Document of The World Bank Public Disclosure Authorized

Report No: 23448-IN

PROJECT APPRAISAL DOCUMENT

Public Disclosure Authorized ON A

PROPOSED LOAN

IN THE AMOUNT OF US$255 MILLION

TO THE

GOVERNMENT OF INDIA

FOR

KERALA STATE TRANSPORT PROJECT Public Disclosure Authorized February 14, 2002

Energy and Infrastructure Sector Unit India Country Management Unit South Asia Region Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective January 28, 2002) Currency Unit = Indian Rupee (NR) INR 1.00 = US$0.02 US$1.00 INR 48.00

FISCAL YEAR April 1 -- March 31

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank MTFP Medium-Term Fiscal Plan BPIP Borrowers' Project Implementation Plan MTR Mid-Term Review CAS Country Assistance Strategy NCB National Competitive Bidding BOT Built Operative Transfer NGO Non-Governmental Organization EA Environmental Assessment NH National Highways EMP Environmental Management Plan NHAI National Highways Authority of India EIA Environmental Impact Assessments NPV Net Present Value EOP End of Project O&M Operation and Management ERR Economic Rate of Retum PAF Project-Affected Family ESMP Environmental and Social Management Plan PAP Project-Affected Person GIS Geographic Information System PCC Project Coordination Consultant GOI Government of India PFMS Project Financial Management System GOK Government of Kerala PMR Project Management Report ICB Intemational Competitive Bidding PMT Project Management Team ICR Implementation Completion Report PWD Public Works Department ID Irrigation Department QCBS Quality- and Cost-Based Selection IDS Institutional Development Strategy RAP Resettlement Action Plan IRI Intemational Roughness Index RIMMS Road Information and Maintenance Management ISAP Institutional Strengthening Action Plan RBOCK Roads and Bridges Development Corporation of Kerala IWT Inland Water Transport R&R Resettlement and Rehabilitation MDR Major District Road SA Social Assessment MOEF Ministry of Environment and Forests SEA Sectoral Environment Assessment MORTH Ministry of Road, Transport and Highways SH State Highways

Vice President: Mieko Nishimizu Country Director: Edwin R. Lim Sector Director: Vincent Gouarne Task Manager: Stein Lundebye INDIA KERALA STATE TRANSPORT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 2 2. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 6

C. Project Description Summary

1. Project components 7 2. Key policy and institutional reforms supported by the project 8 3. Benefits and target population 8 4. Institutional and implementation arrangements 9

D. Project Rationale

1. Project altematives considered and reasons for rejection 10 2. Major related projects financed by the Bank and other development agencies 11 3. Lessons learned and reflected in the project design 12 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project 14

E. Summary Project Analysis

1. Economic 14 2. Financial 15 3. Technical 16 4. Institutional 16 5. Environmental 19 6. Social 22 7. Safeguard Policies 25 F. Sustainability and Risks

1. Sustainability 26 2. Critical risks 26 3. Possible controversial aspects 27

G. Main Loan Conditions

1. Effectiveness Condition 28 2. Other 28

H. Readiness for Implementation 29

I. Compliance with Bank Policies 29

Annexes Annex 1: Project Design Summary 30 Annex 2: Detailed Project Description 33 Annex 3: Estimated Project Costs 36 Annex 4: Cost-Benefit Analysis Summary 37 Annex 5: Financial Summary 43 Annex 6: Procurement and Disbursement Arrangements 44 Annex 7: Project Processing Schedule 56 Annex 8: Documents in the Project File 57 Annex 9: Statement of Loans and Credits 59 Annex 10: Country at a Glance 63 Annex 11: Institutional Development Strategy 65 Annex 12: Environmental and Social Assessment, Environmental Management Plan and 70 Resettlement Action Plan Annex 13: Road Safety, Strategy and Action Plan 74

MAP(S) INDIA Kerala State Transport Project Project Appraisal Document South Asia Regional Office SASEI Date: February 14, 2002 Team Leader: Stein Lundebye Country Manager/Director: Edwin Lim Sector Manager/Director: Vincent Gouarne Project ID: P072539 Sector(s): TH - Highways, TP - Ports & Waterways Lending Instrument: Specific Investment Loan (SIL) Theme(s): Transport Poverty Targeted Intervention: N Program Financing Data [XI Loan [ I Credit [ ] Grant [ Guarantee [ Other: For LoanslCredits/Others: Amount (US$m): 255.00 Proposed Terms (IBRD): Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan (US$m): Source Local Foreign Total BORROWER 81.00 0.00 81.00 IBRD 158.50 96.50 255.00 Total: 239.50 96.50 336.00 Borrower: GOVERNMENT OF INDIA Responsible agency: KERALA STATE PUBLIC WORKS DEPARTMENT The Principal Secretary of the Public Works Department, Address: The Government of Kerala Secretariat, Trivandrum, Kerala, India Contact Person: Mr. Babu Jacob, Principal Secretary Tel: +91-471-327285 Fax: +91-471-327285 Email: [email protected] Address: Office of Chief Project Officer, Public Works Department, Trivandrum Contact Person: Mr. N.D. Kumar, Project Director Tel: +91-471-330787 Fax: +91-471-330787 Email: pdpiupwdgsatyam.net.in Irrigation Department Address: The Govenmient of Kerala Secretariat, Trivandrun, Kerala Contact Person: Mr. Jaya Kumar, Secretary Tel: +91-471-327550 Fax: +91-471-327550 Email: [email protected] Estimated disbursements ( Bank FY/US$m): FY 2003 2004 2005 2006 2007 2008 Annual 19.00 40.00 53.00 56.00 52.00 35.00 Cumulative 19.00 59.00 112.00 168.00 220.00 255.00 Project implementation period: Five years Expected effectiveness date: 06/30/2002 Expected closing date: 12/31/2007

00$ PADFom: RIW M . A. Project Development Objective

1. Project development objective: (see Annex 1) The project's principal development objectives are to improve traffic flow and road safety on Kerala State's primary road network, and to strengthen the institutional and financial capacity of Kerala's key transport sector agencies. The Project will support the above development objectives by: (a) improving the capacity and quality of highly congested State highways and major district roads; (b) improving road maintenance planning and management practices; (c) reducing accidents on major roads; (d) piloting an inland water transport (IWT) improvement component for selected canals: and (e) strengthening the technical, financial and management capacities of the Kerala Public Works Department (PWD) and the Kerala Irrigation Department (ID).

2. Key performance indicators: (see Annex 1) The key performance indicators for measuring the overall success of the project will be as follows: In the road sector: (a) reduction in vehicle operating costs and travel time by 20 percent on the approximately 1,600 km of roads to be upgraded and receive periodic maintenance under the project; (b) reduction in the international roughness index (IRI) to 4.5 m/km on approximately 600 km of road to be upgraded by the end of project (EOP); (c) reduction in road accidents by up to 30 percent by improving black spots along project roads; (d) increase in the portion of State highways in good condition (IRI = <4.5 m/km) by at least 50 percent by end of project (EOP), and (e) implementation of a time-based institutional strengthening action plan (ISAP). In the IWT sector: (a) a pilot program to improve about 100 km of navigable waterways by EOP; and (b) forrnulation of an IWT development program by EOP; based on an evaluation of lessons learned from the pilot component.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 21852-N Date of latest CAS discussion: 04/05/01 The Project is consistent with the Country Assistance Strategy (CAS) for India. The Project will contribute to the CAS's key strategic objective of reducing physical infrastructure constraints to achieve the overall goal of poverty reduction, and to facilitate India's potential for long-term economic growth and social development. In the road sector, this involves expanding road capacity and improving national and state highways' serviceability, implementing institutional reform in national and State road agencies, and promoting the sector's role of the private sector in developing and managing the road network. The Project would be implemented in the context of a comprehensive program of fiscal reforms recently launched by the Government of Kerala (GOK) to bring its finances under control and on to a sustainable medium-term path, which would be essential to reverse the trend of deteriorating state finances in recent years. The new Kerala government, which assumed office in May 2001 published a White Paper on the State's finances in June 2001, thereby bringing to public attention the unsustainable trends in the State's finances and the need to take urgent, corrective action. The draft Medium-Term Fiscal Reform Program submitted by GOK to the Government of India (GOI) highlights the fact that past State expenditure policies have neglected physical infrastructure in the State's expenditure priorities, thereby lowering economic performance below its potential. The report emphasizes the need to correct this policy weakness,

- 2 - particularly, the importance of removing transport bottlenecks to unleash economic growth. The GOK has identified the roads sector as a key area for priority investments and policy and institutional reforms. The Project will contribute to on-going fiscal reforms by bringing greater development effectiveness to public sector spending, developing medium-term fiscal plan for the road sector, and seeking alternate funding mechanisms for the roads sector. The Project is also expected to contribute to State civil service reforms by supporting PWD's reform agenda. Kerala has a strong history of social participation and an effective system to make use of this practice. This history of participation is expected to facilitate an enlightened public discussion on road sector reforms, contributing to the reform agenda's long-term sustainability.

