India - National Highways Project

Document of The World Bank FOR OMCIAL USE ONLY Reprt No. P-4029-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$ 200.0 MILLION TO INDIA FOR THE NATIONAL HIGHWAYS PROJECT April 18, 1985 This docment has a restricted distribution and may be ued by recipiens only in the perfornmace o thir fiEehd dutk& Rs contet may not odwrwise be dbisdsd Yntbou World Bank agMorinflon.  CURRENCY EQUIVALENTS (as of April 16, 1985) US$1.00 = Rs. 12.20 Rs 1.00 = US$ 0.82 Rs 1 million = US$82,000 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rate of US$1 to Rs 12.0, which represents the projected exchange rate over the disbursement period. FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS DTR - Directorate of Transport Research, MOST ERR - Economic Rate of Return GOI - Government of India HPG - Highways Planning Group ICB - International Competitive Bidding IIT - Indian Institute of Technology IR - Indian Railways LCB - Local Competitive Bidding MOST - Ministry of Shipping and Transport NTPC - National Transport Policy Committee PWD - Public Works Department RUCS - Road User Charges Study SU - Supervisory Unic TCC - Transport Coordination Committee VFMS - Vehicle Fleet Modernization Study  FOR OFICIAL USE ONLY INDIA NATIONAL HIGHWAYS PROJECT Loan and Project Sumwary Borrower: India, acting by its President. Beneficiaries: The States of Gujarat, West Bengal, Punjab, Haryana, Tamil Nadu, and Uttar Pradesh, and the Government of India's (GOI) Ninistry of Shipping and Transport. Amount: US$200.0 million Terms: Repayment over 20 years, including 5 years' grace, at the applicable variable rate of interest. GOI will bear the foreign exchange risk. Project Description: The project comprises: (i) Construction and rehabilitation of various sections of national highways in six States, which were selected because of their high priority in the national plan, and also because each subproject embodies a solution to particular technical or institutional problems that is representative of conditions found in many Indian roads. Specifically, the proposed project would finance about: (a) 92 km of a new dual-carriageway express-way; (b) 65 km of a new two-lane road; (c) 217 km of an additional two-lane carriageway and strengthening of the existing two-lane carriageway; (d) 93 km of strengthening the existing two-lane carriage-way; and (e) 30 km of a new two-lane bypass. (ii) Procurement of specialized imported equipment to be used to monitor road conditions, facilitate bridge inspections, and test vehicle conditions. (iii) Technical assistance and training of professionals in central and state highway organizations to keep them abreast of modern techniques developed abroad. (iv) Studies by both consultants and local research organiza- tions to determine the extent and direction of modern- ization appropriate for India's vehicle fleet and the desirable levels of road user charges. This document has a restricted distnbution and may be used by recipients only in the performance of the official duties. Is contents may not otherwise be discosed without World Bank authorization.  -ii- (v) Support efforts by the Government in establishing a transport coordinating committee and improving MOST's highway planning capability. Estimated Cost: a/ Item Local Foreign Total ------US$ Million--- A. Road System 1. Freeways 77.7 29.0 106.7 2. Dual Carriageways 88.7 34.4 123.1 3. Major Bypasses 23.7 9.0 32.7 4. Two-Lane Roads 27.2 13.7 37.9 Sub-total 217.3 83.1 300.4 B. Training & Research/Test 0.2 5.4 5.6 Equipment C. Studies 0.1 0.5 0.6 Project Base Costs 217.6 89.1 306.7 Physical Contingencies 21.8 8.9 30.7 Price Contingencies 61.4 26.1 87.5 Total Project Costs 300.7 124.0 424.7 Financing Plan: Local Foreign Total =-US$ Million - IBRD Loan 76.0 124.0 200.0 GOI 224.7 0.0 224.7 Total 300.7 124.0 424.7 Estimated Disbursements: IBRD FY FY86 FY87 FY88 FY89 FY90 FY91 FY92 - -- - --US$ Million - Annual 8.0 31.4 57.4 51.2 20.9 20.9 10.2 Cumulative 8.0 39.4 96.8 148.0 168.9 189.8 200.0 Economic Rate of Return: About 26Z. Appraisal Report: No. 5435-IN, April 19, 1985. a/ Includes taxes and duties of US$24.7 million.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE NATIONAL HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed IBRD loan to India in an amount of US$200.0 million equivalent on standard terms to help finance the upgrading of major highways in six states throughout India and strengthen the capacity of the various state and central authorities involved in highway planning, construction and maintenance. The loan would have a term of 20 years, including five years of grace, at the standard variable interest rate. The foreign exchange risk would be borne by the Government of India (GOI). PART I - THE ECONOMY 1J 2. An economic report, "Situation and Prospects of the Indian Economy - A Medium Term Perspective't (4962-IN, dated April 16, 1984), was distributed to the Executive Directors on April 23, 1984. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 750 mil- lion (in mid-1984) and an annual per capita income of US$260. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those who own little or no land. Growth of value-added in agriculture - 2.2Z since 1950/51 - has been slower than growth of industrial value-added (5.3Z per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 52% in 1950/51 to about 33% in 1981/82, while the share of industry rose from 20% to around 26%. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income leveLs. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress, with per capita income rising by about 1.4Z per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased markedly since 1950/51: the gross national savings rate more than doubled from 10.8% of GDP (at factor cost) to 22.7% in 1983/84, while the gross domestic investment rate rose from 12.5% of CDP to 24.8Z in 1983/84. Foreign savings 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the Second National Agricultural Extension Project (No.P-3983-IN), dated March 5, 1984.  -2- (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20% was reached during the early 1960s. Currently, foreign savings account for about 8X of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3Z of GDP and averaging below 1% for the past five years. Net use of foreign savings has never risen above 3% of GDP, and presently stands at 2.1%. 5. Before the 1970s, India placed relatively less emphasis on export promo- tion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2% per annum, while the volume growth of imports over the same period was 4.3%. In the early to mid-1970s, however, India's terms of trade, which had remained roughly constant during the 1960., deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India's exports grew on average about 7.3% per annum for the 1970s as a whole, a perfor- mance which demonstrates that sustained rapid growth is possible. While expand- ing world markets, particularly in the nearby Middle East, contributed to this growth, liberalized access to imported inputs and more effective export incen- tives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added sub- stantially exceeded the historical 30-year trends (paragraph 3) averaging 5.3%, 3.3Z and 8.1Z, respectively, during the 1975/76 to 1978/79 period. In 1979/80, however, this momentum was broken when the worst drought in recent years, com- bined with a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a relatively large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks coin- cided with the preparation of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing infrastruc- tural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2Z