ASIAN DEVELOPMENT BANK RRP:BHU 32288

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

TO THE

KINGDOM OF BHUTAN

FOR THE

ROAD IMPROVEMENT PROJECT

September 2000

CURRENCY EQUIVALENTS(as of 15 August 2000)

Currency Unit – Ngultrum (Nu)

Nu1.00 = $0.023$1.00 = Nu44.20

In this report, an exchange rate of $1.00 = Rs43 is used.

ABBREVIATIONS

ADB – Asian Development BankDBST – double bituminous surface treatmentDOR – Department of RoadsEIRR – economic internal rate of returnESA – equivalent standard axleGDP – gross domestic productGNP – gross national productGVW – gross vehicle weightHDM – Highway Design and Maintenance ModelIBRO – Indian Border Roads OrganizationIEE – initial environmental examinationMOC – Ministry of CommunicationsPMO – Project Management OfficeNPV – net present valuePPMS – Project Performance Monitoring SystemSDR – Special Drawing RightsTA – technical assistanceVOC – vehicle operating cost

NOTES

(i) The fiscal year (FY) of the Government ends on 30 June. FY before acalendar year denotes the year in which the fiscal year ends. Forexample, FY1998 begins on 1 July 1997 and ends on 30 June 1998.

(ii) In this report, “$” refers to US dollars.

CONTENTS

Page

LOAN AND PROJECT SUMMARY ii

MAP vi

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. BACKGROUND 1

A. The Road Sector 2B. Government Policies and Plans 5C. External Assistance to the Sector 5D. Lessons Learned 6E. ADB’s Sector Strategy 7F. Policy Dialogue 7

IV. THE PROPOSED PROJECT 8

A. Rationale 8B. Objectives and Scope 8C. Cost Estimates 9D. Financing Plan 9E. The Executing Agency 10F. Implementation Arrangements 10G. Environmental and Social Measures 13

V. PROJECT JUSTIFICATION 14

A. Economic Analysis 14B. Social Dimensions 15C. Impact on Poverty Reduction 17D. Risks 18

VI. ASSURANCES 18

A. Specific Assurances 18B. Condition for Award of Contract 19

VII. RECOMMENDATION 19

APPENDIXES 20

LOAN AND PROJECT SUMMARY

Borrower Kingdom of Bhutan

Project Description The Project will undertake improvements on the East-WestHighway, including resurfacing, construction of line drainage, andslope protection works. Because the project road is the only east-west link, the country will benefit from accessibility of improvedtransport, savings in road maintenance costs, and reduction invehicle operating costs (VOCs).

Classification Primary objective: Economic growthSecondary objective: Poverty reduction

Environmental Category BAssessment

An initial environmental examination was undertaken and thesummary is a core appendix.

Rationale The social and economic well-being of Bhutan is related to aneffective and sustainable road transport network as no othermodes of transport are available for the movement of people andgoods. The extreme geographic conditions and mountainousterrain pose challenges to the provision of transport links and to itsnecessary maintenance. The existing national road network is inneed of improvement and protection as the deteriorated roadsurface makes journeys longer and more difficult. Frequentlandslides also block the roads and cause major delays inmovement by vehicle or on foot. Heavy snow cover in winter alsohinders movement. The East-West Highway, the project road, isoccasionally blocked by landslides, sometimes for more than aweek at a time. Constructed to a single-lane standard by theIndian Border Roads Organization during 1965-1985, the highwayconnects Thimphu in the west to Trashigang in the east. The roadis of strategic importance to Bhutan since it is the only means oftransport between the two important cities. The highway also linksa number of other urban centers along the route, includingWangdue-Phodrang, Trongsa, Jakar, and Mongar, and acts as theonly collector of traffic from the urban centers north and south ofthe route.

The Project will address the following aspects of the AsianDevelopment Bank’s (ADB) sector strategy and policy dialogue: (i)integrate the domestic market; (ii) enhance access to local,regional, and international markets; (iii) increase employmentopportunities and incomes, especially in rural areas, to reducepoverty; (iv) stimulate private sector activity, especially in ruralareas; (v) develop public/private partnerships for planning,managing, and implementing construction and maintenance of thenational road network; (vi) improve road safety; and (vii) developthe domestic consulting profession. The Road Planning and

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Management Strengthening Project technical assistance (TA),which will be implemented concurrently with the Project, willimprove governance by strengthening the Department of Roads(DOR).

Objectives and Scope The objectives of the Project are to (i) promote private sectorparticipation and assist in developing the domestic contracting andconsulting industries by introducing a pilot contractor andequipment leasing scheme; (ii) reduce poverty by enhancingemployment opportunities for the poor and improving access tohealth, education, and other social services; and (iii) improvegovernance by providing institutional support to DOR. The Projectwill undertake improvements on the East-West Highway, includingresurfacing, construction of line drainage, and slope protectionworks. Because the project road is the only east-west link, thecountry will benefit from improved transport accessibility, savingsin road maintenance costs, and reduction in VOCs. The Project’sobjectives are consistent with the Government’s priorities for roadsector development under the Eighth Five-Year Plan (FY1997-FY2002).

The Project will consist of the following components: (i)resurfacing of about 380 kilometers (km) on the East-WestHighway, using mechanized techniques in an environmentallysound manner and incorporating all related drainage works; (ii)improving slope stability to preserve the existing national highwaynetwork; (iii) implementing a pilot contractor and equipmentleasing scheme for domestic contractors to participate in theProject; and (iv) providing consulting services for design andsupervision of civil works and for institutional support.

Cost Estimates The total cost of the Project is estimated at $12.8 millionequivalent. The foreign exchange cost is $8.7 million and the localcurrency cost is $4.1 million equivalent, or 32 percent of the totalproject cost.

Financing Plan($ million)

SourceForeign

ExchangeLocal

CurrencyTotalCost Percent

ADB 8.7 0.9 9.6 75Government 0.0 3.2 3.2 25

Total 8.7 4.1 12.8 100ADB = Asian Development Bank.

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Loan Amount andTerms The equivalent in various currencies of SDR7,310,000 ($9.6

million equivalent) from ADB’s Special Funds resources, with aterm of 32 years, including a grace period of 8 years, and interestcharge of 1 percent per annum during the grace period and 1.5percent per annum thereafter.

Period of Utilization Until 30 June 2005

Executing Agency Department of Roads

ImplementationArrangements The Project will be implemented by a separate project

management office within DOR.

Procurement All civil works contract packages will be procured following localcompetitive bidding procedures among prequalified contractorsaccording to the Government’s standard procurement proceduresacceptable to ADB. Equipment will be procured in accordancewith ADB’s Guidelines for Procurement.

Consulting Services International and domestic consultants will be required for design,supervision, and institutional support. The consultants will berecruited in accordance with ADB’s Guidelines on the Use ofConsultants and other arrangements satisfactory to ADB for theengagement of domestic consultants.

Estimated Project 31 December 2004Completion Date

Project Benefits andBeneficiaries The Project will contribute to the more rapid economic growth of

the project area by expanding economic opportunities, particularlyin agriculture, cottage industry, and tourism. Furthermore, theProject will improve the overall quality of life of rural people andreduce poverty by creating employment and economicopportunities for the poor, and improving access to schools,health, and other social and government services. Roadimprovement works under the Project will require mostly unskilledlabor and will generate direct income-earning opportunities,particularly for the poor and women.

The Project will directly benefit approximately 60,000 people.Although a poverty line for Bhutan is yet to be established, thefeasibility report that gives the poverty profile of the populationaffected by the Project shows that more than one third of theProject’s beneficiaries are estimated to fall below the povertylevel. The beneficiaries will be (i) the poor who will achieve moremobility in seeking employment and income-generatingopportunities; (ii) entrepreneurs and petty traders who will be able

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to set up enterprises along the road; (iii) agricultural enterprisesthat will benefit from faster, cheaper, and reliable access to largemarkets and export opportunities; (iv) neighboring countries thatcan utilize the route for improved access to Thimphu, therebypromoting regional cooperation; (v) passenger traffic along theThimpu - Wangdue-Phodrang – Bumthang – Mongar - Trashigangroutes, and (vi) exporters and importers who will benefit fromreduced transportation cost for freight using the shorter projectroute.

Improving the road conditions on the East-West Highway will alsoproduce road user benefits, such as savings in VOCs and time.For the analysis, road user benefits were restricted to savings inVOCs arising from changes in surface roughness. Additionally,since transport costs are relatively high and improvements offersignificant transport cost savings that will stimulate the localeconomy, there will also be an increase in the quantity and qualityof agricultural production in the project area, tourism, andindustrial development. The Project is expected to have a positivesocial impact. The documented stakeholder consultations confirmwidespread support for the Project.

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I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on a proposedloan to the Kingdom of Bhutan for the Road Improvement Project.

II. INTRODUCTION

2. The social and economic well-being of Bhutan is related to an effective and sustainableroad transport network as there are no other modes of transport available for the movement ofpeople and goods. The extreme geographic conditions and mountainous terrain posechallenges to the provision of transport links and to its necessary maintenance. As theGovernment has invested in the steady development of the road network and graduallyassumed responsibility for its maintenance, the network has remained serviceable but requiressignificant investment in periodic and routine maintenance. To enhance the contribution of theroad network to the social and economic development in the country, during the 1997 CountryProgramming Mission to Bhutan, the Government requested Asian Development Bank (ADB)financing for the Road Improvement Project. The ADB Fact-Finding Mission1 visited Bhutan on8-23 March 2000 to formulate the Project on the basis of discussions with the Government,other agencies active in the road sector, beneficiaries, and the project feasibility report.2 TheAppraisal Mission completed the review and analysis of all aspects of the Project and the sectoron 21 May-1 June 2000. Loan negotiations with representatives of the Government were held inManila on 11-14 August 2000. The project framework is shown in Appendix 1.

III. BACKGROUND

3. Bhutan experienced modest growth in output in fiscal year (FY) 1999, with real grossdomestic product (GDP) growth estimated at 6 percent compared with 5.1 percent per annumthe previous year. Agricultural growth picked up after a slowdown the year before. Currently,major hydropower and industrial projects have continued to expand construction activities.Higher industrial growth, particularly in electricity, is expected after the projects arecommissioned. Because of the exchange rate peg with the Indian rupee and the porous borderwith India, prices in Bhutan can be expected to parallel price development in India. The peggingarrangement has promoted confidence in the ngultrum along with the free circulation of Indianrupees in the country. This arrangement has also facilitated stability in the trade of goods andservices with India, which amounts to almost 80 percent of total trade. Inflation in FY1999increased slightly beyond 9 percent from the previous year due to the rises in food prices inIndia. Money supply growth slowed from the highest of more than 40 percent in FY1998 to 21percent in FY1999. This represents a slower increase of net foreign assets from inflows offoreign aid and continued decline in domestic credit, particularly to the Government, althoughcredit to the private sector slightly increased.

4. The Government continues to conduct a prudent fiscal policy, with current revenuesexceeding current expenditures for the past four years. Inflows of foreign grants were notsufficient to cover development expenditures, and an overall budget deficit of 2.3 percent ofGDP occurred in FY1999, compared with 0.9 percent surplus in the previous year. Thisapparent deterioration in the country’s fiscal resources was due mainly to a major increase incapital expenditures for the hydropower projects. As these investments are all financed by aid

1 The project processing team comprised M. Minc, Project Economist/Mission Leader; R. Rinker, Project Engineer;

S. Handayani, Social Development Specialist; and S. Nanwani, Senior Counsel.2 TA 3107-BHU: Road Transport Network Development, for $650,000, approved on 3 December 1998.

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funds in concessional terms, the small fiscal deficit represents no major risks to themacroeconomic imbalance in the medium term before these projects are commissioned.

A. The Road Sector

5. From a very few kilometers (km) in the 1950s, Bhutan’s road network today has grown to3,375 km of national highways, which make up 47 percent of the total network (1,586 km).During Bhutan’s first three development plans (FY1962-FY1976), three north-south roads fromthe Indian border to the interior of the country were built. An east-west artery from Thimphu toTrashigang was also begun during that period and completed in 1985. The construction ofdistrict and feeder roads began during the Fourth Plan and has continued until present times.The Seventh Five-Year Plan (FY1991-FY1996) and the current Eighth Five-Year Plan (FY1997-FY2002, however, emphasized upgrading and maintenance of existing road assets rather thanthe construction of new ones. The continued development of the road network has been drivenby economic development priorities and by a steady growth in Bhutan’s vehicle fleet and trafficvolume. From 700 vehicles in 1980, the fleet has grown to 18,288, of which 43 percent are two-wheelers, 41 percent are classified as light vehicles, and 16 percent are heavy vehicles. Trafficlevels are highest in the west and much lower in the east and the south. In relative terms, trafficlevels in Bhutan remain low. Basic data for the road sector is presented in Appendix 2.

6. In the past 30 years, the Indian Border Roads Organization (IBRO) has undertaken thevast majority of the construction and maintenance works on Bhutan’s road network through theDANTAK project.3 Over the last decade, however, responsibility for the national road networkhas gradually shifted to the Royal Government of Bhutan. Now, IBRO still maintains 478 km ofthe national highway system. It is expected that the Government will eventually assumeresponsibility for those sections as well. The Government agency responsible for maintainingand managing the national road network is the Department of Roads (DOR) of the Ministry ofCommunications (MOC), originally created as the Public Works Division. As the Governmentinvested in the steady development of the national road network and gradually assumedresponsibility for its maintenance, the network has remained serviceable but requires significantinvestment in periodic and routine maintenance.

1. Road Transport Industry

7. Three bus operators– Bhutan Post, Dawa Transport, and Leksol Buses–currentlyoperate passenger services along the East-West Highway. Passenger bus fares are regulatedby MOC through the Road Safety and Transport Authority and reviewed quarterly. The averagefares these operators charge for a selection of routes tend to be in the range Nu0.35-0.55 perkm. For trucks, average freight rates are not regulated and depend on the type of cargo, size,and ownership of the operator, availability of back-haul rates, and time of year. Freight rates aregenerally higher in the monsoon period, partly due to increased demand coinciding with theharvest season for many crops and partly due to the increased likelihood of trucks beingdelayed due to landslides. Information collected from operators from a number of origins anddestinations in Bhutan indicates that, assuming an average payload of 8 tons, the averagefreight rate is Nu2.5-3.5 per ton-km.

3 DANTAK is the IBRO project that constructed the national highways in Bhutan.

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2. Planning and Administration

8. The planning process in Bhutan begins with the development of the five-year plan. ThePlanning Commission is responsible for developing the plan. The Policy and Planning Divisionof MOC prepares a national plan for the transport and human settlement sector in accordancewith planning guidelines set forth in the five-year plan. This plan also has a five-year horizon,providing orientation to each of the operating units of MOC for the development of its annualoperating plan. DOR has six operating entities: (i) Roads Division, (ii) Survey and DesignDivision, (iii) Bridge Division, (iv) Mechanical Division, (v) Stores Unit, and (vi) World FoodProgram Coordination. The annual investment plan for the Roads Maintenance Sections isdeveloped at the headquarters level from plans for each section submitted by the executiveengineers. The investment plan includes proposed capital investments in road construction andperiodic maintenance, and emergency works such as slope protection or repair of damagedpavement.

3. Budgeting Process

9. Annual budgets for road maintenance include two components, the investment budgetand the routine maintenance budget. The investment budget is prepared by estimating the costof the annual investment plan. The cost of patching potholes, especially when required prior toperiodic maintenance interventions, is included in the investment budget. The proposedimprovements in the annual investment plan are prioritized at an annual meeting organized byDOR headquarters, chaired by the director of roads and attended by senior staff representingthe roads maintenance sections. The projects selected are based on expected budgetaryallocations and on mutual agreement between the parties. Routine maintenance budgets areallocated on the basis of the number of kilometers in each maintenance section. In FY1999 theamounts allocated and spent were Nu30,000 ($698) per km for national highways, Nu26,266($611) per km for district roads, and Nu11,800 ($274) per km for feeder roads.

10. The proposed budget is submitted to the Department of Budget and Accounts of theMinistry of Finance where, after consideration of expected revenue and budgetary requirementsfor all other Government agencies, a budgetary allocation is made to DOR. Due to budgetaryconstraints, the allocation is generally less than the initial request. When this happens,allocations for routine maintenance are not reduced; rather, the investment plan is adjusted byremoving projects. During the year, DOR generally requests supplementary budgetaryallocations to meet emergency needs or to fund priority road improvements. If the request isapproved and supplementary funds are available, the Ministry of Finance may provide them.

4. Budget Allocations

11. Road sector budgetary allocations have increased by an average of 23 percent perannum between FY1993 and FY1999. Funds allocated for resurfacing works increased by anaverage of 57 percent per annum over the period, while maintenance expenditure increased byonly 12 percent per annum. Future plans for road sector expenditure as laid out in the EighthFive-Year Plan for Bhutan allocates about Nu3.0 billion to the roads sector over the five-yearplanning period. This represents a significant increase in the level of funding to the sector andconfirms the overall government objective to concentrate expenditure on social sectors includinghealth and education, and transport.

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5. User Charges and Expenditures

12. The Government levies a range of user taxes and fees on the road transport sector. Themain taxes are the fuel sales tax, motor vehicle taxes, retail sales taxes of vehicle components,import duties, and weighbridge fees. The total revenues collected have increased sharply inrecent years, mainly the result of increased revenue from the sales tax on petroleum products.Expenditures have far outweighed the revenues collected within the sector. In FY1998, roadsector revenues accounted for only 25 percent of total government expenditure on road sectoractivities. However, there is clearly potential for increasing the revenues collected from roadusers. Appropriate cost recovery mechanisms for Bhutan will be assessed during theimplementation of the advisory technical assistance (TA)4 for the Road Planning andManagement Strengthening Project.

6. Regulatory Framework

13. Over the years, the Government has addressed important legal issues affecting the roadsector and transport industry through the various acts, rules, regulations, and guidelines issuedby various government agencies: (i) the Rules and Regulations for construction of temporary,semipermanent, and permanent houses on either side of a road issued by the Ministry of HomeAffairs in 1993; (ii) the Road Safety and Transport Act 1999 issued by MOC; (iii) the FieldManual of Road Maintenance issued by DOR in 1989; (iv) the bioengineering techniques forslope protection and stabilization issued by DOR in 1999; (v) the Environmental Code ofPractices for Highways and Roads issued by DOR in September 1999; (vi) the Municipal Act of1999 issued by MOC; (vii) the Mines and Minerals Management Act 1995 issued by theDepartment of Geology; (viii) the Land Act (second edition 1998) issued by the Ministry of HomeAffairs; and (ix) the environmental guidelines on roads and highways issued by the NationalEnvironment Commission in 1999.

14. A review of the many interrelated legislation reveals no coordinated and focusedapproach through a single piece of legislation covering roads and road transport in the country.Also, the agencies responsible for particular sectors are primarily concerned with safeguardingtheir respective interests, resulting in conflicting rules and regulations. Further, the enforcementmechanisms are varied and uncoordinated. The Government recognizes that coordinatedlegislation is needed, as the national road network is the predominant means of transport withinthe country and as the number of road users and vehicles is increasing. Also, there needs to bea clear delineation of authority and responsibility for enforcement.