2. Main sector issues and Government strategy: The State of Kerala has an area of 38,863 sq. km and a population of about 29 million. The State's total road length is about 142,343 km; some 88 percent of this is paved. About 23,125 km of this primary road network is under PWD responsibility. The roads under PWD management consist of about 1,350 km of national highways (NH - about 5.8 percent of the total length of primary roads; PWD manages these for the Ministry of Road Transport and Highways [MORTH]), 3,330 km of state highways (SH - 14.4 percent), 11,320 km of major district roads (MDR - 49 percent), 3,810 km of other district roads (ODR - 16.4 percent), and 3,315 km of village roads (VR - 14.4 percent). The rest of the network is managed by Panchayath (rural local government), Irrigation and Forest Departments. These roads together constitute the basic State road network, connecting places and people. Kerala was the first state in India to provide 100 percent connectivity to all of its Panchayats. Key Issues Roads and Highways Sector (a) Network deficiencies and inadequate financing of the roads sector: Since 1990 the number of registered motor vehicles has been increasing by 13 percent per year. The capacity of parts of Kerala's road network is insufficient to support this growth in traffic. Around 70 percent of the SHs are still single-lane (3.75 m carriageway), and the rest are two-lane roads (7.0 m carriageway with shoulders only on some sections). The capacity of most SHs is inadequate to serve the growing traffic, which typically is highly mixed, including fast and slow motor vehicles, non-motorized vehicles, and pedestrians. Road surface quality is very poor due to lack of maintenance of existing assets, resulting in excessive wear and tear on vehicles and contributing to high transport operating costs. Poor road conditions also contribute to road traffic accidents and serious environmental pollution. The NHs are funded by GOI through MORTH, while SHs and district roads are funded by the State PWD through plan allocations for development works and non-plan allocations for road maintenance. Historically, the State's level of fnancing for the roads sector has been inadequate. According to norms established by MORTH, the PWD requires about US$50 million per year to maintain its roads. However, typical allocations are much lower, sometimes falling below 50 percent of these requirements. As a result there is a large backlog of road maintenance work in Kerala, which has been estimated at more than US$ 100 million. The State also lacks of a rational road maintenance planning and proper resource allocation system, based on objective economic and social criteria, and does not conduct systematic and regular surveys that could assess the condition of the road network in order to estimate the resource needs for various maintenance programs. This has led to sub-optimal utilization of the limited funds available and the deterioration of existing road assets. (b) High road accident rates: The concerned authorities have not adequately addressed road safety issues. Vehicle accident rates in India are very high compared to other developing countries (about six

- 3 - times as high as the fatality rate of OECD countries), and Kerala has one of the highest road accident fatality rates in India. It has been estimated that about 40,000 road accidents, resulting in around 2,500 deaths, happen each year in Kerala. The estimated loss of life, property, and productivity from such accidents are bound to be significant, perhaps I or 2 percent of the GSDP (as per sources such as the UK's Transport Research Laboratory (TRL). The mixture of buses, trucks, cars, motorized rickshaws, motorcycles, bicycles, and pedestrians, traveling at vastly different speeds contribute to the extremely unsafe road conditions. Road safety problems are further aggravated further by the many sub-standard or poorly maintained roads, frequent encroachment onto the right-of-way, poor driving and lack of discipline by many road users, lack of enforcement due to poorly trained and equipped traffic police, and insufficient traffic education of road users. Some of these problems can be addressed through short-term actions; others will require long-term plans. (c) Limited capacities of road sector agencies: PWD designs, implements and maintains all public works undertaken by the Government, including developing and maintaining major roads. PWD no longer directly executes projects, but provides technical information and advice to other government agencies and consultants. In this role PWD's its primary resource is its staff. PWD's performance presently is only measured in terms of its annual expenditure. A preliminary institutional audit of PWD highlighted gaps and deficiencies in several areas, including road development and maintenance planning, road safety, quality control, financial management planning (including delays in payments to contractors), and transport coordination. The agency has also problems with its organizational structure, administration, delegation of administrative and financial powers, overstaffing, development, and staff training. The PWD staff skill mix concentrates on engineering skills, and the agency has limited capacity and knowledge in strategic planning, contract management and financing, financial management, information systems, transport economics, road safety, social development, and environmental management. These issues and constraints limits P'WD's capacity to respond to the road sector's increasing and evolving demands. (d) Limited private sector involvement: PWD has a large number of in-house staff, who design and supervise various road works, and appoints contractors to carry out construction works and most periodic maintenance in the State. In general, these contractors rely on traditional, outdated management and construction practices. Presently, the number of large and well-equipped contractors in Kerala is few. The contract packages are typically small and contractor prequalification is inadequate, resulting in limited incentive for private sector road contractors to develop their expertise and acquire modem equipment. Commercializing road sector operations has not yet received sufficient attention in Kerala. The Government's inability to undertake large-scale road projects and programs warrants exploration of greater private sector participation in all aspects of the road sector. Inland Waterways Sector Kerala is one of the few Indian states with a vast inland waterway network that could be developed as a significant transport mode. Historically, inland waterways were a key part of the State's transport system, due to the lack of proper road transport to move goods and people to various inland destinations. Initially, the total length of navigable waterways in the State was around 1,700 km. However, in recent decades the inland waterways have fallen into disuse, and IWT's share of the State's total traffic has declined to about 1-2 percent. Concurrently, traffic on parts of the road network has increased to saturation levels, leading to greater congestion, pollution, and accidents. Studies suggest that rehabilitating of the IWT system, with participation by private sector and local communities, could relieve pressure on parts of the State road network. A more efficient IWT network could provide environmentally-friendly and cost-effective support or altematives to road transport. Also, intelligent use of water resources would help realize the full potential of the State's agriculture and transport system, and support eco-tourism. The main problems faced by the State in the IWT sector are:

- 4 - (a) insufficient canal embankment protection; (b) lack of depth due to siltation and lack of maintenance dredging; (c) too few navigational aids and poor maintenance of existing ones; (d) massive growth of water hyacinth; and (e) lack of modern inland aquatic transport, landing terminals, and cargo handling systems.

Govemment Strategy

Road Sector The draft Road Development Policy for Kerala (1999) prepared by the GOK, underlines capacity expansion of its primary road network as key priority and an integral element of the State's economic development strategy. The policy's overall objective is to promote "a sustainable road network providing connection to all cities, towns and villages, and allowing safe and efficient travel between them." The government seeks to address the following key road sector issues: (a) Addressing network deficiencies and improving road sector financing: The new road policy outlines GOK's strategic approach to improve network capacity. GOK aims to rehabilitate existing roads in high- and medium-density corridors in a phased and timely manner, and upgrade the network to meet modem highway design standards. Greater emphasis will be placed on road maintenance. PWD will be encouraged to contract out all maintenance and operations to private contractors, and use more modem technology for road pavement and treatments. The Government aims to provide adequate funds to meet the transport sector growth demand, subject to overall economic constraints. Since budget allocations alone are not expected to meet the road sector's growing requirements, the State intends to supplement its road sector resource allocation by instituting a wider base of road user charges. The Government recently legislated the establishment of a State Road Fund that will seek to generate user charges through road tolls and dedicated fuel levies. The Roads and Bridges Development Corporation of Kerala (RBDCK), recently established by GOK, will seek to raise funds through loans, shares, and borrowings from financial institutions in order to construct and maintain selected roads and bridges. RBDCK recently awarded contracts to build 28 bridges over railway in the state. One major toll bridge in Kerala was constructed as a BOT project and several NHs bypasses will be built as BOT schemes in the near future. If RBDCK can demonstrate that they can undertake road works competitively, the Government would progressively shift road maintenance works from PWD to RBDCK in the future. (b) Enhancing institutional capacities: The government has committed itself to improve the performance of various road sector agencies. In particular, the governnent is taking steps to modernize and improve PWD's performance, so that it keeps pace with new developments in the roads sector. With this in view, the government engaged a consultant to undertake an Institutional Development Strategy (IDS) study of PWD, to help establish a strategy for developing PWD's technical and financial capacity to effectively manage the State road transport network and to be responsive to road users' demands. Based on the study's recommendations, an empowered government committee headed by the Principal Secretary-PWD, including senior PWD staff, has developed an Institutional Strengthening Action Plan (ISAP) matrix, listing the institutional development activities that are expected to be implemented during the project period and beyond. The ISAP has been formally endorsed by the government. Based on the ISAP, PWD is developing a human resource development strategy; improving its financial management capacities; building capacity for planning and policy functions, including a management information system; strengthening environmental and social impact monitoring; improving its procurement procedures; and strengthening road safety engineering capacities.

