Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 27281-PAK

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF Y5,605.5 MILLION (USrS50 MILLION EQUIVALENT)

AND A PROPOSED CREDIT IN THE AMOUNT OF

SDR 105.9 MILLION (US$l50.0 MILLLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR THE

HIGHWAYS REHABILITATION

PROJECT

November 10,2003

Energy and Infrastructure Sector Unit Pakistan Country Management Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents mav not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 3 1,2003)

Currency Unit = Pak Rupees (Rs) Rs 57.595 = U S $ l . O O USS0.017 = Rs. 1.00

ADB BPR CDWP COI EA ECC ECNEC

EMP F Y GOP IBRD

IDA IDB IFC IRI LCS MIS MOC MOF MTBF N H A NHIP

FISCAL YEAR July 1 -- June 30

ABBREVIATIONS AND ACRONYMS

Asian Development Bank Business Process Re-engineering Central Development Working Party Corridor o f Impact Environmental Assessment Economic Coordination Committee Executive Committee o f the National Economic Council Environmental Management Plan Fiscal Year Government o f Pakistan International Bank for Reconstruction and Development International Development Association Islamic Development Bank International Finance Corporation International Roughness Index Least-Cost Selection Management Information System Ministry o f Communications Ministry o f Finance Medium Term Budgetary Framework National Highway Authority National Highway Improvement Program

NHMP NPV O&M PAP PIP PSDP PSP PSR

QCBS RAMD RAMS R M A ROW RPF RUC SA SEA S I L SOE SOP TOR TSP

QBS

National Highway and Motorway Police Net Present Value Operation & Maintenance Project Affected Person Project Implementation Plan Public Sector Development Plan Private Sector Participation Project Status Report Quality-Based Selection Quality and Cost-Based Selection Road Asset Management Directorate Road Asset Management System Road Maintenance Account Right-of-way Resettlement Policy Framework Road User Charges Social Assessment Sectoral Environmental Assessment Specific Investment Loan Statement o f Expenditures Standard Operating Procedures Terms o f Reference Transport Sector Project

Note: References in this document to the Bank include bo th IBRD and IDA.

Vice President: Praful C. Pate1

Sector Manager: Guang Z. Chen Country Director: John W. Wall

Task Team Leader: Navaid A. Oureshi

FOR OFFICIAL USE ONLY

A. Project Development Objective

1. Project development objective 2. Key performance indicators

PAKISTAN HIGHWAYS REHABILITATION

CONTENTS

B. Strategic Context

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

C. Project Description Summary

1. Project components 2. Key pol icy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5. Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

Page

3 3

3 4 8

9 10 11 11

13 14 15 15 16

16 17 18 19 21 24 27

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed lwithout W o r l d Bank authorization.

F. Sustainability and Risks

1. Sustainability 2. Crit ical r isks 3. Possible controversial aspects

G. M a i n CreditILoan Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9:

Project Design Summary Detailed Project Description Estimated Project Costs Cost Benefit Analysis Summary Financial Summary Procurement and Disbursement Arrangements and Financial Management Project Processing Schedule Documents in the Project File Statement of Loans and Credits

Annex 10: Country at a Glance Annex 1 1 : SocialiResettlement Issues and Environmental Aspects Annex 12: NHA Medium Term Budgetary Framework (MTBF) Annex 13: NHA Institutional Reform & Corporate Strengthening Action Plan Matr ix

28 28 30

30 30

32

32

33 38 43 44 52 53 67 68 71 74 76 82 83

MAP(S) Project M a p

BORROWER [BRD

61.40 0.00 6 1.40 24.75 25.25 50.00

[DA Total:

44.67 105.33 150.00 130.82 130.58 26 1.40

Borrower: GOP Responsible agency: MOC/NHA National Highway Authority Address: Plot No. 27, Mauve Area, G-911, Islamabad Contact Person: Raja Nowshenvan, Member (Planning) Tel: 92-5 1-9260409 Fax: 92-5 1-9260418 Other Agency(ies): Ministry o f Communications Address: Block D, Pakistan Secretariat, Islamabad. Contact Person: Iftikhar Rashid, Secretary Tel: 92-51-9201252 Fax: 92-5 1-922 1300

Email: nraja@nha.gov.pk

Email: Estimated Disbursement in US$m Equivalent (Bank FYISemesters):

Project implementation period: 60 months Expected effectiveness date: 0212812004 Expected closing date: 06/3012009

cs P k 3 F" Re" U I M *e4

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A. Project Development Objective

1. Project development objective: (see Annex 1)

The project development objective i s the sustainable delivery of a productive and eficient national highway network, contributing to lower transportation costs.

The Government o f Pakistan (GOP) i s implementing a National Highway Improvement Program (NHIP) to increase the efficiency o f the national highway network, through phased improvement o f approximately 2700 km o f highways. The program was initiated during FY02 using GOP's o w n resources. The proposed Project will finance a segment o f N H I P works (about 856 km o f highway improvements along the national highways N-5 and M-9) over a f ive year implementation period, while also supporting essential reforms in the sector and the strengthening o f the National Highway Authority (NHA).

2. K e y performance indicators: (see Annex 1)

Project implementation and development impact wil l be judged on the basis o f the following performance indicators:

a) Impact Indicators: Improved traffic f low on the network, measured by: (i)

(ii) (iii)

reduction in average Vehicle Operating Costs by 5%; [average network roughness reduced from 5.4 IRI to 4.4 IRI; NHA network in poor condition reduced from 49% to 35%;]; reduction in travel time (growth adjusted) on N-5 by 10%; improvement in the road safety situation along the N-5 corridor [growth adjusted reduction in road fatalities by 10%].

b) Output Indicators: (i) About 550 km o f highways rehabilitated; 306 km o f highways resurfaced; safety improvement

works implemented at 15-20 locations along the N-5; trees planted in about 2,500 avenue km in ROW land; NHA Medium Term Budgetary Framework (MTBF) in place; [annual 'throw-forward' o f the Public Sector Development Program (PSDP) reduced from 4.2 years to 2.0 years; share o f total NHA expenditure on highway network conservation increased from 38% to 55%]; Road Maintenance Account (RMA) operational and financing Annual Maintenance Programs; [routine and periodic maintenance funding increased from 25% to 100% o f stable network needs; allocation based on Road Asset Management System (RAMS); regular consultation with Road Users; publication o f RMA Annual Reports in public domain]; Satisfactory progress on implementation o f the agreed NHA Institutional Reform and Corporate Strengthening Program.

(ii)

(iii)

(iv)

(Note: 'throw-forward refers to total value o f ongoing program commitments carried forward f rom one financial year into the next.)

B. Strategic Context 1. Sector-related Count ry Assistance Strategy (CAS) goal supported b y the project: (see Annex 1) Document number: CAS document number: 24399-PAK Date of latest CAS discussion: June 11,2002

The present CAS covers the period July 2003-June 2005. Bank Group's program priorities focus on

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reforms to (i) strengthen macroeconomic stability and government effectiveness, (ii) improve the business environment for growth, and (iii) improve equity through support o f pro-poor and pro-gender equity policies.

The Project supports items (i) and (ii) o f this strategy. The reforms supported by the Project aim to improve governance, enhance resource mobilization and improve targeting o f NHA’s considerable share o f the overall publ ic sector expenditures. The physical works financed by the Project wil l help lower transportation costs and improve traffic safety on the national highway network. Improvements in transport are essential to achieving Pakistan’s economic growth and poverty reduction objectives. Recent consultations undertaken in Pakistan confirm that improved infrastructure services (including transport) remain an essential component o f any comprehensive effort towards improving the investment climate.

At the time o f June 2002 CAS discussion, i t was anticipated that the proposed project would go to the Board in FY03. However, the important upfront reform action pursued under the project, including, the creation o f a road maintenance hnd, agreement on a medium term budget framework for NHA, and agreement on a debt management plan o f NHA, required extensive pol icy discussions and accordingly took more time than originally expected. The amount o f B a M D A financing has also changed from the June 2002 CAS. During appraisal, the government requested the Bank to expand financial assistance to the road sector to about $200 mi l l ion under the project, compared to $100 mi l l ion IDA credit in the CAS. Taking into account that NHA’s implementation capacity to undertake a larger program has improved in the last few years and that Pakistan’s fiscal and external creditworthiness position has improved since mid 2002, the Bank and the Government agreed that the highway program would be increased, and that $50 mi l l ion equivalent o f the additional resources would be on IBRD terms. The remaining $50 mi l l ion in increased funding would come from IDA resources, which wil l not affect the expected use o f IDA resources for other projects in the three-year lending program o f Pakistan.

2. M a i n sector issues and Government strategy:

a. Sectoral Context

Country Background: Pakistan’s economic development depends on the improvement and modernization o f i t s key transport systems. Transport contributes about 10% to the GDP, and has accounted for 20-25% o f Federal PSDP in recent years. At a time when international trends are towards the development o f efficient, high quality highway and transportation networks, Pakistan’s public transport systems continue to suffer f rom poorly targeted investments, neglect o f essential maintenance, traditional labor and noncommercial practices and obsolete general purpose distribution systems that have led to severe capacity bottlenecks, h igh transport costs, poor safety standards and l o w levels o f service. Industrial and commercial growth and export competitiveness are handicapped by an inadequate and outmoded infrastructure.

Road Biased Modal Split: Pakistan’s inland freight and passenger traffic has been growing at an average annual rate o f 10.6% and 4.4% respectively during the ten year period between 1991 and 2001. However, Pakistan Railways’ freight traffic declined (by 2.3% Iyr), whereas passenger traffic stagnated during this period. As a result, a l l the growth was absorbed by the road sector, which n o w carries over 95% o f the inland freight (107 bi l l ion ton km) and 90% o f the passenger traffic (208 bi l l ion passenger km). Pakistan has about 4.2 mi l l ion vehicles on the road, growing at about 8% annually. This includes about 250,000 commercial vehicles. The road transport industry i s deregulated and predominantly in the private sector.

Road Network and National Highways: Pakistan has a total road network o f some 250,000 km o f which about 60% i s paved. This network has grown at about 4.2% annually over the past decade. The NHA

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under the Federal Ministry o f Communications (MOC) i s responsible for about 8500 km long National Highway and Motonvay network (3% o f the total) which carries 75 to 80 % o f Pakistan's total commercial traffic. About ha l f o f this network i s in poor condition (40% good, 11% fair and 49% poor/very poor). Up until the August 2001 Devolution to local governments, provincial highway departments were responsible for approximately 90,000 km o f provincial roads. The remaining network comprised municipal, district roads and village roads. Traffic movements are primari ly concentrated along the Karachi-Lahore-Peshawar corridor which serves domestic needs, and also l i n k s Punjab and the northern parts o f the country wi th international markets through the Southern Karachi area ports which account for 96% o f al l trade. About 60% o f the port traffic moves along this corridor. NHA's main artery along th is corridor i s the 1760 km long M - 9 M - 5 highway, which serves over 80% o f Pakistan's urban population and carries over 55% o f the country's inter-city traffic. Other National Highways include N-55 (Indus Highway), N-25, N-65, N-40 (RCD Highway), N-50, N-70, and N-35 (Karakoram Highway). Traffic levels on the NHA network vary over a broad range (20% below 1000 ADT, 63% between 1000-7000 ADT, and 16% above 7000 ADT).

b. Road Sub-sector issues

Key challenges facing the National Highway system can broadly be grouped into three areas: (i) investment prioritization & financing; (ii) maintenance neglect; and (iii) institutional capacity and efficiency o f NHA.

i) Investment Prioritization & Financing:

Poor investment priori t izat ion and portfolio management: Although NHA has been the recipient o f almost 10% o f Pakistan's PSDP allocations in recent years, i ts portfolio has suffered f rom poorly justified investments; a bias towards capital construction over asset conservation, and a proliferation o f new start-ups without completing ongoing works. This has led to very limited economic benefits from the investments, significant deterioration in traffic conditions along some heavily trafficked national highway sections; protracted completion delays and substantial increases in completion costs; as wel l as reduced head room for new high priority initiatives. The huge (Rs 277 bn) NHA investment portfol io has i t s roots in a very ambitious highway expansion program launched by GoP during the early 1990s to rectify past under-investment in this sector. GoP's centralized project review and approval mechanisms which provide institutional checks and balance and determine inter-sectoral priorities were bypassed through the creation o f a parallel structure - the National Highway Counci l (headed by the Prime Minister) - to enable rapid approval o f politically high profile projects. These included a grandiose but poorly justified motonvay program, which put considerable strain o n Pakistan's limited public sector resources, and delayed higher priori ty highway investments along the main corridors.

Resource Mobilization: A total o f Rs 207 b i l l i on was raised in revenues from the road sector through a combination o f general revenue taxes and user charges over the five year period 1995-2000. National and provincial highway expenditures totaled Rs 118 b i l l i on over this period. The balance Rs 89 bn (43%) was contributed to the government's general revenue.

Financing of the Capital Program : NHA's capital program i s approved and financed by GoP through the annual Public Sector Development Program, in the form o f cash development loans. This mode o f financing i s very expensive (high interest rates) and unsustainable, since NHA clearly does not have the revenue base to service the resulting debt - which presently stands at around Rs. 120 billion.

- 5 -

i i ) Maintenance Nealect

NHA needs to spend about Rs 3.0 bi l l ion annually to simply conserve the network in i ts present condition. However, over the past decade, i t s maintenance spending covered less than 25% o f stable network needs and averaged less than 6% o f total expenditures. NHA depended almost exclusively o n grossly inadequate and unpredictable transfers f rom GoP’s recurrent budget to finance road maintenance. The persistent bias in favor o f capital programs, together with the modal shift from rai l to road and significant increases in vehicle axle loads, caused a rapid and premature deterioration o f i ts road assets. The National Highway network developed a huge maintenance backlog, which now requires an investment o f the order o f Rs 35 billion, to restore i t to acceptable condition. Alternative financing arrangements were clearly needed to ensure that network maintenance was fully funded on a timely and sustainable basis.

iii’ Institutional Capacity and efficiency of N H A

The NHA was reorganized in 1991 with Bank assistance, into an autonomous highway agency with a functional structure and decentralized implementation through regional offices at the provincial level. As i t continues to evolve in response to emerging sectoral demands, NHA needs to significantly realign i ts staffing levels”, skills m i x and businesses processes, to prepare i t for progressive commercialization. NHA must overcome a number o f internal constraints, as i t shifts focus towards a network operatoriservice provider role.

II A fairly efficient road agency, which contracts out most of i t s work to the Private Sector, should be able to plan and manage

the network with five or less staffper 100 km.

Financial Management & Controls: The previous Bank assisted project had attempted to introduce a modem double entry, accrual based computerized accounting system and independent commercial audits within NHA during 1995-97. However, progress in intemalizing these improvements stalled after the project closed. NHA did not produce any further audited agency level financial statements, nor did i t make much headway, in implementing a remedial plan to address the financial control issues raised in the 1996 commercial auditor’s report.

Enforcement issues: Axle load enforcement over the past two decades has been very limited and largely ineffective. The average damaging effect o f 2-axle trucks increased by over a third between 1982 and 1996, w i th over 40% o f the trucks having axle loads exceeding 12 tons. Overloading has caused extensive damage to the highway network. Extreme axle loadings, coupled with high summer time temperatures have rendered commonly accepted international pavement designs, technical specifications and material testing standards inappropriate for Pakistani conditions. The country has a high road accident fatality rate (over 7000iyear - 23 persons killed per year per 10,000 vehicles). Poor Road Safety was flagged as the number one concern by road users during the 2000-01 country wide road stakeholder consultations. A 1990 study estimated that road accidents cost the economy about 1.3% o f the GNP.

c. Government Strategy

Overall Transport Sector - The Government i s aware that unless Pakistan’s infrastructure, administration and regulations are adjusted to promote modem transport and communications, the country’s economic potential would be compromised. The government that assumed office in late 1999 initiated a number o f actions to address key constraints faced by the sector: (i) a new integrated transport pol icy was drafted; (ii) a major effort was implemented to improve the operational efficiency of Pakistan Railways; (iii) a new Merchant Marine Policy and a revised National Aviat ion Policy was approved; (iv) the IDA assisted Trade and Transport Facilitation Program was implemented to improve commercial facilitation and trade competitiveness; and (v) a country wide Khushal Pakistan (Poverty Alleviation) program was implemented

- 6 -

at the district level to deliver improved rural access.

The fol lowing are the main elements o f the government’s strategy to improve the National Highways system:

1. Governance Improvements: The NHA Act has been amended to restore central review and approval o f a l l NHA programs and projects (exceeding Rs 100 mil l ion) through the Central Development Working Party (CDWP)/Executive Committee o f the National Economic Council (ECNEC) mechanism. NHA management has been strengthened, streamlined and right sized. Overall agency staffing has been reduced f rom 1900 to about 1400. Standard Operating Procedures have been developed and a system o f enhanced staff accountability and merit based promotions has been introduced. NHA has recruited a chartered accountant and other FM professionals f rom the market to strengthen i ts financial management capacity.

2. NHA has a new vision approved at the highest level. I t states that ’NHA must grow into an efficient service provider to road users in Pakistan for safe and comfortable travel on National Highways and Motorways. From an expansion phase, it must transition into a consolidation phase and seek to maintain its road assets exceeding Rs 600 bn.’

3 . Roads are increasingly viewed as a ‘service’ and a ‘business’. A comprehensive country-wide road stakeholder consultation process was completed in January 2001 facilitated by ARUP, a road sector NGO, to better understand road user perspectives and priorities. NHA management i s meeting periodically with truckerdother road user groups to improve responsiveness to customers’ needs. An interactive NHA website i s being developed, to enable road users to provide direct feedback. . 4. The Government has articulated clear development priorities for the sector. The focus i s on early completion o f the large portfolio o f unfinished projects, with appropriate design changes to introduce economies where possible, and to significantly increase allocations for network conservation and selective improvements over the medium term. The NHA portfolio and PSDP are being rationalized along these priorities. The G O P N H A has initiated a multi-year, Rs 35 bn. National Highway Improvement Program covering rehabilitation, resurfacing and improvement o f 2,700 km o f the national highway network - based on a comprehensive condition survey and network level prioritization study. Financing for this program i s expected to come from GoP PSDP, NHA tol l revenues and loans from multi-lateral agencies. GoP recognizes that in view o f the current predominant modal share o f the road sector, a restructured and reinvigorated railway operation may reduce the future rate o f traffic growth along the N-5 over the medium term, but wil l not obviate the need for the high priority rehabilitation and improvements supported under this Project.

5 . Resource Mobilization for Sustainable Maintenance: NHA has begun to implement the ‘fee-for-service’ principle on i t s network. I t has successfully mobilized additional resources through commercial exploitation of the right o f way and substantially enhanced tol l revenues collected through an extensive network o f to l l stations, strategically located at ‘choke points’ (mostly highway bridges) along the network. Direct NHA receipts plus GOP recurrent budget transfers for maintenance are now broadly sufficient to finance sustainable maintenance needs o f the NHA network. A Road Maintenance Account (RMA) has been established and RMA Rules have been notified. These Rules require that designated road user revenues be deposited into a dedicated RMA Account and be used exclusively for eligible expenditures (predominantly network maintenance and road safety). A standard operating procedure has been developed and adopted for operating the Road Maintenance Account with allocations based on a modem Road Asset Management System (RAMS).

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6. The National Highway Safev Ordinance enacted in September 2000 has provided the legal basis for establishing the National Highway and Motorway Police (NH&MP) Force under the federal Ministry o f Communications. This expands the role o f the very successful Motorway Police to the National Highway System, in a phased manner. A 68% decline in both fatal and nonfatal accidents has been recorded by the NH&MP, since the inception o f i ts services on the N-5. Trained and fully equipped N H & M P teams have already been deployed for traffic and road safety enforcement, o n about 1000 km o f the National Highway N-5 and M-9. The remaining section between Rahim Yar Khan and Hala i s expected to be covered during FY04. The N H & M P i s also in the process o f setting up an Accident Recording Center, an Accident Evaluation Laboratory, and a Police Officers Training wing. The ADB has provided some financial assistance to GoP for this program.

7. The Ordinance also includes revised legal axle load limits for commercial vehicles and provides the appropriate legal framework for axle load enforcement. NHA i s currently setting up a network o f 15 weigh stations across the country. From Jan 2003, i t has commenced a phased program for enforcement o f legal axle loads on the network, in conjunction with a public awareness and education campaign.

8. stock o f NHA debt; and (ii) the mode o f a l l future funding provided through the Public Sector Development Program to NHA, with a view to making i t financially sustainable.

The GoP plans to take a decision by the start o f FY04105 regarding (i) treatment o f the existing

3. Sector issues to be addressed by the project and strategic choices:

. a) Issues addressed by the Proiect

The Project supports key reforms to ensure a productive and efficient national highway network and to sustain the benefits o f the National Highway Improvement Program. I t w i l l assist GoP/NHA in:

(i) adoption o f a Medium-Term Budget and Expenditure Framework (MTBF) - to improve the targeting o f public sector resources, by rationalizing allocations across construction, rehabilitation, and maintenance; operation o f the Road Maintenance Account - to ensure a stable and secure source o f funding for network maintenance, and to increase accountability to stakeholders; carrying out an institutional reform and corporate strengthening program - aimed at improving NHA's performance and efficiency; and financing a distinct five year segment o f N H I P works.

(ii)

(iii)

(iv)

b) Strategic Choices

i) Aiming for sustainable highway network management vs. simply f inancing the maintenance back-log: About f i f ty percent o f the national highway network i s in poor condition. Piece-meal rehabilitation and maintenance will not work, as the rate o f deterioration o f the network w i l l always overtake any such effort. To break the sub-optimal cycle o f 'pavement construction - deterioration - reconstruction', the Project supports the adoption o f a sustainable network management strategy by NHA that involves redeployment o f a significant portion o f future highway sector investments towards network conservation - through a substantially enhanced rolling periodic maintenance program, in addition to a one-time network rehabilitation.

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ii) Off-budget earmarked j n a n c i n g of road maintenance vs. Reliance on budgetary allocations : NHA estimates that the national highway network has an estimated replacement cost o f some US$ 10 bn. The social cost o f not maintaining this network i s immense - an estimated NPV o f about Rs 410 bn. Hence funding for road maintenance can not be left to political andor administrative considerations, particularly in view o f GoP's resource constraints and competing demands from other sectors. I t needs proper planning, budgeting and financing. Since reliance o n budgetary allocations has not worked in the Pakistan context, the Project supports institutionalization o f off-budget financing for road maintenance.

Component

1. Network Conservation (a) - Rehabilitation and Improvement o f 550 km o f National Highways

i i i ) Phased Commercialization vs Tradit ional State Road Authority: Traditional public sector road authorities are forced to balance many different economic, social and political objectives. Management o f public sector employees i s hampered by numerous restrictions on establishing accountability and rewarding good performance. Their financial status often depends on budgetary decisions that are unrelated to performance and on pricing decisions that are driven by politics. The Project therefore supports the gradual introduction o f commercial practices in NHA, so that market forces and competition can realign traditional public sector incentives, leading to improvements in the production and delivery o f road infrastructure services, with a greater focus on customer needs.

Indicative Bank- % of costs % of financing Bank-

(US$M) Total (US$M) financing

159.30 60.9 121.07 60.5

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

The Project has the fol lowing components:

(I) and M - 9 comprising:

Ne twork Conservation Component - this consists o f c iv i l works along the national highways N-5

(a) Rehabilitation and Improvement o f about 550 km o f highway (including structures), (b) Resurfacing and Strengthening o f 306 km o f highway, (c) Safety Improvement works at 15 - 20 locations, (d) Afforestation (tree planting) along the Project corridors for a length o f about 2,500 avenue km, (e) Relocation o f utilities, and, ( f ) Consultancy Services for design, contract administration and construction supervision. (g) Resettlement & Land Acquisition

(11) Policy Support and Inst i tut ional Development Component - this includes technical assistance, training, equipment support and incremental operating costs:

(a) to help implement improved sub-sectoral policies (MTBF - to improve targeting o f public sector resources; RMA - to provide stable and secure funding for maintenance), and

(b) to strengthen NHA institutional capacity, improve performance and efficiency (business process re-engineering and corporate strengthening; improved road asset management; improved road safety practices; enhanced environmental management and resettlement practices; sector studies and fuivre Project preparation).