7. Proposed Road Act

15. The Government has expressed its concern about the need for coordinated legislation tocover roads and road transport in the country. The TA will take into account the existinglegislation on road-related matters, and prepare draft legislation for the proposed Road Act,taking into account the views of the Government, local communities, nongovernmentorganizations, and other stakeholders, including road users (vehicle owners, users of publictransportation, and freight transport users). The proposed draft legislation will (i) clearly definethe responsibilities and rights of the provider (the Government), road users, and affectedcommunities; (ii) address the construction, rehabilitation, maintenance, and use of the road,while safeguarding or mitigating the adverse environmental impacts on users and thecommunity at large; (iii) spell out the compensation to be paid in the acquisition of land,

4 TA 3470-BHU: Road Planning and Management Strengthening Project, for $954,000, approved on 20 July 2000.

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including right-of-way, for road construction in accordance with existing legislation; (iv)determine the feasibility of levying user charges to recover the cost of maintaining the nationalroad network; (v) specify the agencies responsible for monitoring and enforcing the provisions ofthe legislation; and (vi) prescribe the penalties for any statutory violation. The Government willuse the draft legislation prepared under the TA as a basis for enacting the Road Act. Withinthree years after loan effectiveness, the Government will (i) consult with ADB on any majorchanges made to the draft Road Act before presenting it to the Cabinet and the NationalAssembly; and (ii) enact and make effective the proposed Road Act.

B. Government Policies and Plans

16. In its five-year plans, the Government has given priority to investments in essentialinfrastructure, providing better access to basic services, improving the quality of life in the ruralareas, supporting community participation in development activities, and promoting privatesector involvement in project implementation. The main objectives of the current Eighth Five-Year Plan are to develop a regionally balanced network that is safe, convenient, andeconomical to use; preserve the past capital investment in roads; reduce the cost of vehicleoperation and travel time of road users; and develop road construction and maintenancecapabilities in the private sector. The main strategies include (i) developing guidelines andpractices for road design, construction, and maintenance that cause minimum adverse impacton the environment; (ii) promoting larger private sector role in road construction andmaintenance through contracting; (iii) developing a long-term comprehensive road master plan;(iv) developing a suitable road maintenance management system; (v) improving maintenancesystems for rural roads; (vi) improving geometric features of roads to reduce accidents; (vii)timely resurfacing of existing roads to reduce vehicle operating costs (VOCs); (viii)strengthening institutional capacity through further training; and (ix) utilizing locally availablematerials and resources whenever possible.

C. External Assistance to the Sector

17. The main source of external financing for roads in Bhutan has been the Government ofIndia. Since 1959, India has provided assistance through the DANTAK for the construction andmaintenance of the main road network in Bhutan. The United Nations Capital DevelopmentFund has completed three projects for rural road development in the eastern region. TheGovernment of Japan is supporting a bridge replacement program mainly along the East-WestHighway. Helvetas of Switzerland is providing assistance to replace one bridge, also along theEast-West Highway. The World Bank recently approved the Rural Access Project for $11.6million for the construction of feeder roads in Zhemgang, Lhuentse, and Trashi Yangtse, andTrashigang Dzongkhag.5 It is important to note that all external interventions in the sector arecomplementary and rely on each other for justification of the overall investments. Details of theexternal assistance to the road sector are in Appendix 3.

18. ADB has been providing support to the road sector in Bhutan since 1983. It began withthe Multiproject6 that focused on infrastructure works. The Roadworks Mechanization Project7

was a loan program designed to increase productivity through the development of mechanizedconstruction and maintenance techniques. The most recent, the East-West Highway

5 A dzongkhag is a district.6 Loan 637-BHU(SF): Multiproject, for $5.0 million, approved on 22 September 1983.7 Loan 790-BHU(SF): Roadworks Mechanization Project, for $4.5 million, approved on 30 September 1986.

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Maintenance Project,8 was intended to cover the resurfacing of the highway and to support thedevelopment of a private sector contracting industry in Bhutan. Throughout these loan periods,ADB also funded nine TA projects in the sector for project preparation and for the institutionalstrengthening of DOR. Those projects were designed in part to improve the capacity of theGovernment and the private sector, as responsibility for the roads continues to be shifted fromIBRO. Most recently an ADB-funded TA9 resulted in a complete overhaul of the constructioncontracting procurement process, including road works. The new framework has been includedin the Government’s Financial Manual and will bring the process in Bhutan closer tointernational standards.

D. Lessons Learned

19. The Multiproject (footnote 6) was completed and a project performance audit report wasprepared. The report found that greater efforts to familiarize the executing agencies with ADBprocedures and practices would have minimized implementation delays, and that trainingprograms for the DOR engineers needed to be developed. The Roadworks MechanizationProject (footnote 7) was aimed at increasing DOR’s productivity in road construction andmaintenance by providing equipment and workshop facilities, and training DOR staff inmechanized road construction operation and equipment maintenance. With ADB approval, theequipment procured under the loan was subsequently sold to the private sector in line with theGovernment’s policy of privatization.

20. The East-West Highway Maintenance Project (footnote 8) encountered problems withthe introduction of a bituminous surface treatment technique new to Bhutan, and with the start-up and equipping of five inexperienced contractors. During the resulting delay of almost threeyears, the road continued to deteriorate, so much so that the improvements proposed duringproject preparation became inadequate and obsolete. Construction supervision for the projectwas provided under an ADB TA10 grant requested by the Government. Timing problemsoccurred in the fielding of the consultants recruited by ADB, mainly due to the start-up of theinexperienced contractors. A road management maintenance system (RMMS) was alsodeveloped under an associated TA.11 The RMMS component was not successful because theproposed system was inappropriate in the light of the institutional capacity of DOR at that time.However, the resulting program of periodic maintenance on roughly half the project roadarrested the rapid deterioration taking place. The project also facilitated the establishment of aprivatized roads construction industry.

21. These lessons were incorporated during project preparation in the feasibility study.Because detailed design of the Project will be undertaken immediately prior to the tendering andaward of construction contracts, very little road deterioration will occur between design andconstruction. Also, the minimum resurfacing intervention proposed for the Project is a doublebituminous surface treatment (DBST), which is twice the pavement coverage of the singlebituminous surface treatment originally specified in the previous project. Therefore, the costestimates developed should closely represent final construction costs. Additionally, designinterventions for the Project include improvement of roadside drainage and slope protection

8 Loan 1265-BHU(SF): East-West Highway Maintenance Project, for $5.2 million, approved on 18 November

1993.9 TA 2802-BHU: Improvement of a Regulatory Framework for Procurement and Contracting, for $400,000,

approved on 23 May 1997.10 TA 1985-BHU: Construction Management, for $740,000, approved on 18 November 1993.11 TA 1984-BHU: Development of a Maintenance Management System, for $390,000, approved on 18 November

1993.

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works. Consulting services for the Project will be carried out by a team of international anddomestic consultants and will provide design, construction supervision, and institutional supportto the project management office (PMO). The consultants will also provide several trainingworkshops for DOR personnel. The PMO will provide counterpart staff to monitor constructionactivities and concur with the consultants regarding project progress and quantity certifications;the arrangement will present an excellent opportunity for technology transfer. Consultingservices will be fully funded out of the loan proceeds, thus enhancing the Government’sownership of the Project. Details of the design approach and technical standards are presentedin Appendix 4.

E. ADB’s Sector Strategy

22. To translate ADB’s overarching goal of poverty reduction into a strategy and operationalprogram, it is necessary to reflect the reality of Bhutan’s development context, considering (i)the nature and degree of poverty; (ii) the effectiveness of the Government’s economic andsocial development programs in addressing basic human needs; (iii) the country’s access togrant funds from India, other bilateral sources, and the United Nations; (iv) the country’s debt-servicing and project implementation capacities; and (v) the likely initiatives of other aidagencies. Reducing poverty requires continued economic growth. ADB is well positioned tosupport poverty reduction by promoting economic growth and social inclusiveness, throughinterventions in physical and social infrastructure, private sector development, employmentcreation, and improved economic management. Given the Government’s determination to seethe private sector play the main role in the future growth of incomes and employmentopportunities, ADB addresses the following areas: (i) strengthening the capacity of governmentagencies, (ii) improving the physical and social infrastructure, (iii) promoting private sectordevelopment, (iv) improving the efficiency of public service delivery and cost recovery, and (v)protecting the environment.

23. ADB’s strategy in the road sector is consistent with the overall areas of emphasis andwith the objectives of the current Eighth Five-Year Plan. The strategic objective is to improveroad maintenance to (i) integrate the domestic market; (ii) enhance access to local, regional,and international markets; (iii) increase employment opportunities and incomes, especially inrural areas, to reduce poverty; (iv) stimulate private sector activity, especially in rural areas; and(v) develop public/private partnerships for planning, managing, and implementing constructionand maintenance of the national road network. Those issues will be addressed duringimplementation of the Project and the TA. The TA will also assist in improving the planning ofnew investments and management of the existing national road network, recommendingefficient budget allocations for road expenditures, and contributing to the institutionalstrengthening of DOR. The TA will also assist the Government in drafting and enacting a RoadAct (para. 15). In summary, ADB’s sector strategy aims at maximizing the sustainability of theroad sector in Bhutan through (i) capacity building and clearly defining the responsibility ofDOR, (ii) introducing simple planning procedures for maintenance and improvement works, (iii)devising adequate cost recovery mechanisms, and (iv) contracting out maintenance works tothe private sector.

F. Policy Dialogue

24. ADB’s policy dialogue with the Government in the road sector has concentrated on theinstitutional strengthening of DOR to enable it to take over from IBRO the responsibility forplanning and managing the national road network. Under the East-West Highway MaintenanceProject (footnote 8), emphasis was given to (i) improving governance by institutional

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strengthening; (ii) allocating funds for road maintenance operations more efficiently; (iii)developing the domestic road construction industry; (iv) establishing a framework for contractingroadworks; and (v) improving cost recovery in the road sector through appropriate user charges.The Project and the TA will continue to address the above policy areas, and will improvegovernance by strengthening DOR to (i) develop a Road Sector Master Plan with an upgradedroad planning and management system, to facilitate efficient budget allocations for road sectordevelopment and maintenance activities; (ii) introduce a more participatory approach for thebeneficiaries in planning and implementation to contribute to poverty reduction; (iii) improveroad safety; (iv) develop the domestic consulting profession; and (v) assist the Government indrafting and enacting a Road Act.

IV. THE PROPOSED PROJECT

A. Rationale

25. The social and economic well-being of Bhutan is related to an effective and sustainableroad transport network as no other mode of transport is available for the movement of peopleand goods. The extreme geographic conditions and mountainous terrain pose challenges to theprovision of transport links and to its necessary maintenance. The existing national roadnetwork is in need of improvement and protection as the deteriorated road surface makesjourneys longer and more difficult. Frequent landslides also block the roads—sometimes formore than a week at a time—causing major delays in movement by vehicle or on foot. Heavysnow cover in winter also hinders movement. The East-West Highway, the project road, wasconstructed to a single-lane standard by IBRO during 1965-1985. It connects Thimphu in thewest and Trashigang in the east. The road is of strategic importance to Bhutan since it is theonly means of transport between those two important towns. The highway also links a numberof other urban centers along the route including Wangdue-Phodrang, Trongsa, Jakar, andMongar and acts as the only collector of traffic from the urban centers north and south of theroute.

26. The Project will address the following aspects of ADB’s sector strategy and policydialogue: (i) integrate the domestic market; (ii) enhance access to local, regional, andinternational markets; (iii) increase employment opportunities and incomes, especially in ruralareas, to reduce poverty; (iv) stimulate private sector activity, especially in rural areas; (v)develop public/private partnerships for planning, managing, and implementing construction andmaintenance of the national road network; (vi) improve road safety; and (vii) develop thedomestic consulting profession. The TA, which will be implemented concurrently with theProject, will improve governance by strengthening DOR.

B. Objectives and Scope

27. The objectives are to (i) promote private sector participation and assist in developing thedomestic contracting and consulting industries by introducing a pilot contractor and equipmentleasing scheme; (ii) reduce poverty by enhancing employment opportunities for the poor andimproving access to health, education, and other social services; and (iii) improve governanceby providing institutional support to DOR. The Project will undertake improvements on the East-West Highway, including resurfacing, construction of line drainage, and slope protection works.Because the project road is the only east-west link, the country will benefit from improvedtransport accessibility, savings in road maintenance costs, and reduction in VOCs. The Project’sobjectives are consistent with the Government’s priorities for road sector development under theEighth Five-Year Plan.

9

28. The Project will consist of the following components: (i) resurfacing about 380 km on theEast-West Highway, using mechanized techniques in an environmentally sound manner andincorporating all related drainage works; (ii) improving slope stability to preserve the existingnational highway network; (iii) implementing a pilot contractor and equipment leasing schemefor domestic contractors to participate in the Project; and (iv) providing consulting services fordesign and supervision of civil works and for institutional support.

C. Cost Estimates

29. The total cost of the Project is estimated at $12.8 million equivalent, of which the foreignexchange cost is estimated at $8.7 million representing 68 percent of the total cost and the localcurrency cost is estimated at $4.1 million equivalent representing 32 percent of total cost. Thecost estimates are summarized in Table 1. Detailed cost estimates are in Appendix 5.

Table 1: Cost Estimates($ million)

Item ForeignExchange

LocalCurrency

TotalCost

A. Base Cost a

1. Civil Works 6.1 3.1 9.2 2. Equipment 0.4 - 0.4 3. Consulting Services 0.7 0.4 1.1 Subtotal (A) 7.2 3.5 10.7

B. Contingencies 1. Physicalb 0.7 0.3 1.0 2. Pricec 0.6 0.3 0.9 Subtotal (B) 1.3 0.6 1.9

C. Interest Charge 0.2 - 0.2

Total 8.7 4.1d 12.8

a In end-1999 prices.b 10 percent for civil works, 5 percent for equipment and consulting services.c 2.4 percent per annum.d Including taxes and duties estimated at $1.6 million equivalent (13 percent of total project cost).

D. Financing Plan

30. It is proposed that ADB provide a loan of $9.6 million equivalent from its Special Fundsresources to finance the entire foreign exchange cost of the Project and about 22 percent of thelocal currency cost, which represents 8 percent of total project cost. The provision for financingof local currency costs is justified under ADB’s local currency financing policy.12 The loan willhave a term of 32 years, including a grace period of 8 years, with an interest charge of 1 percent

12 R-1-95, Review of Lending Foreign Exchange for Local Currency Expenditures on Projects, 3 January 1995.

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per annum during the grace period and 1.5 percent per annum thereafter. The Borrower will bethe Kingdom of Bhutan. The financing plan is shown in Table 2.

Table 2: Financing Plan($ million)

Source ForeignExchange

LocalCurrency

TotalCost

Percent

ADB 8.7 0.9 9.6 75.0Government - 3.2 3.2 25.0

Total 8.7 4.1 12.8 100.0 ADB = Asian Development Bank.

E. The Executing Agency

31. The Department of Roads will be the Executing Agency for the proposed Project. DOR,which is headed by a director under MOC, is responsible for design, construction, andmaintenance of roads and bridges. A PMO was established within DOR before loannegotiations. The PMO will be responsible for coordinating, implementing, and monitoring theProject. A full-time project manager heads the PMO and is supported by adequate andcompetent technical and administrative personnel. The project manager will be delegated withsufficient authority to permit effective decision making on project implementation matters. Theorganization chart of the PMO is presented in Appendix 6. The Government will provide DORwith adequate budgetary allocations for timely implementation of the Project. DOR has gainedadequate experience in project implementation through the previous ADB road projects in thecountry.

F. Implementation Arrangements

1. Implementation Schedule

32. The Project will be implemented over a period of about four years. Civil works areexpected to commence around June 2001 and be completed by the end of December 2004.Because of the harsh winter and monsoon rains in the summer, the work seasons in the projectarea are limited. This schedule assumes the consultant is mobilized by January 2001. Thetentative implementation schedule is presented in Appendix 7.

2. Procurement

33. All goods and services financed under the Project will be procured in accordance withADB’s Guidelines for Procurement. All civil works, the largest having a value of $1.5 million, willbe awarded on the basis of local competitive bidding (LCB) according to the Government’sstandard procurement procedures acceptable to ADB. All civil works contractors will beprequalified. As the contracts are relatively small, they are unlikely to attract significantinternational interest. All bidding documents will include clauses to reflect ADB’s policy on anti-

11

corruption. The bidding documents will also include provisions on environmental protection,child labor, and prevention of communicable diseases, including HIV/AIDS.13

34. The use of local competitive bidding for these contracts will provide an opportunity tostrengthen the emerging domestic contracting industry whose development was initiated in partthrough the East-West Highway Maintenance Project (footnote 8). The proposed pilot contractorscheme, with small contracts for periodic maintenance and slope stability improvements,enables contractors with less experience in road works to participate in the Project, thusexpanding the local construction industry’s capability to carry out road improvement works.

35. Equipment or materials estimated at $500,000 equivalent or less will be procured byinternational shopping procedures, except that equipment or materials estimated at less than$100,000 equivalent per item will be procured through direct purchase. Under the Project acontract package for road improvement equipment for the Mechanical Division, estimated at$400,000 equivalent, will be awarded through international shopping procedures. Also,materials testing equipment, estimated at $40,000 equivalent, will be procured by directpurchase. Indicative procurement packages are presented in Appendix 8.

3. Consulting Services

36. Detailed design, construction supervision, and institutional support for the Project will beprovided by an international consulting firm which will collaborate with domestic consultants.The consultants will be engaged by DOR in accordance with ADB’s Guidelines on the Use ofConsultants and other arrangements satisfactory to ADB for the engagement of domesticconsultants. Staffing inputs will be about 37 person-months for international consultants and 326for domestic consultants. The consulting services will include components to assist DOR instrengthening its capacity in (i) road construction and maintenance, (ii) contract procurementand administration, (iii) slope protection practices, and (iv) road safety measures. Due to thelimited availability of domestic consultants from the private sector, the international consultantsmay be required to draw from DOR suitable staff to assist in project implementation. TheGovernment will ensure that arrangements satisfactory to ADB are made for release of DORstaff to participate in the Project, as domestic consultants independent of DOR, together withdomestic consultants from the private sector. The overall period of service will be about 48months. Outline terms of reference for the consulting services for design, supervision, andinstitutional support are in Appendix 9.

37. To expedite the civil works and make optimum use of suitable construction weather, theGovernment has obtained ADB approval of advance action on recruitment of consultants. TheGovernment has been informed that the advance action does not commit ADB to approve thesubsequent Project. The consultants are expected to commence work in January 2001. DORissued invitations for proposals in August 2000.

4. Land Acquisition and Resettlement

38. The Project does not involve any land acquisition or resettlement, as the works to beundertaken will be confined to resurfacing within the existing right-of-way. The rules andregulations issued by the Ministry of Home Affairs14 specifies that no one will be permitted toconstruct or erect or install any kind of house or fence within 50 feet on either side of the road.

13 Human-immunodeficiency virus/acquired immunodeficiency syndrome.14 Rules and Regulations for Construction of Semi-Permanent and Permanent Houses on Either Side of the Roads.

12

The walkover survey along the project road found no squatters within the right-of-way. Sincethere will be no land acquisition and resettlement in this Project, no land acquisition andresettlement plan is needed.

5. Disbursements

39. Loan disbursements for the consulting services contract to be procured throughinternational selection will be by direct payment procedures. Disbursements for the civil workscontract packages and for incremental expenditures will be through imprest accountprocedures. The Government will establish an imprest account at the Bank of Bhutan. Theimprest account will be established, managed, replenished, and liquidated in accordance withADB’s Loan Disbursement Handbook dated June 1996, as amended from time to time, anddetailed arrangements between the Government and ADB. The initial amount to be depositedwill be based on the estimated expenditures over six months.

6. Midterm Review

40. The Government and ADB will conduct regular reviews during project implementation. Inaddition, they will jointly carry out a midterm review of the Project during the second year of civilworks implementation. The results of the midterm review will be discussed by the parties and, ifrequired, appropriate corrective measures will be carried out to ensure successful projectimplementation and achievement of the objectives.