- 5 - (c) Reducing accident rates and mitigating environmental and social impacts: Kerala's high accident rates have prompted the government to address road safety problems by introducing road safety audits for new road projects and analyzing accident black spot locations. PWD has developed, as part of project preparations, a draft comprehensive and integrated State road safety action plan, which includes recommendations for the following road safety sub-sectors: coordination and management of road safety; accident data systems; safety publicity campaign; safety engineering, safety education for children; traffic legislation and enforcement; driver training and testing; vehicle safety standards; emergency aid to road accident victims; and safety research. The plan also recommends establishing a PWD Road Safety Unit. As for environmental and social impact issues, GOK' approach is to identify potential impacts early in the planning process and plan how to avoid or mitigate these adverse effects. Government policy is to prepare and implement Environment Management Plans when required, and to develop codes for environmental practice related to State road construction and maintenance. Inland Waterways Sector The government sees expanding the IWT sector as a means to relieve pressure on the road network in the State's most populated areas. The pilot IWT component will provide the government with an opportunity to test approaches to correcting the current imbalance between roadways and IWT traffic in the State and to provide an environmentally-friendly and cost-effective alternative to road transport. GOK plans to rehabilitate pilot feeder canals and to help integrate these with the National Waterway III (part of the West Coast Canal, Kerala's main waterway) and help to further promote development of IWT in this part of the State. The Government also intends to announce a suitable IWT policy to eliminate current policy and institutional ambiguities, and ensure greater investor confidence.

3. Sector issues to be addressed by the project and strategic choices: Roads Sector (a) Capacity expansion of primary road network and improved financing for the road sector: The project will provide resources to improve about 1,600 km of SHs (600 km upgrading and 1,000 km periodic road maintenance) to increase their capacity and comply with Indian Roads Congress (IRC) standards. Strategies to increase capacity will include controlling encroachments, and footpaths will be provided where pedestrian traffic is high. During project preparation, GOK promulgated the Kerala Road Fund Bill to create a Road Fund that will collect greater user charges through tolls and other levies. These funds are to be bolstered by support from the Central Road Fund. GOK has also developed a medium-term fiscal plan for the road sector and seeks altemate funding mechanisms for road development and maintenance. (b) Strengthening capacity of road sector institutions: The Project will focus on reforming PWD and enhancing its institutional capacity and reforming the PWD, transforming it into an efficient, modem road agency that can keep pace with new road sector developments, and ensure that staff can address increasing infrastructure requirements. The project will therefore support rightsizing and restructuring of PWD, train road agency staff in modem project management techniques, quality control, and use of modem technical aids (e.g., computerization, surveying equipment), and upgrade PWD capacity in project design and supervising construction and maintenance operations. These reforms are to be addressed by wide-ranging consultations within PWD, and with the assistance of external experts to be supported by the project. PWD reforms in the PWD are expected to assist general civil service reform in Kerala. (c) Enhancing the private sector role: The project preparation has sought out participation by private sector consulting finms and contractors in the design, construction, and maintenance of State roads. All feasibility studies, design, and documentation were done by private sector consulting firms recruited

- 6 - through a competitive bidding process. During project implementation, international consultants, supported by local consultants, will supervise the work; international contractors are encouraged to establish joint ventures with local contractors. (d) Improving road maintenance management: The project seeks to develop an effective road maintenance management system in PWD and reduce the maintenance of backlog for high-priority roads by implementing road rehabilitation component. The Project will also seeks to improve PWD's road maintenance planning capability and budget procedures. Following the recommendations of a Road Maintenance Management Study, conducted during project preparation, PWD will conduct road, traffic and road user surveys throughout the State, and establish a modem Geographical Information System (GIS) based Road Information and Maintenance Management System (RIMMS). This is to lead to the development of multi-year maintenance plans, to be prioritized by economic criteria. The revised PWD road maintenance policy is expected to include: planning, budgeting, procurement, contract administration, monitoring and financial accounting. (e) Improving road safety and reducing accident risks: Reducing traffic accidents on roads to be improved under the project is a major program component. The Project includes measures to address road safety through immediate actions and long-term plans. These include conducting safety audits, identifying accident black spots, improving road pavement conditions, providing new traffic signs and road markings, improving accident recording and analysis, and strengthening traffic law enforcement. The Project also seeks to establish greater interagency road safety coordination, better training of road safety professionals, and greater road safety awareness through the further development and implementation of an integrated road safety strategic action plan. This was developed as part of project preparation. Inland Waterways Sector The pilot IWT component will rehabilitate three important canal links totalling about 100 km, by removing water hyacinths, strengthening canal embanlcments, and installing navigation aids. Two studies will be conducted during implementation: (a) the Project's environmental and social impacts, and (b) constraints on private sector participation in the IWT sector. The pilot IWT component is anticipated to have a positive impact on social communication and transport costs, to protect large agricultural lands and other properties from flooding, to enhance agricultural production, to provide employment opportunities, and to assist poverty alleviation among low-income farmers in the affected areas. The ISAP will help improve policy and strategy development capacity, environmental and social impact monitoring, and procurement and public participation processes.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project will have four main components: (a) transport corridor improvement: upgrading of SHs, including related social and environmental mitigation measures; and rehabilitating IWT feeder canals; (b) periodic maintenance of SHs and MDRs; (c) road safety improvement; and (d) institutional development and technical a assistance. Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing 1. Transport corridor improvements: Highways 261.55 77.8 192.90 75.6 (a) upgrading 600 km. of priority

-7 - State highways, (b) rehabilitation of 100 km IWT canals, and (c) resettlement and rehabilitation assistance. 2. Periodic maintenance program for Highways 58.20 17.3 46.90 18.4 about 1,000 km state highways. 3. Road safety engineering program. Highways 4.20 1.3 3.45 1.4 4. Institutional strengthening of PWD Institutional 9.50 2.8 9.20 3.6 and ID, TA to prepare follow-up Development studies and implementation of a State road safety action plan.

Total Project Costs 333.45 99.2 252.45 99.0 Interest during construction 0.0 0.0 Front-end fee 2.55 0.8 2.55 1.0 Total Financing Required 336.00 100.0 255.00 100.0

2. Key policy and institutional reforms supported by the project: The Project's key policy and institutional reforms are: (a) promulgating a comprehensive Road Development Policy for Kerala; (b) establishing sustainable road funding mechanisms to meet projected financial requirements for medium- to long-term road sector development, through increased budgetary allocations and mobilized funds from other sources (such as the establishment of a Road Fund); (c) reforming PWD to ensure greater accountability, restructure its existing service delivery functions, introduce new functions, improve staff skill mix, and developing human resource capacities; (d) revising outdated PWD codes and manuals; (e) developing a GIS-based, cost-effective RIMMS in PWD for better road inventory data collection, investment prioritization, and project management; (f) introducing computerized project management and financial management systems in the PWD that will relate procurement, physical progress monitoring, and contract management with financial flows; (g) introducing environmental and social impact monitoring; and (h) promoting intemational good practices within PWD including feasibility studies, engineering design, road construction, quality control, contract management, road safety, and social and environment impact assessments.

3. Benefits and target population: Benefits: The proposed roads component is expected to improve the State capacity and quality road network, enhance road safety, and facilitate greater attention to social and environmental issues associated with the road sector. The Project will also strengthen the policy environment, improve the road sector's financial sustainability, reform PWD, and facilitate greater private sector participation and road user involvement. The improved SHs and MDRs are expected to enhance the road network's capacity and condition, provide better connectivity with NHs, and reduce vehicle operating costs and travel times within Kerala. This is expected to result in better inter- and intra-state passenger movement and improved marketing and distribution of agricultural and industrial products. The project will promote policy and regulatory reforms that have been designed to facilitate greater private sector involvement in the road sector. The high -standard civil works contracts to be implemented over the five-year construction period will spur on

- 8 - development and modemization in the domestic construction industry, especially in mechanization and quality of work. The road safety activities are expected to reduce accidents and implement long-term strategic measures to strengthening road safety in the entire State road network. Preparing of IDS and implementing ISAP are expected to reform PWD, strengthen the road sector financial sustainability, improve institutional coordination among transport agencies, facilitate road user participation, and introduce efficient road maintenance management. Through improved road agency and financial effectiveness. The Project is expected to lead to a more optimal allocation of resources for road investment and sustainable maintenance of the State's road assets through improved agency and financial effectiveness. Road sector efficiency gains would free up scarce public resources that could be used by Government for other programs. Target population: The roads identified for improvement (rehabilitation and periodic maintenance) under the project pass through 405 villages and cover 14 districts. These improvements will provide better access to schools and health centers, and the persons living along the project corridors are expected to derive economic and social benefits from better access and enhanced mobility. The pilot IWT component is expected to have a significant positive impact on communication and transport costs, protection of agricultural lands and other properties from flooding, enhance agricultural production, provide employment opportunities, and alleviate poverty in the affected areas. In particular, the coir industry in Alappuzha, and the rubber, cement and paper industries in Kottayam will benefits under the IWT component. This should also generate greater employment in the project influence area. Eco-tourism is another area expected to benefit from improved IWT operations.

