 385 35,981 595 Subtotal (WB) 685 105,794 1,749 E-6 Ratodero-Dadu JBIC 150 17,944 297 N-35 Raikot-Khunjrab PRC 355 30,625 506 Subtotal (Bilateral) 505 48,569 803 Total 3,501 324,492 5,361

ADB = Asian Development Bank, JBIC = Japan Bank for International Cooperation, PRC = People’s Republic of China, PRs = Pakistan rupees, Govt = government, Km = kilometer, MFF 1 = National Highway Development Sector Investment Program Multitranche Financing Facility, MFF2 = National Trade Corridor Highway Investment Program Multitranche Financing Facility, WAPDA = Water and Power Development Authority, WB = World Bank, E = expressway, N = national highway, M = motorway, Other = future financing requested by Government. Note: Foreign Exchange: $1 = PRs60.5 Sources: National Highway Authority Planning Document dated May 2007 and Asian Development Bank estimates for E-1 (Section 1) and E-4.

1. Over 50% of the financing for the National Trade Corridor highway investment plan (NTC highway investment plan) is expected to come from multilateral and bilateral financial institutions (Table A3.2), although efforts will be made to encourage private sector participation. The

41 Appendix 3

National Highway Authority (NHA) has been reviewing the design and plans of the roads and updating its financial plans. Costs of material and civil works have been increasing rapidly, both because of external factors and because of rising demand in Pakistan.

Table A3.2: National Trade Corridor Highway Investment Plan, estimated May 2007

Amount Share (%) ($ million) Governmenta 1,632 30 Asian Development Bankb 1,082 20 People’s Republic of China 417 8 Bilateral Financing Institution 130 2 Other Multilateral Development Banks 1,000 19 Otherc 1,102 21 Total 5,363 100 a Government component for the National Transport Corridor includes roads to be financed by Water and Power Development Authority as well as by NHA. b 16.6% from the proposed Program and 3.4% from NHDSIP c Includes securitization, further potential financing from bilateral and multilateral development financial institutions and other private sector sources. Source: Asian Development Bank.

2. ADB has selected five expressways to be financed through NTCHIP. The total length is about 10% of the NTC highway investment plan. These sections are economically viable and are key connections in the NTC highway network. Because of the high cost per kilometer (km) and the unproven traffic volume, there is unlikely to be private sector investment in the roads. The sections cost from $4.2 million to $2.2 million per km. compared with the average of $1.5 million per km for majority of the roads in the NTC highway investment plan. Private sector participation will be sought in the form of maintenance and operation contracts after completion of the roads.

Table A3.3: NTC Highway Investment Plan–Roads Proposed to be Financed by ADB Number Section Financed By Km Rs Mil $Million ADB PFR Timing Contract Planned MFF 2 Start Completion E-1 Peshawar - Torkham (Section I) Tranche 1 34 7,986 132 106 2007 2008 2012 E-4 Faisalabad – Khanewal Tranche 1 184 34,909 577 439 2007 2008 2012 E-6 Shikarpur – Ratodero Tranche 2 44 9,061 150 120 2010 2011 2014 E-2 Peshawar Northern Bypass Tranche 2 34 5,313 88 70 2010 2011 2014 E-35 Havellian – Manshera Tranche 2 47 11,965 198 155 2010 2011 2014 Subtotal 343 69,234 1,144 890

Number Section Financed By Km Rs Mil $Million ADB PFR Timing Contract Planned MFF 1 Start Completion E-1 Peshawar - Torkham (Section II) PFR2 17 7,865 130 104 2008 2008 2012 N-35 Hasanabdal – Havellian PFR3 50 6,637 110 88 2008 2011 2014 Subtotal 67 14,502 240 192

Number Section Futher Km PRs M $Million ADB Timing Contract Planned Financing Start Completion M-7 Dadu - Dureji – Hub Tranche 1 270 25,671 424 339 2009 2010 2014 Subtotal 270 25,671 424 339 ADB = Asian Development Bank, E = expressway, Km = kilometer, N = national highway, M = motorway, MFF 1 = National Highway Development Sector Investment Program Multitranche Financing Facility, MFF2 = National Trade Corridor Highway Investment Program Multitranche Financing Facility, PFR = Periodic Financing Request. Source: National Highway Authority Document dated May 2007 and Asian Development Bank estimates dated September 2007.

Appendix 4 42

EXTERNAL ASSISTANCE FOR THE ROAD SECTOR

Funding Amount Project Year Source ($ million)

Farm to Market Roads Project ADB 38.00 1986 Second Farm to Market Roads Project ADB 113.00 1990 Provincial Highways Project ADB 165.00 1992 Flood Damage Restoration Project ADB 78.00 1993 Sukkur Bridge Project ADB 45.00 1994 Rural Access Roads Project ADB 123.00 1996 Road Sector Development Program (Sindh) ADB 200.00 2001 Punjab Road Development Sector Project ADB 150.00 2002 Baluchistan Road Development Sector Project ADB 185.70 2003 NWFP Road Development Sector and Subregional ADB 301.20 2004 Connectivity Project National Highway Development Sector Investment ADB 770.00 2005 Program Subtotal 2,168.90

Indus Highways, Phase I JBIC 71.00 1989 Indus Highways, Phase II JBIC 173.00 1991 Rural Roads Construction JBIC 95.00 1993 Indus Highways, Phase IIB JBIC 152.00 1993 Kohat Tunnel Construction (I) JBIC 45.00 1994 Kohat Tunnel Construction (II) JBIC 34.00 2001 Indus Highway Construction Project (III) JBIC 166.00 2006 Subtotal 736.00

First Highway Project World Bank 17.00 1964 Third Highway Project World Bank 50.00 1980 Fourth Highway Project World Bank 152.00 1987 Transport Sector Project World Bank 184.00 1991 Karachi Port Modernization World Bank 91.40 1992 Trade and Transport Facilitation World Bank 3.00 2001 Highway Rehabilitation Project World Bank 365.00 2003 Subtotal 765.40

Total 3,767.30 ADB = Asian Development Bank, JBIC = Japan Bank for International Cooperation, NWFP = North-West Frontier Province. Source: Asian Development Bank.

43 Appendix 5

ROAD SECTOR DEVELOPMENT FRAMEWORK

Implementation Timeframe Component Designation Action 2007 2008 2009 2010 2011 2012 1234123 4 123412341234123 4 Policy Dialogue and Milestones 1. Sustainability of Road Sector MFF1 (3.2) 1.1 First rolling business 5-year plan (2007–2011) MFF1 (M3-1) M1-1: NHA Business Plan and Institutional Reform (1/08) Program 2007–2011 MFF1 (M3-2) M1-2: Federal Government endorsement of NHA (1/08) Business Plan MFF1 (M5-2) M1-3: Federal Government endorses Road (9/08) Maintenance plan (2007–2011) and funding requirement MFF1 (5.3) 1.2 Implement maintenance plan MFF2 M1-4: Resolution of Accumulated Debt determination (1/08) of future financing modality MFF 1 (1.1) 1.3 Initial draft of National Transport Policy (NTP) prepared MFF1 (1.2) 1.4 Ministry of Communication approves draft NTP MFF1 (1.3) 1.5 Steering committee approves draft NTP MFF1 (1.4) 1.6 Federal Government endorses NTP MFF1 (M1) M1-5: Government promulgates NTP (6/08) MFF2 1.7 Initial Draft of Proposed NHA Toll Policy Revisions

MFF2 1.8 Federal Government approves draft NHA Toll Policy

MFF2 M1-6: Adoption of revised NHA Toll Policy (12/12) MFF2 1.9 Road sector sustainability study and recommendation completed MFF2 M1-7: Sustainable mechanism for road funding (12/09) implemented

2. Accountability and Transparency MFF1 (3.3) 2.1 Prepare and implement improvement of financial management systems (World Bank/ADB) MFF1 (3.5) 2.2 Review and update business key performance indicators and reporting mechanism (World Bank/ADB) MFF1 (M3-1) M2-1: Transparency and accountability adopted - (6/07) Establishment of Grievance website MFF2 M2-2: Revised Operation Guidelines to incorporate (12/09) key performance indicators MFF2 M2-3 Financial Statements qualification to Audit (9/08) Letter rectified MFF2 2.3 Publish annual Performance Indicators Report to public (technical and financial) MFF2 2.4 Annual Stakeholder consultation for road maintenance