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(b) - Resurfacing and Strengthening o f 306 h o f National Highways

44.42

25.80

4.90

0.50

10.1 1

1 .oo

14.87

(c) - Safety Improvement Works

17.0

9.9

1.9

0.2

3.9

0.4

5.7

(d) - Afforestation

(e) - Relocation o f Utilities

(f) - Consultancy Services for design and construction supervisionkontract administration o f the physical works.

(g) - Resettlement & Land Acquisition

2. Pol icy Support & Institutional Development - Technical Assistance, Training, Equipment support and Incremental Operating Costs.

Total Project Costs Front-end fee

Total Financing. Reauired

34.81

19.61

3.72

0.00

9.09

0.00

1 1.20

260.90 I 99.8 I 199.50 0.50 I 0.2 I 0.50

261.40 I 100.0 I 200.00

17.4

9.8

1.9

0.0

4.5

0.0

5.6

99.8 0.3

100.0

2. Key policy and institutional reforms supported by the project:

a) The Project supports implementation o f key pol icy reforms described below: (also ref. Annex 13)

i. Improved Resource Allocation & Portfolio Management : Adoption by GoP/NHA o f an agreed Medium Term Budgetary Framework (MTBF) for the national highway network, which includes an indicative 5 year (FY2003-08) highway investment and maintenance program and prioritization criteria for future annual updates o f such program. These criteria require that (a) at least two-thirds o f the total portfolio o f investments i s economically viable; (b) there i s a progressive increase in the share o f expenditures on network conservation; and (c) there i s early completion o f on-going projects. The Framework also includes protection o f annual allocations for network conservation (Protected Program), in case o f subsequent budget cutbacks.

ii. Enhanced Resource Mobilization and Stable Maintenance Funding: Operation o f a dedicated Road Maintenance Account ( M A ) , financed from earmarked road user revenues (including enhanced tolls), to provide an adequate, secure and stable source o f funding for maintenance o f the national highway network. The Account wil l be operated under clear financial r u l e s and standard operating procedures, with appropriate safeguards including: a l i s t of eligible expenditures, periodic independent technical and financial audits, regular road stakeholder consultations, and publication o f the RMA annual report in the public domain. Expenditures w i l l be identified and annual maintenance allocations made on the basis o f a rational Road Asset Management System (RAMS).

b) In addition, the Project wil l finance the following activities to strengthen NHA's institutional capacity, improve performance and increase efficiency o f road sector operations:

i. A Business Process Re-Engineering (BPR) & Corporate Strengthening Program to reposition NHA for progressive commercialization wi th a refocused network operatorhervice provider role. In addition to

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creating an effective IT-Enabled business environment, it will help remodel NHA as a corporatized entity, with a strong commercial orientation, a customer driven focus, enhanced accountability to external stakeholders, and the capability to manage i t s assets and revenues as a business.

ii. Implementation o f Improved Asset Management practices through the Road Asset Management Directorate (RAMD), working in close cooperation with the NHA Regional Offices. This includes: (a) implementation o f a modern Road Asset Management System (RAMS) to provide a technical and economic basis for RMA allocations towards network conservation; (b) development and adoption o f Improved Pavement Systems and Standards appropriate for extreme conditions encountered o n Pakistani highways, and (c) strengthening o f the partnership with the road transport industry and other stakeholders towards more effective axle-load management (monitoring, self regulation, etc).

... 111. Improving Highway Safetv Enforcement through improved accident recording systems; training for accident investigation and analysis; and TA and equipment to undertake wel l targeted road user and community road safety awareness campaigns along Project corridors. The Project wil l also provide TA to help expand the institutional and functional capacity o f the National Highway Safety Council, based o n global experience and best practices.

iv. Mainstreaming Improved Environmental Management and Resettlement practices through the induction o f dedicated environmental and resettlement professionals, and provision o f implementation support and on-the-job training to help NHA integrate environmental and social issues in i t s day-to-day operations: by increasing the environmental and social awareness o f NHA staff, by developing and operationalizing appropriate regulations; systems and procedures (including those for air and noise pollution); by devising a code o f environmental practice applicable to al l future road and highway projects; and by implementation o f mitigation measures including mechanisms for public consultations and third party monitoring.

3. Benefits and target population:

Benefits: The Project, which forms a part o f NHA’s multi-year National Highway Improvement Program, wil l help improve the condition o f the national highway network, lower transportation costs and travel times. The network level economic analysis (based on the HDM module) indicates that the proposed Rs 5 bi l l iodyear road asset preservation program wil l reduce the average network roughness f rom about 5.4 IRI to 4.4 IRI, over six years, resulting in a 5% decrease in road user costs, amounting to a savings o f Rs 189 bn (over U S D 3 billion) over this period. This would increase export competitiveness, accelerate export oriented growth and contribute to sustained economic development. The Project wil l assist Pakistan’s overall fiscal position by mobil izing additional resources from road users, that eliminate the need for increases in maintenance funding allocations f rom the recurrent budget in future years. I t wil l improve governance, by introducing user participation in selection o f maintenance interventions and greater transparency and accountability in NHA operations, leading to more cost effective use o f maintenance funds. I t wil l support development of the private sector construction industry by tapping i t s efficiency for implementation of rehabilitation and resurfacing works, as well as for overall network operations and maintenance. By supporting progressive commercialization o f national highway operations, it wil l help set the stage for greater efficiencies in road sector operations at the provincial and lower tiers in future. The Project wil l also help improve the road safety situation as a result o f the proposed c iv i l works, improved road asset management practices, and community-level safety awareness campaigns along the Project corridors.

Target Population: Road users and inhabitantshusinesses along the densely populated N-5 and M - 9

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corridors will be direct beneficiaries o f the proposed investments under the Project. In addition, given the competitive market structure o f road transport in Pakistan, the benefits o f lower transport costs and improved network operations over the entire national highway network (resulting from the operation o f the RMA) w i l l be passed o n to the users (shippers and passengers) over the medium term, with benefits for the entire economy.

4. Inst i tut ional a n d implementation arrangements:

The estimated period o f implementation i s 5 years.

Implementing Agency: The Project has been prepared and w i l l be implemented by NHA, under the MOC. Implementation arrangements are summarized below. Further details are included in the Borrower’s Project Implementation Plan (PIP).

Project Oversight and Management: A Project Steering Committee comprising NHA Chairman and Members w i l l provide overall guidance and oversight for the Project, and be responsible for ensuring implementation o f the key pol icy and institutional reforms. The Committee wil l be supported by a unit at NHA Headquarters in Islamabad functioning as the Project Secretariat, headed by the General Manager (GM) N H I P - who wil l function as the Project Director. The Project works wil l be implemented through NHA’s mainstream structure. NHA i s in the process o f appointing a Project Coordinator at each o f the three Regional Offices, supported by a Quality Control Specialist, and a Quantity Surveyor. In addition, NHA will post a Deputy Project Coordinator at each contract site. NHA i s providing clear j ob descriptions and instructions to i t s project management staff, to ensure that there i s no conflict with the supervision consultant’s role as the ‘EngineeriProject Manager’. At NHA head office, under Member Operations, the GM Environment/Social/Lands (ESL) and his staff are responsible for ensuring that project design and implementation i s environmentally and socially sound. (refer to Sec E 5.5 and Annex 11 for details).

During project preparation, two national consultant f i rms have assisted NHA with the design o f the c iv i l works program, preparation o f bid documents and an independent environmental and social assessment. Preparation o f the Phase-1 program (comprising about 35% o f the total project works) i s complete. Preparation o f the remaining Project works i s expected to be completed by March 2004. NHA i s currently in the process o f engaging an internationally experienced consultant firm, as the independent ‘EngineeriProject Manager’ responsible for contract administration and construction supervision. The successful firm will prepare implementation progress reports, at least on a quarterly basis and also provide on-the-job training to NHA staff in contract administration procedures. The civ i l works wil l be implemented through competitively procured contracts.

The RAMD will take lead responsibility for implementation o f road asset management related activities supported by the Project. A project management committee headed by Member Planning, and with representation f rom al l wings and regional offices has been formed for implementation o f the Business Process Re-engineering (BPR) sub-component.

NHA has established formal coordination arrangements with NHMP to ensure safe and uninterrupted traffic flows along the Project corridors during construction and operation o f the Project facilities, and to ensure effectiveness o f the various traffic and road safety measures supported under the Project.

Flow of Funds: GOP shall make the proceeds o f Bank Credi tLoan available to NHA as a capital contribution on a non-reimbursable basis, in accordance with i t s standard budgetary procedures.

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Financial Management: NHA carries out i t s functions through i t s four regional offices in the four provinces. Regional accounts offices are headed by Deputy Directors who are adequately experienced. Regional accounting staff need further training in accounting for better functioning. Regional accounts offices submit their monthly trial balances to the Head Office (HO) where these are consolidated and NHA's overall accounts prepared. Finance department in the HO i s headed by Member Finance who i s supported by two general managers (Finance and Budget & Accounts) one o f whom i s a chartered accountant and the other i s an MBA. Accounting staff at the HO i s we l l trained and some are on deputation f rom the Auditor General o f Pakistan's (AGP) office. The internal audit department at HO i s headed by a senior officer f rom the AGP's office. Most o f the other team members are also f rom the AGP's office. The internal auditors conduct audit o f projects, regional offices and HO on an ongoing basis and report their findings to the Chairman, NHA.

Payments and accounting in respect o f projects i s done at the HO. Regions are allocated budgets for maintenance, establishment, etc. and funds are released to regions on the basis o f approved budgets. A Road Maintenance Account ( M A ) has recently been established and i t s Financial Rules notified under the NHA Act. A Standard Operating Procedure (SOP) has also been approved. The RMA i s managed by the Road Asset Management Directorate (RAMD). As per Rules and SOP, accounts o f RMA have to be audited annually by chartered accountants.

D. Project Rationale 1. Project alternatives considered and reasons for rejection:

1.1 Instrument: Adaptable Program Lending (APL) vs. A Specific Investment Loan (SIL): T w o alternatives were considered: i) reforming the national roads sub-sector by assisting GoP implement a ten year reform program through a three phase Adaptable Program Loan (APL); or ii) helping implement key reforms and financing a part o f the prioritized maintenance [backlog] rehabilitation and improvement program works through a five year specific investment loan.

Reforms needed to address key road sector issues, require a long term commitment by GoP. The challenges in achieving these reforms are numerous and not without associated uncertainties and risks. An adaptable program lending provides the tools that are flexible to meet the challenges emerging during the reform program, given the uncertainty o f the developing economies o f South Asia. This was identified as the preferred approach at the PCD stage. However, subsequent events including (a) a period o f G-8 sanctions, (b) Pakistan's fragile macroeconomic situation, (c) GOP's increasing focus on poverty alleviation, led the team to reconsider this decision, and move instead to a specific investment loan (SIL) as the most appropriate instrument for Bank support to the borrower. Strong implementation performance by the borrowerhmplementing agency could merit the consideration o f continued Bank support, through a possible repeater operation in the future.

1.2 Broad based Road Fund with independent Roads Board vs. more limited Road Agency based Fund: T w o options were explored: (a) a broad based (second generation) Road Maintenance Fund to finance the maintenance needs o f both the federal and provincial highway networks - financed by earmarked (fuel based and other) user levies and commercially managed through an autonomous statutory public-private board; or (b) a more limited, road agency (NHA) managed, to l l based, Road Maintenance Fund to finance the maintenance needs o f the national highway network only. Option 'a' was rejected by GOP to avoid (i) creating additional institutional structures (Roads Board) and (ii) a potentially contentious debate on inter-governmental revenue sharing - since the federally collected fuel levy would have been the mainstay o f such a Fund. Option 'b' was thus adopted, as NHA was already empowered to collect tol l revenues under

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i t s Act, and wi l l ing to revise rates and earmark these exclusively for network rehabilitation and conservation.

1.3 Sectoral Approach to Physical Investments vs. Specific highway sections: The early phase o f project preparation took a programmatic approach to addressing the rehabilitation and resurfacing needs o f the entire NHA network. However, the results o f the network level economic prioritization showed that network needs were dominated by the requirements o f Highways N-5 and M-9 by virtue o f the high traffic levels along this north-south corridor. The Project physical works were therefore restricted to the rehabilitation andor improvement o f specific sections o f Highways N-5 and M-9 only. This made the Environmental and Social assessment and documentation more manageable.

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2. M a j o r related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Sector issue Project

3ank-financed 3nhance N-5 Capacity Third Highway Project (CR.

974-PAK); closed in 1986.

Fourth Highway Project (Ln. 2814-PAK); closed in 1995.

Transport Sector Project (Ln. 3241-PAK); closed in June 1998 - rankings refer to the Highway Component only.

Karachi Port Modernization Project (Ln. 3335-PAK); closed in June 1998.

Trade and Transport Facilitation Project (Cr.

3nhance N-5 capacity, institutionalize naintenance

Xeduce maintenance backlog and ;trengthen existing NHB organization

Enhance port cargo handling capacity md improve port access.

[mprove arrangements for Trade and Transport Facilitation

3500-Pak); ongoing. Xher development agencies Enhance N-55 capacity.

Enhance N-5m-65 capacity.

National (transport and road sector) Policy Reform - support efforts of NHA to adapt current business processes to those demanded o f contemporary road agencies.

Enhance N-25 capacity and improve road links up to Afghanistan border.

Enhance N-5 capacity and improve

Indus Highway Project (JBIC): Phases I, I1 and Kohat Tunnel - completed, Phase I11 - planned.

Sukkar Bypass and Bridge (ADB); completed.

Road Sector Development Program - Nov. 2001 (ADB); ongoing.

Balochistan Road Sector Development Project: Kalat-Quetta-Chaman, and Wadh-Kararo (ADB); planned.

N W F P Road Sector

Latest Supervision (PSR) Ratings

(Bank-fjnancel Implementation

Progress (IP)

S

S

S

S

nojects only) Development

Objective (DO)

S

S

S

S

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road links up to Afghanistan border.

planned.

Development Project: Peshawar-Torkham (ADB);

Support GOP's efforts to develop a new deep sea port at Gwadar and overland trade l i n k s with Central Asian Republics.

3. Lessons learned and reflected in the project design:

The key lessons learned from previous highway projects, and reflected in the proposed Project design, include: (i) keeping project design simple and flexible, with manageable components and a single or few implementing agencies; (ii) careful prioritization o f highway sector investments to ensure timely availability o f counterpart funds; (iii) improving project preparation to include complete sub-project designs and bid documents, contractor pre-qualification, and essential pre-construction activities prior to contract awards; (iv) alternative off-budget highway maintenance arrangements to provide an adequate and reliable source o f highway maintenance funding; (v) holding the highway agency accountable for performance to extemal clients to ensure institutionalization o f sound maintenance management practices; (vi) the need for measures to minimize the adverse impact o f vehicle overloading to sustain highway network improvements; and (vii) the need for stronger financial systems and controls.

Gwadar-Khuzdar Highway (IDB); planned.

4. Indications of borrower commitment and ownership:

Strong borrower commitment and ownership i s indicated by the following actions:

The NHA has already initiated a multi-year National Highway Improvement Program (of which this Project forms a part) covering priori ty rehabilitation and maintenance o f some 2700 km o f the NHA network using i t s own resources and GOP budgetary allocations.

The Finance Minister signed a Development Policy Letter in connection with the ADB Road Sector Development Project in late 2002, that confirms GOP's commitment to the key reforms supported under this Project.

The NHA Road Maintenance Account was established during 2002-03. NHA Road Maintenance Account Rules 2003 have been notified as financial rules under the NHA Act, in August 2003. The RMA Standard Operating Procedures have been approved by the NHA Executive Board and notified as Regulations. To l l receipts are being deposited into the RMA.

GOP has confirmed NHA's proposed Medium Term Budgetary Framework and prioritized Highway Investment and Maintenance Plan covering the period 2003-08.

Project preparation activities initiated using PHRD funding, have been completed by NHA using i t s own resources. The Sectoral Environmental and Social Assessment Report, Social Assessment and the detailed Environmental Impact AssessmentEMP and Resettlement Policy Framework (RF'F) for the Phase-1 projects have been prepared by NHA, and cleared by the Bank. Pakistan Environmental Protection Agency (EPA) has completed environmental hearings and provided

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environmental clearance for Phase-1 o f the Project in September 2003.

Advance procurement actions have been initiated for Phase-1 works and services. Preparation activities related to engineering designs, environmental and social assessments and bid documents for Phase-2 works are wel l underway.

The NHA has made credible progress on the Financial Management Improvement Action Plan agreed with the Bank.

The Project PC-1 has been approved by the ECNEC on September 27, 2003.

NHA has appointed a Project Director (General Manager NHIP) and other key staff, and i s in the process o f recruiting remaining Project specific staff.

5. Value added of Bank support in this project:

The Bank i s in a unique position to assist the GOPiTrJHA in undertaking fundamental reforms to overcome key obstacles to sustainable development o f the national highways. I t i s well placed to assist the government to implement the innovative aspects o f t h i s Project by sharing global experience and good practices in the areas o f (i) stable and secure road maintenance funding arrangements; (ii) road agency reform and modernization, including business process re-engineering, and financial management strengthening; (iii) R A M S and modem pavement design and construction standards, (iv) highway safety, and (v) environmental and social safeguards. The Bank team has been closely coordinating with other key donors (ADB and JBIC) o n matters related to road sector pol icy and institutional reform. Some o f the reforms introduced at the NHA with Bank support are now beginning to be adopted by the provincial road agencies (Sindh and Punjab).

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4): 0 Cost benefit 0 Cost effectiveness 0 Other (specify) The cost-benefit analysis was carried out both for the overall maintenance and rehabilitation program o f the national highways network (8,039 km) and for the Project's Phase 1 and Phase 2 rehabilitation and improvement works (549.9 km) and resurfacing and strengthening works (306.0 km), using the Highway Development and Management Model (HDM-4), which compares l i fe cycle road costs with vehicle operating cost and passenger time savings.

NPV=US$297.9 million; ERR = 3 1.4 % (see Annex 4)

The H D M - 4 strategic analysis for the national highways network estimates that the net present value (NPV) o f the overall NHA periodic maintenance and rehabilitation program o f around Rs 5 bi l l ion per year over the next six years, amounts to Rs 410 bi l l ion (US$ 6.8 billion). Without the NHA periodic maintenance and rehabilitation program, the average network roughness would increase f rom 5.4 IRI in 2001 to about 11 .O IRI in 2007. As a result, road user costs would increase by about 32 percent.

The N P V o f the Project rehabilitation and improvement works amounts to Rs 14.6 bi l l ion (US$ 243.7 million) with a corresponding economic internal rate o f return (EIRR) o f 3 1.2 percent. The N P V o f the Project resurfacing and strengthening works amounts to Rs 3.2 bi l l ion (US$ 54.2 mil l ion) wi th a corresponding EIRR o f 32.3 percent. The N P V o f al l (Phase 1 and Phase 2) project highway improvement

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works (representing about 85% o f total project costs) amounts to Rs 17.8 bi l l ion (US$ 297.9 million) with a corresponding EIRR o f 3 1.4 percent. The sensitivity and switching values analyses have shown that the economic return o f the Project i s robust.

2. Financial (see Annex 4 and Annex 5): NPV=USS million; FRR = % (see Annex 4) The NHA Ac t o f 1991 allows the Authority to receive funds from various sources, including loans and grants f rom the federal govemment, income from tolls, foreign aid, grants and loans, and other receipts (lease money, fees, rentals, fines, etc.), as wel l as funds f rom floating bonds, shares etc. At present, the bulk o f NHA’s receipts come through budgetary allocations f rom the federal government. These take the form o f (i) cash development loans from M o F for the public sector development program - to fund capital development; (ii) annual maintenance grants f rom MOC - to fund operations and maintenance expenditures; and (iii) annual establishment grants f rom MOC - to cover NHA establishment costs. Refer to the table below for historical trends:

NHA has significantly increased i t s direct revenues in recent years (see table below), since the introduction o f the ‘fee-for-service’ concept. I t has achieved this by expanding i t s to l l network, revising to l l rates and promoting commercial use o f i t s right-of-way (ROW). Net revenues from tol l collections and commercial use o f ROW which are being credited to a dedicated Road Maintenance Account, plus the GOP annual maintenance grant, are now broadly sufficient to f i l ly fund NHA network conservation at a sustainable level (around Rs 3 bi l l ion annually). NHA i s committed to periodically reviewing and modifying the structure and level o f i ts road user charges including tolls, to ensure that such charges broadly reflect (i) the extent o f road use, (ii) damage caused to the road network by individual vehicle categories and (iii) level o f service provided.

NHA does not have the revenue base to self-finance i t s planned (Rs 20-25 billiodyear) capital development program. The current practice o f funding this program through the PSDP as cash development loans from GOP i s clearly unsustainable. I t has already resulted in an accumulated NHA debt o f around Rs 120

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billion. GOP i s currently reviewing options for resolving this matter. Refer to legal covenants under Section G for details.

2003-04 2004-05 2005-06 Total Expenditures 23,166 21,439 29,144 Funded f rom PSDP 19,126 24,163 26,082 Funded f romRMA 2,193 2,676 3,062 Allocations for Network Conservation 9.03 1 11.566 14.227

A Medium Term Budget Framework (MTBF) & indicative 5vr Investment Proflam prepared by NHA (covering the period 2003-08) has been reviewed by the Bank team. The NHA portfolio consists o f a total o f fifty seven (57) projects - thirty-one (31) ongoing projects (of which 14 are now physically complete), eighteen (18) new projects, seven (7) pipeline projects, and one related to design and feasibility studies. The total portfolio cost i s Rs 277 bi l l ion. The ‘throw-forward’ as o f June 30, 2003 was about Rs 74 billion. The investment program meets the agreed MTB Framework prioritization criteria for improved resource allocation and sustainability as: (a) two-thirds o f the proposed investments over the f ive year review period are economically viable; (b) there i s a steady increase in the share o f total expenditures on network conservation (from 38% to 63% - an average o f 51% over the review period); and (c) there i s a significant reduction in the ‘throw-forward’ (from 4.2 years to 1.4 years) over the review period. The plan i s based on an indicative resource envelope approved by GOP. In addition, N H N G O P have committed to fdly protect allocations for network conservation in case o f subsequent budgetary cutbacks. The medium-term plan wil l need to be updated annually in consultation with the Bank during the Project period.

2006-07 2007-08 21,225 25,848 23,336 21,105 3,889 4,143

15.392 11.161

HRP Allocations as % o f Total 4% I 14%1 16%1 11%1 9%

Fiscal Impact:

A summary o f the MTBF framework indicated in the table above shows that annual funding levels needed to implement the Project, can be accommodated within the resources and fiscal space available to NHA. Counterpart funding requirements wil l be about one-quarter o f these figures (only 1% to 4% o f annual agency expenditures).

3. Technical:

Design Standards and Construction Supervision The rehabilitation and resurfacing o f national highways proposed under the Project i s based o n proven engineering designs and construction techniques, that are well within the capability o f the implementing agency and the private sector. Designs, technical specifications and procurement documents have been prepared under the guidance o f experienced consultants working in close coordination with NHA. Bid packages are being suitably sized and pre-qualification criteria prescribed to be o f interest to well-qualified contractors. C iv i l works wil l be constructed to intemationally accepted standards and supervised by intemationally experienced consultants.