4. Institutional and implementation arrangements: GOK has established three committees to monitor, coordinate, and expedite project activities: (a) State-level Empowered Committee, chaired by the Principal Secretary-PWD and comprising the Secretaries of Finance (Expenditure), Irrigation, Planning and Revenue, the Chief Engineers-PWD (R&B and DRIQ) and the Chief Engineer-ID, to guide and monitor project preparation, oversee policy implementation and decisions on behalf of the Government, ensure improved inter-departmental, and inter-agency coordination, and expedite key decisions during project preparation and implementation; (b) a Project Steering Committee to periodically monitor the project and expedite procurement clearances; and (c) a Tender Evaluation Committee to evaluate all procurement under the project. PWD has overall responsibility for project implementation. A project management team (PMT) was established in PWD, headed by a Project Director (PD) and assisted by PWD and ID personnel skilled in technical, financial, social, and environmental issues related to the project, to manage project implementation. This project team was considered necessary to coordinate and manage the planning, design, and implementation of a project of this size and complexity. Additionally, a Project Coordination Consultant (PCC) was engaged to assist PWD in project preparation and management, introduce project design international standards and introduce PWD staff to internationally accepted project preparation practices. The PCC has helped PWD with project preparation and will continue to provide support during implementation. In addition to engineering inputs from within PWD, GOK has also assigned experienced finance, environment and social resettlement specialists from relevant departments, to coordinate these aspects of project preparation. These staff have been provided with training to strengthen their capacities, and familiarize them with World Bank guidelines and procedures. PWD staff who received both on-the-job and targeted training from the PCC consultants during preparation will be fully deployed during implementation. PWD will manage and supervise resettlement activities and compensation payments, while district authorities will facilitate these activities. PWD will manage procurement of works and services under the

-9- project. PMT will act as the contract management unit, with assistance by the PCC. PWD will engage consultants to supervise civil works contracts under the upgrading and widening component. In the first year of periodic maintenance works, 50 percent of the work will be supervised by supervision consultants and 50 percent by PWD, with periodic technical audits by consultants. In second and third year maintenance work will be supervised by PWD staff with assistance from consultants for technical audits. PWD will also engage specialists to carry out safety audits, other technical audits, and quality control of the rehabilitation works, and to develop an effective system to monitor maintenance performance. The road safety component will be implemented through coordinated arrangements between the concerned agencies. While PWD will be responsible for the implementing the road safety engineering activities, traffic police will primarily be responsible for developing and installing of a new accident recording and analysis system. The pilot IWT component implementation will be monitored by an Executive Engineer and an Assistant Executive Engineer from ID, who will be working with PMT at headquarters and other technical officers at the field level. Financial Management The Project's finance wing will be headed by a Financial Controller (Joint Secretary on deputation from the Department of Finance) and will be assisted by a qualified accountant designated as the project's Finance Manager. They will be responsible for establishing the agreed financial management arrangements, including a computerized Project Financial Management System (PFMS), providing timely financial reports to the stakeholders (including the Bank), ensuring the smooth and timely flow of funds, and supervising the project's financial management issues. The finance staff will be trained by the consultants on the computerized PFMS (currently under development) and on the Bank's disbursement procedures and reporting requirements.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: Roads sector (a) Selection of State roads: The project will improve the capacity and safety of SHs and a few MDs. The project does not support the development of NHs; these are largely addressed by MORTH and the National Highway Authority of India (NHAI) through a special PWD unit. The Bank has a separate program of ongoing and proposed projects to support the capacity expansion in the national highway network and MORTH and NHAI's institutional development. (b) Capacity expansion through upgrading and periodic maintenance: To maximize economic returns and minimize social and environmental impacts, the proposed project will mostly concentrate on expanding State roads network by upgrading and widening of 600 km of existing roads and maintaining 1,000 km of existing roads, rather than build any new roads. Specific road sections were selected through the Strategic Options Study (SOS) undertaken by the government in 1997, with an initial assessment of 5,700 km of the existing State road network. From this 2,800 km of roads were short-listed and analyzed for traffic volumes and bottlenecks, current maintenance and funding levels, and expected traffic growth and investment needs. The SOS identified high-priority roads for further study, based on traffic congestion, expected economic returns, network connectivity, links to expected economic development, and project packaging. (c) Need for government investment: Privatizing and commercializing of the project roads as a means of capacity expansion and improved maintenance were considered as an alternative to government investment. However, privatization potential was assessed as very limited at the time. Therefore,the study decided that the core upgrading and rehabilitating investments would come from the govermment. However, the study

- 10 - recognized the need to access greater non-budgetary resources, and therefore the project includes regulatory and institutional initiatives to generate more user charges and to cultivate greater private sector involvement in the road sector. IWT sector

Pilot project: This project component mainly focuses on rehabilitating three important canals. Large-scale capital investments are not sought at the pilot stage. The component will explore opportunities for attracting potential shippers and transport agencies to make more use of the inland waterways. A future project could make greater improvements to the canal system if this is justified by increases in demand.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

l 1 Latest Supervision ] Sector Issue Project | (PSR) Ratings I______I (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) COMPLETED/ONGOING Construction/rehabilitation of rural Bihar Rural Roads Project U U roads. (Cr. 1072-IN). Construction/rehabilitation of rural Gujarat Rural Roads Project S S roads. (Cr. 1757-IN). Capacity expansion of national First National Highways Project U U highway. Four-laning and strengthening (Ln.2534-IN). in four States. Capacity expansion of State roads and States' Road Project U U institutional development of State road (Ln.2994-IN, Cr.1959-IN). agencies. Capacity expansion of national Second National Highways S S highways and institutional Project (Ln.3470, Cr.2365-IN), strengthening of MOST and NHAI. Third National Highways Project (Ln.4559-IN) Enhancement of institutional capacity State Roads Infrastructure S S to prepare projects at the state-level. Development Technical Assistance (Ln.4114-IN) Capacity expansion, maintenance and Andhra Pradesh State Highway S S institutional development of state road Project (Ln.4192-IN). agency. Widening and strengthening of two ILFS Project (Ln 3992-IN; S S state roads in Gujarat in a commercial Cr.2838-IN). format: Vadodara-Halol SH; Ahmedabad-Mahesana SH. Capacity expansion, maintenance and Gujarat State Highway Project S S institutional development of State road (Ln. 4577-IN). agency. Capacity expansion, maintenance and Karnataka State Highways S S institutional development of State road Improvement Project (Ln. agency 4146-IN). Capacity expansion of national Grand Trunk Road Project S S highways and institutional strengthening Project (FY2002). of NHAI/MORTH. PLANNED Capacity expansion and maintenance Proposed Tamil Nadu, Uttar of State roads and institutional Pradesh, Mizoram and Orissa development of State road agencies. State Highways Projects (FY2002-03). Capacity expansion of national Proposed Allahabad Bypass highways and institutional strengthening Project (FY 2003). of NHAI. Other development agencies ADB: Capacity expansion of national First Highway Project, Second highways and institutional Highway Project, and Third strengthening National Highway Project. of NHAI/MOST OECF: Capacity expansion of Yamuna Bridge Project, national highways and institutional National Highway Project. strengthening of NHAI/MOST. ADB: TA for preparation of national Western National Highway highway project. Corridor Study 1998/99. ADB - TA for preparation of West Bengal, North-South investment plan and strategy for the Corridor Development, north-south corridor development in 1998/99. West Bengal. OECF: National highway expansion. Proposed National Highway Projects. DUTCH DEVELOPMENT AID. Study of Inland Water Transport System (IWT) in India. IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Bank operations India's road sector have identified the following important markers of unsatisfactory projects: (a) poor quality at entry due to inadequate project preparation by PWD; (b) reluctance by individual States to undertake fundamental sectoral reforms; (c) PWD's weak institutional capacities for project management and contract administration; (d) weak State fiscal capacity, affecting fund flows; (e) poor interagency coordination; (f) lack in experience with Bank procurement procedures and insufficient procurement preparation; (g) delays in procurement decisions and handing over project sites to contractors; (h) weak and inadequate capacities by domestic contractors and consultants; and (i) delays in land acquisition and implementation of Resettlement Action Plans (RAP). Several actions were undertaken during project preparation to address these issues: (a) retaining experienced international consultants for civil works design and preparing an IDS to ensure quality at entry; (b) agreement on a final ISAP, including an implementation timetable endorsed by the government to ensure upfront commitment to sector reforms; (c) early implementation of institutional strengthening

- 12 - measures to enhance PWD's institutional project management capacity; (d) analysis of state finances and the road sector MTFP, including risk mitigation measures to ensure adequate State counterpart financing; (e) prior to loan effectiveness, to ensure readiness for implementation, detailed engineering and contract bid documents for 260 km (Phase I) upgrading civil works contracts and about 340 km of periodic maintenance works were completed before project appraisal, and 35 percent of the civil works contracts must be awarded; (f) upfront preparation of the RAP, and advance assessment and timely initiation of the land acquisition process to avoid delays in construction activities; (g) development of a financial management system which must be operational prior to project effectiveness, and (h) upfront completion of a road safety audit for about 600 km upgrading works under the project, the preparation of a draft integrated Road Safety Action Plan, and pilot road accident blackspot investigations, to ensure the prioritization of road safety engineering activities.