per annum. Recent Trends 7. Despite the effects of two severe droughts in 1979/80 and 1982/83, India's economy in the early 1980s continued to grow at the faster pace of the second half of the 1970s. Between the two droughts (from 1979/80 to 1982/83), GDP growth averaged almost 5Z per annum, while between the two recovery years (from 1980/81 to 1983/84), it was 4.5% per annum - substantially higher than India's long-term growth rate of 3.6%. Continued rapid economic growth has resulted from a development strategy which includes higher investment levels and liberalized policies on imports, industrial licensing, prices, and commercial borrowing. These policies, by easing constraints on the supply of infrastruc- ture and basic commodities, were a determining factor in the improved perfor-  -3- mance of the economy and the industrial sector. This overall improvement in performance, combined with a more restrictive monetary policy in 1981/82 and 1982/83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from over 18X in 1980/81 to only 2.6Z in 1982/83, but rose to over 9Z in 1983/84, mainly due to the effect of the 1982/83 drought on food prices. Further improvements in the policy environment will be required to maintain these higher levels of economic growth and investment without put- ting undue pressure on the balance of payments or reviving inflationary expectations. 8. Economic growth in the early 1980s has not been steady, mainly because of the effect of uneven rainfall on agricultural production during the period. In 1980/81 and 1981/82, the economy substantially recovered from the 1979 drought, with real GDP growing by 7.6Z and 5.3%, respectively. While industrial output expanded by 4% in 1980/81 and 8.62 in 1981/82, recovery was particularly robust in agriculture where normaL weather helped output to rise by more than 15Z and 5.5Z, respectively. The supply of power, coal, and rail transport, already improved in 1980/81, was further expanded in 1981/82, recording growth rates of about 1OZ, 9.6% and 12.5%, respectively. This overall improvement in the Indian economy was halted in 1982/83 by a severe drought in mid-1982 which reduced agricultural production by 4%, brought down the GDP growth rate to 1.8%, and put further strains on the already difficult balance of payments and domes- tic resource situation. The timely implementation of various economic policies relating to foodgrain imports, procurement and distribution, and the allocation of power to irrigation pumps mitigated the otherwise very distressing effects of the poor monsoon. The economy recovered in 1983/84, led by a robust agricul- tural sector - GDP grew by about 6.5% to 7% with agricultural production growth in the 9%-10% range and industrial growth of 4.5%. The major factors contribut- ing to the good economic performance during 1983/84 were the excellent monsoon, combined with adequate agricultural policies and programs, and satisfactory performance of the coal and transport sectors. The power sector, however, emerged again as a constraint on higher growth, especially in industry. 9. Agricultural production rebounded strongly in 1983/84 in response to the monsoon, improved use of inputs and continued expansion of irrigation. Overall foodgrain production rose by lO%-12X over the previous year, reaching a new record of 142-144 million tons, a substantial increase over the previous peak of 133 million tons in 1981/82. Corrected for weather variations, foodgrain production continues to grow at a trend of 2.6% per annum-sufficient to maintain a broad balance between supply and steadily increasing domestic demand. Nonetheless, the balance remains delicate, and the need for foodgrain imports to maintain consumer supplies or adequate buffer stocks could arise from time to time. Thus, adequate management of foodgrain stocks and programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Baqic infrastructure services had a mixed performance in 1983/84, par- tially because of sluggish demand from industry during the first half of the  -4- year but also due to a failure to maintain the productivity gains of 1980-82. Electricity generation grew only by about 3.7% due to low reservoir water levels during the first half of the year, delays in the commissioning of new capacity, and a deterioration of capacity utilization in thermal plants. As a result, power generation was about 11.5% below requirements and constituted a major bottleneck in the economy. Key industries which were adversely affected by power constraints included steel, fertilizers, cement, and coal. To improve performance in the power sector, the Government recently increased incentives for higher labor and management productivity in thermal plants. Railway freight traffic, measured in ton-kms, grew by only 0.5% in 1983/84, reflecting sluggish demand. Coal production increased by about 6.5% in 1983/84 reaching 139 million tons. When combined with stocks already available this level of production was sufficient to meet the relatively slow demand growth. Infrastructural con- straints would have emerged much more sharply had the pace of industrial growth and demand been more rapid. It is therefore critically important that India maintain the pace of invest:uent in these key sectors, mobilize sufficient resources to do so, and implement programs to enhance productivity. 11. The Indian economy has reverted from a situation of resource surplus in the late 1970s to an aggregate resource deficit. The gap between gross invest- ment and national savings increased from negligible lev7els during the late 1970s to an average equivalent to 2.1% of GDP in 1980-84. India's gross national savings rate, which averaged 22.6% of GDP in the last four years, is high by any standard, particularly considering India's low income and the large proportion of its population below the poverty line. The scope for a substantial increase in the savings rate is therefore quite limited. If India is to maintain invest- ment at about 25% of GDP, a major effort will be required to raise additional domestic resources particularly in the public sector. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. This would also allow a marginal decline in the use of foreign savings from the recent 2.1Z-2.3% of GDP to l.5%-1.8X, to ensure a sustainable external debt service burden. 12. India's external resource position has changed notably since the late 1970s. The current account balance, which recorded surpluses from 1976/77 to 1978/79, reverted to deficits averaging US$3.5 billion and 2.1% of GDP during 1980/81 to 1983/84. Several developments contributed to these relatively larger current account deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and continued to move against India during the first three years of the 1980s. Second, a more liberal import policy towards industrial inputs was pursued. Third, net invisibles declined as travel receipts fell off, workers' remittances stagnated (reflecting slower development activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Faced with severe infrastructural constraints and a deterioration in its balance of payments, India initiated an adjustment program in 1980/81 designed to raise the growth rate from its his- torical level of 3.6% to 5.2% while adjusting the country's external balance to  -5- the adverse price developments in the world markets. The main elements of this strategy, which is being successfully implemented, are export promotion, import substitution where economically justifiable, implementation of a coherent energy policy designed to meet the energy needs of the economy while curbing the growth of oil imports, and continued movement toward a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. 