3. Efficient Service Provider MFF1 (3.3) 3.1 Prepare institutional reform program (ADB/World Bank) MFF1 (3.6) 3.2 Identify and design management training programs to support new organization MFF1 (3.1) 3.3 Prepare network optimization plan and planning guidelines MFF2 M3-1: Revised Planning Guidelines to incorporate (7/08) network optimization plan adopted MFF1 (5.1) 3.4 Capacity-building program for road maintenance operation (on-going World Bank) MFF1 (M5-1) 3.5 Develop maintenance plan (2007–2011) and funding modality DONE MFF2 3.6 Analysis of road corridor management MFF2 M3-2: Action plan on corridor management (12/09) MFF2 M3-3: Performance based concession contract for (3/10) maintenance and management MFF2 3.7 Human resource policy based on performance indicators, evaluation and compensation formulated MFF2 M3-4: New human resources policy adopted by NHA (12/09)

MFF2 3.8 Training institute established (JICA) MFF2 3.9 Training needs assessment and program development (World Bank) DONE 4. Road Safety on National Highway MFF1 (4.1) 4.1 Pilot study on road safety on NWFP national highway Network section MFF1 (M4-1) M4-1 Road safety unit established DONE MFF1 (M4-2) M4-2: Action plan for implementing Pilot study (12/08) recommendations MFF1 (4.3) 4.2 Implement Pilot study recommendations

Appendix 5 44

Implementation Time Frame Component Designation Action 2007 2008 2009 2010 2011 2012 1234123 4 123412341234123 4 5. Safeguards MFF2 5.1 Staffing of Safeguard Unit MFF2 5.2 Prepare Action Plan for Safeguards 2008–2010

MFF2 M5-1: Adopt Preliminary Standard Operating (6/08) Procedures for Land Acquisition and Resettlement (Aided Projects) MFF2 5.3 Training of Headquarter and Regional staff MFF2 5.4 Seminars for Stakeholders

6. Public-Private Partnership (PPP) MFF1 (2.1) 6.1 Preparation of PPP projects & financing plan MFF1 (M2-1), M6-1: Complete identification of PPP projects & (3/08) DONE MFF2 financing plan 2008–2013 (ADB) 6.2 .Confirm pilot projects for ADB PPP-I project MFF1 (2.2) financing MFF1 (2.3) 6.3 Invite bids for ADB PPP-I pilot project MFF1 (2.4) 6.4 Negotiate ADB PPP-I concession agreement and financial closure MFF1 (2.5) 6.5 Confirm project(s) for PPP-II project financing MFF1 (M2-2) M6-2: PPP projects to combine value of Pak RS (9/08) 60billion prepared for bidding MFF1 (2.6) 6.6 Invite bids for ADB PPP-II project(s) MFF1 (2.7) 6.7 Negotiate ADB PPP-II concession agreement(s) MFF2 M6-3: Confirmation of PPP Policy by Cabinet (12/08) Committee on Investment implementation project milestone ADB = Asian Development Bank, ESSU = Environment and Social Safeguard Unit, HRD = Human Resource Development, JICA = Japan International Cooperation Agency, MFF1 = National Highway Development Sector Investment Program Multitranche Financing Facility, MFF2 = National Trade Corridor Highway Investment Program Multitranche Financing Facility, NHA = National Highway Authority, M = Milestone, NTP = National Transport Policy, NWFP = North–West Frontier Province, PPP = Public-Private Partnership. Funded by ADB MFF1 Funded by ADB MFF2 Funded by ADB NWFP

Appendix 6 45

STATUS OF PREPARATION OF PROPOSED PROJECTS

No. Proposed Project KM Status of Preparation Tranche I 1 Peshawar–Torkham (E-1) 34 Detailed engineering completed; road alignment marked on site; project implementation unit (PIU) established; economic analysis completed; financial analysis completed; environmental assessment completed and disclosed; and land acquisition and resettlement plan completed/disclosed

2 Faisalabad–Khanewal (E-4) 184 Detailed engineering completed; road alignment marked on site; PIU established; economic analysis completed; financial analysis completed and disclosed; and land acquisition and resettlement plan completed and disclosed

Tranche 2 3 Peshawar–Northern Bypass (E-2) 34 Detailed engineering design completed

4 Hasanabdal–Havellian (E-35) 50 Alignment survey underway

5 Shikarpur–Ratodero (E-6) 44 Engineering survey in progress

Source: National Highway Authority. 2007.

46 Appendix 7

SELECTION CRITERIA AND APPROVAL PROCESS FOR PROJECTS

A. Requirements

1. The following are the requirements for each road section under the National Trade Corridor Highway Investment Program (the Program).

(i) The objective of the Program is to develop and improve road connectivity and efficiency along the main north–south national highway to support the National Trade Corridor (NTC). Out of about 1,900 kilometers (km) of total highway length, the Government has requested the Asian Development Bank (ADB) to assist in the construction and improvement of about 346 km in the NTC highway investment plan.

(ii) The projects will be technically sound, and a feasibility study and preliminary design will be prepared. The National Highway Authority (NHA) will ensure that detailed design reports of the respective packages are prepared within the overall time frame agreed for the Program and not more than 5 months after project approval. A road safety audit will be conducted during project design.

(iii) The projects will be economically feasible and financially sustainable, and their estimated economic internal rate of return will be equal to or higher than 12%, or the roads will be a key section integral to the connectivity of NTC, based on an economic analysis to be conducted in accordance with ADB’s Guidelines for the Economic Analysis of Projects (1997).

(iv) Environmental screening in accordance with ADB’s Environmental Assessment Guidelines (2003) will be conducted for all civil works packages. The selected road sections will not pass through or be within or less than 1 (km) from protected areas as designated by the Government, including sanctuaries or national parks. For each project, an environmental assessment report will be prepared, including an environmental management plan in accordance with the environmental assessment and review framework.

(v) In line with the larger objectives of the Program, the highway sections will be socially sound and include measures to mitigate any possible social impacts. For each package, an initial poverty and social assessment will be conducted in accordance with ADB’s guidelines on initial poverty and social assessment.

(vi) Resettlement plans for each package will be prepared in accordance with the land acquisition and resettlement framework and ADB’s policy on involuntary resettlement.

(vii) If any indigenous peoples or tribal peoples are likely to be affected significantly by any civil works package, an indigenous people’s development plan or special action will be prepared following the measures set forth in the indigenous people development framework.

(viii) All necessary federal and provincial government approval will be obtained; and

Appendix 7 47

(ix) Sufficient Government counterpart funding will be allocated to implement the projects.

B. Procedures

2. Each project will be prepared and processed in accordance the following procedures:

(i) A feasibility study for projects will be conducted by consultants engaged by NHA, who will fill out checklists for initial poverty and social assessment, involuntary resettlement, indigenous people, and environmental screening. These documents will be sent for review to ADB and may require revisions.

(ii) Upon completion of the detailed design, NHA will prepare and submit to ADB a summary appraisal report for each project, together with the required attachments, including a land acquisition and resettlement plan, environmental assessment, summary poverty reduction and social strategies, and indigenous people development plan or special action plan for indigenous people if required.

(iii) NHA will translate each project’s land acquisition and resettlement plan into the local language (Urdu and/or possibly Pashtu) and disclose it to affected people before submitting it to ADB. NHA will revise the resettlement plan if required, based on comments from affected people and from ADB.

(iv) NHA (and ADB) will disclose each project summary environmental assessment report for category A or B projects to the public 120 days before ADB's approval of the relevant periodic financing request.

(v) ADB will review the summary appraisal reports, together with the required attachments. If it finds that the project does not satisfy eligibility criteria and procedures, or does not comply with ADB's policies, ADB may advise NHA to modify the project. In addition, NHA will prepare draft pro forma (PC1) reports and forward them at the same time as the appraisal reports to ADB.

3. Based on ADB's approval, and subject to any modification and remedial measures required by ADB, NHA will implement the projects. NHA will ensure that ADB has access to all documents related to the project proposals and approval process. These documents should be kept for 5 years after approval.

C. Organizational Arrangements

4. NHA will appraise the projects, and ADB will advise NHA to comply with the eligibility criteria and procedures and to follow other relevant policies.