4. Indications of borrower commitment and ownership: GOK has demonstrated its interest and commitment through several proactive advance actions: (a) Establishing of a State-level Empowered Committee, headed by Principal Secretary-PWD, to oversee project implementation. A multi-disciplinary project management team has been constituted within PWD, with representation from ID, for day-to-day project preparation and implementation. (b) The PWD has completed a comprehensive IDS study, and prepared the final ISAP; the government has endorsed these. The ISAP recommendations will be implemented in a time-bound manner. PWD has also constituted three dedicated working groups and a committee of Chief Engineers, from within the organization, to fine-tune and expedite ISAP implementation. (c) The government has developed a draft Road Development Policy for Kerala. GOK is expected to formally endorse the final policy in the near future. (d) The Kerala Tolls Act (1983) was studied with a view of facilitating greater private sector participation in the road sector. This led to the Kerala Road Fund Act, November 2001, establishing a road fund facility, headed by a Road Board; (e) GOK drafted a Medium-Term Fiscal Plan (MTFP) for the road sector projecting fund requirements and financing sources. The MTFP includes (i) adequate and timely counterpart project funding, (ii) rising road maintenance allocations to meet Finance Commission norms in the second year of the project and surpass those levels afterwards; and (iii) progressive clearing of pending bills to contractors and reduction in payables position to within 4 months of expenditure, within the next two years. (f) The Roads and Bridges Development Corporation of Kerala (RBDCK) was created to promote private investment in the road sector and improve road infrastructure efficiency by corporatizing some traditional PWD functions. RBDCK has already awarded 28 contracts to build railway over bridges. (g) GOK has enacted the Kerala Highway Protection Act (1999) in order to protect highway corridors from encroachments and undesirable land use developments; (h) GOK recently completed one major bridge project on a BOT basis. Some other BOT schemes to build NHs bypass will begin soon. (i) Several key road sector studies such as: Core Road Network study to identify road and bridge projects amenable for private financing, a study on road maintenance planning, and several road

- 13- safety studies have been completed. (j) The Resettlement and Rehabilitation (R&R) Policy Framework has been approved and ratified, and the Sectoral Environmental Assessment (SEA), Environmental Impact Assessment (EIA), Environmental Management Plans (EMP) and Resettlement Action Plan (RAP) have been completed and made available to the World Bank's Public Information Center and in project districts, for public review and comments. NGOs have been identified and trained for initial RAP implementation. PWD engineers, delegations from project-affected persons, and concerned NGOs have met in orientation workshops. (k) Contractors for civil works (Phase I road rehabilitation works, first year periodic road maintenance works) have been pre-qualified, bids have been received and evaluated for the first year periodic road maintenance contracts, and the proposals for the supervision services of Phase I road rehabilitation works have been evaluated. The contract for the supervision services will be awarded immediately after the Bank's approval of the loan. (1) An international road safety specialist has been appointed to carry out a safety audit, teach PWD staff to analyze accident sites, and help PWD to develop a road safety strate-ic action plan.

5. Value added of Bank support in this project: World Bank involvement in the general transport sector, and specific roads and highways sectors has been extensive. The Bank has been in the forefront of key policy and institutional reforms in the roads and highways sectors in several countries, including India. The Bank's expertise gained from previous and on-going transport operations in India, specifically national- and state-level road projects, is expected to provide invaluable support to transport sector reforms in Kerala. Bank involvement is expected to provide the transport sector agencies, PWD and ID, with improved international knowledge and practices in project management, engineering design and construction, procurement, environrent, land acquisition, resettlement, safety, and construction supervision. The Bank will also bring its extensive experience with other developing countries' experiences in institutional and maintenance challenges at different stages of reforns and modernization. In particular, the Bank's involvement will help ensure that road safety, social development, and environmental issues are fully reflected and integrated in project design, preparation, and implementation. Implementing ISAP is expected to help PWD to transform itself into an efficient, modern road agency. The Project features sector reforms designed to improve state road planning, financing, construction, and maintenance management. Bank project preparation and implementation procedure will ensure greater transparency in the bidding processes and therefore, better use of the State's public resources, and greater participation by local and international private contractors.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$809 million; ERR = 26 % (see Annex 4) O Cost effectiveness O Other (specify) The project feasibility study included cost-benefit analysis of the individual state highways considered for (a) upgrading and widening and (b) periodic maintenance. The upgrading and widening component, including relevant environmental mitigation measures, land acquisition, resettlement and rehabilitation, and contingencies, represents 62 percent of the total project cost; and the periodic maintenance component

- 14 - represents 18 percent of the total project cost. The cost-benefit analysis was based on the Highway Design and Maintenance Standards Model (HDM-III), developed by the Bank. The quantified benefits include savings in vehicle operating costs and travel time, and reduced government/PWD road maintenance and rehabilitation cost. The economic evaluation was carried out for 69 roads proposed for upgrading and widening. The minimum economic rate of return (ERR), 12%, which corresponds to the opportunity cost of capital, was used as the economic threshold for roads selected for upgrading and widening under the project. In addition to economic viability, better spatial equity among the districts in the state was also taken into consideration in the selection of roads for upgrading and widening. Under the budget consideration, 8 roads with a total length of 255 km have been selected for upgrading and widening under Phase I, and 7 roads totalling 324 km under Phase II. The ERR for these roads ranges from 13% to 63%, averaging 26%. The total NPV is USS376 million. Thirty-seven roads (a total of nearly 1,000 km) were selected for periodic maintenance under the project. They all have a benefit-cost ratio over 4. The total NPV for the component is USS433 million. Details of the analysis are provided in Annex 4. Economic analysis was not performed for the road safety, inland waterway, or institutional strengthening components. Intemational experiences suggest that road safety works are highly beneficial to road users. Due to a lack of reliable methodology, the small pilot inland waterway component has not been formally evaluated; it is justified on the ground that small investment is needed to gain experience before larger actions can be considered and implemented to revitalize this potentially viable sector.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4)

Fiscal Impact:

Recognizing the serious fiscal condition of the State, the Medium-Term Fiscal Reform Program, under preparation, aims to reduce the State's fiscal deficit to no more than 1.5% of GSDP by 2004-05 (from about 4.5% in 2000-01), through a combination of revenue enhancement and expenditure rationalization measures. The successful implementation of this reform program is expected to create, over the medium term, adequate fiscal space to fund the proposed roads project. The policy and institutional reforms supported by the project would, in turn, contribute to the overall fiscal correction, such as widening the base of road user charges and improving the coimposition and effectiveness of public expenditures. The project would also contribute to State civil service reforms by reforming and restructuring PWD, one of its largest departments. The annual maintenance requirement for State roads in Kerala state as per MORTH norms, is US$50 million. However, in recent years actual funding has been low and years of inadequate maintenance funding has caused a backlog. The State budget allocation for road upgrading and development was US$33 million, US$25 rnillion, and US$40 million, in the previous fiscal years. Clearing the maintenance backlog is a priority, and improving funding mechanisms was considered under the institutional strengthening component. Road sector expenditure has been brought under greater discipline during the current fiscal year, compared to the past. The highest priority is clearing past bills and maintaining existing assets; new investments are strictly controlled. The State's tight fiscal situation and accumulated payments arrears presents a fiscal risk in the short term, i.e., in the first two years of the project. To mitigate this risk, a special flow-of-funds

- 15- mechanism will be established for this project in the first one or two years, until the fiscal situation shows clear signs of improvement. The fiscal risk also will be mitigated by developing a Roads Sector MTFP that recognizes the need to bring down the payables position, and at the same time, allocate the fresh resources the sector needs, prioritizing maintenance of existing roads rather than making new investments (other than the proposed project).

3. Technical: The capacity and safety of the roads to be upgraded under the project will be substantially improved by strengthening and widening the existing 3.75 m or 5.5 m pavements to 7.0 m. Reconstruction and improvement under the project will adopt proven engineering design standards by employing intemationally experienced engineering consultants, working to design standards that will meet Indian and intemational pavement standards. The Project's road upgrading and maintenance components aim at introducing substantially higher construction and quality control standards. Cost-effective and technically feasible solutions have been developed to improve project roads' capacity, geometry, road safety, and riding quality. Project preparation and implementation has focused on incorporating intemational experience in civil works design and construction. This is expected to result in higher standards and improve local contractors' capabilities. A comprehensive road safety audit was done before the upgrading works design was finalized, to ensure that all safety aspects were addressed. A road maintenance planning study system, completed with the assistance of IDS consultants, was done to complement the rehabilitation and institutional strengthening components. This study reviewed PWD's current maintenance system and identified measures to improve this. Based on study findings, the Project will fund the development of detailed road maintenance design and contracts using innovative technology and contracting arrangements. Study recommendations also include improved planning and budgeting methods using a simple road maintenance management system.