13. A positive development in India's balance of payments is the reduction in the trade deficit from US$7.7 billion in 1980/81 to US$5.9 billion in 1983/84 despite unfavorable world market conditions and import liberalization. Export volume growth and import substitution of oil and petroleum products, metals and fertilizers more than offset the substantial increase in "other" imports. These "other" imports consist mainly of industrial imports and capital goods which historically have been in chronic short supply and which are of critical impor- tance to capacity utilization, product quality, and plant modernization and expansion. A major factor in the decline of the trade deficit was the lower net import bill for petroleum, which dropped from US$6.7 billion in 1980/81 to US$3.4 billion in 1983/84 in response to a successful oil development program that reduced import needs and allowed crude oil exports, which totalled about US$1.5 billion in 1983/84. These structural changes in the balance of payments are to a significant degree the result of India's development and adjustment efforts over the past three years. It is expected that the balance of payments will continue to be under strain for the next severaL years, since the adjust- ment strategy will continue to require high levels of imports. 14. Even assuming a favorable export performance, India will need external capital flows to augment its own resources for the foreseeable future, given the low per capita income level in the country, the already high savings rate, and the structural adjustment process. Faced with a growing need for external capital inflows and stagnation in the availability of concessional assistance, India decided at the start of the Sixth Plan to increase borrowings from the International Monetary Fund (IMF) and commercial banks to substantial levels. In the period covering the fiscal years 1981/82 to 1983/84, India drew SDR 3.9 billion from the Extended Fund Facility of the INF. In addition, India borrowed significant amounts on commercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. In the period 1980-84, India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,000 million. The bulk of this borrowing has been used for specific development projects in the public and private sector (mostly for petroleum exploration and development, steel, power, aluminum and shipping). India's favorable debt service position and the nature of its borrowings, for project-related purposes instead of direct balance of payments support, enabled it to tap commercial capital markets at favorable spreads. This larger commer- cial borrowing and transfer of funds under the arrangement with the IMF has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82.  -6- Development Prospects 15. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India also has a wide range of institutions capable of fostering development and is well-endowed with human resources. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 16. The Government is currently preparing the Seventh Plan which will lay down the development strategy for 1985/86-1989/90. This strategy is expected to continue the emphasis of the Sixth Plan on agriculture, energy development, export promotion, domestic import substitution where economically justifiable and the removal of infrastructural bottlenecks. Overall Sixth Plan performance has been encouraging, with aggregate real investment projected to be about 30X higher than in the period 1975-80-a creditable performance indeed. The Sixth Plan expenditure targets, however, will not be fulfilled as resource mobi- lization by the public sector will fall short of the financing requirements of planned public investment. Actual aggregate real investment is projected to be about 7% below the original target for the period 1980-85, private investment being 5% to 10% higher and public investment about 20% lower in real terms than actually projected. In terms of meeting Plan expenditure targets, the perfor- mance of the Central Government is considerably better than that of the State Governments. The Central Government's Plan outlays are likely to reach about 80% to 90% of the original Plan allocation in real terms, while the States' will probably achieve only about 50% of their targets, due principally to shortfalls in resource generation. Bottlenecks in key sectors such as power, transport and irrigation are likely to persist as a consequence of real investment shortfalls relative to original Plan allocations. 17. Although Sixth Plan expenditure targets will not be met, India's capital formation rates have increased from 22.6% in 1975-80 to 24.7% of GDP in 1980-84. Recent higher capital formation rates are encouraging for future income growth, but returns to invesrment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a Large and growing proportion of investment has been needed to build up basic infrastructure serv- ices which have inherently high capital-output ratios. However, there is scope to reduce capital-output ratios through improvements in efficiency. As dis- cussed in greater detail in our recent economic reports, performance in the basic service sectors can be improved through better planning and management,  -7- thus leading to higher productivity and capacity utilization throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the requirements of the rest of the economy will be vital for sustained growth. 18. Under the Sixth Plan, India has an ambitious oil development program backed by substantial financial commitment. Performance under the program has been excellent with real investment and oil production levels running well ahead of Plan Targets. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. While the gap between domestic consumption of petroleum and produc- tion remains large, India's dependence on oil imports dropped from 63% of con- sumption in 1979/80 to about 41% in 1983/84 and is expected to decrease to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake from known fields, offers much encouragemeat for India's longer-term energy prospects. At the same time, the increases in domestic petroleum prices have helped encourage conservation and slow demand growth. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. This will require the continuation of the current development strategy which assigns high priority to export promotion, public finance discipline, improve- ment of economic efficiency, and investment in infrastructure, supported by adequate flows of external borrowing and aid. In the short term, a relatively large level of external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance since India is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. Although India is currently in a position to increase borrowing on commercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. Nevertheless, with a more open trade policy and expanded efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of both foreign and domestic savings, India-is demonstrating that it can sustain a rate of growth closer to 5.0% per annum than to the long-run trend of 3.6% per annum. If the rate of population growth can be brought to below 2.0% per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India.  -8- 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census indicated there was no decline in the rate of population growth, which remained about 2.2Z per annum in the 1970s despite a measurable decline in fertility rates. The population growth rate failed to decline in the past decade due to a reduction in the infant mortality rate and an increase in life expectancy, reflecting larger availability of food and health services. While this is a welcome development, it implies a greater strain on the economy and re-emphasizes the need for con- tinuing efforts to strengthen the health and family planning programs in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from its estimated 1979/80 level of about 23% to over 35Z by 1984/85. The Government is reviewing its population policy for the Seventh Plan, with indications of a determination to retain the emphasis on the implementation of family pLanning, health, education and literacy programs aimed at reducing fertility ratea. 21. Reduction of poverty remains the central goal of Indian economic and social policy. More than one-third of the world's poor live in India, and more Lhan 80% of the Indian poor belong to the rural households of landless laborers and small farmers. About 51% of the rural population and 40X of the urban population subsist below the poverty line. Significant reductions in poverty will depend primarily on an acceleration of economic growth, particularly in agriculture, combined with effective implementation of poverty alleviation programs. India's poverty alleviation strategy appropriately recognizes that production-oriented programs, which aim at accelerating the overall pace of economic growth, and poverty alleviation programs, targetted at those least able to participate in the general growth of the economy, can be mutually reinforcing rather than substituting for each other. Major poverty programs operating on a nationwide basis at present include: the Minimum Needs Program (CIP), the Integrated Rural Development Program (IRDP), and the National Rural Employment Program (NREP). The IRDP and NREP are targeted programs aimed at increasing the incomes of the poor rapidly, either through the transfer of productive assets or direct employment. The MNP, aims at broadening the provision of social infrastructure and basic services which enhance the human capital of the poor and improve living standards. These programs represent a vitally important commitment of the Government to address the needs of the poorest. The scale of the poverty problem in India, combined with the inherent difficulties in implementing poverty programs in any country, imply the need for continued efforts to enhance the effectiveness of these programs. PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 82 loans and 165 development credits to India totalling US$6,526 million and US$12,268 million (both net of cancellation), respectively. Of these amounts, US$1,524 million has been repaid, and US$6,207 million was still undisbursed as of September, 30, 1984. Bank Group disbursements to India in the current fiscal year through  September 30, 1984 totalled US$171 million, representing a decrease of about 40 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1984. 23. Since 1959, IFC has made 29 commitments in India totalling US$223 million, of which US$34 million has been repaid, US$56 million sold and US$34 million cancelled. Of the balance of US$98 million, US$91 million repre- sents loans and US$7 million equity. A summary statement of IFC disbursements as of September 30, 1984, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of development finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan and in the approach being taken by GOI in the preparation of the Seventh Plan. First, high priority will continue to be given to GOI's agricultural program. While India has made siS- nificant progress in agriculture, productivity growth will have to be sustained to improve the balance between food demand and supply and to contribute to poverty alleviation and employment. Thus, the Bank Group will continue to support irrigation, fertilizer production and distribution, and agricultural extension and credit. Second, alongside GOI's efforts in promoting greater efficiency and faster development of the industrial sector, increased assistance will be provided for industrial development. Third, the review of performance under the Sixth Plan confirms the high priority that should continue to be given to the expansion and more efficient use of basic infrastructure cipacity and to the development of India's indigenous hydrocarbon resources. Accordingly the Bank Group will, continue to support the development of the energy, transport and telecommunications sectors to alleviate critical shortages which constrain output in both agricultural and industrial sectors. Fourth, sunport of urban development and other GOI basic social services programs for t -oor will also continue in light of the growth in population which, despite successes in lower- ing birth and death rates, still increases by about 16 million each year.  -10- 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Rank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to sustain the relatively higher investment and growth rates achieved during the first four years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture and irrigation. 27. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past was provided from IDA. However, IDA lending to India is declining from a peak of US$1.6 billion in FY82, mostly due to funding constraints related to IDA. The amount of IDA funds available to India is likely to remain small in relation to India's needs for external support. Thus, this requirement for additional assistance will have to be met, in part, through larger Bank lending. Given its development prospects and policies, India is judged creditworthy for Bank lending to supple- ment IDA assistance. A continuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic growth and improvement in the balance of payments. India's debt service ratio is estimated at about 15.22 in 1984185. This ratio is projected to rise to around 20% by 1989/9o, mainly due to the hardening structure of India's debt; and to increase slightly over this level through the mid-1990's. Although the projected debt service ratios are con- siderably above historical levels, they are still manageable and will not adver- sely affect India's creditworthiness. 28. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12Z of net disbursements as compared with 62%, 33% and 37%, respectively, in 1983/84. In 1983/84, about 19.0% of India's total debt service payments were to the Bank Group. On March 31, 1984, India's outstanding and disbursed external public debt was estimated to be about US$26.9 billion, of which the Bank Group's share was US$9.6 billion or 36% (IDA's US$7.8 billion and IBRD's US$1.8 billion). As of September 30, 1984, outstanding loans and credits to India held by the Bank totalled US$17,271 million, of which US$6,207 million remain to be disbursed, leaving a net amount outstanding of US$11,064 million.  -ll- PART III - THE TRANSPORT SECTOR Sectoral Overview 29. Rail and road are the dominant modes of transport in India. Railways provide trunk services for bulk movement, and road transport provides long distance service for other commodities as well as most of the feeder and distribution activities. Since it is estimated that rail and road carry about 95 percent of total domestic passenger and freight movement, the role of other modes is relatively insignificant. Nonetheless, these other modes (air transport, pipelines, coastal shipping, and inland waterways) provide important specialized services, and each has a role to play because of the size of the country and its geographical features. 