5. The project management office, assisted by the technical audit team (formed from experts within the project management office and NHA) will process the projects for quality control of preparation and contract implementation. This team will review and examine all technical reports, including feasibility studies, preliminary design reports, environmental assessment reports, land acquisition and resettlement plans, and detailed design reports, to ensure that Government and ADB requirements are fully met.

48 Appendix 7

6. The technical audit team will evaluate the viability of each project and prepare a summary appraisal report to be submitted to ADB for approval. This report will require clearance from the NHA chairperson, before it is submitted to ADB along with all necessary attachments.

Appendix 8 49

COST ESTIMATES AND FINANCING PLAN ($’000) Total Cost Financing Plan

ADB Government Item Total Amount % Amount %

I. KEY HIGHWAY INVESTMENT (OCR) A. Investment Costs 1. Land Acquisition and Resettlement (LR) A. Peshawar-Torkham Section 1 9,545 09,545 B. Faisalabad-Khanewal 64,931 0064,9310 2. Civil Works A. Peshawar-Torkham Section 1 89,482 72,682 16,800 B. Faisalabad-Khanewal 389,247 316,168 81 73,079 19 3. Consulting Services A. Construction Supervision (Peshawar-Torkham 1) 3,579 3,579 0 B. Construction Supervision (Faisalabad-Khanewal) 15,570 15,570 100 0

Subtotal (A) 572,353 408,000 71 164,354 29 B. Taxes and Duties 0 00 C. Contingencies 1. Physical 23,936 23,936 0 2. Price 51,385 51,385 0 Subtotal (C) 75,322 75,322 100 0 0 Total before Financing Charge 647,675 483,321 75 164,354 25 D. Financing Charges During Implementation 1. Interest during implementation 56,815 56,815 0 2. Commitment charges 4,864 4,864 0 3. Front end fees 0 00 Subtotal (D) 61,679 61,679 100 0 0 Total Project Cost 709,354 545,000 164,354 Cost composition (with LR costs) (%) 76.8 23.2

II. INSTITUTIONAL STRENGTHENING (ADF) A. Road Corridor Management 2,500 2,000 B. Raod Sector Policy Study 875 700 C. Project Preparatory 3,125 2,500 D. Social & Environmental Management 1,250 1,000 E. Human Resources Strategy 2,500 2,000 F. Project Management Support 2,250 1,800 Total Institutional Strengthening Cost 12,500 10,000

III. TOTAL (OCR and ADF) with LR costs 721,854 555,000

IV. TECHNICAL ASSISTANCE GRANT (TASF) NTC Business Plan 625 500 ADB = Asian Development Bank, ADF = Asian Development Fund, Gov = Government of Pakistan, NTC = National Trade Corridor, OCR = ordinary capital resources, TASF = Technical Assistance Special Fund. Source: Asian Development Bank and National Highway Authority.

50 Appendix 9

Implementation Arrangements for the Investment Program

National Highway Authority Executive Board

Investment Program Coordinating Committee

• Chairman, NHA • Member Finance • Member Planning • Member (Aided Projects) • Member Operations • Others, as required • Member Construction

Investment Program Management Office NHA Member (Operations)

• GM (ADB) • GM (Construction) • GM (Planning) • GM (Safeguard) • Principal Coordination Officer • Director (Construction) • GM (Design) • Director (Account) • GM (Land Management) • GM (P&CA)

• Resettlement Specialist • Social and Resettlement • Environmental Specialist Monitoring Specialist • Contract Specialist

Projects Projects (Tranche 1) (Tranche 2)

ADB = Asian Development Bank, GM = General Manager, NHA = National Highway Authority, P&CA = Procurement and Contract Administration.

Appendix 10 51

PROEJCT IMPLEMENTATION ARRANGEMENTS

Project Management Office General Manager (ADB)

Projects Projects (Tranche 1) (Tranche 2)

PIU PIU PIU PIU PIU E-4 E-1 E-2 E-6 E-35 Faisalabad- Peshawar- Peshawar- Shikarpur- Hasanabdal- Khanewal Torkham Northern Ratodero Havellian Project (Section 1) Bypass Director Project Project Project Project Director Director Director Director

Construction Construction Construction Supervision Supervision Supervision Consultant Consultant Consultant (CSP1) (CSP2) (CSP3)

Civil Works Civil Works Civil Works Civil Works Civil Works Civil Works Civil Works Contractor Contractor Contractor Contractor Contractor Contractor Contractor

ADB = Asian Development Bank, CSP = Country Strategy Program, PIU = project implementation unit.

52 Appendix 11

IMPLEMENTATION SCHEDULE

2006 2007 2008 2009 2010 2011 2012 2013 2014 Project Activities H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 1. Tranche 1

Detailed design and preparatory works

Land acquisition and resettlement

Supervision consultant selection

Civil works procurement

Civil works

Consultant and support component

2. Tranche 2

Note: H1: First half of calendar year, H2: Second half of calendar year. Source: Asian Development Bank and National Highway Authority.

Appendix 12 53

PROCUREMENT PLAN AND TENTATIVE CONTRACT PACKAGES

Procurement Plan Table A12.1: Project Information Tranche 1 Tranche 2 Program Support

2007–2011 2010–2014 2007–2014 Islamic Republic of Islamic Republic of Islamic Republic of Country Pakistan Pakistan Pakistan Islamic Republic of Islamic Republic of Islamic Republic of Name of Borrower Pakistan Pakistan Pakistan National Trade Corridor National Trade Corridor National Trade Corridor Project Name Highway Investment Highway Investment Highway Investment Program Program Program Loan Reference 40075 40075 40075 Date of Effectiveness TBD TBD TBD Project Cost Amount ($ $678,000,000 $431,000,000 $12,500,000 million) Of which ADB Loan Amount $545,000,000 $345,000,000 $10,000,000 ($ million) National Highway National Highway National Highway Executing Agency Authority Authority Authority Approval Date of Original TBD TBD TBD Procurement Plan Approval of Most Recent TBD TBD TBD Procurement Plan Publication for Local TBD TBD TBD Advertisement Period Covered by this Plana 2008–2012b 2010-2014b 2008-2014b ADB = Asian Development Bank, TBD = to be determined. a The plan will be updated annually, on a rolling 18-month basis, on the anniversary of the date of loan effectiveness. b The plan covers the first 18 months of the procurement activity under the loan, including advance contracting with retroactive financing.

Table A12.2: Procurement Thresholds, Goods & Related Services, Works and Supply & Install Methods Threshold International Competitive Bidding (works) > $5,000,000 International Competitive Bidding (goods) > $1,000,000 National Competitive Bidding (works)

Table A12.3: Procurement Thresholds, Consultants Services (ref. PAI 2.02G/E) Methods Threshold Quality- and Cost-Based Selection (QCBS) > $1,000,000 by Full Technical Proposal

Single-Source Selection Individual consultants may be selected on an ad hoc basis to provide intermittent and independent service for the projects.c C The fields of expertise that the consultants may be engaged in include, but are not limited to: resettlement specialist, social monitoring specialist, environmental expert, and contract specialist.

54 Appendix 12

Table A12.4: List of Contract Packages in Excess of $100,000, Civil Works and Consulting Services

Ref Contract Estimated Procurement Expected Date Prior Comments Description Costs Methods of Review ($ million) Advertisement Y/N A. Tranche 1 1. Civil Works 478.73 ICB Q3 2007 Y Financed by ADB and (4 Packages) the Government

2. Consulting 19.15 QCBS Q3 2007 Y Financed by ADB and Services (2 Packages) the Government B. Tranche 2 1. Civil Works 280.23 ICB Q2 2010 Y Financed by ADB and (3 Packages) the Government

2. Consulting 18.16 QCBS Q2 2010 Y Financed by ADB and Services (2 Packages) the Government C. Road Sector Policy Studies and Institutional Strengthening 1. Consulting 8.20 SSS and Q3 2008 Y Services (5 Packages) QCBS

D. Project Management Support 1. Consulting 1.80 QCBS Q3 2010 Y Following support Services (1 Package) provided by NHDSIP ADB = Asian Development Bank, ICB = international competitive bidding, N = no, NHDSIP = National Highway Development Sector Investment Program, QCBS = quality- and cost-based selection, SSS = single-source selection Y = yes. Source: National Highway Authority.