7. Reporting Requirements

41. The supervision consultant will prepare brief monthly progress reports to be submitted tothe Ministries of Finance and Communications, DOR, and ADB. The reports will provide detailsof the Project, including events or activities not progressing satisfactorily, and remedial actionsrecommended by the consultants and DOR to resolve problems. The format of the reports willbe agreed upon during contract negotiations for consulting services. DOR will also prepare andsubmit quarterly progress reports to ADB. Once the works are complete, DOR will arrange forthe consultants to prepare and submit a project completion report within three months ofphysical completion of the Project.

8. Records, Accounts, and Audit

42. DOR will maintain separate records and accounts adequate to (i) identify the goods andservices financed from the loan proceeds and from counterpart funding; (ii) identify the use ofthese goods and services to the Project; (iii) record the progress of the Project, including itscost; and (iv) reflect, in accordance with consistently maintained sound accounting principles,the Project’s operational and financial condition. The project accounts and related financialstatements will be audited annually by auditors acceptable to ADB. The audited reports andrelated financial statements, to be prepared in English, will be submitted to ADB not later thannine months after the end of the fiscal year to which they relate.

9. Project Performance Monitoring System

43. During project implementation, DOR, with the assistance of the consultants, will carryout project performance monitoring system (PPMS) activities under arrangements satisfactoryto ADB to ensure efficient management of project activities and maximization of project benefits.The Government and ADB have agreed on the performance indicators (Appendix 10) for

13

carrying out these PPMS activities. The findings and supporting data will be incorporated intothe project performance monitoring and evaluation report for the completed Project. Community-based organizations in the geog,15 in association with the DOR, will verify the effectiveness ofproject activities and outputs, as well as the reactions of the intended beneficiaries. A sociologiston the consulting team will assist DOR with that task. The project performance and monitoringevaluation will allow postevaluation of the Project, and also improve planning for future roadimprovement projects.

G. Environmental and Social Measures

1. Environmental Impacts

44. Consultants for the project feasibility study conducted an initial environmentalexamination (IEE) of the Project, following ADB’s Environmental Guidelines for SelectedInfrastructure Projects (Highways and Roads). The summary IEE is presented in Appendix 11.The IEE indicated no significant environmental problems associated with the Project, which willinvolve only improvements consisting of periodic maintenance of existing roads, line drainage,and slope protection works along the existing alignments. The Project will reduce theenvironmental impact of the without-project scenario, especially in relation to siting andoperation of quarries, slope failure caused by inadequate drainage, and use of firewood forheating bitumen. DOR will ensure that the environmental impacts of the Project are minimizedby carrying out the recommendations specified in the IEE and as agreed upon with ADB. TheProject includes the following enhancement measures:

(i) Slope stabilization. For continuous access, slope stabilization is the most importantenhancement measure. Pavement and drainage works are only part of the answerto ensuring continued road operation. Additional and improved slope stabilizationworks are required in many areas. Implementing an appropriate slope-relatedprogram will maximize the effectiveness of the funds available to DOR. A 13-pointaction plan covering a range of slope stability issues, in order of priority, ispresented in the Slope Stabilization Manual.16 In addition, it is stronglyrecommended that DOR consider more extensive use of bioengineering measures.

(ii) Water management. The Project offers an opportunity to assist some communitieswith irrigation water supply and to solve problems of uncontrolled irrigation waterdisposal. The Project will assist both the Ministry of Agriculture and DOR to installdual-purpose roadside water management structures where needed.

(iii) Road safety. The Project provides an opportunity to improve road safety byincorporating various engineering measures in the program of works.

2. Social Measures

45. As part of project preparation, a social assessment was carried out using participatory aswell as survey methodologies in the project area. The assessment consisted of socioeconomicsurveys, and focus group discussions with key stakeholders such as the Planning CommissionSecretariat and the Health and Education ministries, government officials in the dzongkhag(footnote 5) social sector administrators in nine dzongkhag in the project area, Road Safety and

15 A geog is a cluster of villages.16 The Slope Stabilization Manual was prepared under TA 3107-BHU (footnote 2).

14

Transport Authority, Bhutan Development and Finance Corporation, Royal Bhutan WomenAssociation, and Bhutan Chamber of Commerce and Industry. During the Fact-Finding Mission,rapid rural appraisal was conducted for road workers and beneficiaries in several project areasto assess the potential employment opportunity as well as beneficiaries’ needs and constraints.

46. The Project is expected to have a positive social impact. The documented stakeholderconsultations confirm widespread support for the Project. The Project will contribute to morerapid economic growth of the project area by expanding economic opportunities, particularly inagriculture, cottage industry, and tourism. Furthermore, the Project will improve the overallquality of life for rural people and reduce poverty by creating employment opportunities for thepoor through project construction and maintenance activities; and improving access toeconomic and social opportunities, schools, health services, and other social as well asgovernment services. Construction and maintenance works under the Project will require mostlyunskilled labor and will generate direct income-earning opportunities, particularly for the poorand women.

V. PROJECT JUSTIFICATION

A. Economic Analysis

47. Improving the road conditions on the East-West Highway will produce mainly road userbenefits, such as savings in VOCs and travel time. For the analysis, road user benefits wererestricted to savings in VOCs arising from changes in surface roughness. Additionally, sincetransport costs are relatively high and improvements offer significant transport cost savings,which will stimulate the local economy, there will also be development benefits that include anincrease in the quantity and quality of agricultural production in the project area, tourism, andsmall-scale industrial development. These benefits can be measured in terms of net value ofgenerated output directly attributable to road rehabilitation or in terms of the transport costbenefits accruing generated traffic.17 However, it is essential that the two approaches bepursued separately to avoid double counting. The methodology concentrated on road userbenefits and adopted the approach of measuring economic development benefits in terms of thebenefits gained by generated traffic.

48. Economic evaluation was carried out by comparing the costs and benefits for the with-and without-project scenarios. Benefits based on VOC savings, in economic prices, werecalculated for normal and generated traffic. These benefits were compared with the roadimprovement and maintenance costs to calculate the economic internal rate of return (EIRR).Benefit streams were calculated for a period of 20 years starting in 2001. Costs and benefitswere estimated net of duties and taxes, and were expressed in constant end-1999 prices. Thebase EIRR for the Project is 32 percent.

49. The sensitivity of the EIRRs to changes in the underlying cost and benefit parameterswas analyzed. The results show that the adverse assumption of a 15 percent increase in projectcost would decrease the EIRR to 27 percent. If benefits materialized to only 85 percent of theoriginal estimates, the EIRR would decrease to 27 percent. In a more adverse situation of asimultaneous increase in project cost by 15 percent and a reduction of benefits by 15 percent,

17 As mentioned in para. 7, freight rates are determined by the market and passenger fares are regulated but

periodically reviewed. During the economic evaluation, the estimated VOCs showed similarities with the ratesand fares actually charged in the market. This increases the confidence that VOC savings will be passed on tothe users.

15

the overall EIRR will be 22 percent. The switching value18 for cost was determined to be 100percent, and switching value for benefits 49 percent. If project implementation is delayed by twoyears, the EIRR will be reduced to 20 percent. Also, if only benefits due to VOC savings ofnormal traffic are considered, the EIRR will decrease to 25 percent. The economic analysis isgiven in Appendix 12.

B. Social Dimensions

50. The social impact assessment (Appendix 13) served to inform the communities aboutthe Project and its implications, and elicited their suggestions, views on mitigation measures,and the role they could play. The local community, particularly the poor, will be informed andencouraged to engage in road construction and maintenance activities. It is important tomaximize the participation of the local community in road construction, slope protection, andmaintenance activities.

1. Project Beneficiaries

51. The Project will directly benefit approximately 60,000 people. Based on the feasibilityreport on the poverty profile of the population affected by the Project, 38 percent of householdsare below the estimated poverty line level of Bhutan.19 The beneficiaries of the Project will be (i)the poor who will achieve more mobility in seeking employment and income-generatingopportunities; (ii) entrepreneurs and small traders who will be able to set up enterprises alongthe road; (iii) agricultural enterprises that will benefit from faster, cheaper, and reliable access tolarge markets and export opportunities; (iv) neighboring countries that can utilize the route forimproved access to Thimphu, thereby promoting regional cooperation; (v) passenger trafficalong the Thimphu-Wangdue Phodrang-Bumthang-Mongar-Trashigang routes; and (vi)exporters and importers who will benefit from reduced transportation cost for freight using theshorter project route. Road construction and slope protection, which requires mostly unskilledlabor, will generate direct income-earning opportunities, particularly for the poor. Over fouryears, the Project will provide approximately 300,000 person-days of unskilled employmentopportunities, particularly for the poor and women.

2. Impact on Indigenous People and Cultural Properties

52. Data from the social assessment and other available documents show no separatedisadvantaged groups who are likely to be adversely affected by the Project. Accordingly, thereis no need to prepare an indigenous people development plan. Also, the Project will notadversely affect any cultural property. In fact, the Project will facilitate access to some of thehighly revered spiritual centers in Bhutan.

18 The switching value shows the percentage increase in a cost variable (or decline in a benefit variable) required

for the net present value (NPV) to become zero, which is the same as the EIRR reducing to the cut-off level of 12percent.

19 Since no documented information on the poverty line of Bhutan is available, its assessment was based on thesame yardstick (primarily daily calorie intake food of 2,200 calorie per person per day) as that followed in India,adjusted to consider nuances relevant to Bhutan, such as expenditure on transport, shelter, clothing, fuel, etc.This is estimated to be around Nu504 per person per month or $144 per capita per year (December 1998 pricelevel).

16

3. Gender Impact

53. The Project has sought opportunities to address gender concerns in road construction-related activities. Women will benefit from the Project through their participation in roadworkopportunities, particularly in road construction, slope protection, and maintenance works. Sincewomen in Bhutan are active producers and marketers of food, reducing the transport burden ofrural women would release their time and energy for more productive and socially beneficialactivities. The Project is expected to facilitate access to existing health, social services, andschools, making it possible for teachers, of which the majority are women, to commute fromtowns to village schools; and will enable dzongdag or district administrators to establish newschools and recruit more teachers. As a result, the enrollment rates are expected to increase forboth boys and girls, but the rate for girls, which had been much lower than for boys, couldincrease more.

4. Participatory Approach

54. The participatory approach was conducted during feasibility (footnote 2), fact-finding andappraisal to assess poverty from the perspective of a range of stakeholders and to involve themin the planning for follow-up action. Furthermore, the social assessment aims to inform theaffected people about the Project and its implications and elicit their views on mitigationmeasures, suggestions, and role they could play. The local community, particularly the poor, willbe informed and encouraged to engage in road improvement and maintenance activities. It isimportant to maximize the participation of local community in road improvement andmaintenance activities.

55. As part of project preparation an assessment of the well being of women road workerswas conducted.20 The participatory gender assessment of the road workers covered differentparts of the country and provided a sound base for planning programs for improving theconditions and well-being of road workers in general, and women and children in particular. Asurvey was carried out along the East-West Highway. Primary data generated through field visit,interview, and questionnaire formed the baseline information to determine gender ratio, workingconditions, effectiveness of the World Food Program, social and welfare facilities available; andidentify constraints and opportunities. This was supplemented by the analysis of policies on thenational workforce, secondary information on the role of private contractors and Governmentagencies, and consultations with relevant authorities.

5. Local Labor

56. The Government encourages private construction companies to employ local laborinstead of imported labor from India and Nepal for road construction. Any negative impact ongroups and individuals will be identified and remedied. For example, the use of child labor inconstruction activities is not allowed. Close monitoring during supervision will pay attention tothe specific contractual clauses incorporated in the sample bidding documents.

6. Communicable Diseases

57. In addition to the provisions included in each civil works contract, the Government iscurrently taking necessary measures to promote awareness and to prevent the spread of

20 Under TA 5889-REG: Gender and Development Initiatives, for $850,000, approved on 13 December 1999.

17

communicable diseases, including sexually transmitted diseases (STD) and HIV/AIDS. ADB isalso supporting Government’s efforts under the proposed Health Care Reform Program.

C. Impact on Poverty Reduction

58. Under ADB’s current project classification system, the Project’s primary objective iseconomic growth and the secondary objective poverty reduction as it targets the poorer areas ofthe country. Under the new project classification effective 2001, the Project would be classifiedas pro-poor growth. The overall project strategy of poverty reduction was formulated in terms ofthree approaches: (i) pro-poor growth; (ii) improved quality of life; and (iii) employmentopportunities for the poorest population of the country.

1. Pro-Poor growth

59. More rapid economic development is expected to lead to a significant reduction inpoverty in the hinterland and eastern regions. Existing poverty is rooted in the lack of economicopportunity and the associated lack of sufficient employment opportunity and livelihoodactivities. Survey data on occupational distribution suggests that many of the poor in the projectarea are in agriculture (as casual laborers), cottage industries, and construction, or areunemployed. The expected diversification of agriculture and expansion of potentially better paidemployment in small industries and tourism are therefore likely to have especially significantpoverty reduction impacts.

60. For farmers in general, an improved transport network can also ease the introduction ofimproved farming practices and the transition from subsistence farming to cash crops and amarket economy. Improved access to transportation also lowers the costs of inputs such asfertilizer. Reliable access, e.g., all-weather possibilities to input and output markets, canstimulate higher cash-crop farming production and more stable incomes, and enable the poor toimprove their management of risks. The Project will benefit the urban population as well. Forexample, food prices for the urban poor could be reduced.

2. Improved Quality of Life

61. The Project will have direct impacts on the quality of life of all income groups.Improvements of the East-West Highway will not only provide people with more convenientaccess to a broad range of socioeconomic opportunities, but also have strong income effects bylowering transport costs, and hence, the prices of consumer goods and services. In these ways,the Project will contribute to improved personal welfare. Lack of affordable access deprives thepoor of the ability to take advantage of job opportunities and even of very basic social services.Reliable access to schools and health services contributes directly to the poor’s accumulation ofhuman capital, which is a key factor in sustainable poverty reduction.

3. Employment Opportunities for the Poor

62. The Project will generate demand for mostly unskilled labor and provide income-earningopportunities for the poor and women. It will provide local communities with employmentopportunities offered by the privatized road construction companies. This could be of particularvalue to households with very small plots and/or few animals and who have to sharecrop otherfarmers’ land, or who have available time. These tend to be the poorest families. Since theProject will generate jobs for the poor who are otherwise unemployed or underemployed, it willcontribute to poverty reduction. Moreover, the Project will directly benefit the road workers. In

18

the project area, there are 2,748 road workers of whom 40 percent are women who work on theroads and are paid by DOR. Road workers are among the neediest and poorest groups in thecountry. Illiteracy and insufficient land have forced them to leave their villages to join theworkforce. By working in the private construction companies for this Project, they will get 40percent more income than working with DOR. Therefore, the Project will improve their income-earning opportunity.

D. Risks

63. The project risks mainly relate to the implementation arrangements. Due to possibleinclement weather conditions, it will be important to adhere to the implementation schedule.Domestic contractors have learned from experience under the previous ADB Project (footnote8) about the engineering requirements of the different resurfacing treatments. In addition, therewill be international consulting services for design and supervision and institutional support toDOR. It will be important that DOR establish a properly staffed PMO with qualified counterpartpersonnel, for the duration of the Project, both in its Thimphu headquarters and in the fieldwhere the improvement works will take place.

VI. ASSURANCES

A. Specific Assurances

64. The Government has given the following assurances, in addition to the standardassurances, which have been incorporated in the legal documents:

(i) The Government will provide DOR with adequate budgetary allocations for timelyimplementation of the Project.

(ii) Within two years after loan effectiveness, the Government will plan its road sectorinvestments and asset management activities based on the Road Sector Master Plan,which will be developed under the TA for Road Planning and Management StrengtheningProject and agreed upon with ADB.

(iii) Within one year after loan effectiveness, DOR, with the assistance of the consultants, willimplement a pilot contractor and equipment leasing scheme, under arrangementssatisfactory to ADB, for domestic contractors to participate in the Project by (a) providingassistance in civil works contract management; and (b) leasing equipment owned byDOR’s Mechanical Division to domestic contractors.

(iv) Based on the outcome of the TA study (footnote 4), the Government will, within threeyears after loan effectiveness, and in consultation with ADB, levy user charges to recoverthe costs incurred in maintaining the national road network.

(v) Within three years after loan effectiveness, the Government will (a) consult with ADB onany major changes made to the draft legislation on the proposed Road Act beforepresenting it to the Cabinet and the National Assembly; and (b) enact and make effectivethe proposed Road Act.

(vi) The Government will ensure that arrangements satisfactory to ADB are made for releaseof DOR staff to participate in the Project as domestic consultants independent of DOR,together with domestic consultants from the private sector.

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(vii) Upon completion of the Project, the Government will ensure that all periodic maintenanceworks on the national highway network are tendered out to the private sector.

(viii) During and after project implementation, the Government will prepare annual plans on thenational road network taking into account physical measurements, maintenancestandards, and traffic volumes. Based on these annual plans, the Government will (a)provide appropriate maintenance of the national road network; and (b) ensure thatadequate and timely allocation of resources are made available for the maintenance of thenational road network.

B. Condition for Award of Contract

65. DOR will not award any civil works contract under the Project until after it has obtainedfrom the National Environment Commission the necessary environmental clearance related tothat contract.

VII. RECOMMENDATION

66. I am satisfied that the proposed loan would comply with the Articles of Agreement ofADB and recommend that the Board approve the loan in various currencies equivalent toSpecial Drawing Rights 7,310,000 to the Kingdom of Bhutan for the Road Improvement Project,with a term of 32 years, including a grace period of 8 years, and with an interest charge at therate of 1 percent per annum during the grace period and 1.5 percent per annum thereafter, andsuch other terms and conditions as are substantially in accordance with those set forth in thedraft Loan Agreement presented to the Board.

TADAO CHINOPresident

04 September 2000

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APPENDIXES

Number Title PageCited on

(page, para.)

1 Project Framework 21 1,2

2 Road Sector Data 24 2,5

3 External Assistance to the Road Sector 26 5,17

4 Summary of Design Approach and TechnicalStandards

27 7,21

5 Summary Cost Estimates 31 9,29

6 Project Management Office OrganizationChart

32 10,31

7 Implementation Schedule 33 10,32

8 Proposed Procurement Packages 34 11,35

9 Outline Terms of Reference: ConsultingServices for Design, Supervision, andInstitutional Support

35 11,36

10 Proposed Project Performance MonitoringSystem

44 12,43

11 Summary Initial Environmental Examination 46 13,44

12 Economic Evaluation 53 15,49

13 Summary Poverty and Social Assessment 61 15,50

PROJECT FRAMEWORK

Design Summary Project Target/Indicators ofAchievement

Monitoring Mechanisms Assumptions

Goal

A well-planned, accessible, safe, and reliableroad network that is designed, built, andmaintained in a technically correct,environment-friendly, and cost-effectivemanner

The satisfaction of highway users withthe road network improves as a result ofbetter and safer roads.

Road user costs on the road networkdecrease annually.

Road condition-related accidentsdecrease on road network annually.

Road user satisfaction surveys

Road user cost surveys

Road accident statistics

Bhutan's road networkcontributes to socioeconomicdevelopment and improvedquality of life.

Objectives

Bring project roads surfaces and features toan acceptable condition standard usingconstruction techniques that ensureacceptable condition levels for at least sixyears

Improve governance by strengthening theDepartment of Road's (DOR) capacity tomanage road improvement contracts

Strengthen private sector road contractors'capacity to carry out periodic maintenanceworks according to international qualitystandards

Reduce poverty by providing employmentopportunities for the poor and improvingaccess to health, education, and other socialservices

International Roughness Indicator (IRI)value on all project roads is < 5.0.