Cost Estimates: Investment cost estimates are based o n detailed designs o f Phase I works and preliminary design o f Phase I1 works, using prevailing market prices. A 5% allowance has been included in the c iv i l work costs for physical contingencies, and a 7.5% margin has been included for price contingencies.

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Fixed price contract amroach based o n outline designs for Rehabilitation works. Rehabilitation contracts financed under previous Bank assisted projects used the traditional detailed design and admeasured contract approach. However, these frequently encountered major cost over-runs, due to significant variations in final work quantities and delays in project commencement. Variations are most common in pavement and road drainage works, which are very sensitive to the actual pavement condition when the contractor i s mobilized and on how the works are physically set out in the field. To minimize this risk and benefit from contractor innovation and efficiencies during construction, bids for rehabilitation works under the Project will be invited on a fixed price basis using outline designs provided by NHA, which prescribe a minimum pavement thickness. This wil l shift some o f the construction phase r i s k s to the contractor, where they can be better managed. Overall construction completion costs are expected to remain lower than the traditional approach, even though bid prices may be somewhat higher.

Road Asset Management: In light o f the lessons learnt f rom past investments in the sector, the Project includes TA to support (i) development and operation o f a road asset management system (RAMS); (ii) appropriate pavement systems and standards for Pakistan, and (iii) partnerships to improve axle load management o n the network. This wil l ensure the sustainability o f the proposed physical road infrastructure investments. The R A M S wil l be developed in two stages. The f i rst stage includes data collection and development o f a basic annual maintenance plan and an associated work plan, as detailed in the standard operating procedures (SOP) for the RMA. The second stage wil l cover implementation o f the detailed R A M S within the RAMD institution including a corridor management survey and system development. The f irst stage i s already underway. NHA has recently completed the collection o f required data, which i s being processed by RAMD to develop a draft annual maintenance plan for FY03-04.

4. Institutional:

4.1 Executing agencies:

As the executing agency, the NHA i s managed by an Executive Board, comprising the Chairman, two Members (Planning and Finance) and senior representatives f rom N H M P , MoF, Planning, MoC, and two technical agencies. Policy oversight i s provided by the National Highway Council, headed by the Federal Minister o f Communications. Project approvals, above the Rs 100 mi l l ion agency threshold are provided by the Executive Committee o f the National Economic Council (ECNEC). NHA has Regional Offices in each o f the four provinces o f Pakistan, headed by a Regional General Manager. An NHA reorganization plan has recently been proposed for GOP consideration. The plan aims to improve the operational efficiency o f the agency.

NHA has successfully implemented a large portfolio o f highway investments since i ts establishment. Project preparation (including surveys, feasibility studies, designs and preparation o f bid documents) and construction supervision i s generally outsourced to consultant f i rms. C iv i l works are normally procured through a competitive public bid process, although in recent years there has been a tendency to assign a portion o f these works to parastatal contractors at negotiated rates.

As it continues to evolve in response to sectoral demands, NHA needs significant realignment o f i ts staffing levels, ski l ls m i x and internal procedures to prepare it for progressive commercialization with a refocused network operator and service provider role. The absence o f institutionalized accountability to external stakeholders, r isks a continuation o f sub-optimal planning and poor network management practices. Weak financial management systems, poor internal controls and a lack o f integrated management information systems deprive corporate management access to timely and reliable information, critical for efficient decision making. Limited in-house capacity in strategic planning, asset management and network operation

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needs strengthening, to ensure enhanced system productivity. Inadequate attention to environmental management and resettlement issues in the past needs to be addressed, before i t begins to jeopardize the sustainability o f investments and exacerbate social inequity. In response to these challenges, NHA intends to use this Project to embark on a comprehensive institutional reform and corporate strengthening program. (Ref to Annex 2 and 13 for details).

4.2 Project management:

This i s discussed in detail under Section (2.4.

4.3 Procurement issues:

NHA has been implementing construction works valued at around U S D 230 mi l l ion per year during the last 5 years. This has been achieved through NHA’s contracts cell with assistance o f consulting f i r m s on a project-specific basis. For the proposed Project, the procurement capacity o f NHA will be strengthened through procurement support provided by the existing design consultants. In addition, NHA will assign a dedicated staff member o f i t s contracts cell for the Project. The Bank will provide periodic procurement training for NHA staff. Details o f the procurement arrangements are provided in Annex-6.

Procurement Readiness: Bidding documents are currently being issued to pre-qualified bidders for the Phase I resurfacing works. The pre-qualification evaluation report and bid documents for two Phase I rehabilitation contracts have been reviewed by the Bank and are being finalized. Pre-qualification for the remaining three Phase- 1 rehabilitation contracts has been reinvited, in view o f l imited intemational contractor response to the first pre-qualification invitation in Feb 2003. I t i s estimated that about 20% o f the total project works will be ready for award by credit effectiveness. The Bank has cleared the technical evaluation for selection o f consultants for (i) contract administration and construction supervision, and (ii) Business Process Re-engineering.

4.4 Financial management issues:

NHA’s Board o f Directors has approved comprehensive financial management systems both for NHA and the Road Maintenance Account (RMA). These systems are being adequately followed, barring recording o f liabilities as they arise. Accrual accounting i s to be implemented effective July 2003. Over the past year, financial management (FM) professionals have been inducted at senior positions and they are trying to improve financial management. I t i s important that key positions continue to be manned by FM professionals. Staff needs to be trained in modem accounting, as most are only trained in cash accounting. The financial management system and staffing meet basic requirements o f a good system. However several steps have been identified and agreed to strengthen it and improve i t s effectiveness. Special attention i s needed towards reconciling inter-regional accounts that have material differences and also towards quickly ascertaining the opening balances for FY’97, as these two issues are hindering preparation o f accurate financial statements.

NHA has implemented Bank-financed projects in the past and there have been some audit issues. However, NHA management has taken action on the major systemic issues raised in these audit reports.

NHA entity level audit was previously available up to FY’96 only. Entity audits for FY’s 97 & 98 have been completed in Oct 03. Consultants have been engaged by NHA to help prepare outstanding entity level financial statements for FY’s 99-02. These are expected to be complete by March 2004. Act ion plans related to strengthening o f financial management and internal controls at NHA Head Office (HO), Punjab and Sindh Regions have been agreed.

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5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and E M P preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The Borrower has prepared and provided the Bank a sectoral social and environment assessment (SEA), environmental assessments (EAs) for Phase I rehabilitation and maintenance projects and resurfacing and strengthening projects, and environmental management plans for Phase I projects. The environmental documents were prepared by NHA through consultants engaged independently o f the Project’s engineering consultants. The EMPs developed by the NHA will help the organization address the adverse environmental and social impacts, enhance project benefits, and introduce standards o f good environmental and social practice for highway construction and operation within the organization and in the country.

Environmental Category: B (Partial Assessment)

A series o f consultation sessions were held with stakeholders and the Project affected persons (PAPS) during the preparation o f the EAs and EMPs. The EAs and EMPs have undergone a regulatory review, and a public hearing process during August 2003 as mandated by the legislation in the country. In addition the NHA has disseminated the key features o f these documents among local stakeholders.

Apart f rom the construction o f one bypass in Matiari, Sindh, the Project’s construction works will be confined within the NHA’s existing ROW. Environmental issues associated with the Project include managing the procurement o f borrow material and topsoil conservation, including the clean-up and restoration o f disturbed areas; appropriately locating temporary construction camps, asphalt plants, and waste disposal sites, and managing dust, noise and other environmental impacts o f operating these facilities; traffic management and safety during construction and operation; avoiding obstruction o f highway drainage systems during construction and operation; and enhancing and maintaining avenue tree plantation along the proposed highway sections.

Potential long-term impacts include changes in land use patterns and economic activity in and around the Project corridor as a result of r ibbon development and increased traffic flow. Since the N5 and M 9 are primary arteries already carrying the bulk o f the country’s north-south traffic, it i s di f f icult to attribute additional traffic to the improvement o f the highway sections included in the Project. In fact, better highway conditions will improve the speed and f low o f traffic along the corridor, leading to lowering o f emissions and improvement in air quality in the short term, in comparison to a no-project option. Noise generated by vehicular traffic during highway operation i s l ikely to affect sensitive receptors located within about 50 m o f the highway. Impact on water resources associated with silting, stagnation and alterations in watercourses, and impacts on vegetation and wildl i fe resources are expected to be minimal in view o f the existing physical and biological environment along the Project corridor.

The EAs detail the measures to mitigate the impacts on land resources in the corridor o f impact during the construction phase, define the responsibilities for implementation and supervision, and arrangements for monitoring o f impacts. The EMPs define frameworks for monitoring along the Project corridor, and arrangements for institutional and pol icy support to NHA and other stakeholders. (Refer to Annex 11 for details)

5.2 What are the main features o f the E M P and are they adequate?

Principal environmental mitigation measures proposed in the EMPs include the following:

0

0 Location o f borrow areas o n land prone to l o w impact, eg, agriculturally unproductive land; Measures to prevent topsoil erosion eg, limiting the excavation o f soil to specified depths, and protecting embankments with vegetation barriers or stone pitching;

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0

0 Location o f project facilities more than 500 m away from inhabited or protected areas; Measures to manage the environmental impact o f operating project facilities, including waste disposal measures preventing soil and water resource contamination; cleanup and restoration o f disturbed areas such as asphalt plants, borrow areas, waste disposal sites, labor and construction camps, etc.; Tree plantation program to compensate for the anticipated loss o f vegetation during construction activities, and to help abate pollution caused by emissions, dust, and noise during highway operation; Provisions in the Project’s outline design to prevent the obstruction o f the corridor’s drainage system; Wa l l barriers to mitigate the impact o f noise on sensitive receptors such as schools and hospitals during construction and operation Implementation o f traffic management plans and road safety awareness campaigns among local communities, as wel l as provisions for highway safety facilities.

0

0

0

0

The EMPs also define the responsibilities o f the Project proponent, contractors and other key stakeholders; identify training requirements at various levels; define supervision and monitoring mechanisms and parameters; and specify the budgetary requirements for implementation o f E M P to ensure that al l mitigation measures are effectively implemented (ref. Annex 11). A high-level NHA steering committee formed to oversee the Project wil l have the ultimate responsibility for environmental management. Senior staff positions have been provided for supervising environmental assessments, and providing inputs and guidance o n environmental matters during the project’s planning, design, contracting, construction, and operation phases. An international supervision consultant to be appointed by the NHA will assist the organization in supervising the construction contractors and ensuring that al l contractual obligations related to environmental compliance are met.

The Project finances an Institutional Reform and Corporate Strengthening Plan that wil l help build the capacity o f NHA. The plan wil l include the appointment o f dedicated environmental and social staff with clearly defined qualifications, responsibilities, and authority. An environmental training and technical assistance program will be carried out to build the capacity o f NHA and key stakeholders to effectively implement this EMP, as wel l as to facilitate the improved environmental management o f future highway projects.

5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: M a y 30, 2003 for Final Phase I EIAs,

EMPs and SA; June 12,2003 for Final Executive Summary and SEA

Final environmental documentation has been placed at the Bank‘s Infoshops and in-country at public places for disclosure o n July 17, 2003. Background data collection and preparation o f draft Phase 2 E N E M P reports i s in progress.

Regulatory Clearance:

The environmental clearance o f the Phase-1 E N E M P reports by the Pakistan EPA was conveyed during September 2003. NHA submitted the SEA report (for the entire Project) and the E N E M P and Social Assessment reports for Phase 1 works to the Federal EPA on April 22,2003. In accordance with regulatory requirements, the Federal EPA in consultation with the Provincial EPAs, held four public hearings for the Project during August 2003 at Peshawar, Lahore, Hyderabad and Islamabad, fo l lowing the publication o f a Notice for Public Hearing in the nationaVloca1 press. The public hearings were reasonably wel l attended. They did not raise any major new issues not already identified in the safeguard documentation. NHA

- 23 -

subsequently prepared and f i led an addendum to the documentation, to fully address the feedback provided by stakeholdes at these hearings.

5.4 H o w have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

Stakeholder workshops were organized to discuss project-specific issues. The Association o f Road Users of Pakistan (ARUP) organized a series o f regional discussions in 2000 and 2001 that have provided valuable inputs for the project design. At the screening stage, stakeholder meetings were held in Sindh and Punjab by the NHA's EA consultants, involving government and NGO representatives, f ield specialists, road contractors, and a cross-section o f PAPS. Roadside consultations and scoping sessions were carried out mainly with pedestrians, vehicle drivers, public transport passengers, roadside vendors and shopkeepers, local inhabitants, government officials, and NGO representatives at various locations along the Project corridor. Similar consultations and disclosure wil l be undertaken for Phase-11.

5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

The environmental monitoring plan included in the E M P specifies parameters to be monitored, and the frequency, locations and applicable standards o f the monitoring regime. The scope o f monitoring wil l cover borrow p i t management and top soil conservation, location and management o f project facilities (including dust and noise), enhancement and maintenance o f avenue plantation, obstruction o f drainage systems, etc.

Environmental monitoring wil l be carried out by an Independent laboratoqdfirm to ensure that the E M P i s effectively implemented and to document the status o f the environment at periodic intervals. Specifically, the fol lowing environmental parameters wil l be monitored at the locations to be identified during the construction (e.g. locations o f asphalt plants, construction camps, etc.).

0

0

Ambient noise levels 0 Water quality 0 Avenue plantation.

Ambient air quality (mainly PM10) Asphalt plant emission (smoke, dust, etc.)

Within NHA, the DirectorDeputy Director (DD) Environment/Afforestation at head office (HO) wil l have the overall responsibility o f monitoring and evaluation. H e wil l ensure that the human and material resources required for the environmental monitoring are provided; the periodic reports are generated and communicated to the management and appropriate staff members; the required training i s provided to the concerned staff; the external monitoring i s carried out; and, periodic environmental audits are conducted. The regional DD EnvironmeniYAfforestation's team wil l be responsible for carrying out ad-hoc visits to the construction sites to review the environmental performance o f the construction contractors and report to the D i rec torDD EnvironmenUAfforestation (HO). To enable the regional team to carry out i t s functions, each regional team wil l be provided with a geographic positioning system (GPS), a digital camera, a mobile phone and a noise meter. A computer system with access to the Internet would be provided at the regional office to enable the team to compile and send i t s weekly reports in time. Each team wil l also be provided with a 4 wheel-drive vehicle to meets i t s logistical requirements. NHA (D/DD EnvironmenUAfforestation) wil l contract out air and water quality monitoring. This wil l include surface water analysis near the construction sites, dnnking water quality analysis at the camps; ambient air quality assessment and the

- 24 -

emission testing at the asphalt plants.

A supervision consultant firm appointed by the NHA will be responsible to ensure that the contractors comply with al l necessary requirements contained in the E M P and to develop good practice construction guidelines to assist the contractors and NHA staff in implementing the EMP. The firm will also monitor the afforestation program. The Supervision Consultant w i l l be the main conduit through which training will be provided to NHA and contractor’s staff on implementation, compliance reporting, internal monitoring, etc. H e wil l also be responsible for submitting a monthly environmental report for the Project, inter alia including a contract-wise breakdown o f non-compliances and rectification by the contractors and the results o f monitoring environmental and social parameters camed out by the DDs stationed in each region, and Field observations made by the GM Environment/Social/Lands’ staff and the Deputy Project Coordinators. The monthly reports wil l be copied to the Member Operations, and circulated internally and extemally to other parties. The regional DD (Environment/Afforestation) wil l prepare a quarterly report encompassing the environmental and social matters and fol lowing review by the GM Environment‘SocialLands (HO), submit the report to the federal/provincial EPAs and the Bank.

An environmental monitoring committee drawn from senior NHA staff will monitor and document the progress o f the Project in accordance with the planned schedule o f activities; and liaise between the NHA, environmental protection agencies (EPAs), and the Bank in the context o f compliance with EMPs. The committee wil l be assisted by an environmental specialist provided by the Supervision Consultant.

In addition, the NHA, in consultation with the concerned EPAs, will engage an independent monitoring firm on the basis o f clearly defined criteria, to ensure the widespread monitoring o f the Project’s compliance with the EMP, and to document the status o f the Project’s environment at periodic intervals. The f i r m ’ s terms o f reference will define a clear work plan, monitoring indicators, reporting structures and timelines. The NHA will provide the necessary logistical support to facilitate the monitoring process. The firm will report i t s findings on a quarterly basis directly to the NHA, the Bank, and concerned EPAs. The federal and provincial EPAs wil l review and evaluate the monitoring process as wel l as periodic reports submitted by the NHA in their capacity as regulators.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project’s social development outcomes.

The social assessment carried out for Phase I o f the Project provides an assessment o f the Project’s land acquisition requirements, a detailed census documenting the status o f potentially affected people within the Project area, and a mitigation plan accompanied by the Resettlement Policy Framework (RPF). Keeping these factors in view, the Project has been carefully designed to minimize adverse social impacts.

Apart f rom the construction work for dualization o f the Matiari bypass, Sindh, which wil l involve land acquisition o f approximately 6 hectares, the Project’s construction works wil l be confined within the NHA’s existing right o f way (ROW).

The following key issues arise from this Project:

Impact of Involuntary Resettlement on Livelihood of PAPs: Rehabilitation works wil l require varying degrees o f resettlement during both phases. A series o f surveys were camed out within the ROW and corridor o f impact (CoI) to identify the Project-affected persons (PAPs), their socio-economic profiles and vulnerability levels. Some 588 commercial structures l ie within the ROW o f the corridor’s Phase I sections. However, o f these, only 28 wil l need to be relocated as a result o f rehabilitation works, affecting a total o f 36 persons. Preliminary surveys indicate that during Phase 11, approximately 200 structures within the Co I

- 25 -

will need to be relocated. The details o f PAPs whose livelihood wil l be affected during Phase - I1 i s currently being documented by the NHA. Overall, the total number o f PAPs i s estimated at about 350 persons.

Livelihood restoration of vulnerable groups: Livel ihood concems o f squatters and encroachers (particularly the vulnerable persons) who do not possess title to assets but will be impacted by the Project, need to be addressed. This i s being done through the RPF.

Gender: Mitigation measures to be implemented under the Project need to be sensitive to gender concems where applicable. Women must be included in the consultation process. To address these concems, gender sensitization i s included as part o f the training planned for NHA staff.

Highway Safety and Access: Access to the highway wil l be temporarily hindered during construction works. Construction activities such as blasting may affect the safety o f people l iv ing close to the site. Mit igation measures to minimize adverse impacts are included as part o f the EMP.

Capacity to address social development issues: At present there i s very limited capacity within NHA to understand and address social development issues. This will be addressed through a social development training plan provided for in the Project (Ref. Annex 11)

Cultural properties: Some cultural properties including mosques, shrines, graveyards and public utilities that come in the CoI may need to be relocated. Sensitivity will need to be maintained in keeping with the cultural and religious mores.

Social Development Outcomes: Land acquisition fol lowing the Land Acquisition Ac t (LAA), 1894 and the agreed upon RPF ensuring payment o f compensation in a fair and transparent manner i s one o f the social development outcomes. In al l cases o f involuntary land acquisition, section 17 (emergency clause) o f the LAA (1 894) wil l not be applied.

Other outcomes include, preservation o f livelihood of PAPs by resettling them as quickly as possible at a nearby location within the ROW; providing livelihood assistance, if relocation i s delayed; and adjusting lease payments to compensate for loss o f income in case o f delays. The provision o f new kiosks by NHA w i l l enhance the security o f livelihood for these PAPs, by removing the persistent threat o f eviction. The National Highway Police has now been legally empowered (under the National Highway Safety Ordinance 2000) to keep the highways clear f rom any encroachment. This should ensure more effective management o f the ROW along national highways in future.

Compensation under RPF: The resettlement o f PAPs and the relocation o f affected structures wil l be carried out under the RPF prepared for the Project. I t addresses the compensation o f property, structures, and livelihood, and defines implementation responsibilities. I t s main provisions are included in Annex 1 1.

Capacity building: The Project i s expected to build NHA staff capacity to better identify and address social development issues.

6.2 Participatory Approach: H o w are key stakeholders participating in the project?

The participatory approach described in Section 5.4 was used to identify and address both environmental and social concems o f key stakeholders. Stakeholders are also involved in participatory monitoring as described under section 6.5 .

6.3 H o w does the project involve consultations or collaboration with NGOs or other c iv i l society organizations?

The Project has been undertaking consultation with stakeholders including civ i l society and NGOs during

- 26 -

the preparation stage and wil l continue to engage with them during the Project cycle. The consultation strategy being implemented by the Project i s attached in Annex 11.

Regular annual stakeholder consultations have been included in NHA’s new Standard Operating Procedures for operation o f the Road Maintenance Account, as part o f the NHA’s Annual Road Maintenance Program approval cycle. These wil l involve road users, provincial Chambers o f Commerce, commercial vehicle operating groups, and provincial road agency representatives. The Project will also assist NHA in developing partnerships with the trucking industry for improved axle load management, and with road-side community groups for highway safety awareness programs. NHA will contract NGOs andor local community-based organizations (CBOs) operating along various project reaches to provide transparency, veri fy the efficacy, and ensure compliance with the resettlement pol icy framework during project implementation.

6.4 What institutional arrangements have been provided to ensure the project achieves i ts social development outcomes?

The NHA’s General Manager LanddEnvironment wil l be responsible for managing the acquisition o f land and supervising the resettlement program. A Social and Resettlement Committee wil l be appointed to supervise the resettlement process and to ensure that i t conforms to the entitlement pol icy framework adopted for the Project. A grievance redressal system (ref. Annex 11) managed by the NHA’s deputy project coordinators wil l maintain a community complaints-management register to record grievances brought forward by affected communities, and to ensure that these are appropriately addressed.

As far as highway safety and access i s concerned, the contractor wil l be required to ensure that construction work does not hinder local people’s access to the highway and their ability to cross it safely, and to adopt good engineering practices to minimize safety hazards among the local population.

6.5 H o w w i l l the project monitor performance in tenns o f social development outcomes?

Social development outcomes wil l be monitored at various levels. Internally, for land acquisition and management, the Deputy DirectoriAssistant Director, SocialiInfrastructureiLand Management (SILM) at the regional level along with the land acquisition collector and his staff wil l be responsible for implementing these activities and wil l report progress to the DirectoriDeputy Director, S I L M at the head office (HO), who will monitor and verify the Report. For Resettlement/Rehabilitation/other Social Issues, the Deputy Director Operations assisted by the two Assistant Directors (OperationsiManagement and Maintenance/Monitonng) in the field and the supervisorsiinspectors in a particular reach wil l implement the activities and report progress. The monitoring o f progress will be the responsibility o f the DirectoriDeputy Director, S I L M at HO and Deputy/Assistant Director, S I L M at the regional level. The implementation o f the consultation strategy wil l also be monitored.

A t the next level there will be a Social and Resettlement Committee consisting o f regional staff i.e. Director (Operations), DeputyiAssistant Director, S I L M and Project Coordinator, and HO staff including Director/Deputy Director, SILM. The Committee i s tasked with the responsibility o f coordinating al l implementation and monitoring matters. They wil l report to the regional General Managers and General Manager, Environment/Social/Land Management at HO. The Committee wil l meet quarterly, but may need to meet monthly during the init ial period.

Externally, Participatory Monitoring will be undertaken by NGOsiCBOsior entities with presence in the communities. They wil l be selected by NHA (specifically by GM, Environment/Social/Land Management

- 27 -

at HO) against clearly defined criteria and be responsible for monitoring the RPF and other social issues, including the efficacy o f the grievance redressal mechanism in their respective communities (refer to Annex 11 for a set o f social monitoring indicators). They wil l keep close liaison with the communities and provide a local perspective. Among other tasks, they w i l l also reconfirm the identity o f PAPS and report on dispute resolution . The Project wil l define their workplan and lines o f reporting. They wil l furnish periodic (at least quarterly) monitoring reports to regional GMs, GM Environment/Social/Land Management at HO, Social and Resettlement Committee and Project Coordinators.