Appendix 12 55

Table A12.5: Proposed Detailed Contract Packaginga Ref Contract Length Estimated Mode of Duration International Contract Contract Description (km) Costs Procurement (months) or National Starting Completion ($ million) Assignment A. Civil Works 1. Tranche 1 a. Peshawar– 34 89.48 ICB 30 Firmb 2008 2010 Torkham, Sec-1 (E-1)

b. Faisalabad– 58 122.70 ICB 36 Same 2008 2011 Khanewal Sec- 1 c. Faisalabad– 62 131.16 ICB 36 Same 2008 2011 Khanewal Sec- 2 d. Faisalabad– 64 135.39 ICB 36 Same 2008 2011 Khanewal Sec- 3 Subtotal 184 389.25 Faisalabad– Khanewal Total Civil Works (Tranche 1) 478.73 2. Tranche 2 a. Peshawar– 34 71.30 ICB 30 Firmb 2011 2014 Northern Bypass (E-2) b. Shikarpur– 44 121.90 ICB 42 Same 2011 2014 Ratodero (E-6) c.. Hasanabdal– 50 87.03 ICB 30 Same 2011 2014 Havellian (E-35) Total Civil Works (Tranche 2) 280.23 B. Consulting Services 1. Tranche 1 a. Peshawar– 34 3.58 QCBS 33 Firmb 2008 2010 Torkham, Sec-1 (E-1) b. Faisalabad– 184 15.57 QCBS 39 Same 2008 2011 Khanewal (E-4) Total Consulting Services 19.15 (Tranche 1) 2. Tranche 2 a. Peshawar– 34 4.62 QCBS 33 Firmb 2010 2014 Northern Bypass (E-2) b. Shikarpur– 44 7.90 QCBS 45 Same 2010 2014 Ratodero (E-6)

c. Hasanabdal– 50 5.64 QCBS 33 Same 2010 2014 Havellian (E-35) Total Consulting Services 18.16 (Tranche 2) 3. Institutional Strengthening Component Road Sector Policy Studies and Institutional Strengthening a. Road Sector 0.70 SSS 12 Individualsc 2009 2010 Policy Study

56 Appendix 12

Ref Contract Length Estimated Mode of Duration International Contract Contract Description (km) Costs Procurement (months) or National Starting Completion ($ million) Assignment b. Road Corridor 2.00 QCBS 24 Firmb 2009 2011 Management c. Project 2.50 QCBS 24 Same 2008 2009 Preparatory d. Social and 1.00 QCBS 12 Same 2009 2010 Environmental Managementd e. Human 2.00 QCBS 24 Same 2008 2009 Resources Development Project 1.80 QCBS 48 Firmb 2011 2014 Management Supporte Total Consulting Services 10.00 (Institutional Strengthening Component) ICB = international competitive bidding, km = kilometers, N = no, NHA = National Highway Authority, NHDSIP = National Highway Development Sector Investment Program, QCBS = quality- and cost-based selection, SSS = single-source selection, Y = yes. a National Highway Authority is the responsible agency. b International consulting firm in association with national consultants. c Individual international consultants and national consultants. d Phase 1 support financed by NHDSHIP. e Following support provided by NHDSIP. Source: National Highway Authority.

Appendix 13 57

SUMMARY OF ECONOMIC ANALYSIS OF NATIONAL TRADE CORRIDOR HIGHWAYS AND PROJECTS IN TRANCHE 1

I. Economic Evaluation of the National Trade Corridor Highways

A. Freight Movement

1. The main urban centers of Lahore, Karachi, and Islamabad–Rawalpindi attract over 33% of Pakistan’s traded goods. Two thirds of the volume of interregional trade originates from Punjab province, particularly the areas of Lahore, Sargodhar, and Sheikharpura, followed by Islamabad–Rawalpindi and Multan. The highest trade volumes are within Punjab province and the northern and central areas of Sindh. The highest intra-provincial cargo flow is from west Punjab to north-east Punjab (22,700 tons). Other flows exceeding 15,000 tons annually are northern Punjab to northeastern Punjab and vice versa, northern and central Sindh to Karachi, Karachi to southern Baluchistan, Karachi to northeastern Punjab, and southern Baluchistan to Karachi. All these flows except for those to and from Baluchistan are served by highways forming part of the National Trade Corridor (NTC). Most use less than 30% of the total corridor length.

B. Overall Travel Performance

2. The north–south roads have accommodated much of the increase in freight movement. Traffic volumes throughout the main highway network were estimated using Cube Software. Forecasts for transport demand were derived from the comprehensive data set created during the Pakistan Transport Plan Study1. This model uses vehicle operating costs and travel time as the determinants for the assignment of origin, i.e., destination road transport demand. The current traffic on the existing roads ranges from about 2,000 passenger car units (pcu)/day in Torkham–Landi Kotal (N5) to 15,000 pcu/day in Umarkot– Rohri (N5) and 22,000 pcu/day in Karachi–Hyderabad (M9).

3. Under a “do-minimum” scenario where ongoing road works and other nominal rehabilitation works were taken into account, the vehicle and capacity ratios of N5 road sections in 2015 were estimated at about 0.7 or above, which is theoretically reaching capacity.

C. Economic Feasibility of National Trade Corridor Highways

4. The “do-minimum” was compared with a “with development” case in which all the National Transport Corridor highway investment plan proposed works were included. The total financial cost of the road development program of about 3,700 km of roads and four new bridges was estimated at PRs264 billion (exclusive of land acquisition and price contingency). It is assumed that this expenditure will be incurred over the period 2008–2014. Subsequent increases in maintaining the road network will rise to an average of PRs3.7 billion per year.

5. Commercial vehicle travel times between Peshawar and Karachi are currently over 72 hours but would be reduced to about 36 hours following the completion of National Transport Corridor highway investment plan. As traffic grows on the new roads, the impact on reduced speeds caused by the increase in the number of cars will be significantly less than without the capacity added by the new roads. As a result the savings in travel time will grow more rapidly than the savings in vehicle operating costs. This is without allowing for increases in the unit value of time which, with increased real incomes, should also rise.

1 Japan International Cooperation Agency. 2006. Pakistan Transport Plan Study in the Islamic Republic of Pakistan. Tokyo.

58 Appendix 13

6. There will be a gradual build-up of benefits from reduced vehicle operating costs as the improved network is expanded. The economic internal rate of return (EIRR) for the overall National Transport Corridor highway investment plan is 39%, inclusive of the values of time. Without a value assigned to time, the EIRR was estimated at 34%. The share of benefits shifts from predominantly savings in vehicle operating costs to benefits from savings in time (Table A13.1). Total savings were estimated at an average of PRs200 billion per year or about 3% of the Pakistan’s 2005 gross domestic product (GDP).

Table A13.1: National Trade Corridor Highway Investment Plan Benefits (PRs million)

Year Without Program With Program Benefits Vehicle Passenger Vehicle Passenger Vehicle Travel time operating travel time operating travel time operating savings costs value costs value cost savings 2015 1,650,876 149,363 1,490,058 123,909 160,818 25,454 2020 2,275,311 282,305 2,098,575 211,105 176,736 71,200 2025 3,287,493 615,052 3,062,030 433,816 225,463 181,236 Source: Asian Development Bank estimates, 2007.

7. The less rapid increase in savings in vehicle operating costs compared with savings in time reflects the onset of renewed congestion even with the proposed road capacity increases. As truck traffic is less sensitive to travel time, it will increasingly revert back to the presently used roads and away from the new roads as traffic volumes on the new roads increase. This indicates that further increases in capacity will be required within the next 20 years. This was a conclusion of the Pakistan Transport Plan Study, which suggested that the motorway system should include two parallel north–south motorways, one on each side of the Indus River.

II. Sensitivity Test: Economic Evaluation of Tranche 1 Projects

A. Methodology

8. A sensitivity test was performed to assess the worst-case scenario (only individual projects under tranche 1 are constructed). Standard methods were used to evaluate the time-related economic costs and benefits directly associated with the proposed roads. The costs are the resources needed to construct and maintain the road. Benefits are savings by road users, including travel time. Because the road does not replace an existing road that would have continued to be maintained, no significant savings in road maintenance will be realized.