Road user costs are reduced by 25%after project completion.

Passenger fares and freight rates arereduced.

Ongoing periodic maintenance contractsare defined, tendered, and completed ontime, within budget and implemented bythe private sector.

Road feature condition inventories andsurveys

Management and operational reports ofDOR

Sufficient revenues aregenerated and funds allocatedfor continued road constructionand maintenance.

Private sector road contractorand consulting engineeringindustries continue to developand modernize.

The Government continues toseek new avenues for roadsector funding and toimplement modern roadmanagement techniques andtechnologies.

The Government is makingbetter road investmentdecisions as a result ofimproved planning informationfrom DOR.

21A

ppendix 1, page 1

Design Summary Project Target/Indicators ofAchievement

Monitoring Mechanisms Assumptions

Components/Outputs

Final design and bidding documents for 1sttranche periodic maintenance work on theEast-West Highway

180 km of 1st tranche periodic maintenancework completed on the East-West Highway

Final design and bidding documents for 200km of remaining periodic maintenance workon East-West Highway

Additional slope stability works completed onthe East-West Highway and the north-southroutes

200 km of remaining periodic maintenancework completed on the East-West Highway

Functional, sustainable plant hire operationin place

DOR personnel familiar with modern roadconstruction design, contracting, andsupervision techniques

Main road contractors familiar with moderncontracting procedures and fully mechanizedtechniques for periodic road maintenancework

New road contractors familiar with roadmaintenance contracting and operations

Design and contract documents for 1sttranche packages are completed by loaneffectiveness

1st tranche periodic maintenancecontracts awarded, with workcommencing by month 8 of project periodand completed by month 26.

Design and contract documents foradditional slope stability improvementcontract packages are completed bymonth 12 of project period.

Design and contract documents for 2ndtranche of periodic maintenance contractpackages are completed by month 18 ofproject period.

2nd tranche of periodic maintenancecontracts are awarded and workcommenced by month 24 of projectperiod and completed by month 44.

Plant available for hire by newcontractors by month 12 of projectperiod.

Design and contract documentation

Contractor and DOR work completionreports

Consultant work supervision reports

Consultant project reports (inception,quarterly, final)

Loan disbursement reports

Tripartite meetings betweenGovernment, Asian Development Bank(ADB), and consultants

Project completion report

Civil works packages andinterventions were correctlydefined.

Civil works are completedaccording to specifiedstandards.

The Government is able toretain qualified personnel inDOR and/or finance the use ofqualified domestic consultants.

Private sector contractorsmake the required investmentin equipment and humanresources to become and toremain viable roadconstruction businesses.

Appendix 1, page 2

22

Design Summary Project Target/Indicators ofAchievement

Monitoring Mechanisms Assumptions

Inputs

9 periodic maintenance civil works contractpackages and additional slope stabilityimprovement contract packages

Road design and construction supervisionconsulting services to supervise or fast-trackcontracts, design, support the tendering ofand provide supervision for remaining civilworks contracts, and provide direct technicalsupport to and supervise pilot contractors

Equipment and materials for plant hirecheme

Pilot contractor development package

Design and supervision consultingservices terms of reference as defined inloan project documentation

Civil works packages as specified in loandocumentation

Total external financing of $9.6 million

Counterpart Government funding of $3.2million

Loan documentation

ADB policies and practices for loanprojects

Effective management ofinputs by ADB and theconsultants

DOR is committed toimproving and is open to newmethods and technologies.

Government provides qualifiedjunior staff to supportconstruction supervision,required data, and supportfacilities including all requiredsoils laboratory testing.

Appendix 1, page 3

23

Appendix 2, page 1

ROAD SECTOR DATA

Table A2.1: Existing Road Network,by Type and Category

Classification Road Length (km) TotalPaved Gravel Earthen

National highway 1,562 24 - 1,586District 293 122 - 415Feeder 368 828 178 1374

Total 2,223 974 178 3,375

Source: Department of Roads.

Table A2.2: Vehicle Fleet Size in Bhutan a

Year Two-Wheelers Light Taxis Heavy Total

1980 299 213 23 165 7001981 455 371 39 347 1,2121982 707 618 55 460 1,8401983 946 806 60 533 2,3451984 1,200 1,125 78 719 3,1221985 1,513 1,458 117 892 3,9801986 11,883 1,802 153 1,043 4,8811987 2,281 2,043 213 1,184 5,7211988 2,882 2,411 250 1,459 7,0021989 3,222 2,518 291 1,633 7,6641990 4,100 4,372 385 3,059 11,9161991 4,681 4,857 447 3,259 13,2441992 5,028 5,282 534 3,424 14,2681993 4,046 3,082 289 1,557 8,9741994 3,001 2,246 172 655 6,0741995 - - - - -1996 - - - - -1997 5,834 4,368 557 2,140 12,8991998 6,628 5,942 b 2,369 14,9391999 7,095 6,647 b 2,613 16,135

aData for 1995 and 1996 not available.

b Included in Light category

Source: Central Statistical Organization.

24

Appendix 2, page 2

Table A2.3: Road Sector Expenditure 1

(Nu million)

Item FY1994 FY1995 FY1996 FY1997 FY1998

Administration 20.2 23.8 24 30.7 56.8Maintenance 24.0 34.6 71.6 40.1 42.1Capital expenditure 135.3 180.7 185.2 345.7 290.4

Total 179.5 239.1 280.8 416.5 389.31 Excluding Mechanical Cell

Source: Ministry of Finance.

Table A2.4: Road Sector Revenues(Nu million)

Item FY1993 FY1994 FY1995 FY1996 FY1997 FY1998

Motor vehicle tax 22.79 20.56 20.27 21.53 26.26 31.68Sales tax on petroleum products 2.15 4.36 5.8 13.51 31.02 42.25Sales tax on vehicles 2.73 1.29 5.63 3.80 1.05 3

Sales tax on spare parts and tires1 15.25Customs duty on motor vehicles 0.16 7.95 11.13 7.79 9.55Customs duty on spare parts2 4.71BIT on vehicles 3.47 2.97 3.31 3.91 2.79Driving license fees 0.67 0.89 1.03 1.13 0.79Weighbridge fees 0.61 0.98 0.76 0.71 0.76 1.31Vehicle hire charges 0.46 0.42 0.91 0.83 1.25Royalty on bus transporters 0.67 0.11 1.38 0.46 0.27

Total 29.57 39.81 49.74 52.97 75.2 98.78

Notes:1. Includes depot surcharge on petroleum products2. Included under motor vehicle tax.3. Specific details not available.

Source: Department of Revenue and Customs.

25

26 Appendix 3

Loan No. Project Name Amount Approval ($ million) Date

637-BHU(SF) Multiproject 5.00 1983790-BHU(SF) Road Works Mechanization 4.50 19861265-BHU(SF) East-West Highway Maintenance 5.20 1993

TA No. Project Name Amount Approval Type of ($) Date Assistance

540-BHU Multiproject 145,000 22 Sep 83 A&O687-BHU Road Construction and Training 75,000 24 Jun 85 PP799-BHU Institutional Strengthening of the 350,000 30 Sep 86 A&O

Public Works Department809-BHU Bridge Construction 150,000 28 Oct 86 PP1559-BHU Institutional Strengthening of the 530,000 6 Sep 91 A&O

Department of Road1682-BHU Road Project 250,000 30 Mar 92 PP1984-BHU Development of a Maintenance 390,000 18 Nov 93 A&O

Management System1985-BHU Construction Management 740,000 18 Nov 93 A&O3107-BHU Road Transport Network Development 650,000 3 Dec 98 PPA&O = Advisory and operational; PP = project/program preparatory.

Source Project Name Amount Opening Type of (million) Year Assistance

World Bank Rural Access Road 11.6 1999 Loan

Government of Eastern Feeder Roads 1999-2001 GrantIndia Improvement of Thimphu-Puntsholing Highway 2001 Grant

Bridges on Trongsa-Gelephu-Sarpang Highway 1999-2002 Grant

UNCDF Eastern Feeder Roads 1998-2002 Grant

Government of Bridge on Thimphu-Paro Highway 1993 GrantJapan

Helvetas of Bridges on East-West Highway 2002 GrantSwitzerlandUNCDF = United Nations Capital Development Fund.

EXTERNAL ASSISTANCE TO THE ROAD SECTOR

Table A3.2: Asian Development Bank Technical Assistance Projects

Table A3.3: Assistance from Other Sources

Table A.3.1: Asian Development Bank Loan Projects

Appendix 4, page 1

SUMMARY OF DESIGN APPROACH AND TECHNICAL STANDARDS

A. Background

1. The objective of the proposed Project is to undertake road improvements on the East-West Highway in Bhutan. The RIP will involve (i) design of periodic maintenance interventions,(ii) slope protection and drainage improvements, and (iii) consulting services and institutionalsupport.

2. The terms of reference for the Road Network Study,1 under which the Project wasprepared, required the technical assistance (TA) consultant to prepare a prioritized roadimprovement program for the project roads that will facilitate the social and economicdevelopment of Bhutan. The study included three roads totaling 941 kilometers (km). Thepriority link in Bhutan is the East-West Highway, 546 km long, between Trashigang andSimtokha. Two other north-south routes, between Wangdue-Phodrang and Sarpang andTrongsa and Gelephu, were also studied.

3. The Asian Development Bank (ADB)–assisted East-West Highway Maintenance Project,2

completed in 1998, made periodic maintenance interventions along portions of the project roadand assisted in developing a private sector contracting industry in Bhutan. Most of theinterventions remain in good condition, with only occasional and minor routine maintenancerepairs necessary. However, some portions have not performed up to expectations and requirefurther intervention. The previous project introduced new construction methods to nascentprivate contractors. Inexperience with mechanized paving methods in the past contributed to theearly deterioration of some roadway improvements. The Project will benefit from the previousexperience and apply the lessons learned in its implementation.

B. Lessons Learned

4. The original design for roadway improvements under the East-West HighwayMaintenance Project called for resurfacing using single bituminous surface treatment (SBST).The road deteriorated faster than anticipated and, because of severe delays in initialimplementation required a more significant resurfacing intervention–double bituminous surfacetreatment (DBST)–once construction began. This markedly increased the resurfacing cost perkm. To remain within the project budget, lengths of roadway improvement originally planned hadto be dropped from the project. Also, the previous design interventions did not includeimprovement of roadside drainage or slope protection works. Insufficient water drainage andinadequate slope protection along a roadway contribute significantly to road deterioration.

5. The detailed design for the Project will be made immediately before the tendering andaward of construction contracts. As such, very little road deterioration is expected to occurbetween design and construction, and no significant increase in improvements should berequired once construction starts. The minimum resurfacing intervention proposed is DBST,which is twice the pavement coverage of the SBST specified in the previous project.Consequently, upgrades in design are less likely to be necessary, and the cost estimatesdeveloped in the final design should closely represent the final construction costs.

1 TA 3107-BHU: Road Transport Network Development, for $650,000, approved on 3 December 1998.2 Loan 1265-BHU (SF): East-West Highway Maintenance Project, for $5.2 million, approved on 18 November

1993.

27

Appendix 4, page 2

6. As noted, some sections improved under the previous project did not meet performanceexpectations. Due to unfamiliarity with mechanized methods as well as equipment breakdowns,portions of the road were resurfaced using manual placement methods. This, in addition to theinsufficient drainage that existed, undoubtedly contributed to the poor performance of theroadway. To prevent the problem from recurring, all resurfacing will utilize mechanizedoperations. Further, the Project Management Office (PMO) will procure new paving equipmentas part of the plant hire scheme. It should be noted that several domestic contractors in theprevious project did gain experience in the mechanized placement of road resurfacing. Thesecontractors have maintained their equipment plant and complement of trained personnel andstand ready to participate in the Project.

7. Construction supervision in the previous project also proved inappropriate andinadequate. With ADB funding from a TA grant, two independent international consultants werefielded to provide construction supervision support. This arrangement was not successful, asevidenced in part by early deterioration of some road resurfacing improvements, and serviceswere terminated earlier than originally planned. Working with a grant, the Department of Roads(DOR) did not assume significant ownership of construction supervision. Further, no counterpartstaff was assigned to assist with construction monitoring. The geographic distance and timerequired traveling between construction sites further hampered proper supervision.

8. For the Project, a joint team of international and domestic experts will provide design,construction supervision and institutional support to the PMO. The consultant will also conductseveral training workshops for the benefit of DOR personnel. The consultancy team will becomposed of resident engineers and site supervisors. Each construction contract package willbe continuously monitored. The PMO will provide counterpart staff to monitor constructionactivities and concur with the consultant team regarding project progress and quantitycertifications; this provides excellent opportunity for technology transfer. The consulting serviceswill be fully funded out of the loan proceeds and not through a TA grant, thus enhancingGovernment ownership.

C. Road Analysis Approach

9. The existing pavements on the East-West Highway typically have a base coursecomposed of waterbound macadam (WBM) with an average thickness of 320 millimeters (mm).A 20-mm bituminous overlay forms the pavement surface. The typical roadway cross-sectionconsists of a single motorized traffic lane 3.5 meters (m) wide with 1.5 m wide shoulders. Themaximum design vehicle speed is 80 km per hour (kph). Minimum speeds of 20 kph for lightvehicles and 15 kph for trucks are applied to avoid unrealistically low journey speeds.

10. A road roughness survey was conducted using a vehicle-mounted bump integrator andcounter to measure the unevenness of the road. A calibrated odometer was used to measuredistance along the road. The bump integrator produced roughness values and equivalentInternational Roughness Indexes (IRI) for all sections of the road studied. The need for otherexogenous interventions in areas with unlined drains, nonfunctioning culverts, insufficient slopeprotection, and destroyed pavements was also identified during the survey.

11. The physical surveys and reference data collection identified homogeneous sectionsalong the road on the basis of traffic volumes, road roughness measurements, altitude, androad gradient. These sections were used in a modified version of the Highway Design andMaintenance (HDM) model to prioritize the need for intervention.

28

Appendix 4, page 3

12. The HDM program prioritizes road data input to calculate vehicle operating costs. Theprogram was adapted to conditions specific to Bhutan and the East-West Highway. Forexample, a higher likelihood for crack progression was input into the model, due to the poor soiltypes and the freeze-thaw cycles prevalent at the higher elevations. A lower rate of ruttingprogression was used due to the low traffic values. Other relevant inputs were modifiedaccording to Bhutan’s environmental and climatic conditions. The adaptations specialized themodel to give more accurate results for the East-West Highway analysis. Considering othercosts, such as maintenance, fuel, lubricant, tires, and license fees, the study recommended theneed for periodic maintenance of about 350 km of roads, roughly 63 percent of the total length.That figure was used to develop indicative packages for design interventions.

D. Design Philosophy

13. The study first identified four periodic maintenance interventions, which consider localcontractor capabilities, DOR experience, and engineering best practices:

Option 1: DBST chip seal applied every 6 years.Option 2: DBST chip seal applied when roughness IRI is 6.5 m/km.Option 3: 100 mm WBM base course with double surface treatment chip seal.Option 4: 40 mm hot mix overlay.

14. The most appropriate rehabilitations for routine and periodic maintenance are option 1and option 3. On sections where the existing pavement surface is in fair condition, a DBSToverlay will be applied to provide a smoother, more uniform riding surface and to protect theexisting pavement, thus extending the serviceable life of the road. Road sections in moredeteriorated condition will first be strengthened with the WBM base course before receiving theDBST overlay. Road sections now severely eroded or destroyed will be reconstructed as part ofthe exogenous interventions before road surfacing.

15. The pavements will be designed in accordance with Indian Standards for a 10-year life,with provision for overlays every 7 years to extend the road’s life up to 15-20 years. The designswill be based on traffic counts and traffic projections (for capacity), axle load surveys, deflectiontests and projections (for structural capacity). With the WBM base course in option 3, thepavement structure will consist of an improved, well-compacted subgrade, with WBM subbaseand base courses, which consist of 20-50 mm sizes gravels and 20-25 mm bituminous wearingcourse. The roughness values for the existing roads are between IRI6 and 12. The targetroughness values after periodic maintenance is 5.

16. Other exogenous construction works will also be provided to ensure that periodicmaintenance interventions achieve or exceed their intended design life and that the reduction invehicle costs achieves the expected levels. These interventions include slope protection throughretaining walls or revetments, construction of new culverts and repair of existing ones, andconstruction of new lined drains.

17. The indicative construction packages proposed for the Project are based on the feasibilityanalysis and preliminary designs. The packages as presented may be revised by the consultanton the basis of final designs, which will be completed immediately before tendering the worksfor construction.

29

Appendix 4, page 4

E. Technical Standards

18. The principal international standards for detailed design are the following:

(i) highways: recommendations of Indian Standard (IS), Indian Road Congress (IRC)and Transport Research Laboratory (TRL), as in Overseas Road Note 6, TRRL,United Kingdom;

(ii) culverts and other drainage structures: IS; and

(iii) pavements testing and design: IS, IRC, and TRL Road Note 31.

19. The IS and IRC will be used to design all exogenous interventions. DOR standard designsfor retaining walls will be used whenever practical.

30

31 Appendix 5

Item FX LC Total $ million Percent $ million Percent

Periodic Maintenance WorksBase 5.7 2.8 8.6 6.0 0.70 2.6 0.30Physical 0.6 0.3 0.9 0.6 0.70 0.3 0.30Price 0.5 0.2 0.7 0.5 0.70 0.2 0.30Total 6.8 3.3 10.1 7.1 0.70 3.0 0.30

Slope Protection WorksBase 0.4 0.3 0.7 0.5 0.75 0.2 0.25Physical 0.0 0.0 0.1 0.1 0.75 0.0 0.25Price 0.0 0.0 0.1 0.0 0.75 0.0 0.25Total 0.4 0.4 0.8 0.6 0.75 0.2 0.25

Consulting ServicesBase 0.7 0.4 1.1 1.1 1.00 - 0.00Physical 0.0 0.0 0.1 0.1 1.00 - 0.00Price 0.0 0.0 0.1 0.1 1.00 - 0.00Total 0.8 0.4 1.2 1.2 1.00 - 0.00

EquipmentBase 0.4 0.0 0.4 0.4 1.00 - 0.00Physical 0.0 0.0 0.0 0.0 1.00 - 0.00Price 0.0 0.0 0.0 0.0 1.00 - 0.00Total 0.5 0.0 0.5 0.5 1.00 - 0.00

Total CostBase 7.3 3.5 10.8 8.1 0.75 2.7 0.25Physical 0.7 0.3 1.0 0.7 0.73 0.3 0.27Price 0.6 0.3 0.8 0.6 0.73 0.2 0.27Total 8.5 4.1 12.6 9.4 0.74 3.2 0.26

Interest Charges 0.2 0.0 0.2 0.2 1.00 0.00

Total Cost 8.7 4.1 12.8 9.6 0.75 3.2 0.2568% 32%

ADB-FinancingAll Categories 8.7 0.9 9.6 0.75 3.2 0.25

100% 22%

Civil Works 7.2 0.5 7.7 0.70 3.2 0.3066% 4%

FX = foreign exchange; LC = local currency.a Discrepancies in subtotal values are attributed to round-off truncation.