Overall reporting will be the responsibility o f the regional Project Coordinator who wil l provide reports to the Supervision Consultants for collation and reflection o f information in the Quarterly Progress reports o f the Project. The Supervision Consultants wil l monitor activities o f contractors with regard to temporary land acquisition, leasing arrangements, and issues regarding potential conflicts w i th land owners for restoration o f borrow land. All monitoring reports wil l be submitted to General Manager (NHIP), regional General Managers, and the Bank.

At the end o f first year o f implementation, NHA will undertake a review o f the efficacy o f the M&E arrangements for SociaUResettlementlLand Management and fine tune the arrangements accordingly. The NHMP will provide the NHA field-level support in the management o f the ROW, including monitoring encroachments and the implementation o f a traffic control plan.

7. Safeguard Policies:

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The Environmental and Social Documentation prepared by the Borrower on the basis o f national legislation and the Bank's safeguard requirements (including the Sectoral Environmental Assessment, the Resettlement Policy Framework, the EAs/EMP and SAIRPF for Phase-I works) has been finalized. Compliance w i th the EAIEMPs, and the Resettlement Policy FrameworkiPlans i s a part o f the Borrower's obligations under the Project's legal covenants. In addition, the Borrower wil l have to prepare separate environmental and social safeguard documentation for Phase-2 works (EAIEMP and SNRPF) and clear it w i th the Bank before commencing implementation o f Phase-2 works.

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F. Sustainability and Risks 1. Sustainability:

The Project wil l lead to sustainable improvements in the management and delivery o f the national highway system, through measures that include:

Risk Rating

S

(i) focus from a 'constructor' to a 'service provider' role.

putting the highway network on a 'fee-for-service' basis; supporting a shift in NHA institutional

Risk Mitigation Measure

While GOP has placed strong leadership with commitment to reform and good govemance in NHA over the past 3 years, the r isk o f ro l l back remains present, in case o f significant turnover1 political appointments at top levels. The Bank will need to continue emphasizing the importance o f a wel l governed road sector to the national economy in the course o f our country dialogue; and ensure broad-based consensus within GOP on the need to continue road sector reforms.

(ii) Implementing a prioritized MTBF and highway investment and maintenance program to improve the balance between expenditures on maintenance and new construction, target early completion o f the ongoing priority projects; and restrict the bulk o f future investments to projects with positive economic retums.

ineffective Traffic Management and Enforcement along N-5 and M-9 due to inadequate collaboration between NHA -

(iii) increasing resource mobilization and establishing a secure source o f maintenance funding for the network (Road Maintenance Account); reducing future demands on scarce public sector budgetary resources.

M Institutional coordination structures between NHA and N H M P at senior management levels already exist. The project design builds on these

(iv) adopting improved asset management practices at NHA [RMA Standard Operating Procedures, a modem Road Asset Management System, annual maintenance programs; development o f appropriate pavement systems and standards; more effective axle load management; improved environmental management and resettlement practices, etc.).

(v) improving govemance and financial management in NHA by strengthening financial management systems and controls and increasing agency accountability to external stakeholders: regular consultation with road user representatives and key stakeholders; regular independent financial and technical audits; publication o f annual agency reports, including audited financial statements, in the public domain.

The overall fiscal impact o f the proposed physical investments wil l be minimal.

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

Risk :rom Outputs to Objective Ibsence o f competent, professional nanagement in NHA; failure to provide itrong leadership, good govemance and ransparent decision making

md National Highway and Motonvay Police Force

no improvement in enforcement o f lxle-load control over network

From Components to Outputs G O P M H A does not adhere to agreed Medium Term Budgetary Framework (MBTF) & Highway Investment and Maintenance Program

NHA does not operate the Road Maintenance Account (RMA) according to agreed Rules and Standard Operating Procedures (SOP)

Lack o f timely site-readiness, including land acquisition and RPF and E M P implementation

Overall Risk Rating

Risk Rating - H (High Risk), S (Substantial Ris

S

S

S

M

S 1, M (Modest Risk), I

relationships by promoting formal collaboration at the working levels. This will be monitored during supervision.

NHA has recently launched a revived enforcement program along the network. The Project includes TA to assist with public awareness campaigns and build partnerships wi th the trucking industry and other stakeholders to ensure effectiveness. These aspects wil l need to be monitored during supervision.

The MTBF has been based on an overall medium t e r m resource and expenditure envelope agreed by GOP/MoF; it includes a conservation program to be protected in case o f fiscal constraints; implementation o f the MTBF i s included as a legal covenant. Continued compliance wil l be a condition for award o f Phase-2 contracts; this wil l be monitored during supervision and annual PSDP reviews.

RMA Rules have been notified as 'Financial Rules' under the NHA Act; the Project includes TA t'o assist RAMD with RMA operation; this i s also included as a legal covenant. Continued compliance wil l be a condition for award o f Phase-2 contracts; wil l be monitored during supervision and annual PSDP reviews.

Contracts requiring land acquisition wil l not be awarded unless land acquisition has been completed; advance procurement actions alread: initiated for first year program o f works; detailed environmental and social assessment fo Phase-I contracts completed; RAP and E M P compliance included as part o f Supervisory Consultant and C iv i l Works contracts; also included as a legal covenant.

:Negligible or Low Risk)

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3. Possible Controversial Aspects:

(Project Alert System):

Risk

GoP launches additional mega-projects in the sector (fully or partially financed by public resources), that do not comply with the agreed MTBF framework

Type o f Risk Risk Rating

S

Risk Minimization Measure

The legal agreements include a covenant requiring NHA to carry out i t s investment and maintenance program in compliance with the MTBF; the Bank may suspend project assistance if the agreed MTBF i s abrogated.

G. Main CreditlLoan Conditions 1. Effectiveness Condition

Standard Conditions only.

2. Other [classify according to covenant types used in the Legal Agreements.]

Key Conditions for Bank Board GOP’s and NHA’s approval o f the negotiated draft Development Credit Agreement, Loan Agreement and Project Agreement.

Legal Covenants under the Creditnoan

1.

2.

3 .

4.

Standard Legal, Financial and Procurement Covenants.

The Borrower shall make the proceeds o f the Credit and Loan available to NHA as a capital contribution on a non-reimbursable basis, in accordance with the Borrower’s standard budgetary procedures.

The Borrower shall (a) at the beginning o f FY2004105, take a decision regarding (i) the treatment o f existing stock o f NHA debt; and (ii) the mode of a l l future NHA funding provided through the Borrower’s annual Public Sector Development Program, al l with a view to making NHA financially sustainable commencing FY 2004105; and (b) to those ends and not later than April 30, 2004, carry out a review o f available options for financing NHA’s investment program on a sustainable basis, under terms o f reference satisfactory to the Bank, and provide the Bank with a prior opportunity to comment on the findings and recommendations o f such review.

The Borrower shall ensure that during Project implementation, NHA will (a) carry out i t s investment and maintenance program in compliance with the MTBF; (b) consult with the Bank on a timely basis

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5.

6.

9.

10.

11.

each year o n i ts annual investment and maintenance plan, giving due consideration to any comments and suggestions made by the Bank on such plan in the course o f such consultations, and (c) in particular, fully implement the National Highway Improvement Program.

NHA shall maintain and operate the RMA in accordance with the relevant rules, regulations and standard operating procedures notified f rom time to time in consultation with the Bank; as part thereof, produce in each Fiscal Year, an annual report in the public domain on the policies and activities o f RMA in the preceding Fiscal Year, including an assessment o f the current condition o f the NHA road and bridge network, a prioritized annual maintenance plan for such network for the next Fiscal Year, a summary o f the results o f stakeholder consultations, and the reports o f independent annual financial and technical audits; and for these purposes and at al l times, keep al l key professional positions within i t s Road Asset Management Directorate (RAMD) fully staffed.

NHA shall periodically review and modify as appropriate, the structure and level o f i t s road user charges including tolls, to ensure that such charges broadly reflect (i) the extent o f road use, (ii) damage caused to the road network by individual vehicle categories and (iii) level o f service provided; and provide the Bank timely opportunities to review and comment on the proposed modifications before these are implemented.

NHA shall, before the award o f the first c iv i l works contract, engage, a consulting firm to act as EngineedProject Manager for the purposes o f contract administration and construction supervision under the Project.

NHA shall, throughout the execution o f the Project and in collaboration with the relevant traffic enforcement authorities, maintain a formal coordination structure satisfactory to the Bank, for the purposes o f ensuring: (a) safe and uninterrupted traffic flows along the Project corridors during the construction and operation o f the Project facilities; and (b) effectiveness o f various traffic and road safety measures supported under the Project.

NHA shall ensure that no works wil l be undertaken under the second and subsequent phases o f the Project unless and until the relevant Environmental Management Plans and Resettlement Action Plans satisfactory to the Bank have been prepared.

NHA shall ensure that:

a) a l l land acquisition required for the purposes o f implementing any civ i l works under the Project and activities related to the resettlement and rehabilitation o f the PAPS in connection with such works are completed prior to the carrying out o f any works, in accordance with the provisions set forth in the Resettlement Policy Framework and the relevant Resettlement Action Plans in a manner satisfactory to the Bank.

b) al l land acquisition required for the Project wil l be carried out in accordance with the policies, principles and procedures set forth in the Land Acquisition Act, as further elaborated in the Resettlement Policy Framework; and

c) no land acquisition required for the Project w i l l be carried out by using the emergency provisions o f Section 17 o f the Land Acquisition Act.

NHA shall uniformly apply the Resettlement Policy Framework and related safeguard policies to al l

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components of the Project as well as other construction contracts being undertaken during the Project period on the National Highway N-5 and M-9 under the Borrower's National Highway Improvement Program, that result in involuntary resettlement, regardless of the source of financing.

. -. H. Readiness for Implementation R 1, a) The engineering design documents for the first year's activities are conipiete and ready for the start

n I. b) Not applicable.

w 2. The procurement documents for the first year's activities are complete and ready for the start of

3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory

Ir-1 4. The following items are lacking and are discussed under loan conditions (Section G):

o f project implementation.

project implernentation.

quality.

I. Compliance with Bank Policies iSi I. This project complies with all applicable Bank policies. 0 2. The following exceptions to Bank policies are recommended for approva:.. The project complies with

a l l other applicable Bank policies.

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Hierarchy of Objectives Sector-related CAS Goal: 4 more competitive 'akistani economy

)reject Development lbjective: Sustainable delivery o f a iroductive and efficient iational highway network, :ontributing to lower ransportation costs

Annex 1: Project Design Summary PAKISTAN : High ways Re ha bi I i tat ion Key Performance

Indicators Sector Indicators: - increased exports - increased investments - expanded business volume - increased business starts

Outcome I Impact Indicators: Improved traffic f low on the network, measured by:

(a) Reduction in average Vehicle Operating Costs by 5%; avg. network IRI drops from 5.4 IRI to 4.4 IRI; NHA network in poor condition reduced from 49% to 35%;

(b) Reduction in travel time (growth adjusted) on N-5; by 10%;

(c) Improved Road Safety on N-5; growth adjusted reduction in road fatalities by 10%

Data Collection Strategy

jectorl country reports: 3ank/IMF/GOP reports on nacroeconomic Jerformance

'roject reports:

VHA Annual Reports; GOP Statistics; PSDP reviews; Supervision missions; iaseline surveys

Critical Assumptions [from Goal to Bank Mission) - GoP continues its Zomprehensive reform ?rogram aimed at poverty reduction and inclusive development - relatively stable political and macro-economic :nvironment

[from Objective to Goal)

- GOP continues to promote a deregulated and competitive road transport industry through appropriate fiscal and trade policies - helping pass on transport cost savings to consumers

- Concurrent improvements in provincial road networks; rural access, other transport modes

- Improved commercial facilitation procedures

- Consistent policies in other sectors

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Hierarchy of Objectives htput from each :omponent: ) Network Conservation 'rogram implemented.

!a) Improved Policies in dace.

!b) NHA Institutional i e fo rm & Corporate strengthening Program mplemented; lusiness Processes treamlined.

Key Performance Indicators

Output Indicators:

a) about 550 km of highways rehabilitated

b) 306 km o f highways resurfaced

c) safety improvement works at 15-20 locations

d) trees planted in about 2,500 avenue km in ROW land

1. MTBF in place; annual throw-forward o f NHA PSDP reduced f rom 4.2 yrs to 2 yrs; share o f expenditure on network conservation increased from 38% to 55%;

2. RMA Operational and financing A M P (Annual Maintenance Programs); routine and periodic maintenance fimding increased f rom 25% to 100% o f stable network needs; allocations based on RAMS; regular consultatior with Road Users; publication o f RMA Annua Reports in public domain

1. Reorganized NHA structure in place; increased focus on network operator role;

2. Phase-1 o f B P R program :ompleted; Phase-I1 mdenvay ;

3. Act ion plan to improve financial management and

Data Collection Strategy

'roject reports:

)uarterly Progress Reports QPR); Supervision mission keports; Project :ompletion Report

innual Agency Reports; 'rogress reports, iupervision mission reports,

innua l PSD Program

W A Annual Reports, WMD records

Juarterly Progress Reports :QPR); Supervision mission Reports; NHA Annual 4gency & RMA Reports; iudited NHA Financial itatements & Project kcounts; Accident ha lys is Reports; MTR teport; Project Completion teport

Critical Assumptions rom Outputs to Objective)

- Competent, professional NHA management provides strong leadership, good govemance and transparent decision malung

- Improved Traffic Management and Enforcement along N-5 through close collaboration between NHA and National Highway and Motonvay Police Force

- steady improvement in enforcement o f axle-load control over network

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nternal controls mplemented;

I. Modern road asset nanagement system Iperational;

i. Axle Load Management irogram initiated in iartnership with trucking ndustry and other itakeholders;

5. Improved pavement nanagement systems and itandards developed and Iiloted;

7. Highway safety :omponent implemented safety audits, accident .eporting, investigation and malysis, community safety iwareness programs);

3 . Satisfactory compliance with EMPs, RPF and WPs; Environment and iocial management capacity :nhanced (improved xactices adopted, dedicated xofessional staff engaged, pievance redressal system stablished);

>. HRD plan implemented :in-country training, )verseas training, ;cholarship s)

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Hierarchy of Objectives

- NHA internalizes improved financial systems and controls

Voject Components I sub-components:

1) Network Conservation Zomponent :

la) Rehabilitation and [mprovement works

1 b) Resurfacing and Strengthening works

IC) Safety Improvement works

Id) Afforestation

le) Relocation o f Utilities

If) Consultancy Services for Construction Supervision

1 g) Land Acquisition & Resettlement

2) Pol icy Support and Institutional Development Component:

2a) Business Process Re-engineering (BPR)

2b) Asset Management (including RAMS implementation, improved pavement systems and standards & axle load management)

2c) Highway Safety

2d) Environmentall Social Management

Key Performance indicators

uts: (budget for each mponent) S$ mil] >A/IBRD) 6.03 38.31)

9.30 (121.07

.42 (34.81)

.80 (19.61)

30 (3.72)

50 (0.0)

,.11 (9.09)

00 (0.0)

1.87 1.19)

0 (3.6)

68 (3.33)

22 (0.19)

53 (0.47)

lata Collection Strategy

roject reports:

eriodic Progress Reports; hbursement Reports; ipervision mission reports

Critical Assumptions rom Components to utputs) GOP/NHA adheres to Treed Medium Term udgetary Framework MBTF) & Highway westment and faintenance Program

N H A operates Road faintenance Account M A ) effectively - dhering to notiJied Rules nd Standard Operating 'rocedures (SOP)

timely site-readiness, icluding land acquisition nd R A P implementation

- GOP requires prompt and accurate accounting from N H A for large publil sector allocations

- Timely procurement of competent contractors and consultants

- Timely availability o f counterpart funding

- Strong leadership by NHA o f B P R effort

- 37 -

2e) Training & HRD

2f) Sector Studies & Future Project Preparation

2g) NHA’s Incremental Operating Costs

1.91 (0.91)

l.15 (1.94)

3.38 (0.75)

- Continuity o f key counterpart staff and F M professionals in NHA;

- 38 -

Annex 2: Detailed Project Description PAKISTAN: Highways Rehabilitation

7 8

11A

By Component:

(SB) Mianchannu-Sahiwal 46 1030 to 1102* (N&SB) Lahore-Gujranwala 100 1270 to 1320 (N&SB)

Sahiwal-Okara 30 1102 to 1132 (N&SB) Total (kms) 231.7 318.7

Project Component 1 - US$246.03 million Network Conservation: This component consists of: (a) Rehabilitation and Improvement works (including structures); (b) Resurfacing and Pavement Strengthening works; (c) Safety Improvement works; (d) Afforestation; (e) Relocation o f utilities; (9 Consultant Services for Design, Contract Administration and Construction Supervision; and (g) Land Acquisition and Resettlement. C iv i l works are designed to increase the load carrying capacity, improve the road safety features, reduce travel time and enhance the pavement ride quality o f about 856 km o f the National Highways N-5 and M-9, selected on the basis o f a network strategic analysis. Details fol low:

Mianchannu-Sahiwal Lahore-Gujranwala

Sahiwal-Okara Total (kms)

a) Rehabilitation o f approximately 550 km o f the National Highways N-5 and M-9. The works involve removal o f the existing surface course, raising, leveling and strengthening by placement o f 25 c m to 30 c m aggregate base, overlaid with 15 c m to 18 c m asphalt concrete. Safety improvements include addressing concerns identified during a detailed Road Safety Audit, converting sections f rom camber to cross fall, raising o f shoulders, and provision o f service lanes and sidewalks, to separate slow moving traffic. Capacity improvements entail upgrading the Lahore-Gujranwala section f rom four to six-lanes. The implementation period for this sub-component w i l l be about 48 months. The 10 civ i l works contracts wil l be procured in two phases, staggered by 12 months. Fol lowing award, each contract wil l span a detailed construction drawing preparation period o f four months, a construction period o f between 24-36 months, and a post construction defect l iabi l i ty period o f 12 months. These works are to be bid as lump sum, fixed priced contracts, on the basis o f outline designs and bid documents prepared by NHA through consultants. The l i s t o f contract packages i s as under:

Rehabilitation and Improvement works (US$159.30 million) :-

I I I I 1 629 to 632, 641 to 653, 658 to 666,668 to 670 1 (SB)

46 1030 to 1102* (N&SB) 100 1270 to 1320 (N&SB) 30 1102 to 1132 (N&SB)

231.7 318.7

7 8

11A

Notes:

- 39 -

b) Resurfacing and pavement strengthening o f approximately 306 km o f the National Highway N-5. The

Resurfacing and Pavement Strengthening works (US$44.42 million) :

12A 1 Guiranwala-Kharian 1 30 I

works involve patching (where needed) and placement o f an asphalt concrete overlay. The sections included for resurfacing are generally built according to acceptable design standards and require only minor improvements. The implementation period for this sub-component will be about 32 months. The 6 contracts will be procured in two phases, staggered by 12 months. Fol lowing award, the contracts will span a construction period o f about 15-20 months, and a post construction defect l iabi l i ty period o f 12 months. These works are to be bid as item-rate contracts, on the basis o f designs and bid documents prepared by NHA through consultants. The l i s t o f contract packages i s as under:

1320 to 1350 (NBI 12C 12D 14

1 1B 13

Gujranwala-Kharian 27 1383 to 1410 (NB) Gujranwala-Kharian 49 1335 to 1359, 1385 to 1410 (SB) Nowshera-Peshawar 68 1660 to 1694 (N&SB) Mianchannu-Sahiwal-Okara 72 1022 to 1102* (N&SB) Kharian-Rawalpindi 60 1442 to 1539 (N&SB)

Total (kms) 174 132

c) The safety improvement works include traffic f low improvements and black spots removal along the National Highways N-5 and M-9, particularly around urban areas. This w i l l be achieved through a combination o f traffic engineering measures (e.g. pedestrian crossings - at grade, overhead or underpass with ancillary facilities; junction improvements; service lanes to separate slow moving traffic); provision o f bus-bays with covered waiting areas and ancillary facilities; street lighting and guardrail fencing in urban areas; environmental mitigation measures; etc. Al l locations wil l be agreed with the Bank in advance. Detailed designs and bid documents wil l be prepared by NHA through consultants. Up to twenty contracts wil l be bid in two batches during Phase-2, staggered by 12 months, wi th contract implementation periods in the range o f 9 - 12 months. NHA has identified several locations along the National Highway N-5 for such works. These include: Jehangira; Khairabad, Kamra, Hasan Abdal, Rawat, Dina, Ghakhar Mandi, M i a n Channu, Ahmadpur Sharqia, Khanqah Sharif, Ubauro, Moro, and Hala.

Safetv Imurovement works (US$25.80 million):

d) Afforestation (US$ 4.90 million): About 1,150 trees w i l l be cut in Phase I and about 345,000 trees (approximately 1045 avenue-km at 330 plants per avenue-km) wil l be planted to compensate for the anticipated loss o f vegetation and trees during construction activities. In Phase 11, the corresponding numbers are 1490 avenue-km and about 492, 000 trees to be planted. The compensatory plantation w i l l help abate hg i t i ve dust and noise, provide shade and enhance aesthetics along the highways.

e) This sub-component which shall be funded entirely by the GOP, wil l relocate utility lines (electric and

Relocation of Utilities (US$ 0.50 million) :

telephone lines and poles, gas pipelines, sewerage lines, etc.) falling within the corridor o f impact.

n Consultant Services for Design, Contract Administration & Construction Supervision (US$ 10.11 million): NHA i s in the process o f selecting intemationally experienced contract administration and construction

- 40 -

supervision consultants, to be designated as the "EngineerProject Manager" for the civ i l and ancillary works financed under the Project. The Consultant wil l administer the c iv i l work's contracts, make engineering decisions, be responsible for quality assurance, provide general guidance and furnish timely responses to the contractors and ensure that a l l clauses o f the Contract Agreement between the contractors and the NHA are respected. The Consultant wil l prepare a "Contract Administration and Construction Supervision Manual" for NHA, outlining routines and standard operating procedures based on sound internationally recognized practice. Consultants may also be engaged separately by NHA to prepare designs and bid documents for the Safety Improvement Works.

g) Land Acquisition & Resettlement (US$l.OO million): In Phase 1 o f the Project, there are 28 structures located within the Project construction site affecting 36 persons. Project implementation wil l also involve acquisition o f approximately 6 H a o f private land at the Mit iar i bypass, due to which another 8 structures and 30 affectees wil l be impacted. According to surveys currently underway for Phase 2, about 158 structures wil l need to be removed, affecting about 270 Project Affected Persons (PAPs). All PAPS wil l be compensated according to the Resettlement Policy Framework. Construction costs o f alternative kiosks for PAPs and shifting assistance have been included in the C iv i l Works contracts under Component 1. Land acquisition and cash compensation to the PAPs shall be funded entirely by GOP.

Project Component 2 - US$14.87 million Policy Support and Institutional Development: This component comprises technical assistance (TA), training, equipment support, and incremental operating costs for the implementation o f improved sub-sector policies and strengthening o f institutional capacity. The policy support sub-component relates to: (a) adoption o f an agreed Med ium Term Budgetary Framework (MTBF) and an indicative 5 year investment and maintenance program for the national highway network; and (b) operation o f a Road Maintenance Account ( M A ) , financed from earmarked road user revenues (including tolls) to provide a secure and stable source o f finding for network conservation. The Institutional Development sub-component can broadly be divided into the fol lowing groups o f activities:

a) Business Process Re-Enpineerinp & Corporate Strengtheninp (US$4.00 million) : NHA i s embarking on a major Business Process Reengineering (BPR)iManagement Information System (MIS) program, for creating an integrated and effective IT-Enabled environment, covering al l core areas o f the Management, Operational, Technical, Finance and Accounting functions. The BPRiMIS program wil l be taken up in two distinct phases. The program wil l commence with BPR as the primary area o f focus, followed by software procurementhmplementation, computer hardware and networking procurement, installation & implementation, human resource development & training and the development o f institutional and regulatory frameworks, including standard operating procedures.