9. The existing roads will be maintained in good condition but travel speeds on them will remain low even after the project road is completed because of non-motorized and slow- moving motorized traffic. Therefore a speed-related rather than a pavement-roughness- related, vehicle operating cost model was used to calculate road user costs with and without the project. Estimated speeds are assumed to decline slightly over time in both models on the existing roads as traffic grows. There will also be some decline in speeds on the project road as traffic increases, but these reductions will be more modest. Benefits associated with the reduced incidence and severity of road traffic accidents was not included.

10. Civil works and vehicle operating costs have been estimated at 2006 prices. Road maintenance costs were estimated at PRs150,000 per year for routine maintenance and PRs 2,000,000 per intervention for periodic maintenance. It was assumed that there would be periodic maintenance interventions in the 8th and 15th years following opening. A residual value for the project of 10% of capital cost has been included in the final year of the evaluation period of 20 years.

Appendix 13 59

11. Traffic growth rates on the project roads are forecast to be slightly higher than the national average. This is based on expectations of increased trade between Pakistan and Afghanistan and the restoration of and subsequent sustained growth in personal travel between the two countries. The analysis assumes the annual growth rates in total traffic on the route range will be 7.0–9.0% between 2005 and 2010, and 5.5–7.0% after 2020 for various types of vehicles.

12. The proposed projects are new roads on new alignments and will compete for traffic on the existing road. Therefore there are no normal traffic benefits to evaluate. Generated traffic is generally restricted to increased demand for travel (vehicle-kilometer) as a result of reduced costs and travel time. The improved NTC highway network will contribute to the faster general development of areas along the corridor and thus to the economy. However, the economic development is not attributable solely to highway improvements. The, NTC highways will provide only limited links between areas of potential production and local markets. Therefore, a conservative approach was taken by not including generated traffic in the particular projects. The benefits will be restricted to those associated with traffic diversion.

13. Travel time values for cars were estimated based on PRs50 per hour for three occupants for travel during working time (20% of total trips) and 25% of hourly income for non-working time trips, i.e., PRs60 per hour. For minibuses and buses, passenger time was calculated as for car drivers but valued on the basis of an hourly income of PRs12.7. Value per vehicle assumes an average load of eight passengers in minibuses, while for large buses an average passenger occupancy of 20 was assumed. No value was assigned to goods in transit.

14. The economic analysis was conducted using domestic prices. Financial costs, including physical contingencies, were converted into economic costs using a specific conversion factor for civil works of 0.85.

B. Peshawar–Torkham Section I Project

1. Description of Project

15. This road forms part of the N-5 arterial road. It will lead westwards from Peshawar in North-West Frontier Province through Khyber Pass to the Pakistan–Afghanistan international border. The total length of the new road from Peshawar to the border is 51 km; the project section of 34 kilometers (km) commences at the junction between the existing N-5 road and the proposed Peshawar Northern Bypass. The final 17 km ending at the international border is being constructed with ADB assistance under the multitranche financing facility for the National Highway Development Sector Investment Program.2

16. The proposed project will construct a new four-lane highway on an alignment to the south of the existing road. The existing road passes through the towns of Jamrud after about 6 km and Landikotal about 6 km from the Afghanistan border. The new road will pass very close to the town of Jamrud but will bypass Landikotal about 2 km south of the town center.

2. Traffic Forecast

17. Traffic in 2005 varied from about 8,330 vehicles per day (vpd) at the Peshawar end of the highway to 5,400 vpd between Jamrud and Landikotal and to 3,330 vpd between

2 ADB. 2005. Report and Recommendation of the President to the Board or Directors on a Proposed Multitranche Financing Facility and Proposed Loan to the Islamic Republic of Pakistan for the National Highway Development Sector Investment Program. Manila (RRP: PAK 36052, approved in 22 November, for $770,000,000)

60 Appendix 13 Landikotal and Torkham. The composition of traffic also varied with passenger car traffic falling from about 50% at the Peshawar end to under 20% beyond Landikotal. The growth rate was about 17% per year.

18. The split in traffic on the existing and new roads has been estimated for each vehicle category. Cars, jeeps, and pick-ups will probably favor the new road, where they can travel more quickly and will make fewer intermediate stops; it is assumed that 75% of the vehicles in this category will use the new road. More minibuses will stay on the existing road so they can make frequent intermittent stops in built-up areas: it is assumed that only 33% will divert to the new road. It is assumed that large buses will be divided equally between the existing and the new road. Larger, heavier trucks are more likely than 2-axle trucks to be carrying international trade; it is assumed that 50% of 2-axle trucks, 60% of 3-axles and 80% of articulated trucks will divert to the new road.

19. The traffic forecasts of the new road are presented in Table A13.2.

Table A13.2: Traffic Forecast for Peshawar–Torkham Section (number of vehicles) Traffic on Traffic Forecast on New Road Existing Road (assuming existing road remains open) 2005 2013 2015 2020 2025 2030 Annual Average Daily Traffic Total 6,356 3,893 4,425 6,021 8,050 10,777 Source: Asian Development Bank estimates, 2007.

3. Economic Analysis

20. Costs are based on the construction of a four-lane divided road with 2-meter shoulders on either side. Total costs, including civil works, physical contingency, and supervision, are estimated at PRs6 billion.

21. The new road will divert an estimated 60% of the traffic from the existing road. Traffic retained by the existing road on the section as far as Jamrud will be traffic servicing areas along the existing alignment, essentially some private cars, most minibuses, and some trucks, particularly the smaller trucks used for local deliveries. Some public service traffic will use the existing road and some will use the new road. For the evaluation, the existing road and the new road are assumed to share this traffic equally. Total vehicle operating cost savings are estimated to increase from PRs370 million in 2012 to PRs700 million in 2020.

22. The economic internal rate of return (EIRR) was estimated at 10.6% (Table A13.3). Much of the benefit will accrue to Afghanistan’s economy, as much of the traffic comprises the transport of international trade with Afghanistan and the carriage of Afghani passengers. The vehicle operating cost savings and time savings used in the present analysis are taken as proxies for these benefits to Pakistan. The project is only marginally viable because of the high capital cost. The likelihood of having only this project implemented is very small given that the Peshawar–Torkham sections 1 and 23 and the Faisalabad–Khanewal (E-4) section will be under ADB financing. Construction of the sections that will provide shorter connections between Peshawar and Multan will result in higher benefits to society and an EIRR of 14.0%. Construction costs are based on final draft of the detailed designs and should therefore be well within 10.0% of the cost estimates. A cost reduction of 10.0% would result in an EIRR of 13.0%, and a cost increase by 10.0% will reduces it to 11.4%. A reduction in costs may be achieved when the contract is awarded. In the meantime, in order to enhance the project’s worth, NHA will re-examine the design and cost estimates to seek savings in areas that do not compromise road strength, pavement quality, or safety. In

3 Peshawar-Torkham section 2 will be implemented under batch 2 of MFF National Highway Development Sector Investment Program under preparation by NHA.

Appendix 13 61 particular, road sections where the line-of-sight is good could be considered for reductions in overall width.

Table A13.3: Summary Results of Economic Analysis for Peshawar–Torkham Section I (PRs million) Year Capital cost Net Diverted Diverted Total net benefit maintenance traffic VOC traffic time stream cost savings savings 2007–2011 5,031.3 -5,031.3 2012 0.0 4.3 331.2 33.4 360.3 2015 0.0 4.3 434.9 49.2 479.8 2020 0.0 119.9 668.3 87.8 636.1 2025 0.0 4.3 996.7 146.7 1,139.1 2030 0.0 4.3 1,468.4 238.8 1,702.8 Economic Internal Rate of Return 10.6% Note: VOC = vehicle operating cost. Source: Asian Development Bank estimates, 2007.

C. Faisalabad–Khanewal (E-4) Project

1. Description of Project

24. This proposed 184-km expressway is located at the heart of the highly populated and productive Punjab Province. It will form a central section of the nationwide expressway and motorway network, with sections already completed or under construction in the north linking Peshawar, Islamabad, and Lahore. In the south, the proposed network will be connected to the M-9 (Karachi–Hayderabad). In the north, it will connect with the completed M-3, M-2, and M-1 linking Peshawar, Islamabad, and Lahore. The proposed M-5 motorway will further extend the motorway network southbound.