4. Institutional: The institutional aspect of the project will be mainly addressed through the IDS and by implementing the ISAP. The IDS was prepared in a fully participatory manner, through a series of workshops to maximize inputs from relevant government departments and from the road transport users. Based on IDS recommendations PWD and other concemed agencies prepared an ISAP. Following this, a high-level govemment committee, headed by the Principal Secretary, PWD, examined and finalized the ISAP for govemment clearance and endorsement. Details of the final ISAP matrix are included in Annex 1 1. The ISAP includes many activities to be undertaken by the govemment and PWD to reform the sector and to strengthen PWD's and other key agencies' institutional capacity. Proposed actions include: (a) road planning and investment based on user requirements, road transportation network factors, and sound economic considerations; (b) planning, implementation, and management of road construction programs; (c) development and management of cost-effective, rationally determined road maintenance programs; (d) generation of increased, dedicated, and sustained levels of funds for on-going road network maintenance needs and planned investment requirements; (e) effective use of private sector resources in the engineering and execution of the road projects and programs; (f) installing a computerized modem financial management system; (g) consultation with main road user stakeholders when planning road network developments and investments; and (h) the establishment of a PWD Road Safety Cell to undertake future safety audits and investigate accident sites. The full implementation of ISAP activities has been costed and will be funded under the project. PWD staff will be trained as needed for the above activities. In particular, it will be necessary at an early stage to strengthen the PWD capacity in areas such as procurement and resettlement, at an early stage, and to establish good coordination with other agencies responsible for utility relocation. Successfully implementing of the ISAP should ensure sustainable

- 16 - improvements to road sector planning, management and financing, and PWD's institutional framework and capacities to the efficiently manage State road infrastructure development and maintenance.

4.1 Executing agencies: The road component will be implemented by PWD, with technical assistance from ID for the IWT component (as part of the project management team). The Project Steering Committee, headed by the Principal Secretary-PWD, will oversee and coordinate all aspects of project implementation, including awarding contracts for civil works and consultancy services. Although PMT in PWD will manage implementation activities, PWD will receive technical assistance in institutional strengthening, capacity building, and road maintenance management. The project will help PWD to improve its internal coordination, and its relations with other project implementation agencies and departments. The government has agreed in principle to pursue the recommendation to establish a technical twinning arrangement between PWD and an overseas road agency, for information exchange and capacity building purposes. The ISAP will also benefit ID by building its capacity in policy and strategy development, environmental and social impact monitoring and, public consultation, as it implements the IWT component.

4.2 Project management: The government has decided to entrust project implementation to a special project management team in PWD, in order to tap the experience and strength gained by this team during project preparation. PWD staff will be progressively introduced to international technical standards. Strengthening PWD poses special challenges and requires steady and concerted efforts over time. To assist PWD implement the project, specialized consultant services will be provided as and when required. To ensure capacity building and transfer of technology, some PWD staff will be seconded to work under the supervision consultants.

4.3 Procurement issues: Project appraisal included, an in-depth assessment of PWD's capacity to manage procurement activities. PWD's procurement plan for road upgrading and periodic maintenance work and the IWT pilot component were reviewed and agreed with the Bank. The plan includes list of proposed civil works contracts, corresponding supervision and institutional development consultancy contracts, the institutional strengthening action plan matrix, information on goods and equipment to be procured under the project, and the implementation timeline. The government has constituted a Tender Evaluation Committee for evaluating all procurement under the project, and a Project Steering Committee to evaluate all project, and to clear procurement related activities. Most civil works contracts under the upgrading component will be procured by ICB procedures, while civil works under the periodic maintenance component will be procured by NCB procedures. The contract sizes have been designed to encourage bids by international contractors, who will then be invited to form joint ventures with local contractors, helping to develop local industry. The supervision of the road rehabilitation work component will solicit by ICB intemational consulting firms in partnership with local firms. To expedite procurement decision-making in accordance with Bank guidelines, the Government has constituted a Tender Evaluation Committee and a Project Steering Committee has been established. This latter Committee is authorized to take all decisions on procurement issues for contracts to ensure transparency, competitiveness of procurement process and expeditious award of contracts.

4.4 Financial management issues: Kerala PWD has been a participant in States Road Infrastructure Development Technical Assistance (Ln.

- 17 - 4114-IN) since April 1999, and experienced the Bank's disbursement procedures and financial reporting requirements. The entire project costs, including those for the IWT component, would be paid for and recorded in the books of the PMT at PWD in accordance with procedures and policies prescribed in the Finance Manual. The Project's financial management arrangements are detailed in Annex 6. KSTP has a financial management system that should be able to adequately account for project resources and expenditures. A finance manual, detailing the financial policy and procedures and how to use the computerized Project Financial Management System (PFMS), is currently under preparation.

PWD's accounting policies and procedures are well laid out in the Kerala public works account code, the Kerala Financial Code, and various accounting forms and formats. These policies and procedures are exhaustive and meet the financial information requirements of the Accountant General and other stakeholders. The Project proposes to upgrade the current manual recording and reporting expenditures system with a computerized FMS. Consultants are currently designing and implementing this. The consultants have completed inception analysis and the Project has received the System Requirement Specification (SRS) report. The software development work has started and the program is expected to be finalized (including testing with live data and training project staff) by August 31, 2002. The computerized FMS is expected to be operational before disbursement begins. The PFMS being developed by the consultant will be based on PWD's existing accounting system and must meet the reporting requirements of: (a) PWD's general financial rules and codes and accountant general's requirements; (b) the World Bank guidelines; and (c) project management, for managerial decision-making. The FMS system developed for the project is scheduled to be rolled out,with required modifications, to divisions not involved in the project by December 31, 2004, to strengthen PWD's overall financial management arrangements and as a part of the Project's Institutional development component.

GOI will open a special account with RBI to receive project disbursements from the Bank and then make the funds available to GOK under the standard Additional Central Assistance (ACA) mechanism on a 70 percent loan and 30 percent grant basis on a periodic basis, including the initial advance of USS 15 million. All project funds, including counterpart funds will be in budgeted in GOK's budget as an identifiable single budget item each year. Under the arrangement, as approved by the State Cabinet, the project will open a joint bank account in the name of PWD and DOF's representative in a commercial Bank outside the GOK's treasury system. GOK will make funds available to the project in advance, on a quarterly basis, on the basis of monthly cash forecasts based on project expenditure; quarterly reviews will see to it that enough monies are available in the bank account to meet the project's forecasted expenditures. Divisions participating in the project will submit certified bills to the Project Management Team, which will then issue checks to the contractors and suppliers as per contractual terms.

Disbursements: Disbursements from the Bank loan wvould initially be made by the traditional system (reimbursement with full documentation and against statement of expenditure), then converted to Project Management Report (PMR)-based disbursements at the option of GOK and GOI after computerized PFMS is successful implemented and the PMR successfully submits reports for one year. The expected date of conversion to PMR-based disbursement is March 31, 2003. R&R assistance will be disbursed against eligible assets (excluding land) and other enhancement costs incurred by the beneficiaries, within the approved entitlement framework.

Retroactive Financing: Retroactive financing up to an amount of USS15 million will be available to cover eligible project implementation expenditures after the project appraisal. Eligible expenses include expenditures on civil works, consultancy for maintenance contracts, training, R&R, EMP and other expenditures as detailed in BPIP. The retroactive financing will finance relevant project expenditures incurred before the date of signing but after November 1, 2001.

- 18- Audit: The Project accounts will be audited by the Accountant General (Audit) of the State of Kerala on behalf of the C&AG of India and must be submitted to the Bank within 6 months of the end of GOK's fiscal year. The TOR of the proposed audit has been approved by the Bank and have been discussed with the State AG and C&AG. The annual reports must be submitted within 6 months of the close of GOK's fiscal year. The following audit reports will be monitored in Audit Reports Compliance System (ARCS):

Implementing Agency Audit Auditors

PMT/PWD SOE/Project Audit AG (Audit), Kerala on behalf of C&AG

DEA/GOI Special Account C&AG

The audit covenants of Loan 4114-IN, a project being implemented by PWD, have been met.

InternalAudit: In addition to the external audit, a firm of chartered accountants will conduct an internal audit to assess the operation of the project financial management system, and will include reviews of internal control mechanisms, R&R implementation arrangements, and procurement processes. Any issues arising from external or internal audits, including systemic issues, must be promptly and timely addressed by project authorities. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. (Refer Annex 12 for additional details on environmental and social aspects.) Environmental Assessment Process for Roads and Waterways: The EA process to assess the potential impacts included a Sectoral EA (SEA) covering all proposed upgrading, widening, and maintenance work in both phases of the roads component. The EA process was first done for Phase I roads, and as project implementation progresses, will be done for Phase II roads. Subsequent to the SEA, an EA was carried out for all nine corridors targeted for upgrading in Phase I and a consolidated EA report prepared, in addition to individual corridor-specific EMPs. A reconnaissance environment and social baseline survey was carried out for the roads identified for maintenance work, and an Environment and Social Management Plan (ESMP) was prepared. As for the pilot IWT component, a draft Environment and Social Assessment Management Plan (ESAMP) was prepared for the three proposed waterway sections; this was found to be incomplete. A revised and finalized environmental mitigation plan, acceptable to the Bank, must be submitted by GOK as a precondition for financing any activities under the IWT component. Since this is a Category A project, and as the EA reports were prepared by the same engineering design consultant team, an independent review of the Environment and Social Assessments was carried out to ensure compliance with the Bank's Safeguard Policies. Recommendations from the review were incorporated in all the relevant documents -- EAs, EMPs, RAP for roads, and ESAMP for waterways. Statutory Clearances: These have been obtained as necessary for Phase I; see Annex 12 for details. Consultation and Disclosure: The EA process was very consultative in nature, with systematic public consultations at various stages, including during screening when the scope of further consultation was determined. The consultations included the semi-urban and urban populations along the project roads. Follow-up consultation took place in September 2001 and in December 2001. The reports were released in November 2001 to the Bank's Infoshop and affected districts in Kerala.

