PROJECT PAPER DATA SHEET

INDIA: KERALA STATE TRANSPORT PROJECT

Date: September 14,2009 Country: India Project Name: Kerala State Transport John Henry Stein Project ( KSTP) Project ID: PO72539 Environmental Category: Full Assessment

Team Leader: Arnab Bandyopadhyay Sector ManagedDirector: Michel Audig6/

Country Director: N. Roberto Zagha

Borrower: India Responsible agency: Public Works Department, Government o f Kerala Revised estimated disbursements (Bank FY/US$m) FY FY 10 FY 11

Current closing date: December 3 1 , 201 0

The Restructuring i s being submitted for Board Approval.

Does the restructured project require any exceptions from Bank policies? Have these been approved by Bank management? I s approval for any policy exception sought f iom the Board?

oYes * N o

*Yes o N o oYes . N o

Revised project development objectives/outcomes The Project Development Objective remains the same as originally stated Le. “to improve traffic f low and road safety on Kerala state’s primary road network, and to strengthen the institutional and financial capacity o f Kerala’s key transport sector agencies.” The revised outcome indicators would be (a) reduction in vehicle operating costs and travel time by 20 percent on the approximately 1,450 Km o f roads to be upgraded and receive periodic maintenance under the project, and (b) reduction in the international roughness index (IN) to 4.5 m / Km on approximately 250 km road to be upgraded by end o f the project and (c) increase in portion o f state highways in good condition by at least 46% by end o f the project. The other development indicators related to road safety and institutional strengthening remain the same as originally envisaged in the Project Appraisal Document. ,

Does the restructured project trigger any new safeguard policies? No. Revised Financing Plan (US$m.) Source Local Foreign Total Borrower 8 1 .OO 0.00 81.00 :BRD 158.50 96.50 255.00

rota1 239.50 96.50 336.00

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Key Project Data as of end August 2009

Effectiveness date June 06,2002 Closing Date December 3 1, 2010

Extended) Project Age 7.3 years % Disbursed 65%

Introduction

Ratings and Flags from last ISR

Development Objective Moderately Satisfactory Implementation Progress Moderately Unsatisfactory

Problem Flags Low Disbursement, Long term risk

This Project Paper seeks the approval o f the Board to introduce changes in the Kerala State Transport Project (KSTP, P072539, Loan 4653-IN) and the accompanying amendments to the project’s legal documents.

The Part A o f the project, the corridor improvement component envisaged strengthening and widening o f about 581 k m s o f state’s primary road network. These works were proposed to be taken up in two phases, Phase I comprising about 254 km and Phase I1 comprising 327 km. There has been a substantial increase in the l ikely cost o f completion for the c iv i l works for Phase I o f corridor improvement component due to time and cost overruns. This le f t only about U S $ 30 mi l l ion o f loan for taking up the Phase I1 (about 327 km) corridor improvement works, which was grossly inadequate for taking up even one o f the three contracts under the Phase I1 improvement works. Accordingly, on May 07,2008 Government o f Kerala (GOK) had taken a decision (endorsed by the state cabinet) to exclude the Phase I1 works (about 327 km out o f the total scope o f about 581 km) from the scope o f the project. On the other hand, GOK, Government o f India (GOI) and the Bank agreed to utilize the uncommitted loan amount o f US$ 30 mi l l ion for procuring about 200 km o f additional maintenance works. The procurement for these additional maintenance works has also been completed now and the works are under implementation. The project needs to be formally restructured to accommodate exclusion o f the Phase I1 corridor improvement works (about 327 km) and inclusion o f additional periodic maintenance works.

The proposed changes, involving modifications in project outcome indicator targets, would constitute a f irst order project restructuring. The restructuring i s aimed towards partially mitigating the loss o f time and cost savings benefits arising from exclusion o f the Phase I1 corridor improvement works. Moreover, through the proposed restructuring, the project development impact could be extended by bringing in additional 200 km o f primary road network under improved periodic maintenance and safety management framework.

Background and Reasons for Restructuring;

Background

4. Current Status

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5. Project Development Objectives (PDO) and Progress towards Achievement o f PDOs.