The Project provides technical assistance for procurement o f consultant services to (a) streamline the working and management o f core activities o f the Authority, including the implementation o f improved financial management and internal controls, administration and general operations, (b) provide a sound basis and clear strategic road map for the organization's plans to introduce effective computerization and IT-enablement, (c) have in place an IT-enabled information database with a departmental focus for measurement o f performance, costs and revenue, which enable the organization to adopt a commercial orientation in i t s business activities, and (d) ensure that the components o f i t s IT-enablement projects are taken up in context o f a we l l defined, integrated and synergetic framework. The Project will also finance computer hardware (including networking and communications), office equipment, and computer software solutions.

- 4 1 -

b) Asset Management fuS3.68 million):

(4 RAMS Implementation (US$ 1.8 million): As part o f i t s progressive commercialization, NHA has established a Road Asset Management Directorate (RAMD) to implement the fee-for-serviceivalue-for-money concept. RAMD i s in the process o f developing and implementing a modem Road Asset Management System (RAMS) to help optimize network maintenance expenditures. The Project wil l finance: (a) technical assistance to implement the R A M S and improve corridor management; and (b) procurement o f R A M S related equipment (e.g. road profilometer capable o f measuring cracking, rutting and roughness, etc.).

(ii) Improved Pavement Systems and Standards (US$1.5 million): Currently, in Pakistan the 'AASHTO Guide for Design o f Pavement Structures' and the 'Marshall Procedure' are the most widely used approaches for asphalt concrete pavement structural design and bituminous mixture design respectively. These empirical procedures are inherently incapable o f providing reliable designs for the extreme conditions prevalent on highways in Pakistan. To address this, NHA i s launching a comprehensive pavement research program aimed at developing a pavement design procedure and standards that can be relied upon for the heavy axle loads, high tire pressures, locally available materials, and hot climatic conditions encountered in Pakistan. The program involves construction o f a number o f road test sections and a series o f laboratory experiments including evaluation, modification and adoption o f the bituminous mixture design methodology developed by the Strategic Highway Research Program (SHRP) for designing rut-resistant pavements. The Project wil l finance: (a) technical assistance to help develop improved pavement systems and standards; (b) construction o f road test sections; and (c) procurement o f related testing equipment and services.

(iii) Axle Load Management (US$ 0.38 million): Overloading o f trucks i s causing extensive damage to the highway network. Very limited axle load enforcement efforts have been made to-date. The Project wil l finance technical assistance to help NHA initiate a more effective axle load management program, in partnership with the trucking industry and other key stakeholders.

c) Highwav Safetv (US$ 0.22 million): The Project includes technical assistance for the National Highway Safety Council Secretariat at MOC. This wil l involve policy/advisory support based on global experience and best practices.

d) NHA i s inducting dedicated environmental and social development staff to better manage safeguard aspects o f i t s operations. The Project provides technical assistance for (i) external monitoring, (ii) delivering on-the-job staff training, and (iii) assistance in the developmenh'operationalization o f related systems and procedures, with a view to enhancing NHA's environmental management and resettlement capacity.

Environmental and Social Management (US$O.53 million):

A recent N-5 accident analysis report indicates that pedestrian crossings are currently the second biggest cause o f accidents on the highway. Proposed improvements on the N-5 and M - 9 wil l lead to greater vehicle speeds and flow, which may enhance the r isks faced by pedestrians. T o mitigate this, the Project includes community level traffic safety awareness campaigns to be conducted along the project reaches. NHA will undertake these campaigns in partnership with the N H M P . The Project also provides computer hardware and software for accident recording and analysis, and GPS equipment to facilitate identification o f accident locations.

e) The Project includes a number o f measures to strengthen NHA institutional capacity, improve performance and increase efficiency. This sub-component covers capacity building and training in various areas,

Institutional Training and HRD (US$0.91 million):

- 42 -

including: financial management; network planning & prioritization; corridor management; highway safety; contract administration; environmental management; social, resettlement; rehabilitation; information management systems; human resource management; public-private partnerships; road management & administration, etc. through in-country and overseas events and a l imited number o f post graduate scholarships in related specialty areas.

8 The Project includes TA for these activities to be defined during the course o f project implementation.

Sector Studies and Future Project Preparation (US$2.15 million):

9) The Project provides support to meet the costs o f additional staff contracted by NHA and the operation and maintenance cost o f office buildings, office equipment, temporary lodgings and vehicles for the purposes of the Project.

Incremental Operating Costs (USS3.38 million)

- 43 -

Annex 3: Estimated Project Costs PAKISTAN: Highways Rehabilitation

Local Foreign Project Cost By Category US $million US $million

Goods 0.52 4.68 Civil Works 117.88 117.05 Services 7.80 7.68 Training 0.18 0.73 Incremental Operating Costs 3.38 0.00 Resettlement & Land Acquisition 1 .oo 0.00

~~

Project Cost By Component 1. Network Conservation (a) Rehabilitation and Improvement o f 550 km o f N-5 (b) Resurfacing and Strengthening o f 306 km o f N-5 (c) Safety Improvement Works (d) Afforestation (e) Relocation o f Utilities (0 Consultancy Services for Contract Administration & Construction Supervision (g) Resettlement & Land Acquisition 2. Policy Support & Institutional Development - TA, Training, Equipment Support, and Incremental Operating Costs Total Baseline Cost

Physical Contingencies Price Contingencies

Total Project Costs’

Total Financing Required Front-end fee

Total US $million

5.20 234.93

15.48 0.91 3.38 1 .oo

Local US $million

1 Total Project Costs

Front-end fee Total Financing Required

70.57 17.71 1 1.43 4.34 0 -44 4.59

0.92 6.53

116.53 5.24 8.99

130.76

130.76 130.14 260.90

0.50 0.50 130.76 130.64 26 1.40

130.76

Foreign US $million

70.57 21.64 1 1.43 0.00 0.00 4.59

0.00 7.54

115.77 5.18 9.19

130.14

0.50 130.64

Total US $million

0.00 141.14 39.35 22.86

4.34 0.44 9.18

0.92 4.07

232.30 10.42 18.18

260.90 0.50

26 1.40

1 Identifiable taxes and duties are 37 (US$m) and the total project cost, net o f taxes, i s 224.4 (US$m). Therefore, the project cost sharing ratio i s 89.13% o f

total project cost net o f taxes.

- 44 -

Annex 4: Cost Benefit Analysis Summary PAKISTAN: Highways Rehabilitation

, Rehabilitation and Widening 21,598 . Resurfacing and Strengthening 4,823 Total benefits 26,421 costs: . Rehabilitation and Widening 6,979 , Resurfacing and Strengthening 1,571

Net Benefits: . Rehabilitation and Widening 14,619

Total costs 8,550

Summary of Methodology and Results:

. Resurfacing and Strengthening Total net benefits IRR:

The cost-benefit analysis consisted o f two elements: (i) strategic network economic analysis for periodic maintenance and rehabilitation o f the entire National Highways Network and (ii) economic analysis o f the rehabilitation and improvement works (550 km) and the resurfacing and strengthening works (306 km) o f the project. The evaluation was done using the most recent version o f the Highway Development and Management Model (HDM-4), which simulates highway l i fe cycle and vehicle operating conditions and costs for multiple road design and maintenance alternatives.

3,252 17,871

The table below summarizes the results o f the analysis o f the rehabilitation and improvement works and the resurfacing and strengthening works. The present value o f the economic benefits has been calculated using a 12 percent discount rate. The overall project Net Present Value (NPV) i s Rs 17,871 mi l l ion and the overall project Internal Rate o f Return (IRR) i s 3 1.4 percent.

. Resurfacing and Strengthening otal IRR

Table 1 - Present Value Economic Analysis enefits: I

32.3% 3 1.4%

1 , Rehabilitation and Widening I 31.2% I

Summary o f Benefits and Costs:

The main quantified project benefits are savings by road users on vehicle operating costs and time costs. Additional road user benefits, which were not quantified, include reduced accidents rates and improved riding comfort. I t i s expected that, given the deregulated and highly competitive industry structure o f road transport in Pakistan, a large portion o f the savings on commercial vehicles costs (which represent 63% o f the typical traffic composition) wil l be passed on to producers and consumers o f goods transported by road and passenger traffic. The project wil l preserve the road network in an efficient and sustainable manner, which would increase export competitiveness, accelerate export-oriented growth and contribute to sustainable economic development.

Main Assumptions:

Maintenance and rehabilitation costs were estimated in financial and economic te rms (net o f taxes), economic costs being on average 85 percent o f financial costs. Current average unit road works cost estimates are given on table 2.

- 45 -

- Cost per h assumes a 7.3 m wide road (standard 2-lane carriageway)

Table 3 - Vehicle Fleet Characteristics Motorcycle Car Wagon Bus Truck (2 Axle)Truck (3 Axle) Truck (>3 Axle)

Economic Unit Costs (Rs) New Vehicle (per vehicle) 24516 334574 729769 1913308 1502496 2025085 2025085 New Tire (per tire) 438 892 1885 4769 4769 4769 4769

12.83 15.94 12.83 12.83 12.83 12.83 12.83 100 100 100 100 100 100 100 50 30 30 30 30 30 30 0 50 50 50 50 50 50

100 100 100 100 100 100 100 12 12 12 12 12 12 12

15.00 25.00 10.00 10.00 0.00 0.00 0.00 5.00 8.33 3.33 3.33 0.00 0.00 0.00

0 0.10 0 0 0 0 0

2 2 2 2 2 3 5 10000 23000 60000 70000 70000 70000 70000

400 550 1500 1750 2920 2920 2920 10 10 10 10 12 12 14

1 1 12 40 0 0 0 0 0 0 0.50 4.67 8.84 4.63

0.2 1.2 1.5 6.0 15.0 23.0 26.0

'Fuel @er liter) Lubricant Oil (per liter) Maintenance Labor @er hr) Crew Wages (per hr) Annual Overhead (per year) Annual Interest (YO) Work Time (per hr) Non-Work Time (per hr) Cargo Holding @er hr) Basic Characteristics No Axles Annual Km Driven Annual Hours Driven Service Life (yr) Number o f Passengers ESA Damage Factor Operating Weight (t)

Based on these characteristics, typical unit economic road user costs for roughness o f 4.0 IRI, typical unit economic road user costs as a function o f roughness, and the typical traffic composition o n Highway N5 are calculated and are available in project file.

The value o f working time for bus passengers has been estimated conservatively by dividing per capita national income o f Rs 24,000 by 12 months, 25 days and 8 working hours a day, yielding a value o f working time o f Rs 10 per hour per bus passenger. Work related passenger-trips were taken to be 90 percent for buses and 75 percent for cars. The value o f non-working time was taken as a third o f working time. The value o f time for car passengers was taken 2.5 higher than bus passengers. A discount rate o f 12 percent was used for discounting future costs and benefits to compute NPV and as a cut o f f point for IRR. An evaluation period o f 20 years was used in line with common practice. Annual traffic growth rates were estimated based on stable factors affecting generation and attraction o f traffic, such as GDP and fuel consumption. Conservatively, an annual traffic growth rate o f 5.0% per annum for the first 10 years and 4% per annum thereafter was adopted considering that actual road traffic growth for the 1996-2001 period was 6.2% for passengers (passenger-km) and 6.0% for freight (ton-km); petroleum consumption in transport has grown at 6.2% per annum since 1990; registered vehicles have grown at 5.6% per annum since 1990; and the transport component o f GDP has grown at 5.1% since 1995.

- 46 -

Strategic Network Economic Analysis:

Asphalt Concrete

Condition Good Fair Poor Very Poor

Roads Traffic (ADT)

< 1000

< 3.5 I R I 3.5 < IRI < 5.0 5.0 < IRI < 7.0 > 7.0 IRI <5% 5-25% >25% 4 % 5-25% >25% 1 5 % 5-25% >25% <5% 5-25% >25%

305 3 1000 - 3000 3000 - 5000 5000 - 7000

19

64 88 41 l7 I 448 4 573 3 452 51 101 119

Up to 17 project-alternatives were evaluated for each road class using HDM-4, which consisted o f routine maintenance, pothole patching and periodic maintenance and rehabilitation works triggered at different years, followed by 7.5 c m overlays when the roughness reached 4.0 IRI. The base alternative consisted o f routine maintenance, pothole patching and reconstruction when roughness reached 10 IRI.

> 7000 Total

%

Surface Treatment Roads

Traffic (ADT) < 1000

The results show that the optimal level o f expenditures for periodic maintenance and rehabilitation works (reseals, overlays or reconstructions), for the next 6 years, i s around Rs 7 bi l l ion per year, yielding a network NPV o f Rs 460 billion.

416 53 239 112 28 191 24 84 2194 111 0 466 231 0 103 300 4 33 130 58 60% 3% 0% 13% 6% 0% 3% 8% 0% 1% 4% 2%

63%1 19%1 11%1 6%[ Condition

Good Fair Poor Very Poor > 7.0 I R I < 3.5 I R I 3.5 < IRI < 5.0 5.0 < IRI < 7.0

<5% 5-25% >25% 4% 5-25% >25% 4% 5-25% >25% <5% 5-25% >25% 589 47 4 9 210 14 221 218

The graph below presents, for different budget scenarios, the average network roughness, weighted by vehicle-km, which defines the driving comfort and road user costs.

1000 - 3000 3000 - 5000 5000 - 7000

> 7000 Total

%

- 47 -

202 46 86 59 14 109 10 89 522 352 4 4 2 4 11 91 24 156 439 172

99 314 14 46 13 66 15 8 74 7 27 18

856 50 0 135 63 4 55 550 34 365 1523 774 19% 1% 0% 3% 1% 0% 1% 12% 1% 8% 35% 18%

Average Network Roughness Weighted by Vehic le-Km

I

11 - 10 -

c' 9 - !5 8 -

E 7 - v)

8

6 -

5 -

4 -

3 -

LI:

2 1 0 1 2 3 4 5 6

Y e a r

Capital Expendi tures

+Rs 6 Bi l l ion per Year +Rs 5 Bil l ion per Year - C R s 4 Bil l ion per Year -i-Rs 3 Bil l ion per Y e a r

The expected NHA periodic maintenance and rehabilitation expenditures over the next 6-years are around Rs 5 bi l l ion per year, corresponding to a network NPV o f Rs 410 billion. Under this budget scenario, the average network roughness, weighted by vehicle-km, wil l decrease from the current 5.4 IRI to 4.4 IRI in 6 years. This decrease in roughness represents a 5.0% decrease on the vehicle fleet unit road user costs. If the program i s not implemented, the network wil l deteriorate quickly and in 6 years the average roughness will be around 11.0 IRI, representing an increase o f 32% on the vehicle fleet unit road user costs. During the 6-years program implementation, the decrease in total network road user costs will be around Rs 189 billion. Thus, for a road agency expenditure o f Rs 30 bi l l ion (Rs 5 bi l l ion * 6 years), road users wil l save around 6 times that amount. The graph below presents the network road user costs.

Network Road User Costs (Rs Billion)

'On m

The HDM-4 optimized periodic maintenance and rehabilitation works for the next four years, under the Rs 5 bi l l ion per year budget scenario, are given on the Table 5. The optimized program indicates that 59 percent o f the expenditures should be allocated to N - 5 that represents 40 percent o f the NHA network length and carries 65 percent o f the network traffic. The optimized program indicates that, over the next four years, around 538 km o f N - 5 need periodic maintenance, and 1,08 1 km need rehabilitation, which i s in line with the project that broadly keeps the same proportion between periodic maintenance and rehabilitation works on N-5, with 306 km resurfacing and strengthening works and 550 km rehabilitation and improvement works.

- 48 -

ercent

Phase 1 Rehabilitation and Improvement Works:

42% 58%1 100% 20% 8OO/oj 100%

The Phase 1 road works were evaluated considering engineering design costs estimates, and have been divided into six homogeneous sections in terms o f traffic and condition. The existing road sections condition has been investigated by topographic, pavement condition and roughness surveys. Table 6 presents the main section characteristics.

~ 0 5 ~ ) 30 1 533 834 52% 1.4 3.8 5.2 48% N05(S) 237 548 785 48% 1.1 4.6 5.7 52% Total 538 1081 1619 100% 2.6 8.4 10.9 100% Percent 33% 67% 100% 23% 77% 100%

Section

1

2 3 4

5

6

Total

For each road section, up to three project-alternatives were evaluated, with a different design life, comprising two reconstruction options with asphalt concrete wearing course and one reconstruction option wi th a surface treated wearing course. The base alternative consisted o f routine maintenance, pothole patching and rehabilitation when roughness reached 9 IN. The construction period adopted was 2 years. The N P V was the main criteria for selecting a project-alternative per road section, but when the N P V was similar among project-altematives, the project-alternative with lower agency costs was selected. Table 7 presents the selected project-alternative per road section and the results o f the economic evaluation.

Length Width Traffic Surface Strength Roughness A l l Cracks Section Name (km) (m) (AADT) Type (SN) (IRI) (%)

Hyderabad - Hala 48.0 7.0 5820 TST 2.94 6.4 26

Hala - Sakrand 27.0 6.8 4716 TST 2.76 9.4 50 Sakrand - Moro 51.7 7.0 3383 TST 2.60 9.4 60 Tumol - Chablat (N) 34.0 7.0 12170 AC 4.50 7.0 25 Tumol - Chablat (S) 23.0 7.0 11468 AC 4.50 7.0 25

Karachi - Hyderabad S'Hwy 48.0 7.3 6003 AC 3.80 3.3 5

23 1.7

- 49 -

Table 7 - Rehabilitation and Improvement Road Sections Length Width Traffic Surface Strength Roughness Al l Cracks

2 3 4 5 6

Section /Section Name (km) (m) (AADT) Type (SN) (IRI) (%) 1 IHyderabad - Hala 48.0 7.0 5820 TST 2.94 6.4 26

Hala - Sakrand 27.0 6.8 4716 TST 2.76 9.4 50 Sakrand - Moro 51.7 7.0 3383 TST 2.60 9.4 60 Tumol - Chablat (N) 34.0 7.0 12170 AC 4.50 7.0 25 Tumol - Chablat (S) 23.0 7.0 11468 AC 4.50 7.0 25 Karachi - Hyderabad S’Hwy 48.0 7.3 6003 AC 3.80 3.3 5

Section 1 2 3 4 5 6 7 8

Phase 1 Resurfacing and Strengthening Works:

Wearing Course Cost Cost per Km NPV I F 3 Section Name & Base Course (Rs Million) (Rs Millionflun) (Rs Million) (x) Gujranwala - Wazirabad (N) AC 5 - 15 cm 244 8.12 261 25.7% Gujrat - Kharain (N) AC 5 - 18 cm 177 6.57 380 41.5% Wazirabad -Gujranwala (S) AC 5 cm 131 5.44 135 22.4% Kharain - Gujrat (S) AC 5 cm 136 5.44 295 32.8%

210 31.5% Nowshera - Pabbi (N) AC 16 cm 160 8.89 Pabbi - Peshawar (N) AC 16 cm 142 8.89 231 33.0% Peshawar - Pabbi (S) AC 16 cm 142 8.89 231 31.7% Pabbi - Nowshera (S) AC 16 cm 160 8.89 232 34.6%

The roads to be resurfaced and strengthened on Phase 1 have been divided into eight homogeneous sections in terms o f traffic and condition. Table 8 presents the main section characteristics.

Table 8 - Resurfacing and Strengthening Road Sections Length Width Traffic Surface Strength Roughness A l l Cracks

1 Gujranwala - Wazirabad (N) 30.0 7.3 7679 AC 3.29 3.6 27 Section Section Name (km) (m) (AADT) Type (SN) (IRI) (“/I

2 Gujrat - Kharain (N) 27.0 7.3 8395 AC 4.46 3.7 4 3 Wazirabad -Gujranwala (S) 24.0 7.3 7679 AC 5.30 2.5 20 4 Kharain - Gujrat (S) 25.0 7.3 9185 AC 5.25 3.0 15 5 Nowshera - Pabbi (N) 18,O 7.3 11133 AC 4.69 3.3 30 6 Pabbi - Peshawar (N) 16.0 7.3 13207 AC 4.08 4.2 23 7 Peshawar - Pabbi (S) 16.0 7.3 11133 AC 4.91 3.8 17 8 Pabbi - Nowshera (S) 18.0 7.3 13207 AC 4.13 4.6 31

Total 1740

Total

A proposed resurfacing & strengthening project-altemative was evaluated, for each road section, which comprises a 5 to 8 c m wearing course over a base course in some segments. The base alternative included routine maintenance, pothole patching and overlay when roughness reached 6 IN. The construction period i s 1 year. Table 9 presents the economic evaluation results.

1,293 1,976 31.4%

Phase 2 Road Works Evaluation:

The Phase 2 road works were evaluated considering preliminary construction cost estimates. The roads to be rehabilitated and improved have been divided into ten homogeneous sections and the roads to be resurfaced and strengthened into two sections. Table 10 presents the main section characteristics, and Table 11 presents the results o f the economic evaluation.

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Table 10 -Phase 2 Road Sections Length Width Traffic Surface Strength Roughness All Cracks

RHB 1 Moro - Ranipur 88.5 7.0 3899 D S T 2.90 7.6 60 Section Section Name (km) (m) (AADT) Type (SN) (IRI) (%)

31.0 6.5 3167 22.7 6.5 4921 26.0 7.0 3697 20.0 7.0 3873 12.0 7.3 11568 12.0 7.3 11568 38.0 7.3 13621 38,O 7.3 13621

28 43 4s 40 40 4 0

5 5

D S T DST TST A C A C A C A C A C

RHB 10 ISahiwal - Okara 30.0 7.3 3873 A C 3.75 6.5 so Total Rehabilitation and Improvement 318.2

RSP 1 Mianchanu - Sahival - Okara 70.0 7.0 3845 A C 2.80 6.5 60

2.72 2.15 2.45 2.90 3.95 3.95 2.90 2.90

RSP 2 b a r i a n - Rawalpindi 62.0 7.3 6818 A C 4.90 4.5 15 Total Resurfacing and Strengthening 132.0 Total Phase 2 450.2

8.5 9.4

10.2 8.0 5 .O 8.6 5.1 6.7

Section Name M o r 0 - Ranipur Ubauro - Sadiqabad Sadiqabad - Sheikh Wahan Mianchanu - Chichawatni Chichawatni - Sahiwal Lahore - Kalashahkaku (N) Lahore - Kalashahkaku (S) Kalashahkaku - Gujranwala (N) Kalashahkaku - Guiranwala 6’)

& Asphalt Base (Rs. Mi l l ion) (Rs. Mi l l ionkm) (Rs. million) (%) A C 16 cm 1303 14.7 1,793 30.2% A C 16 cm 549 17.7 318 20.6%

. , RHB 10 ISahiwal - Okara

Total Rehabilitation and Improvement 1 bianchanu - Sahival - Okara

A C 15 cm 384 12.8 618 34.9% 5527 8,517 29.5%

A C 5 - 8 c m 636 9.1 478 23.8%

Table 11 - Phase 2 Economic Evaluation I h e a r i n s Course cost cost NPV IR

2 b a r i a n - Rawalpindi A C 5 - 8 c m 376 6.1 798 51.2% Total Resurfacing and Strengthening 1012 1,276 33.8% Total Phase 2 6539 9,793 30.0%

Section RHB 1 RHB 2 RHB 3 R H B 4 RHB 5 RHB 6 RHB I R H B 8 RHB 9

C 1 6 c m 402 17.7 551 27.2% C 15 cm 424 16.3 277 20.1% C 16 cm 326 16.3 451 24.8% C 15 cm 257 21.4 462 33.4% C 15 cm 257 21.4 483 30.5% C l 5 c m 813 21.4 1,732 31.2% C 15 cm 813 21.4 1.832 36.4%

Sensitivity analysis / Switching values of critical items:

The sensitivity analysis o f Phase 1 shows that al l works wil l continue to have rates o f return above the cutoff o f 12 percent in the event o f a 20 percent increase in the investment costs, a 20 percent decrease in the benefits or a combination o f the two. In the latter event, the overall project IRR i s 24.4 percent. Table 12 summarizes the results o f the sensitivity analysis.