30. Transport responsibility in India is shared between the Central and State Governments and the private sector. The private sector controls the trucking industry, a small portion of the shipping industry, and about 40 percent of non-urban passenger road transport. The Government owns the railways, public transport companies, the ports, the major shipping companies, all the institutions involved in civil aviation, and is responsible, at the Central or State leveL, for the construction and maintenance of all roads. 31. The transport sector plays a vital role in India. Virtually all the other sectors are dependent on efficient and reliable transport services. Transport investment represents an important part of total investment in India, although, over the last two decades, investments for the development of the transport system have declined relative to develop- ment investments elsewhere in the economy. Transport expenditures in the country's first Five Year Plan (1951-52 - 1955/56) constituted more than 22 percent of total investment but declined to about 15 percent in the next three plans, and to 13 percent in the Sixth Plan. This trend is partly explained by the need in earlier years to concentrate on basic infrastructure and by the greater emphasis on other sectors in later years. Nonetheless, the level of investment in the sector has not been sufficient to provide-adequate quality of service, as is evident from the following problems: (a) inadequate railway capacity to carry coal, some of which has had to be moved less efficiently by road transport; (b) constraints in port capacity due to obsolete equipment and outdated management practices, (c) overcrowding of passenger trains; (d) poor condition of the national highway system; (e) inadequate network of rural roads (about 35 percent of villages are not connected by all-weather roads); and (f) insufficient maintenance funding across the sector. The  -12- Government is aware of the massive expenditure requirements of the tran- sport system, and real investment in the sector is expected to increase during the Seventh Plan (1985-1990). The Roads Sector and the National Highways System 32. Roads in India are composed of: (a) National highways, which are the main highways in the country connecting major ports and adjoining countries, and linking States' capitals, and include strategic roads required for national security; (b) State highways, which are the main trunk roads within the States (other than national highways) connecting important cities and districts; (c) District roads, which traverse each district, serve areas of production and markets, and connect each district with highways or railways; and (d) Village roads, which connect villages to the nearest district road, main highway, or railway. 33. The road network has experienced an almost fourfold expansion since 1950-51, growing from 0.4 million km in 1950-51 to 1.5 million in 1980-81 at an average annual rate of 4.5 percent. India's density of roads, which stood at 0.46 km per sq. km in 1980-81 compares favorably with densities in other developing countries. Nonetheless, because India has a high population density scattered throughout the country, road transport requirements are considerable and call for further expansion and strengthening of the road network. Traffic in India's total road system has been growing at about 5.4 percent per annum, with traffic in the national highway system growing at a faster rate-census data reveal that annual growth rates in the 1979-1984 period in this system ranged from 8 to 20 percent. 34. The national highways constitute the primary network in the country, with about 32,000 km of road length and an estimated 30 percent of total road traffic. The network has expanded slowly, adding only about 10,000 km in the period 1950-1980. The system is experiencing difficulty owing to a number of deficiencies, such as inadequate road links and bridges, substandard pavements, overcongested sections, single-lane roads, and weak and narrow bridges and culverts. In addition, maintenance funds have been limited. The cost of correcting these deficiencies is estimated to be about Rs 45 billion in 1983-84 prices. Such a large investment can obviously be made only over a long period. Accordingly, in the prepara- tion of the Road Development Plan for 1981-2001, the Ministry of Shipping and Transport (MOST) has estimated that a large proportion of capital works' expenditures during the Seventh and Eighth Plans must be allocated for these purposes. 35. Under the Constitution, national highways are a "Union" or Central Government responsibility and both their development and maintenance are the responsibility of GOI as laid down in the National Highways Act of 1956. The Roads Wing of MOST is thereby responsible for the construction  -13- and maintenance of the national highways throughout the country. The actual construction and maintenance work is performed by the various State and Central Public Works Departments (PWD) and the Barder Road Development Board on an agency basis. Most of the administrative work is also done by the State agencies. The States are paid agency charges of about 9 percent of the cost of the work. The engineers in the Roads Wing examine the projects prepared by the executing agencies and, on approval, recommend that they be sanctioned by the Government. The Roads Wing also coor- dinates matters pertaining to research, planning, monitoring, and evalua- tion of the relevant standards and specifications. Local contractors normally execute road works, although the respective PWDs execute a por- tion by departmental force-account. 36. Capital and maintenance expenditures for the national highways system are financed in full by the Central Government. Annual allocations for capital expenditures are budgeted in the relevant Five-Year Plan. Maintenance funds are also decided on an annual basis, but, being a non- Plan 1/ expenditure, are subject to greater overall resource constraints. With fixed establishments of labor that must be paid, any reduction in road maintenance allocations bears heavily on the purchase of materials, without which labor is unable to work effectively. Thus the effect of budget cuts may be quite disproportionate to their size. Improvements in highway planning contemplated in the project will go a long way toward prioritizing investments and striking a balance in the allocation of resources between investments and maintenance of assets. GOI is aware that past levels of expenditures in the national highways system have been inadequate to allow appropriate expansion, correct the deficiencies, or provide adequate maintenance and the Seventh Plan (1985-1990) is expected to significantly increase the allocation of funds for national highways. In real terms. maintenance expend tures increased, with respect to the previous year, by 11 percent in 1981-82 and by 19 percent in 1982-83. Also, new sources of revenue are being investigated; specifically, the Government is studying the feasibility of establishing a toll system in the country, a system that exists today, to a limited extent, only on major bridges. This matter will also be addressed in the project. Previous Bank Involvement in the Sector 37. The Bank's involvement in India's transport sector dates back to 1949 and has consisted of eight loans and ten credits for Indian Railways (IR) totaling more than US$1.8 billion, five port projects and one ship- ping project totaling US$410 million, and one rural roads project and one highway project totaling US$95 million. 1/ "ncn-Plan" expenditures are, with some exceptions, current, opera- tional expenditures.  -14- 38. Whereas the Bank's involvement with IR has been almost continuous since 1949, Lending to the ports and road subsectors was discontinued in 1962, mainly because of GOI's preference for local competitive bidding. In 1980 the Bank undertook a rural roads project in the State of Bihar (Cr. 1072, 1980) albeit with no ICB provisions given the size (US$29 million) and remoteness of the project area. This situation has now changed with the approval of the Nhava Sheva Port Project (Ln 2387, 1984), where ICB procedures are being followed. The proposed project would be the Bank's first operation in the national highways system since 1962; in addition, a rural roads project in Gujarat is under preparation. 39. The objectives underlying the Bank Group's past assistance in the transport sector have focussed primarily on the railways subsector and have financed the increase in assets required to handle traffic volumes, assisted in rehabilitating and modernizing the infrastructure, and improved operating efficiency, maintenance, administration, and planning capabilities. Because of the Bank's continuous participation in the railways subsector, much progress has been achieved: however, the Bank's involvement in the other subsectors, primarily due to the 25 year absence, has been much less. With renewed dialogue between the Bank and GOI, the focus of attention in the ports subsector has involved the introduction of modern technology, with respect to both design concepts and equipment, for the efficient handling of cargo; the improvement of port operations and management through staff training programs; and the improvement of integration with other modes of transport through hinterland development. Country-Bank Sectoral Objectives 40. The Government recognizes the need for an integrated policy framework as a basis for better planning and coordination of inter-modal investments, appropriate cost-based pricing and better utilization of already available transport capacity at the operational level. To deal with the mounting problems in the sector, GOI commissioned the National Transport Policy Committee (NTPC) to make recommendations an the main transport problems in the country. The Committee's report, which was presented to GOI in 1980, emphasizes greater competition, the use of the price mechanism in resource mobilization within the sector, and improved inter-modal coordination. The Bank, in its policy dialogue with GOI, is strongly supporting the implementation of the NTPC's recommendations, most of which have been accepted by the Government and to this end, we propose to increase our involvement in the sector through our lending and sector work programs. 41. GOI has begun the major task of implementing the key recommenda- tions of the above report-a task that required major shifts in thinking on the part of GOI on such issues as resource mobilization, subsidy elimination and foreign contractor participation in a sector that has  -15- traditionally been reserved for local contracting organizations. It is in this environment that the Bank foresees a continuing role in assisting GOI in its efforts to modernize the transport sector. 42. Within the framework of priorities recommended by the NTPC, the Bank assistance program is designed to emphasize: (i) expansion of overall transport capacities, primarily through greater operational efficiency in the use of existing assets. Investments in key areas such as the modernization of asset management in the railways, rehabilitation of existing capacity and streamlining of maintenance and project execution practices in the sector will be required; (ii) introduction of cost-based pricing principles in the sector and reduction of subsidy levels including cross-subsidization in the railway sub-sector, not only to encourage more efficient traffic allocation, but also to improve the financial position of sector agencies; (iii) improvement of inter-modal planning and coordination; and (iv) strengthening of the management of public transport enterprises particularly in traffic forecasting, maintenance engineering, safety and investment planning. 43. Following successful implementation of the proposed project with its specific objectives (see below), future projects in the roads subsec- tor would extend the institution-building component begun under this project to other States; would embody the results of the Road User Charges and fleet modernization studies to be undertaken in the context of this project; and focus on other institutional issues identified in the NTPC Report such as deregulation and freedom of inter-modal choice for the user-issues that can only be addressed once the basic "building blocks" of pricing and planning to be introduced in this project, are in place. PART IV - THE PROJECT 44. In late 1982 the Government of India formalized its interest in obtaining Bank Group financing for a highway project in India in recogni- tion of the fact that *the Bank's approach would confer a range of benefits in the roads subsector that were badly needed. The project was prepared by the Roads Wing of MOST, with the assistance of Bank staff. It was appraised in September-October 1984. A report entitled "Staff Appraisal Report, Second National Highway Project" (Report No. 5435-IN) is being distributed separately to the Executive Directors. Negotiations were held in Washington, D.C., in April 1985. The Government of India and the Ministry of Shipping and Transport were represented by a delegation coor-  -16- dinated by Mr. Malhotra, Department of Economic Affairs, Ministry of Finance. A supplementary project data sheet is attached as Annex III. Project Objectives and Rationale for Bank Involvement 45. The project, which is seen as the first in a series in the subsec- tor designed to support GOI's implementation of the NTPC recommendations, will remove traffic congestion through the construction and rehabilitation of selected links of the national highway network and will address key institutional constraints both in the Central Government (specifically in MOST) and in six States: Cujarat, West Bengal, Punjab, Haryana, Tamil Nadu, and Uttar Pradesh. The key institution-building issues are the establishment of an intermodal planning and coordination capacity, the strengthening of a highway planning and construction capability, the introduction of modern highway design and economic evaluation techniques both at the Central and S:ate Government levels, and the, albeit modest, initial steps aimed at tLh modernization of the road transport industry. 46. The Bank's involvitent in the project is justified on four grounds. First, the project would make extensive use of modern highway design, quality control, and economic evaluation techniques, areas in which the Bank has experience and expertise. Second, the Bank's presence will assist in the transfer of modern technology to the road subsector, specifically the road construction industry, which is to be gained from the procurement of civil works through international competitive bidding and through the import of specialized equipment to monitor road conditions, facilitate bridge inspections, and to set up vehicle testing stations. Third, the project provides opportunity to examine the resource mobilization mechanisms--road user charges and funding allocation mechanisms that have constrained growth in the past. Fourth, introduction of a highways subsector project into the Bank's lending program will mean that the Bank will be actively involved in all the major transport subsectors, with concomitant opportunities to develop integrated solutions to India's transport needs and, in this project specifically, to focus more fully on the resolution of intermodal issues that constrain transport efficiency. Project Description 47. The proposed project would support the construction and/or rehabilitation of certain sections of national highways, which were selected because of their high priority in the national plan, and also because each subproject embodies a solution to a particular technical or institutional problem that is representative of conditions found on many of India's roads. Specifically, the proposed project would finance works on about: (a) 92 km of a new dual-carriageway expressway; (b) 65 km of a new two-lane road; (c) 241 km of an additional two-lane carriageway and strengthening of the existing two-lane carriageway; (d) 93 km of  -17- strengthening the existing two-lane carriageway; and (e) 30 km of a new two-lane bypass, including a major bridge. Specific technical issues to be addressed in each subproject include the selection of appi:-riate road/bridge design, the introduction of controlled access roads, traffic segregation, road safety, and control of ribbon development. 