2. Traffic Forecast

25. Traffic volumes and origin-destination surveys on existing roads in the area were carried out in September 2004,4 2005,5 and 2006.6 The E-4 will attract long-haul traffic, mainly from the N-5 national highway located to the east; some traffic that currently uses parallel provincial roads; and possibly some traffic from the N-55 to the west (Table A13.4). Traffic on the new expressway will comprise traffic between northern and central and southern Pakistan, including some long-distance traffic to and from PRC, and from parts of Afghanistan to central and south Pakistan, including the international ports. There will be little attraction for long-distance traffic between eastern and western Pakistan to use the expressway.

Table A13.4: Traffic Forecast for Faisalabad–Khanewal (E-4) (number of vehicles) Potential Diverted traffic assuming remainder of network divertable remains undeveloped traffic 2007 2013 2015 2020 2025 2030 Total AADT 4,430 6,278 7,678 10,528 14,156 19,055 AADT = annual average daily traffic. Source: Asian Development Bank estimates, 2007.

4 Faisalabad–Khanewal motorway (E-4). Traffic Report. National Engineering Services Pakistan. 5 Pakistan Transport Plan Study, Traffic Survey, June 2006, JICA. 6 Pre-Feasibility Study of Faisalabad–Jang–Muzaffargarth-DG Khan and Rajanpur (M-4 and M-5), Zeeruk International, 2006.

62 Appendix 13 3. Economic Analysis

26. Costs are based on construction of a four-lane divided road with 2-meter shoulders on either side. The total financial cost of implementation over 4 years, including civil works, physical contingency, and supervision is estimated at PRs26 billion.

27. The project will divert traffic from existing roads. By extending the M-1, M-2, and M-3 motorway network, it will offer a higher speed link for through traffic from the north of Pakistan and its neighbors to the north and northwest to southern Punjab, Sindh, and the ocean ports of Pakistan. Traffic to and from Baluchistan and southern Afghanistan will not be affected significantly. Benefits to diverted traffic will be realized as higher speeds attained. Generated benefits directly associated with the project will not be significant.

28. The project is economically viable with an estimated EIRR of 15.4%. (Table A13.5) This value does not include benefits that derive from reduced traffic on roads from which traffic has been diverted. However, much of the congestion on Pakistan’s roads is a result of conflict between traffic of significantly different speeds and that conflict will remain unresolved unless traffic is better regulated. In addition, heavily loaded trucks will be reluctant to transfer to roads where load controls will be more strictly monitored so road deterioration rates will not be significantly reduced unless monitoring is stricter for the new as well as existing roads. A 20.0% cost increase would result in a fall in the EIRR to 13.3%, indicating no significant threat to the economic viability. The traffic growth rates have assumed sustained economic growth; if growth rates are 20% below the forecast, the EIRR would fall to 13.6%. If the rate of diversion is 20.0% lower than that estimated, the project remains economically viable with an EIRR of 13.5%.

Table A13.5: Summary of Results of Economic Analysis for Faisalabad–Khanewal (E-4) (PPRs million)

Net Vehicle Total net Capital Time Year maintenance operating cost benefit cost savings cost savings stream 2007–2011 21,886.4 0.0 0.0 0.0 -21,886.4 2012 0.0 3.5 2,778.1 214.1 2,988.6 2015 0.0 3.5 3,434.4 262.9 3,693.8 2020 0.0 3.5 6,510.9 490.0 6,997.4 2025 0.0 3.5 6,510.9 490.0 6,997.4 2030 0.0 3.5 8,862.8 662.4 9,521.7 Economic Internal Rate of Return 15.4% Source: Asian Development Bank estimates, 2007.

Appendix 14 63 SUMMARY OF SOCIAL SAFEGUARDS

I. Background

1. The Government of Pakistan has requested support from the Asian Development Bank (ADB) to undertake the National Trade Corridor Highway Investment Program (the Program). With the National Highway Authority (NHA) as the executing agency (EA), the Program will be financed through a multitranche financing facility (MFF) and will finance road sections in the National Trade Corridor. The MFF is expected to have two tranches, each covering several projects which in case of new motorways or highways will entail significant land acquisition and resettlement impacts. MFF appraisal includes the appraisal of the projects under tranche 1: section 1 (kilometer [km] 1 to km 34) of the Peshawar–Torkham Expressway and the Faisalabad–Khanewal expressway (E-4). Projects in North-West Frontier Province (NWFP) may have impacts on indigenous people.

II. General Procedures

2. Land acquisition and resettlement will follow the laws of Pakistan, ADB’s Policy on Involuntary Resettlement (1995), and the ADB Operations Manual section on involuntary settlement.1 MFF and each tranche appraisal and the approval and implementation of each project with land acquisition and resettlement or indigenous people issues will require the preparation of the following documents: (i) a land acquisition and resettlement framework (LARF) and an indigenous people development framework (IPDF) for the whole MFF to be reviewed, updated, and re- approved by ADB annually and before the preparation of each tranche; (i) an initial poverty and social assessment for each tranche, indicating whether land acquisition and resettlement or indigenous people impacts are expected, and if so their type and magnitude; (ii) a land acquisition and resettlement plan (LARP) for each project with land acquisition and resettlement with detailed design and impact figures and compensation budgets and schedules;2 (iii) an indigenous people development plan (IPDP) or relevant indigenous people action for each project affecting indigenous people.

3. The appraisal of the MFF and of each tranche and the approval and implementation of each project under a tranche will follow these land acquisition and resettlement-related conditions. (i) MFF and tranche 1 appraisal: preparation of a LARF and an IPDF for the MFF and LARPs and IPDPs (or LARPs that include indigenous people action plans) for all tranche 1 projects with land acquisition and resettlement or indigenous people impacts. (ii) Other tranche appraisals: A review and update of the LARF and IPDF and preparation of a LARP and an IPDP (or indigenous people actions) for all tranche projects that have land acquisition and resettlement or indigenous people impacts. (iii) Start of project civil works: LARP and IPDP implementation.

4. To meet these conditions, NHA has prepared a LARF and an IPDF for the whole MFF, one LARP for Peshawar–Torkham Expressway section 1, and one LARP for expressway E-4.

1 ADB. 2006. Operations Manual. Manual (OM Section F2/BP). 2 As noted in the ADB Operations Manual Section F2/OP & BP (2006), a resettlement plan’s complexity rests on impact severity. If impacts are severe (> 200 people resettled or with >10% income losses), a project is classified as category “A” and a full plan is prepared. If impacts are not severe (<200 people resettled or with <10% income losses), a project is classified as category “B” and only a short plan is prepared.

64 Appendix 14 The LARP for the Peshawar–Torkham Expressway incorporates the indigenous people action plan.

III. Land Acquisition and Resettlement Framework

5. The LARF are based on the following principles: (i) land acquisition and resettlement will be avoided or at least minimized; (ii) compensation will guarantee the maintenance of the pre- project living standards of the people affected; (iii) those affected will be fully informed and consulted on compensation options; (iv) their sociocultural institutions will be supported and used; (v) land acquisition and resettlement provisions will apply equally to women and to men; (vi) lack of formal title will not be a bar to compensation and/or rehabilitation; (vii) particular attention will be paid to households headed by women and to vulnerable groups; (viii) land acquisition and resettlement will be conceived and executed as an integral part of the project and land acquisition and resettlement budgets will be included in project costs; and (ix) compensation will be fully provided before ground leveling and demolition. The LARF also cover all issues relevant for effectively conducting land acquisition and resettlement tasks so they comply with ADB policy (Paras. 7–11 of this appendix). It establishes the eligibility and compensations entitlements as laid out in Table A14.1.