- 5 1 -

Table 12 ~ Sensitivity Analysis Base Costs Benefits Costs + 20% &

Section Section Name IRR +20% -20% Benefits - 20% 1 Hyderabad - Hala 36.0% 31.7% 30.8% 27.0% 2 Hala - Sakrand 28.5% 24.6% 23.8% 20.5% 3 Sakrand - Moro 23.9% 20.5% 19.8% 16.7%

5 Tumol - Chablat (S) 53.0% 46.3% 44.9% 39.1% 6 Karachi - Hiderabad S'Hwy 23.2% 20.8% 20.3% 18.1%

Total Rehabilitation and Improvement 34.1% 29.7% 28.8% 25.0% 1 Gujranwala - Wazirabad (N) 25.7% 22.0% 21.3% 18.1% 2 Gujrat - Kharain (N) 41.5% 35.7% 34.6% 29.7% 3 Wazirabad -Gujranwala (S) 22.4% 19.9% 19.4% 17.2%

4 Tumol - Chablat (N) 53.6% 46.8% 45.4% 39.5%

4 arain - Gujrat (S) 32.8% 29.1%

Switching values were calculated for the increase in costs or the reduction in benefits. The analysis shows that for the overall Phase 1, costs would have to increase by 227 percent or benefits reduced by 69 percent to yield an IRR equal to 12 percent.

Table 13 presents the results o f the sensitivity analysis o f Phase 2.

28.3% 25.0%

Table 13 - Phase 2 Sensi Base

Section Section Name I R R R H B 1 M o r 0 - Ranipur 30.2% R H B 2 Ubauro - Sadiqabad 20.6% R H B 3 Sadiqabad - Sheikh Wahan 27.2% RHB 4 Mianchanu - Chichawatni 20.1% RHB 5 Chichawatni - Sahiwal 24.8%

R H B 7 Lahore - Kalashahkaku (S) 30.5% RHB 8 Kalashahkaku - Gujranwala (N) 3 1.2% RHB 9 Kalashahkaku - Gujranwala (S) 36.4%

R H B 10 Sahiwal - Okara 34.9% Total Rehabilitation and Improvement 29.5%

RSP 1 h ianchanu - Sahival - Okara 23.8%

R H B 6 Lahore - Kalashahkaku (N) 33.4%

8 kabb i - NowsheraiS) 34.6% 29.6% 28.5% 24.2% Total Resurfacing and Strengthening 31.4% 27.6% 26.3% 22.7% Total Project 33.3% 29.0% 28.1% 24.4%

i ty Analysis costs 1 Benefits +20% 26.3% 17.6% 23.3% 17.0% 2 1.4% 29.2% 27.5% 27.8% 31.8%

- 20%

17.0% 22.5% 16.4% 20.7% 28.3% 26.9% 27.0% 30.9%

'osts + 20% & ,enefits - 20%

22.1% 14.4% 19.2% 13.6% 17.8% 24.7% 24.2% 24.0% 26.9% 24.5% 21.7%

29.8% 28.8%

16.8% 43.2% 41.6% 34.9% 28.6% 27.6% 23.2% 26.1% 25.3% 21.9%

The Switching values analysis o f Phase 2 shows that for the overall Phase 2 works, costs would have to increase by 191 percent or benefits reduced by 65 percent to yield an IRR equal to 12 percent.

The sensitivity and switching values analyses o f Phase 1 and Phase 2 works have shown that the economic return of the project i s robust.

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Annex 5: Financial Summary PAKISTAN: Highways Rehabilitation

Years Ending June 30

I Year1 I year2 I Year3 1 Year4 I year5 I Year6 I Year 7 Total Financing Required

Project Costs Investment Costs 7.3 57.5 65.4 65.4 49.0 16.3 0.0

Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Costs 7.3 57.5 65.4 65.4 49.0 16.3 0.0

Front-end fee 0.5 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 7.8 57.5 65.4 65.4 49.0 16.3 0.0

Financing I BRDll DA 6.0 44.0 50.0 50.0 37.5 12.5 0.0 Government 1.1 7.8 8.8 8.8 6.6 2.2 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 0.7 5.7 6.6 6.6 4.9 1.6 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 7.8 57.5 65.4 65.4 49.0 16.3 0.0

Main assumptions: The Project wil l be implemented over a five-year period f rom fiscal year 2003-2004 through 2008-2009.

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Annex 6: Procurement and Disbursement Arrangements PAKISTAN: Highways Rehabilitation

Procurement

Procurement Capacity

An assessment o f the Implementing Agency’ procurement capacity was carried out by a Procurement Accredited Staff (PAS). The main findings are as follows:

Organization

NHA, the implementing agency which will be responsible for managing al l procurement under the Project, has a separate Contracts Cell which provides dedicated procurement and contract management support to a l l NHA projects, normally with the assistance o f design and supervision consultants engaged under each project. The Cell presently comprises o f 1 General ManagedSenior Director, 1 Director, 1 Deputy Director and 4 Assistant Directors. NHA staff have been involved in past Bank financed projects. Key staff members have also attended basic procurement training conducted by the Bank, and are therefore experienced and wel l versed in the Bank’s procurement procedures. However, keeping in view NHA’s existing and projected portfolio o f projects, the Contracts Cell wil l require assistance and additional support for adequately managing procurement under the proposed project. The fol lowing capacity strengthening measures have been agreed with NHA:

ia) Procurement support for Works under the Project (including preparation o f pre-qualificationbidding docume~ts, evaluation o f pre-qualification applications and bids, and contract award procedures) wil l be provided by the design consultants’ as part o f their on-going contract.

ib) NHA has nominated the Director Contracts to serve as the focal point for interaction with the Bank on project procurement matters. I t has also been agreed that at least one qualified staff member f rom NHA’s Contracts Cell wil l be dedicated for the Project. NHA also plans to increase the existing strength o f i t s Contract Cell by adding 1-2 persons to enable the Cell to manage i t s overall portfolio o f projects more effectively.

(c) Bank will assist in capacity building by conducting procurement training workshops for key procurement staff o f NHA, before the start and during implementation o f the Project, in order to improve and update their knowledge o f the Bank’s procurement procedures.

Procurement Procedures

The existing procurement procedures o f NHA were reviewed and found to be broadly based on competitive methods o f procurement, with systems for intemal review/clearances. Inputs were also obtained through discussions with private sector contractors and consultants. I t was noted that some differences exist between the procurement procedures o f NHA and the Bank, such as in the use o f pre-qualificatiodpost qualification procedures, the Bank’s open eligibility requirements vs NHA’s practice o f enlistingipre-registering bidders, which the Bank finds restrictive. Furthermore, under Bank financed projects, no dependent agency o f the Borrower or sub-Borrower can be permitted to

- 54 -

bid or submit a proposal for the procurement o f goods, works or consulting services. Government-owned enterprises in the Borrower’s country can only participate if they are legally and financially autonomous and operate under commercial law. These differences will be removed through application o f the Bank’s Procurement Guidelines which will govem al l procurement o f Goods and Works to be financed under the Project. Consultants’ services wil l be procured in accordance with the Bank’s Consultant Guidelines. The specific procurement arrangements described below are designed to ensure conformity with the Bank’s procurement procedures.

Procurement Methods

Goods and Works to be financed under the Project shall be procured in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits, January 1995, revised January 1999. Consultants Services financed under the project shall be procured in accordance with Bank’s Guidelines for Selection and Employment o f Consultants by Wor ld Bank Borrowers, January 1997, revised M a y 2002. The Bank’s standard bidding documents for procurement under Intemational Competitive Bidding (ICB), and sample bidding documents for procurement under National Competitive Bidding (NCB) which are already being used on other Bank financed projects in Pakistan, wil l be used for procurement o f Goods and Works under the Project. However, for the rehabilitation works contracts to be awarded on lump-sum basis, model bidding documents developed using the Bank’s SBD for Procurement o f Works appropriately modified for lump-sum contracts, wil l be used with the Bank’s prior concurrence. The Bank’s Standard Request for Proposal document wil l be used in the selection o f Consulting f i r m s .

All expected procurement o f goods, works and consultants’ services wil l be listed in the project’s General Procurement Notice (GPN). The G P N has already been published in the United Nations Development Business (UNDB) and wil l be updated annually. The Specific Procurement Notice (SPN) for each contract estimated to cost more than $10 mi l l ion wil l also be required to be advertised in UNDB besides national newspapers.

C iv i l Works

C iv i l works generally comprise:

Rehabilitation and Improvement Contracts - A total o f 10 contract packages covering rehabilitation and improvement o f approximately 550 km o f the Highway N 5 are included. These lump-sum contracts have been kept in the range o f U S D 8 and 12 mi l l ion during Phase-1 to generate maximum contractor interest and participation. The Phase-I experience wil l be reviewed and package sizing may be increased during Phase-11. Contractor pre-qualification applications for the 5 Phase-1 contracts (total length 232 k m s ) have been received, and outline design and bid documents have been prepared by NHA through consultants. However, due to inadequate intemational contractor response, prequalification for 3 Phase-1 contracts (1, 9, 10 - [length 153 km]) i s being reinvited.

Resurfacing and Pavement Strengthening Contracts - A total o f 6 contract packages covering resurfacing and pavement strengthening o f approximately 306 km o f Highway N 5 are included. These simpler and smaller value item rate contracts are expected to range between U S D 3 to 10 mil l ion. Contractor pre-qualification has been completed and NHA i s currently issuing bid documents for the 4 Phase-1 contracts (total length 174 k m s ) prepared by NHA through consultants.

- 55 -

0 Safety Improvement Works - A total o f 20 contract packages covering localized safety improvements valued at U S D 1-2 milliodcontract, such as traffic engineering measures (pedestrians crossings, junction improvements, service lanes); bus bays; street lighting and guard rai l fencing in urban areas; environmental mitigation measures; etc. along the National Highways N-5 and M-9 corridor are included. The aggregate value o f these 20 contracts i s estimated to be $2.4 million, and the works wil l be implemented during Phase-11, as pre-designed i tem rate contracts procured through N C B procedures.

C iv i l Works estimated to cost more than $5 mi l l ion per contract wil l be procured following International Competitive Bidding (ICB) procedures Domestic Preference wil l be allowed to local contractors on I C B contracts for Works. The remaining contracts are not expected to attract the interest o f foreign contractors and wil l be procured through National Competitive Bidding (NCB) procedures acceptable to the Bank. However, if foreign f i r m s wish to participate in these contracts, they w i l l be permitted. I t i s expected that a total o f 10 Rehabilitation and Improvement Contracts and 3 Resurfacing and Strengthening contracts (each exceeding USD 5 mil l ion) will be awarded through I C B procedures, whereas 3 Resurfacing and Strengthening contracts (each less than U S D 5 million) and 20 Safety Improvement Works contracts wil l be awarded through N C B procedures under the Project.

Pre-qualification o f bidders wil l be required for al l contracts exceeding US$3 million, whereas contracts o f lesser value wil l be subject to post-qualification. The process o f pre-qualification for specific contracts i s not to be confused with the practice requiring bidders and contractors to pre-register/enlist with specific government agencies including the Pakistan Engineering Council, which conflicts with the open eligibility principles o f the Bank's Procurement Guidelines and i s considered to be restrictive.

Goods

Goods under the Project would generally include Road Asset Management related equipment, testing and monitoring equipment for pavement studies, environmental monitoring and testing equipment, office equipment including computer hardware and software, and highway safety equipment including software and hardware for accident recording and analysis, mobile road safety education u n i t s and training material.

International Competitive Bidding (ICB) procedures wil l be followed for each Goods contract estimated to cost more than USS200,OOO equivalent. Domestic Preference wil l be allowed to local manufacturers on I C B contracts. Goods estimated to cost between US$25,000 equivalent and USS200,OOO per contract up to an aggregate amount o f US$l,OOO,OOO will be procured through National Competitive Bidding (NCB) procedures acceptable to the Bank. Small value off-the-shelf goods estimated to cost US$25,000 equivalent or less per contract up to an aggregate amount o f USS300,OOO are expected to be procured fol lowing NationaMntemational Shopping procedures in accordance with the Procurement Guidelines.

Improvement o f Bidding Procedures under National Competitive Bidding

The fol lowing improvements in bidding procedures wil l apply to al l procurement o f Goods and Works under National Competitive Bidding, in order to ensure economy, efficiency, transparency

- 56 -

and broad consistency with the provisions o f Section 1 o f the Guidelines:

0

0

0

0

0

0

0

0

0

0

0 0

Invitation to bid shall be advertised in at least one national newspaper with a wide circulation, at least 30 days prior to the deadline for the submission o f bids; bid documents shall be made available, by mai l or in person, to al l who are willing to pay the required fee; foreign bidders shall not be precluded from bidding and no preference o f any kind shall be given to national bidders in the bidding process; bidding shall not be restricted to pre-registered f i rms; qualification criteria shall be stated in the bidding documents; bids shall be opened in public, immediately after the deadline for submission o f bids; bids shall not be rejected merely on the basis o f a comparison with an official estimate without the prior concurrence o f the Bank; before rejecting al l bids and soliciting new bids, the Bank’s prior concurrence shall be obtained; bids shall be solicited and contracts shall be awarded o n the basis o f unit prices and not on the basis o f a composite schedule o f rates; contracts shall not be awarded on the basis o f nationally negotiated rates; contracts shall be awarded to the lowest evaluated and qualified bidder; and post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders.

Consultants’ Services

Contracts with consulting f i r m s estimated to cost more than $100,000 per contract w i l l be procured in accordance with Quality and Cost Based Selection procedures. Contracts estimated to cost less than $100,000 per contract may be procured through the method o f Selection Based on Consultants’ Qualifications. For contracts with consulting f i r m s estimated to cost less than $500,000 equivalent per contract, the shortlist o f consultants may comprise entirely national consultants in accordance with the provisions o f paragraphs 2.7 and footnote 8 o f the Consultant Guidelines. Contracts with individual consultants will be procured in accordance with the provisions o f paragraphs 5.1 to 5.4 in Section V o f the Consultants Guidelines.

Procurement Planning

The Procurement Plan for the key contracts for goods, works and consultants’ services expected under the Project have been provided to the Bank and are available o n file. Procurement under the Project wil l be carried out in accordance with this procurement plan. Procurement plans wil l be closely monitored and updated as required.

Review o f Procurement by the Bank (Table B)

Prior Review:

0

0

0

The first N C B contract for Goods, irrespective o f value, and thereafter each contract for Goods estimated to cost US$200,000 equivalent or more. The f irst N C B contract for works, irrespective o f value, and thereafter each contract for Works estimated to cost USS500,OOO equivalent or more. The first Consultants’ Services contract with consulting f i rms, irrespective o f value, and the f i rst consulting services contract with individual consultants, irrespective o f value, and thereafter al l

- 57 -

contracts with f i r m s estimated to cost US$lOO,OOO equivalent or more, and with individuals estimated to cost US$ 50,000 equivalent or more.

All other contracts wil l be subject to Post-Review by the Bank. NHA will send to the Bank o n a quarterly basis, a l i s t o f a l l contracts subject to post-review.

Procurement Information and documentation

Procurement information will be recorded and reported as follows:

(a) Complete procurement documentation for each contract, including bidding documents, advertisements, bids received, bid evaluations, letters o f acceptance, contract agreements, securities, related correspondence etc., wil l be maintained by NHA in an orderly manner so as to readily available for audit.

(b) Contract award information will be promptly recorded and contract rosters, in the Bank's sample format, maintained by NHA.

(c) Comprehensive quarterly reports by NHA indicating:

(i) (ii)

revised cost estimates, where applicable, for each contract; status o f on-going procurement, including a comparison o f originally planned and actual dates o f the procurement actions, including preparation o f bidding documents, advertising, bidding, evaluation, contract award and completion time for each contract; and

(iii) updated procurement plans (if required), including revised dates, where applicable, for the procurement actions.

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Procurement methods (Table A)

Expenditure Category 1. Works

2. Goods

3. Services

Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

Procurement Method' ICB NCB Other2 N.B.F. Total Cost

190.93 43.49 0.00 1.50 235.92 ( 1 45.8 6) (33.36) (0.00) (0.00) (1 79.22)

3.33 1.87 0.00 0.00 5.20 (3.00) (1.68) (0.00) (0.00) (4.68) 0.00 0.00 15.49 0.00 15.49

I I I I

4. Training and Workshops (0.00) (0.00) (1 3.94) (0.00) (1 3.94) 0.00 0.00 0.91 0.00 0.91

5. Front-end fee (0.00) (0.00) (0.91) (0.00) (0.91) 0.00 0.00 0.50 0.00 0.50

5. Incremental Operating (0.00) (0.00) (0.50) (0.00) (0.50) 0.00 0.00 3.38 0.00 3.38

' I Figures in parentheses are the amounts t o be financed by the Bank LoaniCredit. All costs include contingencies.

'' Includes c i v i l works and goods to be procured through national shopping, consulting services, services o f contracted staff o f the project management office, training, technical assistance services, and incremental operating costs related to managing the project.

costs Total

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(0.00) (0.00) (0.75) (0.00) (0.75) 194.26 45.36 20.28 1.50 26 1.40

(148.86) (35.041 (16.10) (0.00) (200.00)

Consultant Services Expenditure Category

A. Firms

B. Individuals

Total

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank LoanKredit.

Selection Method

QCBS QBS SFB LCS CQ Other N.B.F. Total cos( 14.99 0.00 0.00 0.00 0.28 0.00 0.00 15.27

(13.49) (0.00) (0.00) (0.00) (0.25) (0.00) (0.00) (13.74) 0.00 0.00 0.00 0.00 0.00 0.22 0.00 0.22

14.99 0.00 0.00 0.00 0.28 0.22 0.00 15.49 (13.49) (0.00) (0.00) (0.00) (0.25) (0.19) (0.00) (13.93)

(0.00) (0.00) (0.00) (0.00) (0.00) (0.19) (0.00) (0.19)

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review '

Expenditure Category 1. Works

2. Goods

3. Services

Consulting Firms

Individual Consultants

Contract Value Threshold

(US$)

> 5,000,000

500,000-5,000,000

< 500,000

> 200,000

25,000-200,000

< 25,000

>

<

00,000

00,000

> 50,000

< 50,000

Procure men t Method

I C B

NCB

NCB

ICB

N C B

NS

QCBS

SBCQ

Section V- CG

-do

Contracts Subject to Prior Review (US$ millions)

232

All

All

First NCB Contract

5

All

First N C B Contract

None

15

All

First SBCQ Contract

All

First I C Contract

Total value of contracts subject to prior review:

Overall Procurement Risk Assessment

Average

US$252 million

Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits)

'Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance.

- 6 1 -

Disbursement

Expenditure Category 1 (a) C iv i l Works - Rehabilitation Contracts 1 (b) C iv i l Works - Resurfacing

Allocation of loankredit proceeds (Table C) The IDA Credit o f US$150.0 mi l l ion equivalent and IBRD Loan for US$ 50.0 mi l l ion equivalent would be disbursed over a period o f five years. Disbursement f rom the IDA CreditABRD Loan would be made using traditional disbursement procedures (replenishment and reimbursement supported by full documentation and against the Statement o f Expenditures). The final disbursement i s anticipated by October 30, 2009. Allocation o f the CredivLoan proceeds under the proposed project will be made as indicated in Table C below:

Amount in US$million Financing Percentage 121.07 76%

34.82 76%

Table C: Allocation of LoanlCredit Proceeds

1 (c) C iv i l Works - Safety Oriented Small Works 1 (d) C iv i l Works - Afforestation 2. Goods

19.61 76%

3.72 76% 4.68 100% o f foreign expenditures, 100% o f

local expenditures (ex-factory cost); and 80% o f local expenditures for other items

Drocured locallv

Contracts I I

3. Consultant Services

4. Training & Workshops 5. Incremental Operating Costs

Total Project Costs Front-end fee

13.94 88% for foreign f i r m s and individuals and 98% for local f i rms and individuals

(based on standard disbursement percentages agreed with GOP for these

categories)

75% up to June 30,2005; then 60% up to June 30,2006; then 45% up to June 2007; then 30% up to June 2008; then

15% up to June 30,2009.

0.91 100% 0.75

199.50 0.50

Total 200.00

Use of statements of expenditures (SOEs):

Disbursements wil l be made o n the basis o f the statement o f expenditures for: (a) c iv i l works for contracts not exceeding US$ 500,000 ; (b) goods (equipment) for contracts not exceeding US$ 200,000; (c) consultants services f i r m s contracts not exceeding US$ 100,000 and individuals no t exceeding US$ 50,000; (d) training and workshop; and (e) Incremental Operating Costs.

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Special account: T w o separate Special Accounts (WAS) wil l be established at the National Bank o f Pakistan to meet IDA’S and IBRD’s eligible share o f financing. About four months estimated expenditures (USSl5.0 mi l l ion for the IDA Credit and US$5.0 mi l l ion for IBRD Loan) w i l l be deposited into the each S/A as an initial advance. All eligible payments greater than one fifth o f the initial advance into the each S/A may be submitted to the Bank for direct payment to the suppliers at a specific request f rom National Highways Authority. The SIAs will be replenished on the basis o f the replenishment claims for eligible expenditures received by the Bank, at regular monthly intervals or whenever 20% o f the SIA balance has been utilized, which ever i s earlier.

Retroactive financing up to an amount o f USS2.0 mi l l ion would cover eligible expenditures for implementing activities after M a y 1, 2003. Retroactive financing would support mostly c iv i l works, goods, consultants services and incremental operating costs.

Financial Management & Audit

Country issues: Inadequate budget management and control has resulted in weak financial management and accountability. However, NHA being an autonomous body, has framed i t s own financial management rules and employed professionals for effective financial management. As such, country specific issues do not directly impact the Project. A review o f the financial management system o f NHA’s head office (HO) and two o f the four regional offices was conducted as part of financial management assessment o f the Project. An internal review o f the four regional offices was also conducted by a team under the guidance o f NHA General Manager (Finance). These reviews highlighted some weaknesses in financial management - which are being addressed through dated action plans: (i) The financial management system at the HO i s generally f ine but needs improvement in some areas. Books o f account are being properly maintained. However, the record in respect o f f ixed assets needs to be maintained properly. (ii) The financial management system in the Punjab region i s weak and needs a lot o f improvement. Although basic books o f account are being maintained, these are not internally consistent. The f ixed asset ledger does not have values. (iii) The financial management system in the Sindh region i s generally satisfactory. However, some areas need to be strengthened.

Fund Flow: NHA has the fol lowing sources of revenue/ budgetary allocations: (a) Development Funds: have been provided by the Ministry o f Finance through Public Sector Development Program (PSDP) in the form o f Cash Development Loans (CDL). These funds are obtained on the basis o f budget estimates prepared by various wings o f NHA, consolidated by the Finance Wing and approved by GOP. NHA forwards request for release to the Ministry o f Finance at the beginning o f each month along with utilizationheview report. Funds are sanctioned and released by the Accountant General Pakistan Revenue’s office. (b) Maintenance/Establishment Grants: These grants are allocated annually through the Recurrent Budget and are part o f the demand under Ministry o f Communications (MOC). Requests for release are made to M O C o n quarterly basis, and releases provided by the Accountant General Pakistan Revenues. (c) NHA Direct Revenues: are collected on account o f tolls, weigh stations, commercial use o f Right o f Way, police fines etc. These revenues have increased significantly since 1999. A Road Maintenance Account (RMA) has established since July 2002 as a commercial non-lapsable account, fimded from NHA revenues and the government’s maintenance grant, to provide a stable and secure source o f financing for

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highway maintenance and operations. Detailed Financial Rules have been notified for the RMA and a comprehensive Standard Operating Procedure (SOP) has been approved by the NHA Executive Board. Audited financial statements o f RMA have to be presented to the Executive Board by December 3 1 each year. (d) Separate bank accounts are used both at the HO and the regional offices for transfer o f funds to the regions in respect o f maintenance and establishment expenses. Payments relating to projects are made by the Head Office on the basis o f verification by the Resident Engineer appointed by NHA. The bank accounts are jo int ly operated by two signatories. Funds are transferred to each site in their Imprest account that i s replenished on a monthly basis. There i s no accounting staff at the sites and accounting i s done at the regional office. Imprests for sites are approved by the HO.