The primary project development objectives are (a) to improve traffic f low and road safety on the state's primary road network, and (b) strengthen institutional and financial capacities o f the key transport sector agencies. These objectives were originally envisaged to be achieved through implementation o f the following components - (a) Transport corridor improvements consisting o f about 581 Km o f high priority state roads and o f about 90 km o f inland waterways (cost US$ 261 million); (b) Rehabilitation and Maintenance o f about 1,000 km o f state roads (cost US$ 58.20 million); (c) Road Safety component including policy development towards comprehensive road safety management, accident management database development, safety works and equipment (cost U S $ 4.2 million) and (d) Institutional Strengthening (IS) component including Technical Assistance (TAs) in the area o f road information and management systems, restructuring o f transport organizations and their core functions and supporting TAs, training and equipment (cost U S $ 9.5 million). Contribution o f components (b), (c) and (d) towards achievement o f both the development objectives are satisfactory. The institutional strengthening and road safety management improvements already achieved fully satisfy the development objective (b). The development objective (a) on improved traffic f low and safety continues to be relevant. However, the travel time, cost and safety benefits associated with the project component (a) can be only partially achieved as (i) the Phase I1 corridor improvement works (about 327 Km out o f total o f 580 km) have been excluded from the scope o f the project due to paucity o f funds and time constraints, and (ii) completion o f Phase I corridor improvement works will be delayed by about 30 months. However, the additional periodic maintenance works have now fully commenced and progressed about 25% which would compensate the benefits lost f iom exclusion o f the Phase I1 corridor improvement works. The Phase I corridor improvement works have also completed about 86% and moved closer to completion. On balance, the achievement o f project development objective, can therefore been rated as moderately satisfactory.

6. Project Implementation Progress

The project implementation progress was downgraded to 'moderately unsatisfactory' in December 2006 following consistent poor performance o f the project component (a), mentioned in paragraph 5 above. Consequently, a seven point action plan was agreed between GOK and the World Bank in December 2006 to bring the project implementation back to satisfactory status. The action plan can now be considered as fully complied. However, compliance with the action plan entailing streamlining o f overall project administration has not fully translated into improved physical progress o f c iv i l works. One o f the four ongoing Phase I civi l works contracts, contract 4b (representing about 20% o f the ongoing works), was running seriously behind the agreed schedule and was terminated on February 12, 2009. Procurement and re- engagement o f contractors for the balance works in contract 4(b) has been concluded for section 4b(2) and expected to be concluded for section 4b(l) by October 2009. The implementation progress o f components (b), (c) and (d) are, however, satisfactory. Nevertheless, the implementation progress o f the largest component o f the project

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being ‘moderately unsatisfactory’ the implementation progress o f the overall project continues to be rated as ’moderately unsatisfactory’. However, once the loan i s formally restructured by excluding the Phase I1 corridor improvement works and the Contract 4(b) o f Phase I corridor improvement works resume, the implementation progress can be upgraded to ‘moderately satisfactory’. With improved implementation o f the Phase I corridor improvement works and additional periodic maintenance works, the problem flag related to low disbursement could be removed after resumption o f works in contract 4b.

Specific Reasons and Rationale for Proiect Restructuring:

7. The following factors make a strong case for the proposed project restructuring:

a. Funding gap for Phase 11 corridor improvement works component - As explained earlier in the project paper, there has been a substantial increase in the likely cost o f completion for the civ i l works for Phase I corridor improvement component due to time and cost overruns. The estimated cost o f c iv i l works under the transport corridor improvement component (Phase I and I1 combined) was US$199.60 mil l ion during appraisal, while the likely completion cost o f only Phase I has now been estimated at about US$ 162.00 million. This le f t only about U S $ 30 mil l ion o f loan for taking up the Phase I1 corridor improvement works, which was grossly inadequate for taking up even one o f the three contracts under Phase 11. Moreover, on May 07, 2008 Government o f Kerala (GOK) had taken a decision (endorsed by the state cabinet) to exclude the Phase I1 works (about 327 km out o f the total scope o f about 580 km) from the scope o f the project. It was also agreed that the Government o f Kerala would continue to finance, beyond December 2008, the remaining land acquisition and resettlement and rehabilitation works for Phase I1 works utilizing their own resources following the framework o f the agreed Resettlement Action Plan for the Project. The state Government would explore alternate financing resources for implementation o f the Phase I1 works. Restructuring o f the project i s therefore fully justified from the funding gap point o f view.