- 19 - Project Activities and Potential Impacts: The road corridors and waterways were selected to cause minimal direct adverse impacts on biodiversity and ecologically sensitive areas. Major issues emerging from the environment analysis include: (a) soil erosion; sedimentation; roadside flooding; slope instability (in hilly regions); drainage; and submergence problems due to heavy rainfall, requiring raised formation levels in certain road sections, cross-drainage structures and embankment stabilization techniques; (b) high accident rates due to poor traffic and road management practices and substandard design of curves; mitigating curve improvements, short realignments, and one bypass, have been considered. A separate Road Safety Audit studied the engineering designs and its recommendations--including bus bays, parking areas, pedestrian facilities, and landscaping activities have been incorporated into the final designs; (c) loss of roadside trees, and an extensive tree plantation plan has been prepared; (d) land use with respect to sensitivity of paddy field conversions for collection of borrow material and locating construction camps for mitigation measures and guidelines have been integrated in the EMPs; (e) possible impacts on roadside cultural properties enhancement plans have been proposed; and (f) monitoring plans have been provided in the EMPs for air, water and noise pollution during construction and operation phases. Construction-related impacts will be confined to the existing right-of-way (ROW) to the extent possible, except for realignments and the one bypass (proposed only in Phase 2). These mainly include: (a) air and noise pollution during road construction and operation of the roads; (b) dust and smoke from material transport, crushers, and asphalt plants during construction; (c) the risk of oil fuel and lubricants spills; and (d) borrow pits, quarries, and construction camps. Mitigation measures are a part of the EMP for upgrading and maintaining roads and waterways. Key environmental issues emerging from the waterways analysis include: (a) bank erosion; (b) removal and disposal of water hyacinth; (c) transportation and disposal of dredge material; (d) noise disturbance; (e) impact on water quality due to sewage disposal from private residences and other sources; and (f) fuel and lubricant leaks from boats. Dredge and water hyacinth disposal plans have been prepared as part of the ESAMP. Disposal sites have been located along the waterways to minimize transportation. As the pilot waterways receive wastewater discharges from residences along the banks and other sources, measures to improve sanitation practices have also been considered.

5.2 What are the main features of the EMP and are they adequate? The SEA includes a EMP framework, while the consolidated Phase I EA includes detailed EMPs for all nine upgrading corridors, ESMP for the maintenance corridors and an ESAMP for the waterways. These cover impact identified by the EAs and issues raised during public consultations, and detail measures to avoid, mitigate and enhance impacts during all project stages. They include an implementation schedule, with links to the relevant contract clauses; Bills of Quantities and appropriate links to the bidding documents; a monitoring plan; and anticipated budget and institutional measures necessary to mitigate and monitor the performance of the management plan. The loss of roadside trees, already minimized, will be compensated by an afforestation plan that includes the plantation of four grown-up saplings for the loss of one tree. The ESMP addresses mitigation measures that are primarily related to construction and any other additional measures (such as traffic calming, signs, noise mitigation, no camps in sanctuary limits, no construction during night, etc.) that will be necessary in sensitive locations. The EA recommendations have been incorporated in the analysis of altematives and detailed project design as far as reasonably practicable. This means that the comparison of altematives and widening options has included environmental and social considerations and public opinion. Every effort has been taken to avoid or minimize negative impacts, including realignment to avoid cultural assets, minimizing tree felling, and minimizing land acquisition and the displacement of people.

Other measures will be taken during construction to mitigate impacts and optimize future environmental

- 20 - improvements. Mitigation measures include effective restoration of borrow pits, noise restrictions at sensitive sites, maintenance of irrigation and drainage channels, measures to prevent siltation, restrictions on the locations of crushers and asphalt plants, and slope protection. The project also envisages environmental enhancements, such as improved aesthetics, increased safety, enhancement of sites and cultural properties important to local residents, improved local drainage, preservation and improvement of water bodies and the reuse of industrial waste-ash from thermal power plants, which is an environmental hazard. The EMPs also specify responsibilities for implementing mitigation measures during the operation phase including, monitoring air, water and soil pollution, maintaining of roadside plantations, preventing undesirable roadside developments, and road safety management.

Implementation Responsibilities

An Environment and Social Management Cell has been created in the PWD to coordinate and oversee the implementation of the Project's environmental and social components. This is headed by the Project Director assisted by two Executive Engineers (EE), already in position. This cell will liaise with relevant government departments, contract with NGOs for assistance with the RAP, and oversee the implementation of EMPs and the RAP and the preparation of EAISA for Phase II roads. Independent Supervision Consultants (SC) will oversee and monitor all aspects of the Project's road rehabilitation component; their team will also include inputs from environmental specialists, as specified in their TORs. Major maintenance supervision will be done by PWD staff with technical audits by independent consultants, and assistance from environment specialists. Contractors employed by PWD will implement construction and associated environmental mitigation activities. PWD staff, the SC, NGOs providing RAP services, and contractors' personnel will be trained as per the training modules and plan prepared as part of the EMPs and RAP. The Irrigation Departmnent has created a task force, headed by Secretary-ID, to facilitate the preparation of the waterways component and has designated two Assistant Engineers to coordinate related activities with ESMC (see section 6.4.). The Environment and Social Management Cell has been fully staffed. During negotiations GOK was committed through covenants in the Project Agreement to: (a) adequately maintain the Environment and Social Management Cell and District Grievance Redressal Committees; (b) acquire land in a timely fashion; (c) obtain and comply with the provisions of any necessary government clearances; (d) furnish to the Bank EAs, EMPs, and RAPs for any project corridors for which detailed designs have not been completed as of the date of project appraisal; (e) ensure the satisfactory implementation of the environmental protection measures stipulated in the EMPs, ESAMP, and ESMPs; (f) ensure the satisfactory implementation of the tree plantation plan as stipulated in the EMPs and the tree plantation strategy; (g) furnish to the Bank quarterly environmental supervision and monitoring reports; and (h) commission external evaluators to monitor the implementation of the RAP.

5.3 For Category A and B projects, tirneline and status of EA: Date of receipt of final draft: SEA for roads - Jan. 2002; Project EA for waterways - Jan. 2002; EA for upgrading roads - Jan. 2002; Individual EMPs for upgrading roads - Jan. 2002; ESAMP for inland waterways - Jan. 2002; and ESMP for maintenance roads - Jan. 2002.

- 21 - 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? The public consultation strategy included integrating stakeholders concerns upstream and throughout the project cycle. In parallel with environmental and social screening, PWD held three scoping workshops to identify upstream project preparation environment and social issues and scope the EAs accordingly. These workshops included a wide spectrum of people and organizations. The key issues that emerged included road safety, resettlement, protection of cultural assets, biodiversity conservation, air and noise pollution, flooding and water-logging along project roads, and sewage disposal and water quality degradation in the waterways. The public consultations were common to both the social and environmental assessment processes. A series of follow-on consultations have been planned; the first was done in September 2001(see section 6.2.).

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The EMP for each route to be upgraded includes monitoring plans for the preconstruction and operation stages; and monitoring plans are part of the ESMP for major maintenance works and ESAMP for waterways. The plan specifies the parameters to be monitored, location of monitoring sites, frequency, applicable standards, responsibilities, costs, and formats for monitoring and reporting. The contractor will report to the SC (or PWD field staff, in the case of major maintenance roads), the SC will report through PWD district officers to ESMC and PWD will report to the Bank on a quarterly basis. During construction, the contractor will report to the SC on compliance and implementation of the EMPs, ESMP, and ESAMP as per the determined frequency. Bank supervision teams will include an environment specialist. It has been proposed that during construction regular meetings be held with local stakeholders at sensitive locations on upgradation corridors to ensure continued community participation in project monitoring. Operation-stage reports, as detailed in the EMPs, will be either annual or biennial, will be conducted by PWD, and will be made available to the Bank. Environment performance indicators have been included as an integral part of the EMP and ESAMP in order to reflect the EA's objectives and results. These include monitoring performance indicators such as sapling survival rates testing, conditions of construction and worker camps, and air, noise, water, and soil pollution. Parameters and testing frequencies have been specified.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. (Refer Annex 12 for additional details on environmental and social aspects.) Social Impact Assessment A social impact assessment was done during project preparation, consisting of: (a) early screening as part of project feasibility studies; (b) census and baseline socioeconomic surveys of the potentially affected population; (c) consultations at village, district, and State levels; (d) finalization of entitlements and preparation of the R&R policy; and (e) finalizing arrangements to implement and monitor the Resettlement Action Plan (RAP). A full census documented the status of the potentially affected population within the corridor of impact, particularly their assets and sources of livelihood. This provided the basis for establishing a cut-off date to determine who would be entitled to relocation assistance or other benefits. A detailed socioeconomic survey of the affected population was also done; from this a database and monitoring and evaluation parameters were created. The surveys provided a baseline against which