48. The institution-building component of the project involves adop- tion of specialized imported equipment to assist MOST and the participat- ing states in monitoring road condition and usage, to facilitate bridge inspections, and to provide equipment for vehicle testing stations. Use of this equipment will enable MOST to plan and allocate maintenance expen- ditures on the basis of need, rather than on the basis of historical norms as at present. GOI would agree to provide adequate maintenance funds upon completion of each segment of the project: (a) as determined initially by established norms, and (b) after April 1, 1990, in accordance with the results of pavement condition analysis systems (Section 4.03, Loan Agreement). The proposed project also provides for technical assistance and for the training of professionals employed in central/state highway organizations to keep them abreast of current developments in highway administration, design, construction, supervision, and maintenance. Some 480 man-months of overseas training to an agreed agenda is provided at a cost of about US$2.4 million. Moreover, the project would support the improvement of intermodal coordination and the strengthening of the high- way planning capabilities in MOST through the establishment of a Transport Coordination Committee in the Planning Commission and a Highway Planning Group in MOST, two of the key recommendations of the NTPC report. MOST's planning capabilities have already been strengthened in the context of preparation of this project-the Bank's computer modelling techniques are used in selecting the project components and a MOST engineer is currently on secondment to the Bank's Transportation Department for further training. 49. Finally, under the proposed project, consultants and GOI research groups would undertake studies to establish: (a) the extent and direction of modernization appropriate for India's vehicle fleet and concomitantly, the optimum highway design and axle-loading policies; (b) the appropriate structure and levels of road user charges. GOI has completed an examination of road safety and understandings have been reached that MOST would prepare a plan of implementation of the recommendations contained in the report for submission to the Bank by December 31, 1985.  -18- Project Cost and Financing 50. The cost of the proposed project, which forms part of the national development plan, is estimated at Rs 5,097 million (US$425 million), including US$24.7 million in taxes and duties. The proposed loan of US$200.0 million would provide 50 percent of the total project costs, net of taxes and duties. It would cover 100 percent of the foreign exchange costs plus about 25 percent of the local cost. The balance would be financed by GOI and, to this end, GOI *'ould agree to provide all funds necessary to complete the project (Section 3.61, Loan Agreement). Possession of the additional land required for each project contract would be a condition of disbursement of the funds required for each contract (Para 3 of Schedule 1 to the Loan Agreement). Procurement and Disbursement 51. Almost all civil works contracts will be awarded using the Bank's international competitive bidding (ICB) procedures from among contractors prequalified in accordance with the Bank's guidelines. The only exception is made in respect of small and widely scattered works that will, in aggregate, not exceed US$25 million equivalent (Part D of Schedule 4 to the Loan Agreement). Individual contracts will, as far as is practicable, be about US$10 million equivalent, and, where applicable, packages of three contiguous contracts will be tendered simultaneously so that both local and foreign contractors may be encouraged to compete (Part A.3 of Schedule 4 to the Loan Agreement). Contractors may bid on one or more contracts up to the limit of their prequalification. Some of the special- ized equipment needed to monitor road conditions will be purchased directly from the single known manufacturer/supplier (up to a maximum of US$1.4 million), while the equipment needed for the vehicle testing sta- tions and bridge inspections will be procured by ICB. All contracts costing more than US$300,000 equivalent each for civil works, consultant services, and equipment financed by the Bank would be subject to prior review by the Bank before award. Domestic contractors would be given a preference of 7-1/2 percent on civil works contracts. For procurement of equipment, a domestic preference of 15 percent, or the import duty, whichever is less, would be applied to bids of local manufacturers in bid evaluation.  -19- 52. The procurement arrangements for the proposed project are sum- marized as follows: Procurement Method (US$ Million) Project Element ICB LCB Other Total Cost 1. Civil Works 353.4 20.0 373.4 (182.0) (10.3) (192.3) Supervision of Construction 33.5 33.5 Land Acquisition 9.7 9.7 2. Equipment 3.4 1.4 4.9 (3.3) (1.3) (4.6) 3. Training 2.4 2.4 (2.4) (2.4) 4. Consultants' Services 0.8 0.8 (0.7) (0.7) Total 356.9 20.0 47.8 424.7 (185.3) (10.3) (4.4) (200.0) Note: Figures in parentheses are the respective amounts financed by the Bank. 53. The proceeds of the loan would be disbursed as follows: - 46 percent of total expenditures (net of taxes) for civil works; - 100 percent of foreign expenditures and 100 percent of local expenditures (ex-factory) for equipment; and - 100 percent of foreign expenditures for training and consultant services. Disbursements under the loan are expected to be completed by June 30, 1992 and the closing date would be December 31, 1992. The pattern of disburse- ments is expected to be consistent with the Bank's disbursement pattern for similar projects in other countries. Project Management 54. MOST would have overall responsibility for project implementation, although execution would be delegated to each State's roads organization on an agency basis, as is normal practice in India. Each participating state would arrange for the formation of a Supervisory Unit (SU), whose personnel-engineers, technicians, and support staff--together with the necessary equipment, laboratory facilities and vehicles, would be deter-  -20- mined and agreed with the Bank in accordance with the magnitude of the works. In addition to the supervision and quality control exercised over construction operations by the SU, GOI, quite independently, has an ongo- ing mechanism to check on quality of work. This is the Vigilance Committee, which carries out spot checks on major works to ensure that design and construction standards are being maintained. 