b. Time and Cost Overruns in Phase I corridor improvement Component - The time and cost overrun in Phase I corridor improvement component was largely on account o f severe delays in land acquisition and utility relocation. While the procedure for land acquisition had been subsequently streamlined, the risks associated with delayed land acquisition and utility relocation s t i l l remain high. Exclusion o f Phase I1 corridor improvement component remedies that risk significantly and restructuring i s justified from an overall risk reduction aspect.

c. Satisfactory performance of the Periodic Maintenance Improvement Component - 1000 k m s o f periodic maintenance o f primary roads, as originally envisaged have been completed with 98% o f these roads having demonstrated satisfactory quality and minimal time and cost overruns. These periodic maintenance works included considerable safety management and drainage improvement measures besides improving the road pavements and had an excellent demonstration impact on the remaining periodic maintenance works being concurrently carried out by GOK

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using their own funds. Under the circumstances, inclusion o f the additional periodic maintenance works for 200 km primary roads was the best use o f the savings o f US$ 30 mi l l ion resulting from exclusion o f Phase I1 corridor improvement works.

111. Proposed Chanves

Changes in Proiect Outcome Indicators

8. The originally stated Project Development Objective would remain the same as “to improve traffic f low and road safety on Kerala State’s Primary road network, and to strengthen the institutional and financial capacity o f Kerala’s key transport sector agencies”. The benefits associated with the Project Development Objective, as originally anticipated, will not be fully realized though and hence the target value for three outcome indicators need to be modified, as explained in paragraph 17.

Changes in Proiect Design, Scope, and Costs

9. The following changes in the project scope are proposed -

(a) Exclusion of Phase 11 corridor improvement works - This entails exclusion o f the entire Phase I1 corridor improvement works involving widening and strengthening o f about 327 km o f primary roads in the state. The originally envisaged cost for this component as mentioned in the P A D was US$ 101 million. Exclusion o f these works has also been endorsed by the Government o f Kerala State Cabinet on May 07, 2008 through a Government Order.

(b) Inclusion of additional periodic maintenance works - This entails inclusion o f additional periodic maintenance o f about 200 km o f primary road network in the state at an estimated cost o f about US$ 33.0 million. This component would involve strengthening o f pavement and improvement o f drainage and road safety measures in the selected 200 k m s through eight construction contracts. This component would fully utilize the balance US$ 30.0 mi l l ion relinquished due to exclusion o f Phase I1 corridor improvement works and an additional saving o f US$ 3.0 mi l l ion from the construction supervision and project preparation services for corridor improvement works.

(c) Construction Supervision and Project preparation services - It i s estimated that the expenditure for this component till end o f the project would be about US$ 11.5 mi l l ion against the originally allocated amount o f US$ 14.5 million. This savings i s accrued primarily on account o f exclusion o f Phase I1 corridor improvement works supervision from the scope o f consultant services. The savings are proposed to be fully reallocated to the additional periodic maintenance works.

(d) Goods under the Institutional Strengthening and Road Safety Components. Under the goods category, till date the project has disbursed about US$ 1.55 mi l l ion against the originally allocated US$ 7.0 million. The anticipated expenditure (and reimbursement) for goods by the end o f the project closure i s expected to be about U S $ 2.2 million. The savings i s accrued primarily on account o f I T equipment which the

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state has procured from other funding sources and the savings o f U S $ 4.8 mi l l ion i s proposed to be fully reallocated to the civ i l works.

Particulars

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10. Revised Cost Allocations - The detailed cost overview o f the restructured project i s presented in Table 1. The table indicates both component-wise and category-wise costs. The available $-loan amount remains the same as 255 Mill ion.

As per PAD Likely Completion Cost Cost Variation Total Bank Total Bank With With Bank cost Financing Projected Financing PAD financing

2 3 4 5 6 7

Table 1: Revised Cost Allocation

Civil Works including Pilot

Supervision, Technical Audit Corridor Improvement

and Design Services Sub-total

56.4 93.9 37.5

1.8 1.8 0 +30.0 76.9 46.9

58.2 46.9 95.7 76.9 +37.5 +30.0

Sub-total Front end fee @ 1% of total cost Grand Total

9.50 9.20 9.50 9.20 0.00 0.00 2.55 2.55 2.55 2.55 0.00 0.00

336.00 255.00 336.80 255.00 0.80 0.00

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Category

Civil Works - l(a)