- 22 - mitigation measures and support will be measured and includes a comprehensive examination of people's assets, incomes, important cultural or religious networks or sites, and other sources of income, such as dependence on common property resources. An analysis of survey results included a gender analysis. A similar process was followed for the inland waterways and an ESAMP was prepared. R&R Policy and RAP: An appropriate R&R Policy was prepared in accordance with the Bank's Operational Directive 4.30 - Involuntary Resettlement and O.D. 4.20-- Indigenous People to cover situations where the temporary or permanent relocation of people will be required or other losses will be incurred. The R&R policy recognizes the rights of squatters and vulnerable encroachers. The policy was approved by the government and endorsed by the Bank. The guidelines included in the policy require: (i) a documentation of the resource base of all families affected by the project and the losses they will face; and (ii) the development of mitigation measures, institutional requirements for the implementation of these measures (including a participatory strategy) and a budget. The RAP for state highways and ESAMP for waterways is complete and consistent with the Project's approved R&R entitlement framework. The RAP and ESAMP have been endorsed by the government. The Environment and Social Management Plan ensures that should there be adverse impact on people along the maintenance roads, the provisions of the R&R policy and the RAP will be implemented in their full spirit. A separate IPDP has not been prepared as only one tribal family will be affected by the project. Social Issues and Mitigation Impact on People and Land: The project is designed to minimize land acquisition and avoid large-scale community displacement by limiting the widening to the existing formation width of the existing roads. As a result of this strategy, the proposed widening standard from 7.1 to 10.0 m of Phase I roads, will have a limited impact on people and common property resources. Acquisition of agriculture, residential, and homestead land and commercial structures will be required to upgrade and widen the road; resettlement and relocation will be necessary for affected people. The Project will affect and displace a number of properties. For both phases I and 11 15,319 families will be affected and 99.31 hectare's of land must be acquired by the project (Phase II estimates are based on initial social screening and extrapolation from the Phase I Census and other surveys). 6,607 project affected families (PAF) will lose residential or commercial properties and 565 PAFs will lose agriculture land to Phase-I of the project. Findings indicate that 6,556 of them are title holders. The number of squatters and encroachers is only 46 and 29, respectively. Only 859 families will be displaced; the remaining families will only lose their compound walls. Of the total PAFs affected under Phase I, vulnerable families number 2,160 and 174 will be displaced. The vulnerable people (including one tribal family) are dispersed along the total 257 km project length. To ensure women's security, all alternate plots for houses or shops will be jointly registered. The land acquisition process has started compensation and assistance to meet replacement costs must be completed by end of May 2002, prior to initiating the civil works. Rehabilitating the inland waterways is not expected to lead to any adverse impacts. However, the ESAMP provides for the enhancements of community resources along the canal network. Loss of Property or Income: Resettlement is required where residential or commercial structures must either be fully demolished or made uninhabitable. The owners of structures will be displaced. Displaced people and religious buildings and structures must be relocated. Rehabilitation is required where resettlement, relocation, or other project impacts have resulted in lost livelihood or income (Annex 12). Efforts have been made to identify alternate sites for displaced shelters and commercial establishments. Families dependent on agriculture will lose a small strip of land and the remaining plot will be viable for cultivation. However, 41 families will become landless. Compensation and assistance will be provided to

- 23 - purchase alternate land for the displaced families and to develop the remaining land. In all cases, it will be necessary to restore the economic status of affected persons to at least pre-project level or improve their living standards. Additional support will be extended to all the vulnerable; alternate sites will be given free of cost and will be registered under names of husband and wife. Common and Cultural Property: Thirty-six religious structures will be affected by the project; in most cases the project will claim only the boundary wall or part of the compound area. Mitigation plans as per OPN 11.03 have been prepared as part of the RAP, EMP, and ESAMP. If "chance archeological/cultural finds" are found during construction, these will be handled under national laws, as covered by the civil works contracts. STDs: Studies on the human immune deficiency virus (HIV) and Acquired Immune Deficiency Syndrome (AIDS) indicate that truckers, are a significant vector of the virus. As traffic is expected to grow as a result of the project, the rates of sexually transmitted infection may increase. This impact can be minimized through preventive awareness-building plans and facilitating National and State health programs, and this has been included in the RAP. Road Safety: Another potentially negative social impact is the risk of road accidents associated with increased traffic speeds. This impact has been minimized by undertaking a safety audit of the Project's engineering design; the implementation of accident blackspot program to reduce road accidents at the SH's most hazardous locations; and the implementation of a comprehensive Road Safety Action Plan. Social Outcomes The project is designed to improve road transport efficiency, inland waterways, and road safety on important sections of the State road network and therefore will bring about significant social benefits. Improved and better maintained roads will facilitate the movement of goods and enhance people's access to markets, services, and information. Better access to markets will increase economic opportunities, thereby increasing the conmmunity's income and reducing of poverty. Another positive social impact is the projected reduction of road accidents and fatalities, due to enhanced safety measures. However, the project may cause some marginal adverse impacts on communities residing within the corridor of impact as noted above.

6.2 Participatory Approach: How are key stakeholders participating in the project? In accordance with the framework developed in the R&R policy, the project authority organized various discussions and consultations with different social groups and stakeholders at the district and State level. The stakeholders views have been incorporated to minimize negative impacts, and to enhance the benefits through the design and preparation of the RAP. Moreover, focus group discussions with the villagers and Panchayats enabled the government to develop the R&R policy and the RAP and ESAMP according to the true needs of the affected PAPs. The public consultation process provided the necessary input to modify engineering designs to minimize negative impacts and develop mitigation measures to address adverse impacts. Project infommation was shared in three scoping workshops. Nearly 200 NGOs, government agencies, university and Research organizations received detailed information. Extensive district and local-level consultation drew on different social groups, district administrators, NGOs, and other interested groups. The main concem of the people residing along the project roads was high road accident rates. In the case of waterways, people indicated that waterway maintenance is not a State priority and that the Government should provide adequate resources so that this transportation resource could be made viable. The suggestions and views facilitated changes and modifications in the project design. The R&R policy, EA, EMPs, RAP, ESMP, and ESAMP have been made public in November 2001 through Bank's Infoshop and

- 24 - in the districts that will be affected by the project. To ensure continuous participation, the RAP and ESAMP provides a mechanism for consultation with affected people and Panchayats while implementing and monitoring the work progress (ref. Annex 12 also).

6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The scoping workshop and district-level consultations as mentioned in Section 6.2, invited NGOs to participate in project preparation and policy. R&R policy recognizes the importance of NGO involvement in project implementation, and their representatives will be members of the project committees. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The RAP and ESAMP provide details on the institutional arrangements, roles, and responsibilities of the staff implementing, monitoring, and evaluating of the project. The Environment and Social Management Cell, in coordination with the field staff, is responsible for implementing the RAP and ESAMP. Land Acquisition Officers are also cell members. District-level committees will support the implementation of the RAP and the Grievance Redressal Committee will hear complaints or grievances by the affected people (see section 5.2 and annex 12). 6.5 How will the project monitor performance in terms of social development outcomes? The RAP and the ESAMP contain monitoring and evaluation parameters and describe the institutional arrangements, including Panchayati Raj institutions, to facilitate process and progress monitoring. Monitoring reports will be prepared monthly and will be included in the overall quarterly project monitoring report. An extemal agency will prepare independent evaluation quarterly and for end-term.

7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestry (OP 4.36, GP 4.36) 0 Yes 0 No Pest Management (OP 4.09) 0 Yes 0 No Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) 0 Yes 0 No Involuntary Resettlement (OP/BP 4.12) * Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes 0 No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes * No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. The Government has prepared SEA, EA, EMP, ESMP, RAP, R&R Policy, and ESAMP to manage project-related environmental and social impacts, which are consistent with OP 4.01, OD 4.30, OD 4.20, OPN 11.03, and GOI's environmental assessment policies. Furthermore, in compliance with OP 4.01, since the project has been classified as category A project, GOK has done an independent review of the project's environment and social assessment. As per BP 17.50, the Final Draft SEA, EIA, EMP, ESMP, RAP, ESAMP and the Executive Summary (translated in local language) were disclosed in public places in effected districts. (see Annex 12).

- 25 - F. Sustainability and Risks 1. Sustainability: The government's commnitment to increase road maintenance funding and gradually reduce the current gap is probably the most important factor affecting the long-term sustainability of the States road network. The project sustainability also depends on the government's ability to provide adequate project and counterpart funding. In addition, the project's long-term sustainability depends largely on the government's commitment to undertake major policy reforms in areas such as road financing mechanisms, institutional reforms, and road maintenance management arrangements. In this regard, Kerala's new Road Development Policy, the Road Fund and the RBDCK are steps in the right direction. The endorsement or legislation of many critical reforms before loan effectiveness is expected to ensure the project's greater sustainability. The institutional strengthening component is expected to contribute to project sustainability through the implementation of the ISAP, which will enhance PWD's operational efficiency. The ISAP focuses on introducing improved planning, budgeting, financial, and management practices into PWD. The successful transformation