Government

SUMMARY COST ESTIMATES a

Asian Develo pment Bank

PROJECT MANAGEMENT OFFICE

ProjectManager

Director

Design &SupervisionConsultants

AssistantProject

Manager

ExecutiveEngineers

(8)Stores Unit

AssistantEngineer

AssistantEngineer

AssistantEngineer

ProjectAccountant

OfficeSecretary

Drivers(2)

AssistantEngineer

JuniorEngineers

(3)

JuniorEngineers

(3)

JuniorEngineers

(3)

Appendix 6

32

J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

Design and SupervisionAdvance RecruitmentDesign Construction Supervision

Equipment ProcurementEquipment for the Mechanical CellMaterial Testing Equipment

Civil WorksPrequalification, Bidding,

Evaluation and Contract AwardPeriodic Maintenance Contracts

Package 1Package 2Package 3Package 4Package 5Package 6Package 7Package 8Package 9

Additional Slope Protection Works

IMPLEMENTATION SCHEDULE

2004

Project Implementation SchedulePosition

200320022000 2001

Advance Recruitment

Appendix 7

33

Appendix 8

PROPOSED PROCUREMENT PACKAGES

PackageNo.

Description Length(km)

BaseAmount

($ million)Procurement

Method

PlannedCompletion

Date

PM -1 Km 11 to Km 40 29.0 0.48 LCB Aug 2002

PM-2 Km 40 to Km 94 54.0 1.48 LCB Sep 2004

PM-3 Km 181 to Km 225 44.0 1.35 LCB Sep 2004

PM-4 Km 225 to Km 257 32.0 0.91 LCB Jan 2003

PM-5 Km 319 to Km 376 57.0 1.12 LCB Jan 2004

PM-6 Km 376 to Km 427.7 43.7 1.34 LCB Jul 2004

PM-7 Km 434.5 to Km 482.5 48.0 0.93 LCB Jan 2003

PM-8 Km 482.5 to Km 525 42.5 0.65 LCB Oct 2002

PM-9 Km 525 to Km 546 21.0 0.29 LCB Aug 2002

SP-1,2 Additional SlopeProtection Works

0.68 LCB Mar 2004

Equipment

E-1 Equipment forMechanical Cell

0.40 IS Dec 2001

E-2 Laboratory TestingEquipment

0.04 DP May 2001

Consulting Services 1.10 IR Oct 2004

DP = direct purchase, IR = international recruitment, IS = international shopping; LCB = local competitive bidding.

34

Appendix 9, page 1

OUTLINE TERMS OF REFERENCECONSULTING SERVICES FOR

DESIGN, SUPERVISION, AND INSTITUTIONAL SUPPORT

A. Background

1. Bhutan’s road network is presently about 3,375 kilometers (km), of which 47 percent areclassified as national highways. The network is still relatively limited but adequate to serve thecountry’s economic development and social needs. Therefore the policy of the RoyalGovernment of Bhutan is to focus on maintaining the existing road network rather thanexpanding it during the current Eighth Five-Year Plan.

2. To support these objectives, the Asian Development Bank (ADB) financed technicalassistance (TA)1 to help the Department of Roads (DOR) develop a sustainable road transportnetwork to provide access and economic development. This TA was carried out during 1999and, among other things, resulted in the preparation of a prioritized road network improvementprogram to facilitate the social and economic development of Bhutan.

B. Objectives

3. The primary objective of this ADB Project is to undertake a road improvement projectthat will address the majority of the periodic maintenance needs on the Simtokha-TrashigangHighway (the East-West Highway). Another objective is to improve slope stability along portionsof the East-West Highway as well as the Wangdue-Sarpang Highway and the Trongsa-GelephuHighway. Approximately nine individual contract packages for resurfacing of the roadway areenvisaged, with about half to be prepared on a fast-track schedule for an early start ofconstruction activities. Smaller contract packages for slope stability improvement works on othersections of the roadway not receiving periodic maintenance will also be developed throughoutthe project for less experienced or petty contractors.

4. The Project includes consulting services and institutional support in specific areas whereexisting capacities or resources are limited. It will involve (i) designing of periodic maintenanceinterventions including patching, pavement strengthening or leveling course as required, surfacetreatment, minor drainage and slope protection works; (ii) assisting DOR in contractorprequalification, preparation of bid documents, bid evaluation, contract negotiations, andsecuring necessary approvals, (iii) developing a slope stability program for DOR (para. 5); (iv)supervising the periodic maintenance contracts; (v) assisting DOR in procuring, throughinternational shopping, road construction and materials lab testing equipment; and (vi) trainingand building the capacity of DOR personnel in road maintenance and contract management. Allthese activities will be coordinated through the project management office (PMO).

5. Although the prime purpose of the Project is to improve the existing road pavement andassociated drainage, it is recognized that slope instability, road blockages and landslides aremajor causes of traffic disruption, pavement damage, and environmental degradation.Accordingly, some slope protection will be required, both within and outside the identifiedperiodic maintenance contract packages. Due to cost constraints, only a limited portion of theslope instability affecting each periodic maintenance contract package will be addressed. Theconsultant will be required to prioritize the individual sites, in consultation with the PMO, to

1 TA 3107-BHU: Road Transport Network Development, for $650,000, approved on 3 December 1998.

35

Appendix 9, page 2

arrive at the most cost-effective solution overall. The consultant will also assist DOR inintegrating slope stability measures into routine and periodic maintenance operationsnationwide.

C. The Consultant

6. The consultant must be an international consultant from a member country of ADB, whomay associate with other similarly eligible international consultants, and who is obliged toassociate with domestic consultants. An international consultant must lead the association.

D. Scope of Work

7. The TA consultants produced samples of prequalification documents, bid documents(Instructions to Bidders, Conditions of Contract, Technical Specifications, specimen Bills ofQuantities, Schedules of Supplementary Information, and appropriate forms), and bid evaluationdocuments based on the Government’s Ministry of Finance Financial Manual, Chapter 17,updated in July 1998. The documents are substantially based on standard Sample BiddingDocuments produced by ADB.

8. The contract packages proposed by the TA consultants are in the table. These areindicative packages that may be modified according to the detailed design.

KilometerPackageNumber From To

Length(km)

PM-1a 11 40 29.0PM-2 40 94 54.0PM-3 181 225 44.0PM-4 a 225 257 32.0PM-5 319 376 57.0PM-6 376 427.7 43.7PM-7a 434.5 482.5 48.0PM-8a 482.5 525 42.5PM-9a 525 546 21.0

Total 371.2a Proposed fast-track packages.

9. During detailed design of the contract packages, the consultants will

(i) evaluate the pavement strength including, as necessary, Benkelman beamdeflection testing, trial pitting, laboratory testing of the pavement layers andsubgrade DCP (dynamic cone penetrometer) tests. In particular, carry outpavement strength testing on a damaged road section at a high mountain passsubject to freeze/thaw and determine appropriate remedial measures;

(ii) assess the requirement for localized patching, leveling; and reconstruction;

(iii) review the proposals for new culverts or culvert replacement/rehabilitation(including erosion protection measures) on the road lengths identified forimprovements;

36

Appendix 9, page 3

(iv) check the condition and performance of the roadside drains and, where theyrequire rehabilitation or upgrading, propose appropriate measures. Where roadside drains are used for irrigation purposes, design appropriate structures topermit excess water to pass through the existing culverts;

(v) evaluate the requirement for slope protection measures adjacent to the road.Where these are relatively minor (e.g., limited-height breast or retaining walls,slope trimming or bioengineering), prioritize individual locations in order of risk ofblockage or damage to the road and draw up a schedule of protection measuresfor each road section;

(vi) identify appropriate periodic maintenance and/or slope stability contractpackages within the competence of the less experienced contractors and attracta good level of competition for the work;

(vii) assess the sources of natural construction materials (e.g., quarry sites), carry outsuitability tests, and prepare a materials report for the contractors’ information;

(viii) locate suitable areas for disposing of surplus spoil;

(ix) assist DOR in determining what additional construction equipment should beprocured as part of the plant hire scheme;

(x) review the available material testing equipment and recommend additionalmaterials lab testing equipment to be procured for use on the Project;

(xi) carry out the final design for resurfacing, roadside drainage improvement, andculvert rehabilitation or replacement, utilizing pavement courses and otherconstruction methods within the capability of local contractors;

(xii) expedite detailed design of the fast-track packages, with an intent to award forconstruction approximately eight months after the start of the project;

(xiii) calculate quantities and analyze unit rates for all items of work to be carried out,prepare detailed estimates of construction costs for each road section;

(xiv) prepare in consultation with DOR the final bid documentation for periodicmaintenance and slope stability contract packages. Develop technicalspecifications, drawings, bills of quantities, and cost estimates. Ensure thatappropriate construction methods, utilization of local labor forces wheneverpossible, provisions for health care and education for labor forces are detailed inthe contract documents. Include in each contract package a provision thatsubcontracts a minimum 5 percent of the contract price to petty contractors.Ensure environmental mitigation measures conform to the requirements of theGovernment; and

(xv) prepare a project prospectus with an environmental management plan forsubmission by DOR to the National Environment Commission, and respond toqueries from the Commission.

37

Appendix 9, page 4

10. Prior to bid submission for the civil works contract packages, the consultants will

(i) review and confirm with DOR the proposed implementation program so as to bidthe fast-track periodic maintenance works as quickly as possible and maximizecontractor competition;

(ii) assist DOR with procurement of road construction and materials lab equipment inaccordance with ADB’s Guidelines for Procurement;

(iii) develop and agree with DOR on the contractor prequalification documents andscoring system and, after approval by ADB, issue them to interested contractors;

(iv) conduct prequalification workshops to explain to contractors how the biddocuments should be completed;

(v) evaluate completed prequalification documents and recommend contractorshortlists to DOR;

(vi) agree on a bid evaluation scoring system for both experienced and lessexperienced contractors and assist DOR with obtaining approval from ADB; and

(vii) issue approved bid documents to prequalified contractors, assist DOR in the pre-bid meetings, answer contractor queries, and issue bid addenda.

11. Following submission of bids, the consultants will

(i) undertake bid clarifications with contractors, evaluate the bids, and recommendto DOR the award of contracts;

(ii) assist DOR in contract negotiations, preparation, and signing of final contractdocuments with successful bidders, and issuing Notices to Proceed; and

(iii) assist DOR in obtaining necessary approvals from ADB and other agencies.

12. For construction supervision of all sections, the consultant will carry out the duties of theengineer as described in Chapter 17 (Procurement) of The Government’s Ministry of FinanceFinancial Manual 1988 (revised 1st July 1998), Conditions of Contract for Civil Works, LocalCompetitive Bidding. The tasks will be performed in coordination with DOR executive engineersassigned to the Project. The duties of the consultant will include, but will not necessarily belimited to,

(i) giving construction management advice to the contractors;

(ii) monitoring the setting out of the works of each contractor;

(iii) checking and supervising, for DOR approval, all working and as-built drawingsprepared by each contractor;

(iv) reviewing the quality control programs of the contractors;

38

Appendix 9, page 5

(v) inspecting and testing all materials and works to ensure compliance withspecifications and giving immediate notice to the contractor in the event that suchmaterials and works fail to comply with the specifications. Special provisionshould be made for testing the bitumen or bitumen emulsion provided by thecontractor, including verification of supply sources;

(vi) accepting or rejecting any part or parts of the completed works. All resurfacing,leveling, and patching works constructed with unapproved bitumen or emulsionwill be rejected;

(vii) advising DOR on changes in drawings or specifications that may provenecessary or desirable during construction, together with the preparation ofrevised drawings or specifications for DOR and ADB approval;

(viii) measuring the quantities of approved and accepted works and materials, andchecking and certifying each contractor’s monthly invoices. Records should bemaintained in the formats prescribed in the Government’s Financial Manual. Thisactivity will be coordinated with the DOR executive engineer or hisrepresentative;

(ix) assisting DOR in preparing withdrawal applications for contractor payments;

(x) periodically checking the remaining quantities, and undertaking constantmonitoring of each contract’s costs;

(xi) reviewing and recommending to DOR variation orders, extensions of time,claims, and other matters that may come from each contractor;

(xii) negotiating with each contractor and recommending to DOR the rates for anyunscheduled items of work that may arise;

(xiii) preparing monthly reports on each contract for DOR and ADB;

(xiv) assisting DOR in preparing quarterly progress reports to be submitted to ADB;

(xv) inspecting works completed under each contract and certifying to DOR the dateof commencement of the defects liability period;

(xvi) preparing a project completion report, combining all contracts;

(xvii) undertaking benefit monitoring and evaluation in the course of the Project andpreparing a benefit monitoring and evaluation report, taking into account thesocioeconomic and traffic baseline data prepared during the TA; and

(xviii) providing guidance to DOR on future maintenance of the road and associatedworks, and identifying potential problem areas that will require regular inspectionand/or attention.

13. One aim of the Project is to train and build the capacity of DOR in road maintenance andconstruction project management. To support this goal, the consultant will

39

Appendix 9, page 6

(i) propose and operate formal training programs for DOR personnel and affectedstakeholders to take place in Bhutan during the course of the project. Theprograms will include

(a) biannual project review workshops;(b) road construction and maintenance practice;(c) contractor prequalification, bidding, and evaluation;(d) slope protection practices in road maintenance;(e) road safety measures and improvement;(f) the role of the engineer/supervisor and employer in contract

management; and

(ii) conduct on-the-job training for domestic local consultant design and supervisionstaff and DOR site engineers during the course of the project.

E. Reports

14. The consultant will submit reports in seven copies to DOR and three copies to ADB. Alldraft reports will be submitted four weeks in advance of their final due date (to be determinedduring contract negotiations) to allow the Government and ADB to review the reports and submittheir comments. The required reports are

(i) an inception report, giving initial findings and the work program for the balance ofthe assignment, to be submitted one month after services commence;

(ii) monthly progress reports, giving brief details of the work carried out during theprevious month, the problems encountered or anticipated, together with the stepstaken or recommendations for their correction, and financial and physicalprogress to date, by the 10th day of each month following the inception report;

(iii) a draft and final design report, complete with drawings, schedules, technicalspecifications, bills of quantities, and cost estimates for each periodicmaintenance package;

(iv) a materials report giving details of suitable material sources;

(v) final contractor prequalification documents for both less experienced and moreexperienced contractors;

(vi) final bid documents for each contract package;

(vii) final bid evaluation document for each contract package;

(viii) a project prospectus for each contract package for submission to the NationalEnvironment Commission;

(ix) annual financial reports, in coordination with DOR, as per ADB’s auditingrequirements. Reports should be submitted to the Royal Audit Authority forpreparation of an audited financial statement to be forwarded to ADB.

(x) a project completion report, combining all construction contract packages; and

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Appendix 9, page 7

(xi) a benefit monitoring and evaluation report for the completed Project.

F. Staffing

15. One of the aims of the Project is to encourage the development of the local consultingprofession. International consultants are therefore required to associate with domesticconsultants on all phases of the project. The following staffing pattern is suggested. The periodof engagement, in person-months, is in parentheses.

1. International Consultants

(i) a team leader/highway engineer with wide experience in roadmaintenance, contract documentation, and construction supervisionacquired in developing countries, with experience in applying surfacedressing using emulsion and straight run bitumen (29);

(ii) a pavement engineer with experience in the design and specification ofroad pavements, Benkelman beam testing, road drainage in developingcountries (4); and

(iii) a geotechnical engineer/engineering geologist with extensive experiencein slope instability and stabilization/protection measures (4).

2. Domestic Consultants

(i) a civil/highway engineer with experience in pavement design,construction supervision, and project management, to serve as deputyteam leader (44);

(ii) a civil/pavement engineer with experience in road pavement design andmaterials testing (7);

(iii) a civil/geotechnical engineer with experience in geotechnicalinvestigations and design of retaining structures (16);

(iv) a civil engineer/hydrologist with experience in design of minor drainagestructures (6);

(v) an environmentalist with experience in environmental mitigationmeasures for road works and bio-engineering techniques, particularly inrespect of slope protection (3);

(vi) a sociologist, with experience in project benefit monitoring (5);

(vii) a materials engineer with site experience in materials testing (39);

(viii) resident engineers, with experience in site construction management,approximately one for every two periodic maintenance contract packages(88);

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Appendix 9, page 8

(ix) site inspectors, with experience in construction monitoring, approximatelyone for every periodic maintenance contract package (142); and

(x) additional support staff including a draftsman, secretaries, and laboratorytechnicians, as required.

G. Services, Accommodation, Vehicles and Equipment

16. The Government will provide the consultant with the following:

(i) all available studies, reports, and data relevant to the project, including the TAfinal report, maps, previous traffic counts;

(ii) suitable office space in the DOR office in Thimphu;

(iii) office equipment and monthly operating allowances, including telephone,computer and printer, photocopier, digital camera, handheld global positioningsystem (GPS), Road Management Data Acquisition System (ROMDAS);

(iv) one 4WD twin-cab diesel engine pickup vehicle. The cost of vehicle operation,maintenance, and drivers will also be included under this provision; and

(v) basic laboratory and measurement facilities at three locations along the project.Laboratory equipment will include, at minimum, aggregate sieves, Atterberg Limitapparatus, Dynamic Cone Penetrometer, sand cone density test apparatus,aggregate crushing value, water absorption, Los Angeles abrasion andBenkelman beam. Compression testing, as well as bitumen and emulsion testing,will be possible in at least one central materials testing lab.

17. The consultant is required to detail what additional facilities he requires in theperformance of his work on this Project, and specify their cost in his financial proposal. Allvehicles and equipment procured by the consultant for the performance of his services willremain the property of the Government. Any equipment temporarily imported for the proposedservices during the duration of the project and then reexported will be exempted from importduties or taxes. This will also apply to the personal effects of the consultant’s personnel.

18. Each contractor awarded a periodic maintenance contract package will provide thefollowing facilities to the consultant at the project site:

(i) suitable office space including maintenance and supply of office consumablesand communication;

(ii) office equipment and monthly operating allowances, including a telephone,computer and printer, and photocopier;

(iii) one 4WD twin-cab diesel engine pickup vehicle for use by the resident engineersand site inspectors. The cost of vehicle operation, maintenance, and drivers willbe borne by the contractor; and

(iv) support personnel to include office assistants and drivers.

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Appendix 9, page 9

H. Schedule

19. It is estimated that the consultants will commence their duties in January 2001 and thatthe Notice to Proceed for all fast-track contract packages will be issued by June 2001. It isexpected that detailed design for the remaining contract packages will be completed bySeptember 2002. Award of all detailed-design contract packages is anticipated by January 2003and all are expected to be finished, excluding the Defects Liability Period of one year, by theend of September 2004.

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Appendix 10, page 1

PROPOSED PROJECT PERFORMANCE MONITORING SYSTEM

1. The project performance monitoring system (PPMS) aims to ensure that the roadimprovement project is benefiting the target groups. The PPMS will (i) monitor theproject implementation performance mainly, the timely realization of the physical andother components; (ii) monitor operations performance, mainly in terms of area andpopulation benefited by the Project, operation and maintenance performance, and levelof cost recovery achieved; and (iii) evaluate performance during and after projectimplementation. Ultimately the result of the PPMS program will be incorporated into anevaluation exercise, which will be undertaken after an extended period of operation ofthe facilities.

2. The baseline conditions will be established at the time of project inception. Datawill be updated annually and at project completion. The PPMS will be designed,developed, and commissioned with the assistance of the consultants for designsupervision and institutional support, but its maintenance will be the responsibility of theproject management office.