Table A14.1. Eligibility and Compensations Entitlements Contained in the Land Acquisition and Resettlement Framework

Asset Specification Eligible Persons Compensation Entitlements Permanent < 10% land Farmer or titleholder Land for land compensation in plots of impact on loss equal value/ productivity; cash at market arable land value free of taxes or registration or transfer fees. Tenant or leaseholder Lease renewal in plots of equal productivity (registered or not) or market value in cash of net harvest lost for the remaining lease years. Sharecroppers Cash equal to market value of lost harvest (registered or not) share (1 time if temporary impact; 2 times if permanent impact) Agricultural workers Cash indemnity corresponding to their (registered or not) salary for the remaining part of the agricultural season. Squatters 1 rehabilitation allowance equal to market value of 1 net harvest (additional to crop compensation). > 10% land lost Farmer or titleholder 1 severe impact allowance equal to 1 year Tenant or leaseholder market value of net harvest of affected land (additional to crop compensation) Sharecroppers 1 severe impact allowance equal to market (registered or not) value of net harvest share lost (additional to crop compensation). Workers, with interrupted contracts will get a 3-month income allowance. Squatters 1 rehabilitation allowance equal to market value of 1 gross harvest (additional to crop compensation). Residential or Titleholder Land for land compensation in plots of Commercial equal value or cash at market value free of Land taxes and registration or transfer fees. Renter or leaseholder 3-month allowance Informal settlers Plot in a resettlement area or a self- relocation allowance Structures All persons affected Cash at replacement rate for affected items. Crops Crops affected All persons affected Cash at full market value of gross harvest by default Trees Trees affected All persons affected Cash compensation shall reflect income replacement

Appendix 14 65 Asset Specification Eligible Persons Compensation Entitlements Business or Business or All persons affected Owner: cash for 1 year (permanent loss) or Employment employment for the business interruption period losses (temporary loss). Worker or employee: Indemnity for lost wages up to a maximum of 3 months. Relocation Transition All persons relocated An allowance covering transport or costs livelihood costs for 1 month. Source: National Highway Authority Land Acquisition and Resettlement Framework.

6. Institutional responsibilities. NHA has overall responsibility for land acquisition and resettlement preparation, implementation and financing and will exercise its functions via a project management unit (PMU) and project implementation units. At the PMU, land acquisition and resettlement tasks will be handled by a land acquisition and resettlement unit. This unit will be aided by a social safeguard team under the project preparation and supervision consultants and by nongovernmental organizations or impact assessment or valuation consultants hired for impact surveys or monitoring assistance. The PMU will coordinate with local governments that have jurisdiction over land administration and valuation. At the provincial level, these are tasks of the Board of Revenue, and at the district level, they are handled by the District Collector’s Office and the Land Acquisition Collector. Minor agents such as patwari (land record keeper) will identify and verify titles. Compensation for assets other than land or income rehabilitation is the responsibility of the relevant district department. To ensure effective coordination with local governments and other agencies, NHA will establish a land acquisition and resettlement steering committee at the provincial level and a land acquisition and resettlement coordinating committee at the district level. ADB clearance for category B LARPs or IPDPs will be done by a social development specialist hired at the resident mission. Category A projects will be cleared at ADB headquarters.

7. Disclosure and public consultation. Preparation of LARPs will require intensive consultations with affected persons, the results of which will be fully documented in the LARPs. As an appraisal condition, LARF and LARPs in English will be disclosed on the ADB website while LARF and LARPs in the local language (Urdu and/or possibly Pashtu) will be disclosed locally.

8. Grievance procedures. Grievances will first be handled at the village level. If no solution is reached, the persons affected will then lodge a complaint with the land acquisition and resettlement unit. If no settlement is reached, the case can, with land acquisition and resettlement coordinating committee support, be brought to the PMU. If the grievance remains unsettled after 3 weeks, the persons affected will be able to seek redress at the appropriate court.

9. Monitoring and evaluation. PMUs will internally monitor and report to the EA on land acquisition and resettlement implementation. The EA will report to ADB quarterly. External monitoring will be assigned to an independent agency by the EA, and external monitoring reports will be submitted to ADB twice a year. At the end of project implementation, the independent monitoring agency will carry out a general evaluation of land acquisition and resettlement implementation.

10. Finances and schedules. The LARF prescribes that each LARP include detailed land acquisition and resettlement budgets and provide clear schedules linking land acquisition and resettlement tasks with the initiation of civil works.

IV. Indigenous People Issues

11. Indigenous people will be affected only by projects in NWFP tribal areas. No area with groups fitting ADB’s definition of indigenous people will be affected in Punjab. The LARP for section 1 of the Peshawar–Torkham Expressway includes the required indigenous people action plan. To comply with ADB’s indigenous people policy provisions, NHA has also drafted

66 Appendix 14 an IPDF for the whole MFF detailing (i) project processing conditions relating to indigenous people; (ii) IPDP preparation or implementation requirements; (iii) definitions of indigenous people in Pakistan; (iv) results of a general social assessment; (v) an indigenous people strategy for the Program and the type of action related to indigenous people that is needed; (vi) IPDP participation instruments; and (vii) general processing and implementation issues.

12. Based on IPDF provisions and the results of the social assessment, it is assumed that Pakistan’s definition of “tribal peoples” fits ADB’s definition of “indigenous people”. Therefore “tribal peoples” will be substituted for “indigenous people” in the preparation of specific documents. Also, based on IPDF provisions, the appraisal of each tranche will include an indigenous peoples identification assessment (IPIA) providing (i) general information on projects likely to affect indigenous peoples, the relative magnitude of impact expected, and the number or type of IPDPs to be prepared ,and (ii) an outline of indigenous people groups to be affected, including an overview of their demography, social organization, livelihood or land tenure features, relations with government or other groups, adaptation to outside society or culture, and local governance. 13. The IPDF also indicates the type of actions needed, based on the magnitude of impacts and the situation. This action will be of two types.

(i) If impacts affecting indigenous people are limited to land acquisition and resettlement but have no broad community or systemic effect requiring the rehabilitation of an entire production system, specific actions related to indigenous people will be integrated in the text of the LARP.

(ii) If impacts affecting indigenous people go beyond standard land acquisition and resettlement effects and cause broad disruption with systemic sociocultural dimensions and wide economic and community effects, a stand-alone IPDP, including a detailed action plan, schedules, and budgets, will be prepared. The stand-alone IPDP will not only cover land acquisition and resettlement issues, it will also provide a detailed action plan based on direct participation by indigenous people in the socio-economic rehabilitation of the affected communities, including providing community development packages.

14. Institutional responsibilities. Based on the IPDF, NHA has overall responsibility for actions related to indigenous people, including IPDP preparation, implementation, financing, and monitoring through the PMU and the project implementation units. The PMU will be assisted by the land acquisition and resettlement unit and the social safeguard team under the project preparation and supervision consultants and by nongovernmental organizations in project areas. The PMU will coordinate with local government authorities in tribal areas and with indigenous people communal organizations and will carry out all activities related to indigenous people in such a way as to follow the administrative or political process prevalent in tribal areas. In particular, the PMU will carry out these tasks together with the political agent and the district coordinators’ offices and through them make workable arrangements with concerned tribal leaders (maliks, sardars and/or khans) who in turn will consult their tribal councils (Jirgas) and/or communities to make the final decisions and take necessary actions in line with the project’s requirements. To ensure coordination with tribal territorial governments, political agents will be members of the land acquisition and resettlement steering committee in NWFP and of the land acquisition and resettlement coordinating committee at the district level.

15. Complaints and grievances. Complaints from affected indigenous people will be addressed to the political agent’s office via tribal leaders and councils. If convinced, the political agent will then call on the PMU or NHA headquarters to discuss, negotiate, and resolve the issues at hand. If NHA, the political agent, and the tribal leaders cannot find mutually agreeable solutions to a grievance, the project will not be implemented.

Appendix 14 67 I6. Public consultation and disclosure. Indigenous people tasks will be planned and executed on the basis of intense consultations with affected communities and will entail the signing of specific land acquisition agreements by the tribal elders, the political agent, and NHA.

17. As an appraisal condition, IPDF and IPDPs in English will be disclosed on the ADB website while IPDF and IPDPs in local languages (Urdu and/or possibly Pashtu) will be posted locally.

18. Monitoring and evaluation. Internal monitoring of IPDP implementation will be done by the PMU and reported to NHA. NHA will report to ADB quarterly. External monitoring will be assigned to an independent agency by NHA, and external monitoring reports will be submitted to ADB once a year. At the end of project implementation, the independent monitoring agency will carry out a general evaluation of IPDP implementation.

19. Finances and schedules. The IPDF prescribes that each stand-alone IPDP will detail budgets and provide clear schedules linking land acquisition and resettlement tasks with the initiation of civil works.

V. Impacts of Tranche 1 Projects

20. Tranche 1 of the MFF covers two projects: (i) the Peshawar-Torkham Expressway section 1, and (ii) the Faisalabad–Khanewal expressway (E-4). LARPs were prepared for these two projects and have been included in Supplementary Appendix K.