Through the Special Account (S/A) to be opened for the Bank’s share o f financing.

Staffing The Member Finance heads the Finance Wing. At the HO he i s supported by two General Managers, one o f whom i s a chartered accountant and the other i s an MBA. General Managers have Directors who supervise Deputy Directors heading the various sections. Most o f the accounting staff in the various accounting sections are commerce graduates and experienced. However, they need training in modem accounting and continuous guidance from professional managers. The regional accounts offices are headed by Deputy Directors who are adequately qualified and experienced. They are supported by Superintendents and Accounts Assistants. A training budget has been approved and training plans are being prepared. NHA must ensure that key financial management positions continue to be staffed by qualified and experience professionals.

Budget Preparation and Execution The Budget Section in the HO i s responsible for preparing the capital and establishment budgets for NHA. The budget covers the regions also. This section also monitors and reallocates budget as needed. A monthly report i s submitted to management on budget utilization. Four types o f budget are executed at the regional level i.e. Establishment, Road Maintenance/Works, Projects and Capital. All budgets are approved by the NHA Board. Actual expenses are monitored on a monthly basis by preparing a Budget vs Actual Expenditure Statement. This statement i s prepared f rom the Budget Control Register.

Accounting System NHA’s Financial Manual prescribes accrual accounting and lays down the policies and procedures to be followed in respect o f accounting. However, in the past liabilities were not being booked - only payments were being recorded. I t has been agreed that accrual accounting would be implemented w.e.f. 01 July, 2003 to reflect the true position o f liabilities and expenditure/assets in the monthly/periodic accounts. A project specific financial management manual has been prepared that takes care o f the Special Account book keeping. Books o f account are maintained manually by the various sections in the Finance Wing. Bank books are maintained by the Drawing & Disbursing Officer’s (DDO’s) Cel l headed by an Assistant Director. Payments are made through crossed cheques that are signed joint ly by any two o f the fol lowing without any limit: Director Accounts; Deputy Director Accounts; Drawing & Disbursing Officer.

For effective control i t has been agreed to have one o f the signatories f rom another section. I t was noted that inter departmental and inter regional accounts do not reconcile even for transactions for the period Ju1’02-Dec’02. However, 80 % o f the transactions have been reconciled up to September’03. Opening balances remain a problem as these have not been verified so far, even though work i s in progress. NHA understands that without authenticated opening balances i t s financial statements wil l remain unreliable and unacceptable. Separate books o f account are to be kept for the Project (including the Special Account) to report expenditure by activity and disbursement category. As part o f Business Process Re-engineering

- 64 -

(BPR), NHA’s accounting system would be computerized under the Project. The consultants would suggest the software to be used.

In Sindh, where advances have been given to officers in charge o f works sites, they have been submitting only the amount o f claim without mentioning the opening balance, receipts, payments made and the balance on hand. A format has now been advised to such officers for claiming reimbursement. Subsidiary record i s being maintained for advances and reconciled with the control account in the General ledger.

Other Subsidiary Ledgers: Contract registers are maintained that contain value o f work done, mobilization advance, deductions in respect o f retention money, income tax, etc. The amounts o f retention money and mobilization advance are cross checked with the General Ledger control accounts. An effective system i s in place for processing payments especially those to suppliers and contractors. There are n o cash disbursements except for petty cash at the HO. In Punjab, cash i s collected on account o f police fines. The staff engaged for this i s o n contract which i s not advisable. Review o f the Police Fine Collection showed some weaknesses that have been discussed and improved controls agreed. In Sindh, cash i s collected by Weigh Stations (WSs) in respect o f penalties for excess axle weight. Cash i s deposited by the WSs with the regional office on a weekly basis. WSs submit a monthly collection statement to the Project Director (WS). There are no cash disbursements. All payments are made through crossed cheques.

Fixed Assets At the HO, f ixed assets register i s maintained by the Administration Department, however, the values are not tallied with the control accounts. Assets are not tagged for identification. This needs to be done on an urgent basis. This i s a cross-cutting issue and needs to be addressed at the regional level also.

Procurement and Payables I t has been agreed that a Bills Payable Register would be maintained by the accounting staff f rom July, 2003 to keep track o f bills received and the liability in this respect.

Payments to ContractorsLContractors perform work on site and raise Inter im Payment Certificates (IPCs). The Resident Engineer reviews this and certifies the work done. This i s recorded in the measurement book (MB). The concemed Project Director and General Manager o f the Project veri fy th i s and recommend for approval by Member (OPS). At NHA Headquarter, the Interim Payment Certificates (IPCs) are approved by Member (OPS) in accordance with PC-1 document, contract agreement(s), and complete record o f previous payments. Subsequently, payments are released to the concerned contractors by the Finance Wing through crossed cheques, on the basis o f availability o f funds.

Toll Collection RAMD monitors to l l collection. In some cases tol l i s not being deposited by the tol l collectors on a timely basis, resulting in loss o f interest and non-availability o f funds to NHA.

Management Control Methods Contractors’ bills are verified by the Resident Engineer appointed by the HO. Although work o f every staff i s overseen by the immediate supervisor and then by the DD (Accounts), subsidiary and main ledgers are being maintained by the same person - this issue wil l be addressed by end March’04. Intemal Audit cames out a test-check to assure proper collection and reporting o f to l l revenue.

- 65 -

Internal Audit The Internal Audit Department reports to the Chairman. The department i s headed by a General Manager who i s f rom the Auditor General’s Office. There are seventeen audit staff and audit teams comprise o f three members. There are two sections in the department, (i) Internal Audit and (ii) Public Accounts Committee. The former does the core work o f internal audit and the latter coordinates with the relevant departments in resolving external auditors’ observations and also w i th the Public Accounts Committee. Since NHA i s fast moving towards commercialization, it i s imperative that key positions in the Intemal Audit Department be manned by professionals i.e. fully qualified and partly qualified chartered accountants.

Entity Project/SOE Special Account

External Audit The statutory external audit o f NHA i s conducted by the Auditor General’ Office under the NHA Act. There are unresolved audit issues in respect o f previous Bank-financed projects that are currently being addressed. Management has taken action on systemic issues raised in the audit reports. As per SOP, audit o f the RMA i s to be conducted by a firm o f chartered accountants. The fol lowing annual audited financial statements would be required for the Project.

31 December 31 December 31 December

I Audit reDort I Due Date I

Risk Staffing Fixed asset accounting

Risk Rating Risk Mitigating Measures H igh Continuity o f professionals High Fixed Assets registers to be written up and

tallied with control accounts

Financial Reporting & Monitoring Financial Monitoring Reports (FMR) formats have been discussed with NHA. I t has been agreed that a subsidiary record wil l be maintained to provide expenditure reports by disbursement category and activity.

Unreliable financial statements

Liabilities not being recorded Contract staff on cash collection

The fol lowing monthly reports are prepared for management’s review at HO: Cash position (daily basis); Liabi l i ty in respect o f contracts (not accounted for in books); Comparison o f expenditure with the budget; and Consolidated tr ial balance The fol lowing monthly reports are submitted by the regions to the HO: Receipt o f Funds; Comparison o f expenditure with the budget for the regional office and projects stations; Trial Balances in respect o f Establishment, RMA, projects and retention money. In the past only receipts f rom HO were being reported in the Receipts Statement. I t has been agreed that receipts f rom other sources e.g. weigh stations, etc. would also be reported in future.

High

High High

Work on FY’96 accounts to arrive at factual closing balances Book liabilities as and when incurred E m d o v regular staff/out source cash collection

Most o f the Actions agreed during appraisal have been completed, except in respect o f accounting for f ixed assets.

Training Moderate Accounting staff to be sent on courses to professional institutes (ICAPACMAP)

- 66 -

Supervision Plan The Project would need intensive supervision in view o f the past experience. Quarterly reviews by F M S and Disbursement Staff are suggested.

Status o f Key Actions: 0 Audit issues in respect o f projects previously financed by the Bank: NHA management has taken

Audit o f financial statements for FY’S 97 & 98 has been completed by the Auditor General o f

Intemal review o f financial management at the regions: Weaknesses highlighted in the regional

Staffing: Most o f the financial management staff i s in place bamng Director (Finance). The

action on systemic issues raised in the audit reports.

Pakistan’s Office and a copy provided to the Bank. NHA has also provided the Bank a remedial action plan based on the draft audit reports.

reviews are being addressed through dated action plans. Majori ty o f the weaknesses have been removed. Remaining are to be addressed by end December’03.

position o f Director (F) has been approved by MoC and would advertised by end October’03.

0

0

0

- 67 -

Annex 7: Project Processing Schedule PAKISTAN: Highways Rehabilitation

Project Schedule Time taken to prepare the project (months)

Planned Actual 84

1 First Bank mission (identification) I I 0713 01 1 996 I Appraisal mission departure

Negotiations

Planned Date of Effectiveness

04l3012003 0412912003 lOl0612003 lOlO912003 02/28/2004

Prepared by: National Highway Authority (NHA)

Preparation assistance: PHRD Grants (No. TF029641 - Borrower-Ex.; TF029741 - Bank-Ex)

Bank staff who worked on the Droiect included: I Name Navaid A. Qureshi, SASEI * Ian Heggie, TUDTR Colin Gannon, TUDTR Stein Lundebye, SASEI Amer Zafar Durrani, SASEI * William Paterson, EAP Akhtar Hamid, LEGMS Ali Awais, LEGMS Hasan Saqib*, SARFM Tasnim Beg, SARFM Omar Morshed, Consultant Rodngo Archondo, TUDTR * Hanid Mukhtar, SASPR Zarafshan Khawaja, SASES * Ani1 Somani *, EASES Gerard L. Liautaud, LCSFP Ahsan Ali, SARPS * Anwar Ali Bhatti *, SARFM Vaqar Zakaria*, Consultant Zafar Iqbal Raja *, Consultant Abid Abrar Hussain *, Consultant Ayaz Parvez *, Consultant Shaukat Javed *, SASEI

Speciality Task & Team Leader Road Fund Issues Economist (PR) Road Safety issues Highway Engineer Pavement Design Lawyer Lawyer Financial Management Financial Management Financial Management Economist (HDM Network Analysis) Fiscal Issues Social Assessment Environmental Assessment Highway Specialist (PR) Procurement Disbursement Environmental issues Highway Engineer BPR and MIS Highway Engineer Program Assistant

* Appraisal Team; PR: Peer Reviewer at PCD stage

- 68 -

Annex 8: Documents in the Project File* PAKISTAN: Highways Rehabilitation

A. Project Implementation Plan

1. Pakistan Highways Rehabilitation Project, Borrower’s Project Implementation Plan, October 23,2003

B. Bank Staff Assessments 1. Appraisal Mission, April 29 - May 23, 2003 2. Preparation Mission for Appraisal, December 11 - 19, 2002 3. Pre-appraisal Mission, July 24 - Aug. 10, 2001 4. World Bank, Draft Final Report, Pakistan Economic Analysis, Prioritization and Rationalization o f

National Highways Projects & Draft Medium Term Investment Plan, December 1999 5 . Rodrigo Archondo-Callao for National Highway Authority and World Bank, National Highways

Network Economic Evaluation, May 1998

C. Other

NHA’s Economic & Network Analysis and Asset Management Studies 1. 2. 3.

4.

5 .

6.

7.

8.

9.

10.

11.

12.

13.

14.

Road Maintenance Account (RMA) Rules - 2003, August 2003 National Highway Authority (NHA) Act 199 1 as amended in 200 1 FinnRoad Oy & Finra for National Highway Authority, Strategic Economic Analysis o f National Highway Network (2001-2006), May 2001 Louis Berger Intemational, Inc. for National Highway Authority, Final Report on Prefeasibility Study National Highway-5, September 1998 Wilbur Smith Associates for National Highway Authority, Draft Final Report Road User Charges Study, June 1998 Wilbur Smith Associates for National Highway Authority, Interim Report Road Fund Study, June 1998 National Highway Authority, Regulatory Framework and Standard Operating Procedures for Preservation and Commercial use o f ROW (Executive Board Approved), May 2002 National Highway Authority, Standard Operating Procedure for Road Maintenance Fund (Executive Board Approved), May 2002 National Highway Authority, National Highways and Strategic Roads Control Rules 1998 as Amended in 2002, May 2002 Association o f Road Users o f Pakistan, Final Report, Stakeholder Consultation Workshops on Baseline Performance Indicators in Pakistan’s Road Sector, April 200 1 Association o f Road Users o f Pakistan, Final Report, Stakeholder Consultation Workshops (August-September 2000) on Baseline Performance Indicators in Pakistan’s Road Sector, October 2000 FinnRoad Oy & Finra for National Highway Authority, PPRMS Vs. HDM-IV: A Comparative Study May 2001 FinnRoad Oy & Finra for National Highway Authority, Summary Report for National Highway Management Project in conjunction with the NDF financed Provincial Road Project, August 2000 FinnRoad Oy & Finra for National Highway Authority, Seminar/Workshop Reports Combined Programme - IBRD, August 2000

- 69 -

15. FinnRoad Oy & Finra for National Highway Authority, Preparation o f Periodic Maintenance Programme year 2000/2001, August 2000

16. FinnRoad Oy & Finra for National Highway Authority, Condition Survey Data National Highway Network August 2000

17. FinnRoad Oy & Finra for National Highway Authority, Field Condition Survey Data Forms June 2000 National Highway Network, August 2000

18. FinnRoad Oy & Finra for National Highway Authority, Periodic and Reconstruction Works Plans (Year 2000-2004) for National Highways N-5, N-25, N-35, N-40, N-50, N-55, N-65 and N-70, July 2000

GOP’s NHIP & HRP Specific Reports 1. National Highway Authority, Medium Term Five Year Budgetary Frame Work, Investment and

Maintenance Plan 2003-08, October 15,2003 2. National Highway Authority, N-5 Highway Rehabilitation Project, PC- 1 Proforma May 2003 3, National Highway Authority, Working Paper on National Highway Improvement Programme, July

200 1 4. National Highway Authority, Report on Medium Term Rehabilitation (2001-2002) under NHIP, July

200 1 5. Fifth IBRD Highway Project, National Highway Authority, Project Concept Document, Highway

Rehabilitation and Maintenance Program, March 200 1

NHA Institutional & Financial 1. National Highway Authority, Audited Financial Statements for the Year ended June 1997, and June

1998. 2. National Highway Authority, Report on Institutional Reforms, May 2003 3. National Highway Authority, Facts and Figures o f National Highway Authority, April 2002 4. National Highway Authority Act 199 1 and Amended NHA Act 200 1 5. National Highway Authority, Working Paper on Road Asset Management Directorate (Executive

Board Approved), March 2000 6. National Highway Authority, Financial Manual, February 1999 7. National Highway Authority, Audited Financial Statements for the Year ended June 1996.

1.

2.

3.

4.

5 .

6.

7.

8.

NHA Works Procurement, Design & Estimates (Proiect related & General) National Highway Authority, Bidding Documents on N-5 Highway Rehabilitation Project, (Rehabilitation Contract) Hala-Mor0 Section (Contract Section-2A & 2B), September 2003 National Highway Authority, Bidding Documents on N-5 Highway Rehabilitation Project (Resurfacing and Strengthening Contract) Nowshera-Peshawar Section (Contract Section 14), September 2003 National Highway Authority, Bidding Documents on N-5 Highway Rehabilitation Project (Resurfacing and Strengthening Contract) Gujranwala-Kharian Section (Contract Section 12A), September 2003 National Highway Authority, Outline Design Reports, Design Drawings and Engineer’s Estimates for Highway Rehabilitation and Resurfacing Subproject Contracts (January 2002 - March 2003) National Highway Authority, N-5 Highway Rehabilitation Project, Resurfacing and Strengthening Contract 12 (Gujranwala-Kharian), Special Provision Folder, October 2002 National Highway Authority, Draft Turnkey Tender Documents For Highway Rehabilitation and Maintenance Project, June 200 1 National Highway Authority, Draft Bid Evaluation Criteria, Prequalification Questionnaire & Prequalification o f Bidders Evaluation Guidelines, Highway Rehabilitation and Maintenance Project, June 2001 National Highway Authority, Bidding Documents for Procurement o f Contractors, Routine

- 70 -

Maintenance Works, Periodic Maintenance Works & Highway Safety Works, August 2000 9. National Highway Authority, Model Concession Agreement, July 1998

Axle Load Management 1. National Highway Authority, Concept Paper, Installation o f Weigh Stations on National Highway

Network 2. National Highway Authority, Control of Overloading in Pakistan through Enactment and Enforcement

o f Legal Load Limits, July 1996

Highway Safety 1.

2.

3.

4.

5. 6. 7.

Road Safety Wing, National Highways and Motonvay Police, Accident Analysis Report (August - December 2002), December 2002 National Highways and Motonvay Police (MOC), Proposals and Proposed Draft PC-1 for Road Safety Components o f Pakistan Highway Rehabilitation Project, January 2002 National Highway Authority and MOC, Motonvay Police Manual and Report on Road Safety, May 200 1 Consult and Train for World Bank, Draft Concept Paper and Study Proposals for Road Emergency Services, Targeted Training o f Drivers and Road Accident Recording Investigation and Analysis, October 2000 Gazette o f Pakistan, National Highways Safety Ordinance 2000 National Highways and Motonvay Police (MOC), Road Safety and Traffic Education Plan, 1998 FinnRoad for Asian Development Bank, Road Safety Study o f Provisional Highways Project, Concept Note (June 1998) and Progress Report (December 1998)

Environmental & Social Documentation 1. Decision on Pakisan Highway Project EIA for N-5 and M-9 (Phase-1), September 2003 2. National Highway Authority, Addendum to NHIP for N-5 and M-9 (Phase-1) Project, September 2003 3. National Highway Authority, Final Executive Summary, Phase I & 11, June 12, 2003 4. National Highway Authority, Final Social Assessment, Phase I, May 30, 2003 5. National Highway Authority, Final Sectoral Social & Environmental Assessment, Phase I & 11, June

12,2003 6. National Highway Authority, Final Environmental Impact Assessment, Rehabilitation & Maintenance

Projects, Phase I, May 30, 2003 7. National Highway Authority, Final Environmental Impact Assessment, Resurfacing & Strengthening

Projects, Phase I, May 30, 2003 8. National Highway Authority, Final Environmental Management Plan, Rehabilitation & Maintenance

Projects, Phase I, May 30, 2003 9. National Highway Authority, Final Environmental Management Plan, Resurfacing & Strengthening

Projects, Phase I, May 30, 2003 10. National Highway Authority, Earlier Versions o f Social and Environmental Studies, June

200 1 -October 2002 11. Global Environmental Lab for National Highway Authority, Final Report, Ambient Air Quality

Monitoring Along N-5 NHIP, Phase4 Sections, May 2002

*Including electronic files

- 71 -

Annex 9: Statement of Loans and Credits PAKISTAN : Highways Rehabilitation

27-Oct-2003 Difference between expected

and actual disbursementsa Original Amount in US$ Millions

Project ID F Y Purpose iBRD IDA GEF Cancel. Undisb. Orig F r m Rev'd PO71454 2003 AJK Community Infrastructure & Services 0.00 20.00 0.00 0.00 20.66 2.88 0.00

PO74797 PO74856 ~ 0 7 7 2 8 a PO81909 PO55292 PO71092 PO56213 PO35823 PO49791

PO10500 PO36015 PO39281

2003 Banking Sector Technical Assistance 2003 HIV~AIDS Prevention Project 2003 National Education Assessment System 2003 Partnership for Polio Eradication

2002 BSRPP 2001 NWFP ON-FARM WATER MANAGEMENT 2001 TRADE 8 TWNSPORT 2001 GEF-Protected Areas Management Project 1999 POVERTY ALLEVIATION FUND 1998 NATIONAL DRAINAGE PR 1997 IMPR FIN REP &AUDIT 1996 GHAZI BAROTHA HYDROP

0.00 0.00

0.00 0.00 0.00

PROJECT 0.00 0.00 0.00 0.00

0.00 0.00

350.00

26.50 27.83

3.63 20.00

300.00 21.35

3.00 0.00

90.00 285.00

28.80 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

10.08 0.00 0.00 0.00

0.00

0.00 26.43 9.86 0.00

0.00 38.58 3.65 0.00

0.00 3.87 0.00 0.00 0.00 11.49 8.66 0.00 0.00 111.37 -204.62 0.00 0.00 21.94 -1.48 0.00 0.00 0.95 0.40 0.00 0.00 10.73 0.63 0.00 0.00 24.67 -11.04 0.00 0.24 95.21 90.30 17.73

0.00 16.30 16.89 6.14 0.00 10.56 10.56 10.56

0.24 392.76 -73.31 34.43 Total: 350.00 826.11 10.08

- 72 -

PAKISTAN STATEMENT OF IFC's

Held and Disbursed Portfolio June 30 - 2003

In Mill ions US Dollars

FY Approval Company 1995 AES La1 Pir 1996 AES Pak Gen 1995 Abamco Mgmt 1996 Atlas Inv Bank 0 BRRIL 1991194195 BRRIM 1995 BSJS Fund 1993 CDCPL 1993197101 Crescent Bahuman 2003 Dewan Salman 1998 Engro Asahi 1991195197 Engro Chemical 1996 Engro Vopak 1990192196 FIIB 1993194102 Fauji Cement 1994196 First Leasing 1995 First UDL 1996 Gul Ahmed 1991195 IHFL 1992196 JSCL 2003 KCT 1995 2001 Lasmo Pakistan 0194195197100 Maple Leaf 2002 Micro Bank 1994196 Orix Finance 1994 Orix Leasing

K o h i n o o r

1994 PI&CL 1991194195 PILCO 1983l84194195102 PPL 196518018218719119419 Packages 5 Regent Knitwear 1994 Rupafab 1995 Sarah Textiles 1993196101 Uch Power 1996

Total Portfolio:

Committed Disbursed IFC IFC

Loan 25.64 14.20 0.00 0.60 0.00 0.00 0.00 0.00 2.50

34.00 5.14 0.00 5.12 0.96 0.00 0.00 0.00

16.20 0.00 0.00 9.25

13.75 30.00

0.00 0.00 0.00 0.70 0.3 1 0.00 0.00 0.00 7.86 0.92 0.00

38.05

Equity 9.50 9.50 0.29 0.00 0.24 0.00 0.50 0.16 0.00 1 .oo 0.00 0.00 0.00 0.00 2.18 0.69 0.00 4.10 0.40 0.27 0.00 6.30 0.00 0.00 2.71 0.00 0.00 0.00 0.00 6.63 0.26 0.00 0.00 0.00 0.00

Quasi Partic 0.00 0.00 0.00 21.47 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.32 0.00 0.00 0.00 0.00 0.00 0.00 6.67 0.00 0.00 16.76 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14.23 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.80 0.00 0.00 0.00 0.00 0.00 65.56