3. The desired project impacts and the indicators for measuring such impacts arepresented in the table.

Impact Indicator

1. Economic growth throughgreater production ofagricultural products

2. Economic growth throughemployment opportunities

3. Economic growth throughtourism

Change in extent of land usage and crop type(shift to commercial from subsistence) judged bychange in area under different crops and changein total area under cultivation

Change in commercial tonnage using roadnetwork

Increase in value of agricultural productsExpansion of extension service activity

Expansion of community employment on theroad

Change in the number of tourists using the roadChange in the number of hotel accommodationsChange in the number of employees in tourismindustry

4. Better health of populationserved by road network

Incidence of specified diseases

5. Lower poverty in the region Change in the percentage of families belowpoverty lineChange in average rural household income

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Appendix 10, page 2

Impact Indicator

6. Reduced transport cost Change in passenger faresChange in freight ratesReduction in average travel timeTrend in maintenance costs per kilometerFreight costs of large commercial usersRoughness indexRegulatory costs per vehicle

7. Improved access to socialservice

Change in traffic patterns (by type of vehicle)Change in origin – destination patternsSocial services – visitor origin analysisVolume of traffic on market days

8. Safer travel Accidents by severity by cause per 1,000registered vehiclesReduction in road traffic congestion

9. Infrastructure improvement Kilometers of road, drainage, and slopeprotection

Change in roughness index of project roadsPassability of roads (duration of road closuresdue to flooding or pavement failure, etc.)

10. Institutional strengthening,e.g., technical training,pavement, or assetmanagement systems,computerization, upgradingoffice facilities, enforcingregulation, etc.

Numbers trained, systems made operational,computer installed, reduction of workforce,existence of scheduled maintenance plans,incidence of unscheduled maintenance activities

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Appendix 11, page 1

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction

1. This report summarizes the results of an initial environmental examination (IEE) of theproposed Road Improvement Project in Bhutan. The Project was prepared under AsianDevelopment Bank (ADB) technical assistance (TA)1 between May and November 1999. TheIEE was carried out in three stages: (i) fieldwork along the main highway network to observeenvironmental conditions and listen to the concerns of stakeholders; (ii) interaction with othermembers of the project design team to ensure that environmental constraints and opportunitieswere fully reflected in the project proposals; and (iii) preparation of the IEE documentation (IEEand Summary IEE).

B. Description of the Project

2. Much of Bhutan’s main highway network was constructed during the 1960s by the IndianBorder Roads Organization (IBRO). Investment in structures—particularly retaining walls andside drainage—has been insufficient and landslides frequently block the roads. Some stretchesof the pavement are in very poor condition, and in many locations the base courses are showingsigns of failure. The Department of Roads (DOR) under the Ministry of Communications (MOC)is a relatively young organization, with inadequate resources for dealing with the demands ofroutine, periodic, and emergency road maintenance.

3. The road contracting industry is small scale and requires strengthening; and so does theconsulting engineering profession. Bhutan’s engineers have few opportunities for continuingprofessional development. To respond to these challenges, the Project has two majorcomponents: road improvement program and road sector institutional strengthening program.2

The road improvement works will concentrate on the East-West Highway (Route No. 1)between Simtokha near Thimphu and Trashigang (546 km). Other roads will be treated if fundsare available.

4. The periodic maintenance activities proposed in the Project fall into ADB’s screeningcategory B/C, projects judged to have some adverse environmental impacts, but of lesserdegree and/or significance than those for category A projects. For this category, an IEE isrequired to determine whether or not significant environmental impacts warranting anenvironmental impact assessment (EIA) are likely. If an EIA is not needed, the IEE is regardedas the final environmental assessment report. Under Bhutan’s environmental screeningprocess, this type of project falls into category C, impacts moderate, project repetitive. Project ofthis category does not require further environmental assessment, but do require formalenvironmental clearance from the National Environment Commission (NEC). Impacts ofcategory C projects are best controlled through application of Codes of Practice.

1 TA 3107-BHU: Road Transport Network Development Project, for $650,000, approved on 3 December 1998.2 This Program will be carried out under TA 3470-BHU: Road Planning and Management Strengthening Project,

for $954,000, approved on 20 July 2000.

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C. Description of the Environment

1. Physical Environment

5. The project roads are situated in a mountainous environment, with elevations rangingfrom 300 meters above sea level (m asl) in the Terai to about 3700 m asl at Thrumshingla.Regional climates vary from subtropical in the south through warm temperate to cool temperate.The climate is monsoonal, with most rain falling between June and September. Annual totalsmay exceed 5,000 millimeters (mm) at Sarpang and Galephu. In rain shadow areas and athigher elevations, annual totals may be much less, down to 1,200 mm. In the front ranges,rainfall intensities can reach 600 mm/day, but again are much less at higher elevations andinterior valleys. In winter the highest passes are closed by snow. The region isgeomorphologically active. Most slopes are only marginally stable, and landsliding is common.The geology is mixed, with rock types varying from hard quartzite to soft mudstone.

2. Ecological Resources

6. Bhutan is a country of extreme biodiversity. Below the tree line (approx. 4,000 m), thevegetation is forest. Most of this is still intact, and so most of the project roads lie withintemperate or subtropical forested landscapes. Forest types crossed by the roads include fir,blue pine, mixed conifer, upland hardwood, lowland hardwood, chir pine, and subtropicallowland. The forests offer a full range of ecosystem services, including wildlife habitat andwatershed protection, and are important economically (both commercially and for subsistence).Many medicinal plants are found in the forests, at all elevations. Bhutan retains an exceptionalrange of wildlife that includes many endemic species. Many are nationally or internationally rare,endangered, or threatened. Flagship mammalian species utilizing the terrain crossed by theproject roads include red panda, Himalayan and sloth bear, tiger, elephant, and golden langur.The temperate broadleaf forests are particularly important as habitat for birds, of which 770species have been identified to date. Birdlife International has listed Bhutan as a Priority 1Endemic Bird Area. Habitat degradation and loss, subsistence and commercial hunting, andpoisoning have affected some wildlife populations. However, the prevailing Buddhist culture andlow population density combine to reduce the severity of the threats to wildlife, especially whencompared with that in other South and Southeast Asian states. The project road crosses onenational park and four proposed biodiversity corridors linking protected areas.

3. Human and Economic Development

7. Bhutan’s population is approximately 600,000, of whom some 85 percent are rural anddepend on agriculture for a living. Population growth is reported to be 3.1 percent per year. Thesettlements connected by the project roads are very small, with district centers housing amaximum of a few thousand people. The communications infrastructure includes the roadnetwork, now standing at about 3,375 kilometers (km), and a new national telecommunicationssystem. There is no internal air service and no inland navigation. All other transport is on foot,by horse, mule, or yak.

8. Industrial activities are very limited. The most important strategic industry is hydropower.This is developing rapidly, with electricity sales to India seen as providing the bulk of stateincome in future years. Two hydro projects are relevant to the project: (i) the ongoing KurichhuProject, under construction by Indian contractors on the Kurichhu, some 7 km south of the East-

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West Highway; and the planned Mangdechhu Project, located on the Mangdechhu immediatelybelow Trongsa town and Dzong, which will have access to India.

9. Local administration is carried out through districts (Dzongkhag) and blocks (geog). Atthe national level, environmental policy is developed and implemented by NEC. With ADBassistance,3 Bhutan recently established a formal process for environmental assessment of allmajor projects. The new system includes both sectoral guidelines for assessing road andhighway proposals and a code of practice for road construction and rehabilitation.

4. Quality-of-Life Values

10. The population of Bhutan is predominantly rural and poor. Health services are free.Serious health problems include respiratory infections, mother/child mortality, accidents(including traffic accidents), and vector-borne diseases such as malaria. An important constrainton the provision of health care is physical access. Due to the remoteness of many settlements,it is often very difficult for patients to reach appropriate facilities. Bhutan has many importantcultural heritage sites, archaeological, historical, and religious. The most spectacular are thedzongs, but the list also includes sites of battles and sacred natural features such as pools,mountains, and caves. Information on such sites is readily obtained from local residents.Bhutan’s national identity centers on Buddhist values. In environmental terms, the mostimportant is the interdependence of all life forms. Bhutan is a very important reservoir fortraditional ecological knowledge or IK (indigenous knowledge), particularly in relation to the useand properties of medicinal plants.

D. Screening of Potential Environmental Impacts and Mitigation Measures

1. Impacts due to Project Location

11. The Project concerns road periodic maintenance and will not involve road widening,realignment, or new construction. This aspect of the Project will not give rise to any significantimpacts. Small-scale construction camps, contractor’s facilities, and quarries will be needed.Subject to appropriate site-specific planning and control through Environmental Codes ofPractice, those structures will not give rise to unacceptable impacts. The project road passesthrough one national park and four proposed biodiversity corridors. Appropriate responses areto (i) ensure that wildlife is not harassed; (ii) consult with national park managers with respect towildlife concerns, labor force management, etc.; (iii) coordinate with national park managerswith respect to road maintenance activities and scheduling; (iv) avoid quarrying within nationalparks; (v) avoid siting work or labor camps within national parks; and (vi) review siting of existingnational workforce camps.

2. Impacts due to Project Design

12. The Project is designed to carry out much-needed highway periodic maintenance and toimprove relevant domestic capacity. It will result in an overall reduction of environmental impactcompared with the without-project scenario, especially in relation to (i) siting and operation of

3 TA 2535–BHU: Strengthening EIA Capabilities & Preparation of Environmental Guidelines, for $350,000,

approved on 13 February 1996.

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Appendix 11, page 4

quarries, (ii) slope failure caused by inadequate drainage, and (iii) use of firewood for heatingbitumen.

3. Impacts during Construction

(i) Erosion and sedimentation. The Project will not involve earthworks.

(ii) Hydrology and Drainage. The Project will improve road drainage. Nosignificant impact from this activity is foreseen.

(iii) Paving and Firewood. A major part of the Project’s physical works will bepaving. At present this activity uses firewood. The Project will requirenonwood burning technologies for heating asphalt in all dzongkhags(Thimphu, Wangdue-Phodrang, Mongar, and Trashigang).

(iv) Construction Materials. The Project will require appreciable quantities ofaggregates for paving works. Historically, stone has been collected from theroadside or from shallow workings, with significant negative impacts. Sandand gravel are obtained from rivers. Small aggregate may also be producedby hand. The Project provides an opportunity to improve the system forsupply of construction materials by developing district-level plans, andpossibly centralized quarries.

(v) Traffic. It will not be possible to bypass the works, so providing continuedaccess for normal traffic will be a major element in construction planning.Hazards could occur and should be minimized though appropriate signing,lighting, flagmen, etc. Construction traffic should be subject to standardcontrols on speed, vehicle loading, sheeting, etc.

(vi) Camps: The Project’s construction camps could be foci for various healthand social problems. These can be avoided or minimized throughconsultation with the relevant district and geog officials, and campmanagement.

(vii) Labor: Employment would be a major temporary benefit of the works.

(viii) Health and Safety. The Project provides an opportunity to improve safetyand working conditions, through training and development of relevantcontractual conditions.

4. Impacts during Road Operation

(i) Air quality. The Project will not affect Bhutan’s excellent air quality.

(ii) Severance. Severance is not a problem along the project roads, andpredicted traffic levels will not result in severance being a problem in anyof the communities served by the road.

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Appendix 11, page 5

(iii) Accidents. Improving the pavement is likely to result in higher vehiclespeeds. This may result in more accidents and increased severity ofaccidents. A particular concern is the hazard to roadside residents,especially children, from speeding through-traffic. Mitigation measures toconsider include engineering measures for differentiating between high-speed rural areas and settlements, including speed bumps and rumblestrips; and incorporating safety measures in the design of the project,specifically superelevation on bends when the pavement is reconstructed,guardrails, provision for pedestrians, and reflective roadside markings.

(iv) Fire. The project will not alter the situation with respect to roadside fires.

(v) Induced development. Roadside development is tightly controlled by thedistrict administrations. The Project will not contribute to uncontrolleddevelopment.

(vi) International trade. Road improvements to be carried out under theProject are unlikely to have any measurable effect on international tradeconsidering the unsustainable use of timber, wildlife, and other forestproducts.

5. Impacts of the Environment on the Project

13. The Project will be significantly affected by weather and by slope processes.

(i) Weather. The dominant climatic feature in Bhutan is the monsoon.Routine and periodic maintenance works during this time are difficult.Activities focus on emergency landslide clearance. It is important that noearthworks are carried out during the monsoon. Maintenance work at highelevations can be constrained by frost and snow.

(ii) Slopes. The roads traverse a geomorphologically active landscape inwhich landsliding are the rule rather than the exception. This has manyimplications for road design, construction, and maintenance: slopes mustbe treated with great respect, and disturbance to them minimized.

6. Unlikely Impacts

14. The following impacts are considered unlikely to occur in this road maintenance Project

(i) involuntary displacement due to land take for the works,(ii) unwarranted alteration of traditional lifestyles,(iii) increased direct access to unprotected ecologically valuable resources,(iv) increased unsustainable or illegal use of natural resources,(v) unmanageable immigration to the project area, and(vi) unmanageable induced and/or roadside development.

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Appendix 11, page 6

7. Potential Enhancement Measures

15. The Project provides an opportunity for major enhancement measures. From the point ofview of continuous access, slope stabilization is the most important:

(i) Slope Stabilization. Pavement and drainage works are only part of the answer toensuring continued road operation. Additional and improved slope stabilizationworks are required in many areas. Implementation of an appropriate slope-related program would maximize the effectiveness of the funds available to DOR.A 13-point action plan covering a range of slope stability issues, in order ofpriority, is presented in the Slope Stabilization Manual.4 In addition, it is stronglyrecommended that DOR consider more extensive use of bioengineering.

(ii) Water Management. The Project offers an opportunity to assist somecommunities with the supply of irrigation water, and to solve problems ofuncontrolled irrigation water disposal. The Project could assist both the Ministryof Agriculture and DOR to install dual-purpose roadside water managementstructures where needed.

(iii) Road Safety. As noted, the Project provides an opportunity to improve roadsafety by incorporating various engineering measures in the program of works.

E. Institutional Requirements and Environmental Monitoring

1. Institutional Capacity and Requirements

16. At present DOR has limited capacity to implement and enforce the environmentalprovisions for road projects, which are emerging from Bhutan’s new environmental assessmentprocess. Since environment-friendly techniques are central to low-cost mountain roadengineering, it is essential that DOR increase its ability to design and implement thesemeasures. The Project provides an opportunity for relevant training directed at roadmaintenance operations. Such training will complement and amplify technical assistance beingprovided to DOR relating to new feeder road construction (proposed United Nations CapitalDevelopment Fund Feeder Roads Project BHU/98/C02) and rural access (InternationalDevelopment Association /SNV Rural Access Project).

17. Environmental aspects of road maintenance where improved techniques will be ofbenefit include paving, drainage, Construction Materials, slopes stabilization, earthworks, spoildisposal, snow clearance, safety, consultation, contract documentation, contractors, andenforcement.

2. Environmental Management

18. The Project will incorporate a number of mitigation measures to minimize impacts onsensitive receptors. These can be dealt with through the application of the existingEnvironmental Code of Practice for the Road Sector.

4 The Slope Stabilization Manual was prepared under TA 3107-BHU.

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3. Environmental Monitoring

19. The project manager in DOR’s project management office will be responsible formonitoring environmental compliance. At the field level, site engineers will carry out periodicmonitoring, while day-to-day monitoring is the contractors’ responsibility to fulfill therequirements established in the contract documents. An environmental specialist on theconsulting services team for design, supervision, and institutional support will assist DOR withenvironmental monitoring.

F. Findings and Recommendations

1. Evaluation of IEE

20. This IEE has identified (i) sensitive environmental receptors such as slopes, wildlife, andhabitat; (ii) important technological issues such as sourcing construction materials, and heatingbitumen; (iii) mitigating measures in case of environmentally damaging activities included in theProject like earthworks; (iv) important enhancement opportunities such as slope stabilization,water management, and health and safety; and (v) strengthening of environmental capability forthe key actors in road construction and maintenance, including project engineers, contractors,engineers, and domestic consultants.

21. The authors of the IEE consider the effort involved sufficient to guide decision making onthis project.

2. Further Environmental Work Required

22. Further environmental work is required during project preparation: (i) incorporating theIEE recommendations in the Project’s final design; and (ii) drafting a Project Prospectus forsubmission by DOR to NEC to obtain formal environmental clearance.

G. Conclusions

23. The IEE concludes that the Project, as proposed, does not require an environmentalimpact assessment. The road improvement activities proposed in the RIP fall into NEC’sscreening category–C Impacts moderate, project repetitive. Projects in this category do notrequire further environmental assessment, but require formal environmental clearance fromNEC. To receive domestic environmental clearance, DOR needs to develop and submit to NECa formal Project Prospectus. Impacts of category C projects are best controlled through Codesof Practice, in this case, through the existing Environmental Code of Practice for the RoadSector, completed in 1999.

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ECONOMIC EVALUATION

A. Analysis of Basic Data

1. The economic evaluation of the proposed road improvements was based on thefollowing basic data: (i) road condition, traffic, and axle-load surveys; (ii) analysis of roadimprovement costs; and (iii) review of vehicle operating costs (VOCs).

1. Assessment of Road Condition

2. A road roughness survey was carried out using a vehicle-mounted bump integrator andcounter to measure the unevenness of the road profile, and a calibrated odometer to measuredistance along the road. The bump integrator produced roughness values and the equivalentinternational roughness index (IRI) for all sections of the road being considered forimprovement. Also, a road inventory and condition survey was conducted using a standard four-wheel drive pickup with a distance/speed sensor spliced to the vehicle speedometer cable. Thisequipment was interfaced with the ROMDAS software. This allowed the location of inventoryfeatures and their condition to be recorded. Events were recorded on the computer keyboardas point events or continuous events. Point events are those on or adjacent to the road such asa culvert or a pothole. Continuous events are those that apply over a section of the road such asdrains or cracking. During the inventory and condition survey, exogenous interventions such asthe construction of new drainage structures and/or slope protection works were identified.

3. Following the physical surveys on the project roads, homogeneous sections weredefined based on traffic volumes derived from the traffic analysis, roughness observed duringthe surveys, and altitude and gradient of the roads. On inspection, the East-West Highway wassubdivided into 24 homogenous sections, the Sarpang-Wangdue Highway, 9 sections and theTrongsa-Gelephu Highway, 12 sections. The resultant homogeneous sections together with theengineering data were used in the Highway Design and Maintenance (HDM) analysis.

2. Axle-Load Surveys

4. To check on the loading characteristics of trucks, an axle-load survey was undertaken atLobesa, west of Wangdue. In total 68 vehicles were weighed: 45 trucks of various sizes, 12buses, and 11 other vehicles. All lighter vehicles were discarded in assessing vehicle damagefactors. In the case of trucks, 55 percent of the vehicles had gross vehicle weight (GVW) under12 tons and 45 percent above 12 tons. However, 70 percent of trucks had damage factors ofequivalent standard axle (ESA) below 3.0 and 30 percent above 3.0. Overall, the estimatedaverage damage factor for trucks was ESA 2.01. Buses were generally lighter, with all vehiclessurveyed being under 12 tons GVW. The calculated damage factor for all buses was below ESA0.5. The estimated overall average ESA for buses was estimated 0.11. Estimated damagefactors for both trucks and buses compare reasonably well with default suggestions in the HDMmodel as well as with those in previous studies. The estimates of ESAs for trucks and buseswere subsequently incorporated into the pavement deterioration analysis in HDM III.

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Appendix 12, page 2

3. Traffic Analysis and Projections

5. For analysis purposes traffic volumes for three types of motorized vehicles weredeveloped. The level of traffic on the project roads was determined by referring to recentDepartment of Roads (DOR) traffic count data. This was compared with figures in recentstudies relating to the transport sector in Bhutan to check on the validity of the base information.Traffic on the project roads is subject to a range of influences, some of which are markedlyseasonal. In particular, the extremely low temperatures in winter on the high mountain passesmake the road difficult to drive on. During the monsoon season in June-September, many roadsections become difficult to negotiate, which also reduces traffic levels. Seasonal factors wereapplied to the traffic counts and base year traffic was obtained. It is evident, Table A12.1 thattraffic is much higher in the west, toward Thimphu, than in the east. Light vehicles predominatein the traffic mix, with trucks comprising the majority of the remainder.