55. Inasmuch as this will be the first Bank-financed project in national highways in nearly twenty-five years, and some of the subprojects are innovative and somewhat experimental in their application, more inten- sive supervision would be required from MOST in New Delhi. The arrange- ments for sub-project supervision made in each state (including organiza- tion structure and staffing levels, laboratories, facilities, and equipment) have been discussed and agreed. In addition, understandings have been reached that, where necessary MOST would retain the services of specialist consultants (about sixty man-months, costing US$0.8 million) to assist in executing the more innovative aspects of some of the sub- projects (Section 3.02 and Schedule 4, Loan Agreement). Appropriate training schools and facilities have been set up and competent staff are available at both Central and State levels. 56. The Bank is actively supporting HOST's efforts to improve its effectiveness in maintaining the national road network. Understandings have been reached that GOI would provide for a gradual improvement in the allocation of resources for the national highway maintenance by ensuring that, by December 31, 1992 maintenarce funds will be allocated in accord- ance with a pavement condition system that underpins a rational main- tenance funding allocation process. Further, GOI undertakes that future investment allocations for national highways will take into account plans prepared by the Highways Planning Group established under the Project (Section 4.04, Loan Agreement). Studies 57. The Vehicle Fleet Modernization Study (VFMS) will: (a) review existing vehicle fleet technology and current conditions of the highway system; (b) estimate road traffic demand; (c) propose and evaluate alter- native future mix of commercial vehicles on the basis of vehicle perfor- mance and the structural capability of the network; and (d) make recommen- dations on the proposed vehicle specifications and on an action plan for their implementation. The study will expand the scope of the work being carried out by the Indian Institute of Technology (IIT), and understand- ings have been reached that GOI would complete the study by December 31, 1986, and would furnish the same to the Bank for its comments. 58. The Road User Charges Study (RUCS) is designed to examine, for the first time, the adequacy of road user charges in relation to the real costs of road use (road maintenance and congestion and investment  -21- funding); and to propose changes, if necessary, in taxes and other road user charges in order to align road user charges with costs and to enhance the efficiency of the transportation system. GOI would carry out the study by December 31, 1987, and the results would be furnished to the Bank for its comments (Section 3.03, Loan Agreement). Transport Planning and Coordination 59. Highway planning in India is still in its infancy and, under the project, GOI has established and is staffing a Highway Planning Group (HPG) with membership, powers and functions acceptable to the Bank. Furthermore, GOI has adopted an economic evaluation methodology, accept- able to the Bank in order to determine its road investment programs and is presently promulgating its use throughout all State highway agencies. GOI has also established a Transport Coordination Committee with membership, powers and functions acceptable to the Bank that will, inter-alia, examine the inter-modal issues in the transport sector and review, on a continuous basis, the implementation of the key recommendations of the NTPC Report. Economic Justification and Risks 60. The economic case for the proposed project rests on the expected reduction in vehicle operating costs, passenger travel time, and in the costs of road rehabilitation and maintenance. When the projects are implemented, significant savings will accrue from reduced fuel consumption, tire wear, vehicle maintenance and depreciation, and time- and road maintenance-related costs. Also, in some cases, future road reconstruction costs will be delayed. In addition, the proposed project is expected to yield significant institutional benefits in terms of improved intermodal coordination, highway pLanning, and execution capabilities; improvements in road safety; modernization of the road and road industry subsectors; improved road work quality; and further develop- ment of domestic road contractor capabilities. The road transport market in India is highly competitive and thus it is expected that the benefits of the project, which initially accrue almost entirely to road users, will be passed on to the economy in general. 61. The economic rate of return (ERR) for the project as a whole is 26 percent. For the six civil works components, which amount to about 98 percent of total project cost, the individual ERRs vary from 19 percent to 37 percent. No attempt has been made to ascribe benefits to the costs of studies, training, or equipment, although their costs are included in the calculation of the project ERR. According to sensitivity analyses, there is little risk that the ERR for any of the subprojects would fall below 12 percent, which is the estimated opportunity cost of capital for India. In addition, three sensitivity cases were analyzed that involved (a) an increase in capital costs of 20 percent, (b) a decrease in benefits of 20 percent, or (c) a combination of a 10 percent increase in costs and 10  -22- percent decrease in benefits--all of which would have a similar effect on the overall ERR, which would decline to about 23 percent in each case. 62. Since most project components involve proven technology, technicaL risks connected with the project are minimal. However, the Bank has not had an operation in this subsector in India for almost twenty-five years, and there is little experience concerning the capacity of the Roads Wing of MOST to implement the six subprojects properly and on time. Experience in other transport subsectors in India has been good, however, and, since the same Ministry is involved, it is reasonable to assume that the implementation risks will be acceptably small. The operation of some of the proposed "state-of-the-art" improvements, such as expressway, bypass, and traffic segregators, have a certain degree of risk, given the lack of experience in India in the utilization of such systems. However, the training element of the project and the proposed intense supervision of civil works and studies are designed specifically to contain those risks. The staff examined the environmental aspects and found that, as is normal in highway construction, the project may temporarily impinge adversely on the environment during the construction phase. However, the completed works will have a positive impact in that smoother road surfaces and improved capacity will result in shorter journey times; less congestion, dust, and noise, and a general enhancement of the environment. PART V - LEGAL INSTRUMENTS AND AUTHORITY 63. The draft Loan Agreement between GOI and the Bank and the Report of the Comittee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 64. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 65. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President April 18, 1985  ANN I Fag. 1 of 5 TABLE SA INDIA - SOCIAL INDICASORU DATA INERT INDIA *FEUNM umurst tNOUPS EIC AVCRAs) p NOST (NOSY siEOUl ESTIMATE) IIICUT LOW INC MIDE mc&0i iw7g?o z LbTSMASL ASIA 6 PACIFIC ASIA & PACIFIC A (IBM= . m) TOTAL . 3287.6 3287.6 3287.6 ACRICULTUSAL 1763.5 17S0.5 1612.3 GO PE CAPTT& (MS) 60.0 100.0 260.0 278.6 1291.2 (KILWORMS OF OIL EqUIVALENT) 79.0 113.0 158.0 272.0 567.3 mOA AJ. an vtAL sTIM POPULATION.MIDO-YEA (ThOUSANDS) 434849.0 347569.0 716985.0 URBAU POPULATIO- C OF TOTAL) 13.0 19.8 24.1 21.7 34.7 POPULATION PROJECTIONS POPULATION IN YEARt 000 (MILL) 994.4 STATIONARY POPULATION (MILL) 1707.2 POPULATION tKOEWI 1-.7 POPULATION DENSIY PU sq. it. 132.3 166.6 213.4 166.6 261.9 PER sq. K. AGRI. LAD 246.6 307.5 387.1 345.