21. The Peshawar-Torkham Expressway (E-1) will affect 88 households (2,417 affected persons) who will lose 121 structures (36 houses, 67 shops or commercial structures and 18 dismantled houses). Nearly 179.37 hectares (ha) of land will be acquired, of which 1.43 ha is private residential or commercial plots and 177.94 ha communal land belonging to various Pathan clans of the Afridi tribe. Land losses will have minimal impact on livelihood as the affected areas are essentially barren, stony hills. The overall budget for the resettlement component is estimated to PRs643.89 million.

22. E-4, will affect 9,209 households (9,050 households loose land—8,113 as owners, 727 as tenants and 210 as lease holders) with an overall population of 65,370 persons; of these, 207 families will lose a house and 19 will lose businesses. Other impacts include 1 mosque, 1 school, 5 tube wells, 5 cattle yards, 3 shops, 2 brick kilns, a poultry farm, a hatchery, a soap factory and a petrol pump that will be affected to varying degrees. Finally, a total of 18,000 wood trees and 13,295 fruit trees will be affected. Costs of LARP implementation are estimated at PRs6.45 billion (inclusive of impacts, compensation, administrative costs, and contingencies)

68 Appendix 15 SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY A. Links to the Country Poverty Analysis

Is the sector identified as a national Yes Is the sector identified as a Yes priority in country poverty analysis? national priority in country poverty No partnership agreement? No

Contribution of the sector or subsector to poverty Reduction: Based on an analysis of the determinants of poverty, Pakistan’s poverty reduction strategy explicitly recognizes that, while economic growth and service delivery are crucial for poverty reduction, infrastructure development (including aviation, ports, railways, and roads) is critical as a catalyst for generating economic activity, employment, and accelerating growth. Better transport infrastructure also helps to integrate Pakistan’s provinces and regions. Increases in trade with neighboring countries facilitated through highways and other means contributes to macroeconomic stability and reduces risks of shocks for the vulnerable poor.

Consultations with local communities during poverty reduction strategy formulation indicated that the need for improved connectivity and access to markets through rural roads was a key issue for the poor. The provision of electricity was another. Rural–urban links promoted through improvements in highways and roads help to ensure greater stability of income and more off-farm employment in rural areas, where the majority of Pakistan’s population and the poor live. In support of the Government’s poverty reduction strategy, ADB recognizes the potential of subregional cooperation through the better transportation links. Transportation is expected to contribute to macroeconomic growth and to increase revenue to the national government (and therefore indirectly to lead to an increase in social spending that benefits the poor, who have a disproportionate interest in public social spending). In addition, better accessibility helps reduce the urban–rural gap and leads to more economic activity, generating off-farm employment for the poor. However, macroeconomic growth in Pakistan will not necessarily translate into reductions in the social gap.1 B. Poverty Analysis Poverty Classification : General intervention What type of poverty analysis is needed? The number of poor2 in Pakistan more than doubled in the 1990s, increasing to 45 million in 1999. Of this figure, 33 million or 73% (4.7 million households), were estimated to live in rural areas. Moreover, Pakistan ranks poorly in major social indicators: the infant mortality rate in rural areas is 106 per 1,000 live births and the percentage of malnourished children under 5 is 39%. An important feature of poverty in Pakistan is the clustering of incomes around the poverty line, as 40.5% of the nation’s population falls in a narrow income range around this line. Approximately 12.2% of the total population may be classed as chronically or extremely poor. According to a Social Policy Development Center assessment (1990-2000), over a 10- year period the disposable income of the top income quintile grew in real terms by 23%, while that of the lowest quintile grew by 3%, increasing the gap between the rich and the poor.3 Factors that affect the livelihood of the poor include (i) low literacy; (ii) lack of access to appropriate technologies, government extension services, off-farm employment opportunities, and formal credit; (iii) social exclusion; (iv) gender discrimination; (v) exclusion from benefit of development projects; and (vi) poor service delivery. The direct impact of the projects on the poor is not expected to be substantial, since the roads would not be primary roads. Instead, they are partially limited access or limited access roads, motorways, and expressways. Benefits for the poor would take the form of improved local employment prospects during project construction. The projects will create significant employment opportunities for skilled and unskilled labor during implementation. Unskilled labor will be employed directly in road construction, rehabilitation, and maintenance and indirectly in providing materials and services for contractors. The projects will generate approximately 26,000 person-months of unskilled labor

C. Participation Process

Is there a stakeholder analysis? Yes No Is there a participation strategy? Yes No

1 World Bank. 2002. Pakistan - Poverty Assessment. Washington DC. 2 The official poverty line is estimated at 2,350 calories/day/adult, equivalent to PRs750 per month in the 2002 PRSP. This was calculated at 2000–2001 prices. Inflation has increased it to PRs850 per adult equivalent per month at 2004 prices (Economic Survey of Pakistan 2004). 3 Social Policy Development Center Annual Report 2001.

Appendix 15 69 Participation, consultation, and information dissemination were incorporated at several levels during the planning of tranche 1 projects while (i) validating principles on which entitlements for compensation and compensation levels specified in the entitlement matrix for the project are based; (ii) forming committees of people affected; and (iii) minimizing adverse impacts, exploring alternate alignments, and restricting design to adjust to available space.

The National Highway Authority (NHA) will ensure that implementation will involve local groups in (i) preparing final compensation listings and individual claim files and in the payment of compensation for acquired land and loss of assets and livelihood; (ii) consultations with displaced people and host communities on relocation options if relocation is necessary; (iii) the Land Acquisition and Resettlement Coordinating Committee (which will include representatives from affected people and NHA and will serve as a liaison with the project for compensation matters, technical design, and construction issues and will participate in any grievance redress); and (iv) monitoring and evaluation during implementation of the resettlement plan.

D. Gender And Development

Women will be able to benefit from the program through improved access to basic services such as health, education, and clean water. Additional assistance to households headed by women will be provided as part of the resettlement plan. There are potential risks of HIV/AIDS and trafficking of women or children that may be aggravated improving connections to and from project areas. However, the project aims to address these issues through its mitigating measures. Has an output been prepared? Yes No

E. Social Safeguards and other Social Risks Significant/ Plan Item Not Significant/ Strategy to Address Issues Required None Significant The two projects in tranche 1 will affect 9,297 Full households. These were identified through a detailed Resettlement Not measurement survey of the impacts caused by loss of Short significant titled plots, loss of leases, and loss of untitled space. Additional impacts include demolition of houses and RF None loss of business, crops, and trees. Land acquisition prepared will be conducted under the Land Acquisition Act, 1894 which provides for compensation to be paid in a fair and transparent manner according to market value. Other losses will be compensated according to the entitlement matrix developed for the project in keeping with Pakistan laws and ADB safeguard policies, according to which the absence of a formal legal title is not a bar to compensation.

For all additional projects that entail resettlement, the executing agency will prepare resettlement plans on the basis of the resettlement framework (Supplementary Appendix L) prepared for the project. Significant The development of the roads will reduce transport costs and increase the mobility of the local population Yes Affordability Not in the project areas. significant No

None Significant No job losses will occur. The project is expected to generate employment opportunities for local Yes Labor Not communities during the construction and maintenance significant phase. No

None Significant The project will affect tribal communities in the same way as settled populations. Appropriate indigenous Yes

70 Appendix 15 Indigenous Not people development instruments based on thorough Peoples significant community participation have been applied in the No preparation of this project. None Significant/ Plan Item Not Significant/ Strategy to Address Issues Required None

Other Risks Significant Considering the possible presence of laborers from Yes and/or outside the immediate project area and long-distance Vulnerabilities Not truck drivers, NHA will employ qualified national No significant consultants under construction supervision to conduct information and education campaigns on the risks of None HIV/AIDS and human trafficking, targeting construction workers at campsites, truck drivers at truck stops, and local communities along project highways, particularly rural women. The consultants will work closely with the relevant district agencies and other existing networks dedicated to the prevention of HIV/AIDS and human trafficking.

NHA will ensure that the contracts for civil works require that contractors (i) not employ or use children for labor; (ii) disseminate information at worksites on risks of sexually transmitted infections and HIV/AIDS as part of health and safety measures for workers employed during construction; and (iii) follow and implement legally mandated provisions on labor (including equal pay for equal work), health, safety, sanitation, and working conditions.