Table A12.1: Traffic on the East-West Highway (AADT)

Section Light Bus Truck TotalTrashigang – Mongar 33 1 35 69Mongar – Jakar 28 1 23 52Jakar – Trongsa 38 3 16 57Trongsa – Wangdue 100 3 64 167Wangdue – Lobesa 184 9 86 279Lobesa – Simtokha 323 21 131 475

AADT – average annual daily traffic.

6. For the forecast, two types of traffic are considered: normal and generated traffic. Sincethe project road passes through a remote area and, currently, access to markets and urbancenters is hampered by the relatively poor condition of the road, it seems logical that if the roadsare improved, some additional trips will be generated. The area of influence of the project roadsis concerned mainly with pastoral and subsistence farming with little or no industrialdevelopment. In addition, the area has significant potential – but as yet unrealized - for tourismdevelopment. Diverted traffic1 has been excluded from the analysis.

7. Predictions of generated traffic are difficult to make because they involve judgmentbased on the expected response of road users to the reduced cost of road transport due to animproved road. It is only likely to be significant in those cases where the road investment bringsabout substantial reductions in transport costs. To estimate the amount of generated traffic,2 atransport elasticity of demand of unity was adopted for all vehicle types. This means that 1percent decrease in transport costs leads to 1 percent increase in traffic.

8. In developing traffic forecasts, it was important to take full account of the analysis ofexisting traffic demand, which showed the following principal features: (i) rapid growth of all 1 Diverted traffic is traffic that would switch from another route or mode of transport if the Project is implemented,

while still traveling between the same origin and destination. The East-West highway forms part of the maincorridor that links the country. The main alternative route is to travel south to the border and subsequentlythrough India. That option is unlikely.

2 The United Kingdom’s Transport Research Laboratory has undertaken extensive research in this area and therecommended approach to forecasting generated traffic is to use demand relationships. The price elasticity ofdemand for transport measures the responsiveness of traffic to a change in transport costs following a roadinvestment. Evidence from a selection of countries indicates a range of -0.6 to -2.0 for the elasticity of demandfor transport, with an average of about -1.0.

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Appendix 12, page 3

motorized traffic, 20 percent annual increase over the last five years; (ii) low car ownership,11/1,000 population with a growth of 21 percent annually since 1994; and (iii) dominance of theroad transport mode for both passengers and freight. Historic data did not seem to be consistentfor forecasting purposes. Accordingly, it was decided to use factors based on experience inother developing countries, modified by evidence available in Bhutan. That experience showsthat, generally, freight traffic grows at a pace similar to that of the gross domestic project (GDP),an implied elasticity of 1.0, and passenger traffic grows rather faster with a typical elasticity ofaround 1.2. The elasticities adopted (Table A12.2) were disaggregated into three time periods:1999-2006, 2007-2012, and 2013-2021. Over time, the elasticities gradually decline as is shownby evidence from many countries. If this were not the case, the proportion of the transportsector in relation to total GDP would continue to increase. Since the share of transport as aproportion to total GDP rarely amounts to more than 10 percent this seems unlikely.

Table A12.2: Transport Demand Elasticities

Period Light Bus Truck1999-2006 1.8 1.8 1.52007-2012 1.6 1.6 1.32013-2021 1.4 1.4 1.0

9. The forecast GDP growth rates were combined with the income elasticities of demandfor transport to give traffic growth projections for each vehicle type. Annual traffic growth ratesused for forecasts of future traffic and road user benefits were assumed to vary over time asfollows (Table A12.3):

Table A12.3: Traffic Growth Rates (%)

Period Light Bus Truck1999-2006 10.5 10.5 8.72007-2012 7.2 7.2 5.92013-2021 6.3 6.3 4.5

B. Economic Evaluation

1. Road Improvement Costs and Options

10. The economic costs of implementing the Project were estimated from the financial costsof civil works, physical contingencies and supervision. For nontradable items, a standardconversion factor (SCF) of 0.93 was used. The estimates included physical contingencies butexcluded price escalation, price contingencies, and interests during construction. Financialoperation and maintenance (O&M) costs were also adjusted by the same approach to obtaineconomic costs. Incremental O&M costs were calculated as the difference between O&Mrequirement for the with- and without- project scenarios. Economic costs were estimated inconstant end-1999 prices. No salvage value was considered at the end of the project life cycle.

3 SCF based on the average level of direct taxation and the level of market distortion present in the economy.

Evidence from recent studies, most notably the World Bank-financed Rural Access Project, estimates a SCF of0.9.

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11. The cost estimates of the road improvement activities were derived from several sourcesincluding DOR, Bhutanese contractors, previous studies as well as experience within the regionand elsewhere. The activities comprise the following:

(i) Routine maintenance includes the cleaning of drains and culverts, removal of debrisfrom the roadway including material deposited in the drains and roadway from minorslips, cutting of vegetation as well as pothole patching. Each of these activities isassumed to occur throughout the year.

(ii) Periodic maintenance includes activities, that are required at regular intervals to restorethe road surface to the condition of the original construction. When performed in a timelymanner, periodic maintenance activities may contribute to the strengthening of thepavement structure, thereby accommodating increased levels of traffic. Periodicmaintenance activities may include resealing such as surface treatment with sand orchip seals and overlay with cold or hot mix asphalt. The periodic maintenanceinterventions selected for this study took into consideration local contractor and DORexperience and engineering best practices. Several trial runs were made using the HDM,including the single surface treatment option, after which four options were selected:option 1, double surface treatment (DST) chip seal applied every 6 years; option 2, DSTchip seal applied when roughness is IRI 6.5 meters per kilometer (m/km); option 3, 100millimeters (mm) water-bound macadam (WBM) base course with DST; and option 4, 40mm hot mix asphalt-concrete (AC) overlay. Unit costs were derived for each option byapplying current unit costs for labor, equipment, and material; productivity rates weredeveloped by the consultant and validated with DOR..

(iii) In addition to routine and periodic maintenance, capital works are required in certainareas to ensure that periodic maintenance interventions achieve or exceed theirintended design life and reduction in VOCs achieve expected levels. While in someareas these interventions may be quite extensive and could not be covered under theexisting loan, other areas require only relatively minor interventions. The interventionsare (i) reconstruction of destroyed pavement, (ii) slope protection, (iii) construction ofnew culverts, (iv) repair of existing culverts, and (v) construction of lined drains.

2. Least-Cost Improvement Options

12. The preliminary results of the economic analysis indicated option 4 (40 mm hot mix ACoverlay) would produce the highest returns on many sections of the project road, given thegreater reduction in road roughness offered by this alternative than by the DST options.However, implementing option 4 will involve more sophisticated engineering expertise andnecessitate the use of expensive plant and equipment. Given the relatively low development ofthe contracting industry in Bhutan at present, it is doubtful if the AC overlay solutions would betechnically feasible. Furthermore, while option 4 generates greater benefits than alternativeDST solutions, it also involves significantly greater cost. Given the circumstances, the economicanalysis was augmented by engineering practicalities that indicate the most appropriaterehabilitation option on each section of the East-West highway. On the majority of the sections,option 1 (DST) was identified as adequate to improve the pavement to a satisfactory condition.On certain sections in a particularly poor condition, however, option 3 (100 mm WBM + DST)was deemed necessary.

56

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3. Vehicle Operating Costs

13. The VOC parameters for three vehicle types were developed using the World Bank’sHDM model adjusted to local conditions. VOCs are influenced by vehicle speed, the horizontaland vertical alignment of the road, and the physical condition of the road surface in addition tovehicle type, price, age, and load. The model utilizes the input data to calculate VOCs based onthe relationships originally prepared for the HDM III model of the World Bank. Substantial inputdata are provided as defaults of the model itself. For this analysis, however, detailed localinformation was provided as much as possible to obtain results that are specific to Bhutan. Theinput data was based on the end-1999 prices and is net of taxes, duties, and other charges. Theoutput of the model includes physical quantities of consumption and speed, and the associatedVOC per predefined unit of 1,000 vehicle-km. VOC estimates for the three vehicles types andIRI values are shown in Table A12.4.

Table A12.4: Vehicle Operating Costs for Different IRIs by Vehicle Type(Nu/km)

IRI (m/km) Li ght Bus Truck2.0 4.9 7.8 9.43.0 5.1 8.0 9.84.0 5.3 8.3 10.25.0 5.6 8.6 10.76.0 6.0 9.0 11.37.0 6.4 9.4 11.98.0 7.0 9.8 12.79.0 7.9 10.4 13.5

10.0 9.0 11.0 14.511.0 10.8 11.7 15.7

4. Benefits

14. The improvement of the East-West Highway will produce mainly road user benefits,which include savings in VOCs and time arising from the road rehabilitation. For this analysis,road user benefits were restricted to savings in VOCs arising from changes in surfaceroughness. Additionally, since transport costs are relatively high and improvements offersignificant transport cost savings that will stimulate the local economy, there will also bedevelopment benefits such as increase in the quantity and quality of agricultural production inthe project area, tourism, and industrial development. These benefits can be measured in termsof net value of generated output directly attributable to the road rehabilitation or in terms of thetransport cost benefits secured by generated traffic.4 However, it is essential that each approachbe pursued separately to avoid double counting. The present methodology concentrates onroad user benefits and adopts the approach where economic development benefits aremeasured in terms of the benefits gained by generated traffic. The benefits from generatedtraffic equal half of the product of the extra number of trips and the VOC saving per trip.

4 In Bhutan, freight rates are determined by the market and passenger fares are regulated but periodically

reviewed. During the economic evaluation the estimated VOCs showed similarities with the rates and faresactually charged in the market. This increases the confidence that VOC savings would be passed on to theusers.

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Appendix 12, page 6

15. Road improvements will change the nature and patterns of road maintenance comparedwith continuance of the without- project scenario. This has repercussions for the time stream ofnet maintenance costs and there may be opportunities, depending on the nature of the initialintervention, for net savings in resource costs. The incidence of maintenance activities andsubsequent costs are determined by the HDM model. Savings (or costs) in these were alsoincluded in the analysis.5 Other quantifiable benefits such as travel time savings, cargo holdingtime savings, and reduced agricultural cargo spoilage were also studied, but not included in theevaluation. Nonquantifiable benefits such as social benefits and improved national integrationare described in Appendix 13.

5. Economic Rate of Return

16. The economic evaluation of the Project compared the costs and benefits for the with-and without- project scenarios. Benefits based on VOC savings, in economic prices, werecalculated for normal and generated traffic. These benefits were compared with the roadimprovement and maintenance costs to calculate the economic internal rate of return (EIRR).Benefit streams were calculated for a period of 20 years starting in 2001. Costs and benefitswere estimated net of duties and taxes, and are expressed in constant end-1999 prices (TableA12. 5.6 The base EIRR for the Project is 32 percent.

17. The sensitivity of the EIRRs to changes in the underlying cost and benefit parameterswas analyzed. The results (Table A12.6) show that assuming a 15 percent increase in projectcosts would decrease the EIRR to 27 percent. If benefits only materialized to 85 percent of theoriginal estimates, the EIRR would decrease to 27 percent. In a more adverse situation of asimultaneous 15 per cent increase in project cost and 15 percent reduction of benefits theoverall EIRR will be 22 percent. The switching value7 for cost was determined to be 100percent, and switching value for benefits was 49 percent. If project implementation is delayed bytwo years, the EIRR will be reduced to 20 percent. Also if only benefits due to VOC savings ofnormal traffic are considered, the EIRR will decrease to 25 percent.

5 It is important to mention that a road for motor vehicles exists. The economic and social cost of severance of the

road would be unacceptable. Therefore, the complete loss of motorized accessibility cannot be argued as beinga realistic without-the-project case. Indeed, if it were, it would be possible to justify most infrastructureinvestments merely by failing to provide for their maintenance. However, it is clear that presently the project roadis deteriorating over time. With this in mind, it has been assumed that the project road in the without-the-projectcase receives minimal maintenance, but with a cap in the IRI. Furthermore, between 1999 and 2001, it isassumed only routine maintenance is undertaken on the project roads. Following 2001, works are assumed toinclude both routine maintenance and patching (80 percent of potholes).

6 As observed in Table A12.5 benefits from VOC savings diminish with time due to the natural deterioration of theroad.

7 The switching value shows the percentage increase in a cost variable (or decline in a benefit variable) requiredfor the net present value (NPV) to become zero, which is the same as the EIRR reducing to the cutoff level of 12percent.

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Table A12.5: Economic Cost and Benefit Streams(Nu. Million)

Benefits NetBenefits

Year Costs

NormalTraffic

GeneratedTraffic

MaintenanceSavings

Total

1999 0.0 0.0 0.0 0.0 0.0 0.02000 0.0 0.0 0.0 0.0 0.0 0.02001 -138.9 8.5 0.0 -4.0 4.5 -134.32002 -195.4 35.2 3.8 4.0 42.9 -152.52003 0.0 46.5 5.2 57.3 108.9 108.92004 0.0 62.4 7.4 56.8 126.5 126.52005 0.0 78.2 9.6 56.7 144.5 144.52006 0.0 95.9 12.1 0.6 108.6 108.62007 0.0 119.2 16.1 -82.0 53.3 53.32008 0.0 128.3 17.3 -83.8 61.8 61.82009 0.0 127.2 16.2 0.8 144.3 144.32010 0.0 120.2 14.2 0.9 135.2 135.22011 0.0 104.3 11.5 1.0 116.8 116.82012 0.0 84.1 9.0 1.0 94.2 94.22013 0.0 85.5 8.7 -81.6 12.6 12.62014 0.0 75.4 8.7 -83.5 0.7 0.72015 0.0 62.5 7.3 1.3 71.1 71.12016 0.0 51.5 6.2 1.3 59.1 59.12017 0.0 43.6 5.2 1.5 50.3 50.32018 0.0 37.6 4.2 1.6 43.4 43.42019 0.0 50.6 3.1 -81.0 -27.3 -27.32020 0.0 37.2 3.7 -82.8 -41.8 -41.82021 0.0 35.6 3.2 1.8 40.7 40.7

IRR (%) = 32NPV = 231.8

IRR = internal rate of return, NPV = net present value.

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Appendix 12, page 8

Table A12.6: Sensitivity Analysis

Scenario EIRR(%)

NPV(Nu. Million)

SwitchingValue (%)

Base caseIncreased costs by 15%Reduced benefits by 15%Increased costs b y 15% and

Reduced benefits by 15%Delay in Project Implementation

by 2 yearsConsiderin g Benefits due to

Normal Traffic only

32272722

20

25

231.8198.3163.5130.1

105.9

193.3

100- 49

EIRR = economic internal rate of return, NPV – net present value.

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Appendix 13, page 1

SUMMARY POVERTY AND SOCIAL ASSESSMENT

A. Poverty Reduction and Social Assessment

1. Background

1. The Government, with the assistance of the Asian Development Bank (ADB), prepared astudy1 on poverty and a social assessment of the Project. The overall objective of the study wasto assess (i) the poverty profile of beneficiaries; (ii) the groups who are expected to benefit from,and use services that are to be provided by the Project; (iii) the needs and demands of thegroups; (iv) their absorptive capacity; (v) gender issues; and (vi) possible adverse effects onvulnerable groups and the need for measures to mitigate such effects or compensate thoseadversely affected. The study was carried out in June-July 1999.

2. The main finding of the study was that the Project will lead to an improved standard ofliving and reduced poverty and unemployment in its area of influence. This will be achieved byenhancing household mobility and expanding economic opportunities in the project area,particularly in agriculture, cottage industry, and tourism. Special efforts were also made toinvolve the poor by providing employment in the process of construction and in theinstitutionalized labor-based road maintenance, particularly for women through the Departmentof Roads–national workforce.

3. Bhutan remained closed to the outside world until the 1960s when the third King openedlinks with other countries and initiated the development of Bhutan as a modern nation. SinceBhutan is a landlocked country, its socioeconomic development depended largely on theconstruction of roads. Bhutan now has a road network of about 3,375 kilometers (km), the mainroutes being the East-West Highway and the four north-south highways. These connect almostall dzongkhags (districts) and a large proportion of the rural settlements. Establishing andmaintaining these roads have been a very difficult task because of the terrain and extremevariations in climate: heavy snows in winter, and monsoon rains in summer.

4. A social assessment using participatory approaches and surveys in the project area wascarried out as part of project preparation. The study consisted of socioeconomic surveys (105households, about 1 percent coverage of total households in the project area), focus groupdiscussions with key stakeholders such as Planning Commission and the Health and Educationministries, Government officials in the district, social sector administrators of the nine districts inthe project area, Road Safety and Transport Authority, Bhutan Development FinanceCorporation, and National Women Association of Bhutan. During the Fact-Finding Mission, arapid rural appraisal was conducted for road workers and beneficiaries in several project areasto assess the potential employment opportunity as well as beneficiaries’ needs and constraints.In addition, an initial participatory workshop on improving the well-being of women road workerswas conducted with key stakeholders such as the private sector, aid agencies, civil society, andgovernment officials during the Appraisal Mission.

2. The Project Area

5. The East-West Highway is the strategic road link allowing access across the country.Without this road, access between the steep valleys of Bhutan would be only by horse and foot.The only alternative route is to go south into India and back up into Bhutan. The road has

1 TA 3107-BHU: Road Transport Network Development Project, for $650,000, approved on 3 December 1998.

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Appendix 13, page 2

therefore a major national and strategic importance, which has allowed developmentopportunities into central and eastern Bhutan. It links the districts of Thimphu with Wangdue-Phodrang, Trongsa, Bumthang, Mongar, and Trashigang and therefore directly affects thepopulations in those areas.

6. The Project will influence the economic and social development of much of the centralregion of Bhutan, with direct impacts on 9 of the 20 districts. Beginning in Thimphu, the capitalcity on the west, the road traverses hinterland areas of the Wangdue-Phodrang, and Trongsadistricts, with access links to Bumthang, Mongar, and Trashigang districts in the east. Byimproving the road condition and accessibility, the Project will indirectly influence all districts inthe country.

3. Poverty Data Availability

7. The late start in planned development and, hence lack of trained and qualifiedmanpower, constrained the systematic surveys on the income and expenditure patterns ofhouseholds in Bhutan. The limited surveys of land holdings and asset ownership, are notnationally representative. Bhutan has yet to institute a comprehensive national sample surveysystem that can collect, analyze, and report socioeconomic data periodically.

4. National Human Development and Government Strategy

8. With an estimated gross national product (GNP) per capita of $586 in 1998, averageBhutanese incomes are low–some $1.30 per head per day–reflecting widespread incomepoverty. However, measuring poverty by using GNP per capita often gives a partial anddistorted picture of human development. This is perhaps more true of Bhutan than of manyother countries. A large part of Bhutan’s rural economy, which is predominantly agrarian,remains nonmonetized, with barter systems still prevalent in many parts of the country. TheGovernment recognized the multiple dimensions of poverty by measuring and targeting a rangeof health, education, and other standards regarded as fundamental to human well-being.