Loan 25.64 14.20 0.00 0.60 0.00 0.00 0.00 0.00 2.40

30.00 5.14 0.00 5.12 0.96 0.00 0.00 0.00

16.20 0.00 0.00 0.00

13.75 30.00 0.00 0.00 0.00 0.70 0.3 1 0.00 0.00 0.00 7.86 0.92 0.00

33.09

Equity 9.50 9.50 0.29 0.00 0.24 0.00 0.50 0.16 0.00 0.00 0.00 0.00 0.00 0.00 2.18 0.69 0.00 4.10 0.40 0.27 0.00 6.30 0.00 0.00 2.71 0.00 0.00 0.00 0.00 6.63 0.26 0.00 0.00 0.00 0.00

Quasi 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.67 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Partic 0.00

2 1.47 0.00 0.00 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 2.32 0.00 0.00 0.00 0.00

16.76 0.00 0.00 0.00

14.23 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.80 0.00 0.00

50.53

-

205.20 44.73 6.67 124.64 186.89 43.13 6.67 109.61

- 73 -

Aoorovals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

- 74 -

Annex I O : Country at a Glance PAKISTAN: Highways Rehabilitation

1982 1992 2001 2002

31.6 26.3 25.3 23.2

POVERTY and SOCIAL Pakistan

Growth of Investment and GDP ( O h )

lo T I

2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1996-02

Population (%) Labor force (%)

Most recent estimate (latest year available, 1996.02)

Poverty (% of population below national poverty line) Urban population I% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Chiid malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Illiteracy I% of population age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1982

GDP (US$ billions) Gross domestic investmentiGDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savingslGDP

Current account balancelGDP Interest paymentslGDP Total debVGDP Total debt servicelexports Present value of debtiGDP Present value of debvexports

30.7 19.3 9.9 7.4

14.3

-3.6 0.8

38.1 16.2

1982-92 1992-02 (average annual growth) GDP 6.0 3.3

144.9 420 60.9

2.4 3.1

33 34 64 80

90 55 74 93 54

1992

48.6 20.2 17.4 17.1 25.5

-1.8 1.4

51.2 23.6

2001

2.6 0.1

South Asia

1,401 460 640

1.8 2.3

28 63 71

84 44 97

108 89

2001

58.6 15.5 18.0 14.2 18.3

-1.9 1.3

54.7 25.7 43.5

221.7

2002

2.6

Low- income

2,495 430

1,072

1.9 2.3

30 59 81

76 37 95

103 87

2002

59.1 14.7 18.7 14.4 22.9

2.7 1.5

59.4 21.4

2002-06

5.3

Development diamond'

Life expectancy

-

GNI Gross per - primary capita enrollment

1

Access to improved water source

*' Pakistan Low-income w o w

Economic ratios"

Trade

i indebtedness

I Pakistan Low-income orow

a * Llr*.,

GDP per capita 3 3 0 8 0 4 2 8 I

STRUCTURE of the ECONOMY

(% of GDPJ Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing I 519 :ll ~.:p--""" 54, 2

223 250 22 8 151 169 462 486

159 161 o " + 46.- ?v4' 98 Q% 99 8 00 01 "*

*I, I 82.2 70.0 75.6 74.4 . i o 1 10.3 12.9 10.2 11.3 21.8 20.5 19.3 19.0 = j X I GDI " O ' G D P

1982-92 Igg2-O2 2o01 2o02 1 Growth of exports and imports (%) (average annual growth) Aariculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and sewices

Manufacturing

4.5 3.6 -2.8 I 7.2 3.5 3.8 5.4 6.9 3.8 8.3 5.0 6.1 4.1 4.1 4.1

4.4 4.0 1.5 1.4

10

0

7.8 1 .o -5.3 13.5 -10 4.7 0.6 3.1 -3.0 -'"Y-Exports *Imports 2.7 -0.2 1.5 4.5

- 75 -

Pakistan PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplusideficit

TRADE

(US$ millions) Total exports (fob)

conon Rice Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including goid (US$ millions) Conversion rate (DEC, local/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1982

9.4

1982

2,464

1,600

1982

3,055 6,686

-3,631

-321 2,835

-1,117

10.6

1982

11,704 340

1,051

877 53 11

419 648 445 122

0

359 205

32 172 32

141

1992

10.6 10.1

19.2 0.1

-7.5

1992

6,762 518 416

3,618 8,998

978 1,377 2,985

89 95 94

1992

8,274 11,468 -3,194

-1,266 3,564

-896

1,026 -130

1,730 24.8

1992

24,918 2,384 2,457

2,318 296

41

450 1,009

625 335 219

378 609 150 460 188 272

2001

4.4 6.1

16.2 -2.7 -5.2

2001

8,934 139 525

5,820 10,202

579 3,327 2,687

82 92 89

2001

10,284 12,535 -2,251

-2,160 3,269

-1,112

2,200 -1,088

3,810 58.5

2001

32,028 2,796 4,245

2,949 390

96

839 1,080

286 -560

-142

674 669 300 369 187 183

2002

3.5 3.1

17.2 -2.1 -6.7

2002

9,140 18

448 5,368 9,432

413 2,664 2,594

80 90 89

2002

11,056 11,646

-590

-2,319 4,500

1,591

1,491 -3,082

4,810 61.4

2002

35,113 2,749 5,394

2,903 367 111

1,495 758

-389 366

-491

1,382 961 318 643 160 483

lnflatlon (Oh) 1

Export and Import levels (US$ mill.) I 10 000

5 000

0

O2 I 96 97 96 99 00 01

Q Exports Imports

Current account balance to GDP (%)

Composltlon of 2002 debt (US$ mill.)

G: 1,540 A 2,749

A . IBRD E. Bilateral B . IDA D . Other multilateral F . Private C. IMF G . Short.term

Development t m

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Additional Annex 11 : SociallResettlement Issues and Environmental Aspects PAKISTAN : Highways Re ha bi I i tat ion

SociaU Resettlement Issues:

1. Compensation under the Resettlement Policy Framework (RPF): The resettlement o f PAPS and the relocation o f affected structures wil l be carried out under the RPF prepared for the Project. I t s main provisions are listed below:

The loss o f privately owned land or built-up property wil l be compensated on a replacement-cost basis under the LAA, 1894. N e w 8 x 8 ft kiosks wil l be constructed to accommodate displaced squatters and vulnerable encroachers who operate fixed structures that cannot be moved any further back from their current location wi th in the proposed construction limit. Squatters and vulnerable encroachers whose structures are mobile wil l be provided only shifting assistance. The main highway construction sites wil l not be handed over to the contractors until the kiosks have been constructed. However, if new kiosks are not provided at the time o f shifting, eligible squattershlnerable encroachers w i l l be exempted from kiosk lease payments for a specified period; and wil l be provided livelihood assistance until new kiosks are made available. Labor employed by squattershulnerable encroachers wil l be protected by making their employers’ livelihood assistance conditional on the employees being retained Existing public utilities that may be affected within the proposed construction limit wil l be relocated with the prior approval o f the concerned agencies and utilities. Community-owned utilities, eg, hand pumps and wells that may be affected within the proposed construction l imi t wil l be relocated in consultation with local communities. All culturally significant structures that may be affected within the proposed construction l imi t wil l be relocated in consultation with the local community.

2. Training and Capacity Building: In order to place people at the center o f development, and given that expertise to address social concerns in the Project i s inadequate, a capacity building and training program i s envisaged for the Project. The broad areas are as follows:

Training Program Training program Awareness o f social issues in the Project including Bank OPsiODs, poverty dimensions o f development, inclusion, participation, gender sensitization etc.

Resettlement Policy Framework

Specific ski l ls

partnerships Others (TBD)

hration 2 days

2days 1 Asabove

No. participants 100 all concerned N H A project staff, LACS, Provincial staff involved with land acquisition in Sindh and Balochistan, consultants and contractors

Obiectives Create awareness o f “People” centered development; that cost effective design needs to be evaluated in terms o f resettlement costs also; social issues include gender where if there are women PAPS the compensation package in terms o f relocation etc. need to be reviewed carefully. Women need to be a part o f consultation Ensure an understanding o f what the

for project implementation

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In al l situations, a needs assessment will be undertaken to identify the exact requirements o f staff and also to identify other areas where specific skills may be required. The training program wil l be phased to meet the requirement o f the staff and provided where convenient for most participants to attend. In order to provide the local social context, most o f the training wil l be done through local trainers and training institutes ( where feasible). A budget has been provided. The mission recommends that NHA plan to initiate training activities on social aspects immediately on project effectiveness.

Local Community Reps

Stakeholder (6)

PAPS including identified affectees and NGOslCBO

Identified PAPS and local community

Al l relevant stakeholders

PAPs, squatters, Community repsmGOs

affected communities and NGOs

Identified PAPS and

3. Consultation Strategy

Activitv Plannine Staee Phase I a. Sharing of info; project awareness; and input into project design and TOR of Env. And SOC. Ass e s s m e n t s

b. To receive feed back on proposed construction and ways to reduce traffic hazards and resettlement issues

c. To receive feedback on project design, env. and social issues (inc. gender)

2nd stage consultation to discuss nature of socialienv. impacts and acceptability of mitigatory measures (1)

Consultation process for land in Matari bypass and resettlement o f PAPS using RPF

Phase I 1 a. Input into any new designs ( if changed)

b. second stage consultation on RPF and EMP to discuss mitigatory measures acceptable to PAPS in specific affected areas

c. Consultation for input and consensus for relocation of cultural sitesipublic utilities in specific locations

d. agreement for leasing of land for campsites, borrow etc.

Mode I Stakeholders

Regional Work- Shops

Scoping Session

FDG (2)

Road-Side Consultation

Focus groups in 2 sections (3)

FGDiRoad Side meetings

Scoping Sessions and FGD

FGD where

required RIR (4)

scoping sessions RGD

FGDi Scoping

Al l stakeholders(5)

Community and local

I'gpI

lcommunity

output

Documented in the SA

Documented in SA

Documented in SA

Documented in SA

To be documented in the SA and EMP

To be documented

To be documented

To be documented

To be documented

To be documented

Status

Completed

Completed

Completed

Completed

Completed

To be done

To be done prior to construction

To be done

To be done

To be done

(1) The RPF and E M P was disseminated and mitigatory measures discussed among others, W T P and leasing conditions. (2) Focus Group Discussions (3) In Hyderabad-Hala section, and Hala -Mor0 sections in Sindh (4) Resettlement and Rehabilitation (5) All stakeholders includes general public and al l groups o f road users, govt reps, NGOs, env. Field specialists, engineers, road contractors, and PAPs ( squatters, vendors shopkeepers and gas station dealers) and media.

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(6) Pedestrians, vehicle drivers, public transport passengers, roadside vendors, local communities, NGO and govt. reps at various locations on the highway.

Scopingi FGD

Discussions with relevant staff or Fill questions developed.

4ctivity Implementation: Phase I &I1 Construction a. during this phase consultations for any issue raised that needs redressal

b. Needs assessment for training and capacity building of NHNproject

A l l relevant stakeholders

Relevant persons (7)

M&E c. Participatory monitoring to discuss modalities and procedures including implementation mechanism and indicators

d. participatory monitoring by community partners

Mode I Stakeholders

Discussions on modalities

Scooping FGD in specific project reaches

Identified NGOiCBOi other external group with project management

Identified NGOsiCBOs and PAPS and community

butput

To be documented

To be documented

Mechanism developed and documented

Document progress against indicators.

#tatus

To be done

To be done

To be done

To be done

(7) This includes all project staff involved in social issues, contractors, consultants, and LACS

4. Grievance RedressaYConflict Resolution: Grievance redressal mechanism for conflict resolution will be a part o f the institutional and implementation process. The focal point will be the Deputy Project Coordinator (DPC) in each section, (where in the case o f RSP, he wil l also be Deputy Director (Operations) in the field), who wil l report to Director and GM (Operations) at the regional and Federal level respectively on al l conflict related issues. At the field level, a Register wil l be maintained to document al l grievances related to social issues including safety matters that will then be monitored by the M&E system to ensure that grievances are redressed. The Complaint Register wil l provide for : the date and particulars o f the complainant; description o f the grievance; follow-up action required; name o f person responsible for implementing the action; and a target date for redressal.

Affected communities and their representatives will be identified at project preparation stage. The Deputy Project Coordinator (DPC) will visit the community on a monthly basis while his office wil l maintain a record o f these visits (date visited, persons met, issues discussed, and complaints brought forward). The DPC wil l work towards resolution o f grievances recorded in the register, in partnership with the supervision consultant, within 7 calendar days and forward any unresolved issues to the Project Coordinator (PC), responsible for that particular region. The PC wil l in turn seek to resolve outstanding issues referred to him, within 7 calendar days and keep the GM (Region) and GM (HQ) informed. In al l cases, NHA’s response wil l be formally communicated to the complainant in writing.

The Register along with record o f actions taken and feedback f rom the NGOs/CBOs engaged in monitoring will be reviewed periodically (at least quarterly) at a high-level meeting at the regional GM’s office, and necessary actions taken to redress outstanding issues at the earliest - with a formal NHA response communicated in writ ing to the complainant. Local NGOs and CBOs will also fo l low up on grievances o f the community that have not been redressed.

5. Social Monitoring Indicators: This i s not a comprehensive l i s t but indicative o f the major areas to be monitored, by the different groups. The response to the indicators wil l include an update and status o f the

- 79 -

following: 0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Number o f PAPs to be resettledrelocatedprovided livelihood-- by impacted types Number o f public facilities and ut i l i t ies to be relocated and relocated AvailabilityiAdequacy o f altemative resettlement sites-by number and types Amount o f land required and by types ( private lands, and government land) Amount o f land to be acquired and acquired ( permanent and temporary acquisition) Process followed in acquisition o f land( al l types o f land) Notice given to encroachers/squatters prior to dislodging them. H o w long before shifting ? Number o f kiosWother facility ( as agreed upon between PAPs and NHA) to be provided and provided Time lag between dislodging PAPs and providing the facility Number o f kiosks leased and at what prices ( by size) Record and timeliness o f compensation payments ( when due, when paid) Value o f PAPs affected assets, their prior income level and present one. Number and types o f consultation held, with whom and for what. Number o f grievances recorded and redressed PAPs perspective o f future resettlement sites, compensation procedures and entitlement framework (for Phase 11) Are PAPs able to express and record grievances? Any redressed? Any problems with lack o f access to highways during construction? Where required, have rampddiversions been provided What are the major issues o f conflict between PAPs and NHNContractors during implementation. Any mosque, graveyard, shrine etc. removed? If so what has been the contribution o f the affected communities and NHA Was RPF fol lowed for relocating mosques/graveyards etc. If so, provide details. I f not, explain why not. Have al l vulnerable PAPs been compensated? If water pumps removed. Any alternative water supply provided? Have squatters/ encroachers operating mobile business been allowed to remain with ROW close to original site Was assistance provided for shifting business to PAPs Were Squatter owner allowed to salvage facilities

Environmental Aspects

1. Implementation Arrangements for Environment

The Project wil l be administered at three levels: at the head office (HO) in Islamabad, at the regional level and in the field. NHA has developed te rms o f reference/job descriptions for the key environmental positions and i s currently recruiting for vacant positions.

At NHA HO: under the Member Operations, the GM Environment/Social/Lands (ESL) and his staff are responsible for ensuring that the Project design, construction and operation i s environmentally and socially sound. During the Detailed Design Phase the DirectodDeputy Director (D/DD) Environment/Afforestation, under the GM ESL, wil l ensure the project’s compliance with environmental regulations and donor requirements, and ensure stakeholder participation in the Project design. During the Construction Phase: the D/DD EnvironmentIAfforestation wil l oversee the project’s environmental implementation, training, reporting and monitoring and may commission periodic environmental audits. During the Operation Phase: the D/DD EnvironmentIAfforestation wil l maintain the environmental management system; ensure continued compliance with environmental regulations; prepare and deliver training programs to al l NHA staff and contractor’s staff and maintain close liaison with the Project’s stakeholders.

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At the regional level: the regional DD Environment/Afforestation wil l assist the Supervision Consultant to oversee the supervision and report on the implementation o f the EMP, the afforestation program, and assist with the training o f the f ield and regional staff. The regional DD Environmenb‘Afforestation will report administratively to the regional GM, and functionally to the D/DD EnvironmentiAfforestation

In the field: in each region, two or three supervisors or inspectors wil l be assigned (one for each contract) to the DD Environmenb‘Afforestation, to assist NHA oversee, report and monitor the Project. Also, as soon as the Afforestation contract i s awarded, a Forest Officer wil l be assigned to each region reporting to the regional DD Environment/ Afforestation.

A supervision consultant appointed by the NHA will be responsible to ensure that (i) the contractors comply with al l necessary requirements contained in the Environmental Management Plan (EMP); (ii) ensure that the day-to-day construction activities are carried out in an environmentally sound and sustainable manner; (iii) in consultation with NHA, organize periodic environmental training programs and workshops for the staff o f the Contractors and NHA site staff; (iv) develop good practices construction guidelines to assist the Contractors and NHA staff in implementing the EMP; (v) monitor the afforestation program and (vi) prepare and submit regular environmental and social progress report.

Afforestation (Tree Planting): NHA i s currently considering a tree plantation policy, which inter alia prescribes that “in future al l forestation projects o f NHA shall be executed, maintained and managed preferablv by the Provincial Forest Departments (PFDs) as deposit works”. Accordingly, a draft Memorandum o f Understanding (MoU) between NHA and PFDs for the management o f NHA plantations has been prepared and i s currently under active discussions with the Provinces. The Bank team has reviewed the M o U and has provided comments and guidance to NHA. Until such time that the M o U and the related legal agreements are formalized between NHA and PFDs taking into consideration the Bank’s comments, it i s assumed that for this project, the median and ROW plantation w i l l be carried out by forestry contractors selected through competitive bidding. A plantation committee drawn from staff o f the provincial forest department concerned, and the NHA will supervise the plantation and maintenance o f trees along the project corridor.

(HO).

2. Training

For long-term development o f environmental capacity in NHA and for successful implement the EMP, a training program wil l be initiated at NHA to increase the environmental and social awareness o f the NHA staff. Initially, the training program wil l target a small portion o f the NHA staff directly associated with the Project, but, i t i s expected that it wil l start a process that wil l enable NHA to integrate the social and environmental issues in i t ’ s day-to-day operations and in future transportation development projects. The strategy adopted for the Project consists o f training and exposing the senior staff to environmental and social issues associated with highway projects. The group o f senior staff will then form a core group that o n the one hand can provide training to other staff o f the NHA and on the other hand can be the catalyst o f change. At the same time, the inspectors/supervisors and the regional team members responsible for overseeing the implementation and monitoring wil l be trained on the specific issues associated with the implementation o f the EMP. These may include the environmental regulations; environmental aspects o f the Project; the mitigation measures and their objectives; duties and responsibilities o f the different role players; public consultation; liaison with the stakeholders; supervision and monitoring; and reporting.

The Supervision Consultant will be the main conduit through which training wil l be provided to NHA and contractor’s staff on implementation, compliance reporting, intemal monitoring, etc. The Project

- 8 1 -

also provides budget and resources for regional and international training for selected NHA staff and seed funds for developing procedure for I S 0 14000 certification.

1 2

3

3. Cost Estimate for Environmental Management

The cost estimate o f mitigation and other environmental management measures i s summarized in the fol lowing table. These costs have been incorporated in the Project budget.

Monitoring costs 0.35 Mit igation costs 5.30

noise barriers 0.25 tree plantation 4.50 resettlement 0.55

TA and Training costs 0.35 Tota l costs

- 82 -

6.00

Additional Annex 12: Medium Term Budgetary Framework (MTBF) PAKISTAN: Highways Rehabilitation

- 83 -

Additional Annex 13: NHA Institutional Reform & Corporate Strengthening Action Plan PAKISTAN : Highways Rehabilitation

I Sub-component

1. Planning & Budgeting

2. Road Maintenance Account

3. Business Process Re-engineering & Corporate Strengthening

4. Asset Management

Key Outputs

MTBF & Protected Program (PP);

Steady increase in RMA revenues; prioritized fully funded AMPs under implementation; regular Stakeholder Consultations; Financial & Technical Audits; RMA Annual Report in public domain; a) NHA reorganization Re-organized NHA structure with greater focus on network operatorhervice provider role; improved ski l ls mix;

Updated conditions o f service developed based on review o f Salary levelshncentive structures, service rules, ski l ls mix and staffing levels to enable NHA to attract and retain high Derforminlr staff:

b) BPR: Streamlined, computer enabled business processes adopted; M I S in place; annual business plans prepared with explicit performance targets; agency benchmarking; annual agency reports in public domaidon website - including audited Accounts and Procurement data; c) Strengthened Financial Management & Internal Controls: FM professionals in leadership positions in Finance Wing; reconciliation o f asset and advances registers; clearance o f accounting & audit backlog; timely publication o f entitv accounts in Dublic domain: a) R A M S : Modem Road Asset Management System operational; corridor management approach

Actions

MTBF & PP implemented; annually updated in compliance with guidelines; Implement RMA cycle detailed in SOP:

GOP Approval; Implementation; Staffing; Redefining Functions & Charts o f Responsibility; Revised Salary Structures; Performance Evaluation and Promotion criteria; Training;

Review, approve and periodically adjust service conditions;

Award contract to commence BPR Phase - 1 ; provide strong counterpart team to take ownership o f process; implement early wins to build momentum for change;

Agreed Action Plan for Improvement o f Financial Management Systems Implemented;

Fully staff key RAMD positions; appoint R A M S consultant;

Implementation Time Frame Over project period

Over project period

:ompleted by un 04

un 05

Phase 1 - Feb 04 to Aug 05;

Phase 2 - Jan 05 to Jan 08

Per agreed dates

an 04

un 04

- 84 -

5. Road Safety

6.Environmental & Social Management

adopted; performance based maintenance contracts/O&M concessions piloted; b) Improved Axle Load Management: Partner with trucking industry and other stakeholders; towards greater monitoring & self regulation; improved enforcement; reduced incidence o f overloading;

c) Improved Pavement Systems & Standards developed and in use; reduction in premature pavement failures;

a) Safety considerations take center stage;

b) Strengthening o f Traffic Enforcement; Accident Reuorting & Investigation system;

c) Enhanced Public Awareness; Safety awareness & Education

Enhanced Environmental & Social Management Capacity & Improved Practices;

commence implementation o f RAMS cycle per SOP; procure network survey equipment; continue recent enforcement initiative, expand network o f weigh stations in consultation with provinces; Initiate proposed study; follow-up emerging recommendations; Commence proposed research activities; construct test sections during phase-2; monitor pavement performance; pi lot in new works; SOP issued to institutionalize Safety Audits as integral part o f planning and design cycle; staff and consultants trained; safety targeted improvements regularly implemented as part o f AMP: Accident Recording system set up at beat level; accident investigation training provided to N H M P ; accident data, analysis and investigation reports feed back into planning loop; Awareness program initiated; NHA partners with road users, roadside communities and othe stakeholders to improve safety along i t s network;

Dedicated professional staff mainstreamed in HQ and regions with clear job descriptions; Training in core competencies provided; RPF implemented to provide fair compensation for PAPS; mechanisms for grievance redressal established; Safeguard SOPS adopted; safeguard issues addressed

un 05 bngoing;

l a y 04

un 05 day 04

)ec 04

une 08 ul 05

JulO4

JulO5

M a y 04 Dec 05

Jan 04

JulO4

M a y 04

Jan 05

- 85 -

7. Training & HRD

HRD Plan Implemented, including: In-country training; Overseas training; Postgraduate scholarships;

Training areas to include among others: financial management; network planning and prioritization; corridor management; safety; contract administration; Environmental aspects ; Social, Resettlement & Rehabilitation information management systems; Human Resource Management ; Public-Private Partnerships ; and Road Management & Administration related subiects

early in planning cycle;

Urgent training programs initiated (environment and resettlement related, etc);

NHA develops and implements agency wide HRD programs, based o n training needs assessments; introduces career planning, including training as a factor for promotion

onwards

M a r 04 onwards

JulO5 onwards

- 86 -