Goods Consultants Services and

Civil Works - l(b)

Original Loan Revised Loan Difference between Yo o f Allocation Allocation Original and revised Expenditures to

allocation be finances 10.56 10.56 0 90%

209.79 217.59 +7.8 80% 7.0 2.2 -4.8 100%

25.1 22.1 -3.0 100%

Front end Fee 2.55 I 2.55 1 0.0 I Total 255.0 I 255.0 I 0.0 I

11. Procurement Plan. The procurement plan has already been modified and agreed with the Bank to reflect the change in scope o f the project. The procurement plan i s attached as Annexure 2 to the Project Paper. The procurement plan includes three services contracts and one works contracts totaling to about US$ 6.5 million, to be procured in future. However, all o f these items were originally included in the project scope and have not resulted due to project restructuring.

Component

Corridor Improvement Road Maintenance

Total

12. Closing Date and Implementation Schedule - It is estimated that at the current rate o f progress, the remaining works for Phase I corridor improvement works and the additional periodic maintenance works would be completed by September 201 0. Final loan extension till December 2010 has been granted on August 31, 2009 to allow completion o f all these ongoing works. An implementation schedule has been drawn up for completing all remaining civ i l works by September 2010 and would be closely monitored.

Original NPV Revised NPV ( Mil l ion USD) ( Mil l ion USD)

376.00 205.00 433.00 491.00 809.00 696.00

IV. AppraisaYAnalvsis o f Restructured Proiect Activities

13. The proposed restructuring does not raise the environmental category o f the project. The classification remains as Category A under the Bank’s OP 4.01. There are no new environmental safeguard policies triggered. The existing Environmental & Social Management Framework (ESMF) for the periodic maintenance works has been updated to reflect inclusion o f the 200 km additional periodic maintenance works.

14. The additional periodic maintenance component i s already under implementation. In fact all contracts are in progress and the cumulative progress has reached 25%. The procurement plan has been updated to include the additional periodic maintenance works. These works are being fully supervised by the GOK P W D Engineers.

15. policies.

The proposed project restructuring does not involve any exceptions to Bank

16. The costs and the benefits o f the restructured project would undergo changes with the exclusion o f Phase I1 corridor improvement works and expansion o f periodic maintenance works. The revised Net Present Value (NPV) @ 12% discount rate, as presented in the table below, indicate that the restructured projects would s t i l l remain viable and the change in the overall project N P V i s only about 14% with respect to the original.

V. Expected Outcomes

17. with the following exceptions:

The proposed changes do not alter the original PDOs and outcome indicators,

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a. The reduction in vehicle operating and travel cost by 20 percent will be achieved on approximately 1,450 km o f roads to be upgraded and receive periodic maintenance instead o f about 1,600 km as originally envisaged.

b. The reduction in the International Roughness index (IRI) to 4.5dKt-n be achieved on about 254 km o f road to be upgraded instead o f about 581 km as originally envisaged.

c. Increase in portion o f state highway network to good condition by 46% against 50% as originally envisaged.

The revised End o f project targets for the various outcome and output indicators are presented in Annex 1 to t h i s project paper.

VI. Benefits and R i s k s

18. Benefits - Major benefits from the project restructuring include the following:

i. Deepening and further consolidation o f the project development impact associated with the periodic maintenance works and improving the overall asset management culture in the state; and

ii. Effective utilization o f the savings accrued from cancellation o f the Phase I1 corridor improvement works from the scope o f the project.

19. Restructuring R i s k s - The governance, management and results-delivery r isks associated with the more complex corridor improvement works will be substantially reduced due to exclusion o f the Phase I1 improvement works. Moreover, the state in consultation with the Bank has already developed and started implementing a plan to deter any potential re-encroachment o f the land already acquired for Phase 11. It has also been agreed and documented in the December 2008 Aide Memoire that the Bank would continue to monitor the compliance with the resettlement and rehabilitation framework for Phase I1 corridor improvement component. On the other hand, the implementation o f periodic maintenance component has been largely successful, completed with minimal time and cost overrun and contract disputes. Increasing the scope o f this component by an additional 20% would bear low risk with reference to the probability o f their occurrence as well as their potential to impact the effective, efficient and transparent delivery o f the intended results from the restructuring.

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