9. Indicators of human development showed that life expectancy in Bhutan had risen from48 years in 1984 to 66 years in 1998, which was three years more than the average for SouthAsia. The reported infant mortality rate was 71 per 1,000 live births in 1998. While that wasconsiderably higher than Sri Lanka’s 17 deaths per 1,000 live births, it was marginally lowerthan the average for South Asia. Life expectancy figures are strongly influenced by theprevailing levels of infant mortality. Many aspects of life are reflected in this one statistic–thecapability of parents, prevalence of malnutrition and disease, availability of clean water, efficacyof health services, and, above all, the health and status of women. Furthermore, although theadult literacy rate had quadrupled in the past 20 years, that of Bhutan was 54 percent in 1998,among the lowest in the South Asia region. Based on these indicators above, the HumanDevelopment Index in 1998 was estimated at 0.581 putting Bhutan in the category of mediumhuman development countries along with Sri Lanka and the Maldives in South Asia.2

10. Bhutan has concentrated on supporting socioeconomic growth to ensure universalaccess to basic health, education, and essential social services. Thus, the abject poverty seenin some parts of Asia as a result of low incomes is not evident, as the Government’s socialwelfare policies over many years have resulted in high levels of human capital and relativelywidespread social well-being.

2 Royal Government of Bhutan, Bhutan National Human Development Report 2000.

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5. Poverty and Socioeconomic Profile in the Project Area

11. According to the socioeconomic survey, 38 percent of the households are below theestimated poverty level of Bhutan.3 The survey shows that the poor are more likely to havelower education, have more children, have poorer house, lack of potable water, and have smallland.

12. The total population in the Project area is 68,437 and 85 percent live in rural areas.Agriculture continues to be the main source of livelihood. Most of the people earn their livingthrough farming, raising animals, and gathering forest products. About 90 percent are farmerswhile approximately 15 percent also engage in off-farm enterprises including retail activities,handicraft, and food products.

13. Land holdings vary in size from zero for the few landless people to around 25 acres;however, the average holding for 65 percent of the people has is 2.0 acres. From the focusgroup discussion conducted during the Fact-Finding Mission, size of land holding is not apredictor of income; depending on the mix of types of land, production and its value, the incomederived from a plot will vary. Farmers with little land of their own will often sharecrop the landbelonging to others in return for half the crop so as to generate sufficient income.

14. Employment opportunities in rural Bhutan are restricted to work as a civil servant, ateacher, or a health worker in the basic health units in the villages or as a village headman.Some of the landless poor run small shops in the villages as one of their survival strategies.Occasional day labor is available for collecting and carrying firewood in some areas. Duringharvest and planting seasons, often there is labor shortage in rural areas. Farming householdstend to help each other at times of greatest labor need and reciprocate to fill the gaps ratherthan hire labor.

15. Other land-poor families join the Department of Road (DOR) national work force (NWF)in constructing and maintaining roads or working for the few private road contractors. The roadworkers are among the neediest and poorest groups in the country. Illiteracy and insufficientland have forced them to leave their villages to join the workforce. They often are based in laborcamps along the road, with or without their families, and are solely there to maintain the road.

6. Gender and Poverty

16. Women in general are found to be more affected by poverty. This is largely due to thediscrepancies that remain in important areas such as literacy and school enrolment particularlyin secondary and tertiary education. On the whole, however, Bhutanese women enjoy arelatively high status. For example, most women, inherit land, own livestock, and tend to play acentral role in the family. Bhutanese law gives equal rights to women.

17. Agriculture sector is a major employer of women, as 85 percent of the Bhutanese peopleare entirely dependent on subsistence farming. Women play multiple roles in both productiveand reproductive activities. For women working in agriculture, estimates and anecdotal evidence 3 Since no documented information on the poverty line of Bhutan is available, its assessment was based on the

same yardstick (primarily daily calorie intake food of 2,200 calorie per person per day) as that followed in India,adjusted to consider nuances relevant to Bhutan, such as expenditure on transport, shelter, clothing, fuel, etc.This is estimated to be around Nu504 per person per month or $144 per capita per year (December 1998 pricelevel).

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Appendix 13, page 4

show that their workload is higher than men’s, largely because of their housekeeping and childcare responsibilities. In addition, the surveys indicate that 10 percent of the men have out-migrated to join traditional religious schools, the armed forces, and other services, thusimposing an additional burden on women in terms of work and responsibilities. The mostdisadvantaged women are those who live in low-income households. Illiterate women are oftencut out of economic activities such as trading, and are a particularly vulnerable group.

B. Stakeholder-Based Assessment of the Importance of the Project

18. A stakeholder-based assessment was carried out as part of social assessment to gaininsights into the existing situation of stakeholders and to determine their expectation on theimpact of the Project. The assessment was undertaken in eight village clusters along the East-West Highway and with other key stakeholders in Thimphu, through focus group discussions.

1. Community Perception of the Importance of the Project

19. Community members expected the Project would lead to significant improvements insocioeconomic conditions, with many existing constraints being reduced or overcome. The mostcommonly cited impacts are as follows: (i) improved transportation would allow farmers todiversify into higher value crops, such as fruit and green vegetables; (ii) reduced journey timeswould increase tourist visits, and seasonal reductions in tourism would be moderate; and (iii)improved access to market would lead to the expansion of cottage and small industries. It wasexpected that such improvements would contribute to improvements in living standards and thequality of life.

20. There was widespread consensus that the poor standard of transportation contributed tothe existing lack of employment opportunities and access to health, education, and other socialservices, and that the Project would help improve economic prospects, living conditions and thequality of life. Examples of why stakeholders are looking forward to the project are sited here.

21. Road Users (passengers and drivers of motor vehicles) . The main impact of theProject will be shorter travel time, reduced delays, higher travel speeds, increased comfort, andreduced vehicle operating costs (VOCs), which may translate into increased service frequencyand lower fares.

22. Access to Markets. Timely access to markets, particularly during rainy season, is vitalto the survival of the majority of households served by the East-West Highway. Cash crop salesare the major source of income in almost all rural households, supplemented by sale of wovenhandicrafts where the skills exist in the household. Loss of income from crops will lead thehousehold to poverty unless other sources are available.

23. Labor Force Participation and Employment Opportunity . Communities along theEast-West Highway expect that the Project will lead to investment in new industries and serviceactivities offering more attractive sources of employment. With improved access to markets,they expect to have better opportunities for operating their own small and medium-scaleenterprises. Moreover, the Project will create employment opportunity for the road workers, roadsupervisors, engineers, and petty road contractors.

24. Farmers and Agricultural Producers . Improvements in transportation will facilitateaccess by rural people to markets in urban centers, and sellers of garden fruit and vegetableswill have more ready access to the markets. This is especially important for sellers of potatoes

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Appendix 13, page 5

where delay in delivery can result in the crop loss. The seasonal nature of potato sales meansthat loss of the crop will ruin the household financially. Furthermore, road improvements meanthat Druk Seeds could expand its marketing activities out of its district headquarters inBumthang. This would provide farmers greater security of income, and reduce the risk andefforts required–at present, to hire trucks to carry the crop to Phuentsholing themselves–andenable them to sell to the Indian export market.

25. Extension Workers. Improved access will increase the effectiveness of extensionworkers in reaching communities and promoting improved technologies and inputs. This willhave a direct impact on rural production and income. Currently there are agricultural andforestry extension workers based in the community along the East-West Highway.

26. Health Services. Improved access can mean increased use of health and familyplanning services. Health services are also better when access is easier. Road improvementswill facilitate movement of staff to the outreach clinics from the basic health units, permit timelydelivery of medical supplies, and facilitate access to the services, particularly in case ofemergencies. One of the most frequently mentioned concerns of rural villages was the difficultyof accessing emergency care, especially in the monsoon period when landslides frequentlyoccur.

27. Educational Facilities. The main restraint to the expanded provision of education islack of trained teachers. Teachers, particularly women, are reluctant to accept postings inremote areas where access is difficult or transport services are minimum and/or expensive.Parents are reluctant to send children to school where the travel time is prolonged. The Projectwill reduce travel times and costs for teachers and pupils, and contribute to the expansion andtake-up of education services in the project areas.

28. Tourism. Improved roads will lead to an expansion of tourism with both foreigners andBhutanese visitors. Bumthang, one of the main religious places of the country receivesnumerous pilgrims and other visitors. Better access will lead to an increase in visitors andexpansion of related-service industries. Similarly, many Bhutanese travel to India in winter toundertake pilgrimages in Bihar. Over 80 percent of religious pilgrims are from rural areas.Improved access along the East-West Highway will enable more people to travel more easily forthese purposes.

29. Social Benefits. Improvements to the transportation system and network have socialbenefits for families. Communications between families will be easier and they will be able tovisit each other more easily and more frequently. These are important benefits when people areposted all over the country for work, to attend schools and colleges, and where marriages oftenoccur between people from different districts.

2. Business Community Perception

30. During the Fact-Finding Mission, focus group discussions to assess the generalperception of the business community in Thimphu and Wangdue-Phodrang on how the Projectwould benefit private sector activities indicated strong support for the project. In general, theprivate sector expects the Project to significantly improve the attractiveness of the east regionfor business and private investment, and contribute to more rapid economic growth. The East-West Highway will enable companies to make use of the region’s abundant agriculturalproducts, natural resources, and tourism opportunities, as well as the proximity to India. Untilnow, these advantages have been outweighed by lack of an efficient transport network.

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31. Lack of an efficient long-distance transport has been a major constraint on privateenterprise development in the east region. It was a source of multiple, mutually reinforcingdisadvantages. Businesses whose inputs and/or outputs were perishable faced unacceptablelevels of spoilage and could not attract premium prices. Lack of reliable transportation precludedcertain types of agricultural products that were subject to strict delivery schedules. The businesscommunity expects the Project to significantly reduce these constraints.

32. The business community claims improved transportation will help increase the scale andraise the profitability of private activities. Businesses will gain access to better priced domesticand export markets, enjoy reduced input costs, and be able to improve productivity. Among themain areas of private sector activities that will benefit are agriculture, tourism, cottage and smallindustries, and supporting services. The private sector believes the Project will contribute toattracting domestic and foreign investment and international tourism, not only in the project areabut also throughout Bhutan.

3. Perception of a No–Project Scenario

33. Focus group discussions with key stakeholders such as government staff, businesscommunity, and direct beneficiaries indicate that none of the positive benefits would occur if theworks did not take place. Two main reasons are mentioned: (i) Income generation would notincrease if the road quality declines. Increased transport delay would cause rural incomes todecline. For the majority of farm households in the project area, this would lead to a significantincrease in poverty. (ii) Increased difficulty of travel would increase reliance on the routes viaIndia, which will increase transportation transportation.

34. The summary of beneficiary assessments of the with- and without-project scenarios areas follows.

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Appendix 13, page 7

Table A13: Beneficiary Perception of the Project

Type of Beneficiar y With Project Without ProjectConsultation

Method

1. Road workers Poverty will be reduceddue to higher salariespaid by privatecontractors.

Condition of these workerswill not improve.

Rapid rural appraisal

2. Rural farmers Better roads mean morereliable and cheapertransportation of theirproducts to the market,as well as better accessto markets.

Economic growth of ruralfarmers will not increase atthe desired level. Some ofthem will even fall below thepoverty level

Beneficiary groupdiscussions andsurveys

3. Traders There will be morecustomers and bettersupply of their goodsfrom the market.

Traders will suffer as theywill not get their stocks ontime and will have lesscustomers.

Beneficiary groupdiscussion andsurveys

4. Transporters Vehicle operations andmaintenance costs willdecrease and servicefrequency will increase.

Transporters will not beable to provide reliable andtimely transport. Frequencyof services may decrease.Maintenance and vehicleoperating costs willincrease.

Beneficiary groupdiscussion andsurveys

5. RuralPassengers

There will be adecrease in travel time,reduced delays, morecomfortable journeys,cheaper fares.

Rural passengers will facemore delays. Travel timewill increase and journeyswill be disrupted anduncomfortable.

Beneficiary groupdiscussion

6. PrivateContractors

The Project will buildlocal contractor capacityand increaseexperience.

Institutional capacity of thedomestic contractingindustry will not develop asdesired.

Beneficiary groupdiscussion

7. Extensionworkers

Extension workers willhave easier and morereliable access to ruralareas to implementdevelopment schemesand supply improvedtechnologies and inputs.

Extension workers will facedelays and disruptions inconducting theirdevelopment andassistance works to therural communities.

Focus groupdiscussion

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Appendix 13, page 8

Type of Beneficiar y With Project Without ProjectConsultation

Method

8. Students Students will havebetter access toeducational facilities.School enrolment will behigher.

Journeys and travel toeducational institutions willtake longer.

Focus groupdiscussion andsurvey

9. Ruralcommunities

The Project will lead toincrease employmentand income-generatingopportunities; morereliable transport ofgoods/produce; betteraccess to markets,health, and educationfacilities. Cottage andsmall industries willdevelop. Postal serviceswill be more reliable andfaster.

Employment opportunitieswill not increase along theproject area. Many ruralpeople will be driven topoverty when their crops failto reach the export marketon time or their perishableproducts rot due to thedelays in transportation.Cottage and small-scaleindustries will not develop atthe desired beneficial rate.

Focus groupdiscussion andsurvey

10. Tourism industry National andinternational tourism willexpand.

Tourism will be restricted toand around the capital.Tourism into the other areasof Bhutan will be restricted.

Focus groupdiscussion

C. Project Approach to Poverty Reduction

35. Under ADB’s current project classification system, the Project’s primary objective iseconomic growth and the secondary objective, poverty reduction as it targets poorer areas ofthe country. Under the new project classification effective 2001, the Project would be classifiedas pro-poor growth. The Project will approach poverty reduction in at least three ways: (i) pro-poor growth, (ii) improved quality of life, and (iii) employment opportunities for the poorestpopulation of the country.

1. Pro-Poor Growth

36. More rapid economic development is expected to significantly reduce in povertyhinterland and eastern regions. Existing poverty is rooted in lack of economic activities,sufficient employment opportunities, and livelihood activities. Survey data on occupationaldistribution suggests that many of the poor in the project area are engaged casual labor; or work

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in agriculture, cottage industries, and construction; or are unemployed. The expecteddiversification of agriculture and expansion of potentially better paying employment in smallindustries and tourism are likely to have especially significant poverty reduction impacts.

37. For farmers in general, the improved transport network can also ease the introduction ofmodern farming practices and the transition from subsistence farming to cash crops and amarket economy. Better and reliable access can also lower the costs of inputs such as fertilizerand stimulate higher cash crop farming production and more stable incomes, enabling the poorto improve their management of risks. The Project will benefit the urban population as well. Forexample, a reduction in food prices for the urban poor can be achieved.

2. Improved Quality of Life

38. The Project will have direct impacts on the quality of life of all income groups.Improvements on the East-West Highway not only provide people with more convenient accessto a broad range of socioeconomic opportunities, but also have a strong income effect bylowering transport costs and hence the prices of consumer goods and services. Therefore, it willcontribute to improving personal welfare. Moreover, lack of affordable access deprives the poorof opportunity to take advantage of jobs and even of very basic social services. Reliable accessto schools and health services will enable the poor to accumulate human capital, which is a keyfactor in sustainable poverty reduction.

3. Employment Opportunities for the Poor

39. The Project will generate a demand for labor (often unskilled labor) and provide income-earning opportunities for the poor. It will enable the privatized road contractors to provideemployment opportunities for the local community. This could be of particular value tohouseholds with very small plots and/or few animals and who have to sharecrop other farmers’land, or who have time available. Since the Project will generate jobs for the poor who areotherwise unemployed or underemployed, it will contribute to poverty reduction.

40. The Project will also directly benefit the road workers. In the project area are 2,748 roadworkers–40 percent are women–who are paid by DOR. They are among the neediest andpoorest groups in the country. Their average salary is Nu1,500 per month and their families livewith them. On the average, each family has four children. The Project will be implemented bythe private contractors, which will hire the bulk of the road workers. Private firms pay their roadlaborers an average Nu2,700 per month, which is Nu1,200 higher than the DOR rates and willdefinitely decrease poverty among the road workers.

D. Gender Impact

41. The Project will have no negative impact on gender relations. Women will benefitthrough their participation in roadwork opportunities, mainly drainage and slope protectionactivities. Since women in Bhutan are active producers and marketers of food, reducing thetransport impediments of rural women would release their time and energy for more productiveand socially beneficial activities. The Project will facilitate access to existing health, socialservices, and schools; enable teachers, of whom the majority are women, to commute fromurban centers to village schools; and permit district administrators to establish new schools andrecruit more teachers. The enrollment rates will increase for both boys and girls, but the rate forgirls, which has been much lower than for boys might increase more.

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E. Local Labor

42. For road improvements, the Government will encourage private contractors to employlocal labor instead of imported labor from India and Nepal. This will be closely monitored duringsupervision, with attention to the specific contractual clauses incorporated in the sample biddingdocuments. Any negative impact on groups and individuals will be identified and mitigated. Forexample, the use of child labor in construction activities is not allowed. Close monitoring duringsupervision will pay attention to the specific contractual clauses incorporated in the samplebidding documents.

F. Participatory Approach

43. The participatory approach was used during the project preparatory technicalassistance, Fact-Finding and Appraisal Missions to understand poverty from the perspective ofa range of stakeholders, particularly poor women and men, and to involve them in the planningfor follow-up action. The social assessment aims to inform the affected people about the Projectand its implications, and elicit their suggestions, views on mitigation measures, and the role theycould play. The local community, particularly the poor, will be informed and encouraged toparticipate in road improvement and maintenance activities where their participation will bemaximized.

44. A participatory gender assessment of the well-being of women road workers wasconducted.4 A survey was carried out along the East-West Highway. Direct generation ofprimary data through participatory gender assessment and survey will produce the baselineinformation to determine gender ratio, working conditions, effectiveness of the World FoodProgram, social and welfare facilities available, and the constraints and opportunities to improvetheir working conditions and livelihood. The analysis of policies on labor and the nationalworkforce, and other secondary data will supplement this participatory assessment. An initialstakeholder survey was conducted during Appraisal Mission aimed at increasing keystakeholders’ awareness of the importance of improving the well-being of road workers andassessing stakeholders input on issues that need to be addressed during the assessment.

G. Land Acquisition and Resettlement

45. The Project does not involve any land acquisition or resettlement, as the works to beundertaken will be confined to resurfacing within the existing right-of-way. The Ministry of HomeAffairs Rules and Regulations state that no one is permitted to construct or erect or install anykind of house, fences within 50 feet on either side of the road. The walkover survey along theEast-West Highway found that there are no squatters within the right-of-way. Since there will beno land acquisition and resettlement in this Project, a land acquisition and resettlement plan isnot needed.

4 Under TA 5889-REG: Gender and Development Initiatives, for $850,000, approved on 13 December 1999

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H. Impact on Indigenous People and Cultural Properties

46. Data from the social assessment and other available documents show no separatedisadvantaged groups who are likely to be adversely affected by the Project. Accordingly, thereis no need to prepare an indigenous people development plan. Also, the Project will notadversely affect any cultural property. In fact, the Project will facilitate access to some of thehighly revered spiritual centers in Bhutan.

I. Project Performance Monitoring System (PPMS)

47. During project implementation, DOR, with the assistance of the consultants, will carryout project performance monitoring system (PPMS) activities under arrangements satisfactoryto ADB to ensure efficient management of project activities and maximization of project benefits.The Government and ADB have agreed on the performance indicators (Appendix 10) forcarrying out these PPMS activities. The findings and supporting data will be incorporated intothe project performance monitoring and evaluation report for the completed Project. Community-based organizations in the geog,5 in association with the DOR, will verify the effectiveness ofproject activities and outputs, as well as the reactions of the intended beneficiaries. A sociologiston the consulting team will assist DOR with that task. The project performance and monitoringevaluation will allow postevaluation of the Project, and also improve planning for future roadimprovement projects.

5 A geog is a cluster of villages.

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