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PUBLIC WORKS DEPARTMENT Government of Uttar Pradesh, India

UTTAR PRADESH STATE ROADS PROJECT Under IBRD Loan No. 4684-IN

Technical Assistance for Implementation of Institutional Reforms in the Road Sector of Uttar Pradesh

REPORT ON IMPLEMENTING COMPREHENSIVE PROJECT MONITORING AND MANAGEMENT

PROCESS AND SYSTEM

and

REPORT ON LINKING OF PROJECT MONITORING AND MANAGEMENT PROCESS WITH MASTER PLAN

(FINAL)

Report No. 31 and 40

November 2008

LEA International Ltd., Canada in joint venture with

LEA Associates South Asia Pvt. Ltd., India in association with

Ministry of Transportation of Ontario, Canada

Technical Assistance for Implementation of Institutional Reforms in Road Sector of Uttar Pradesh Report No. 31 and 40

November 2008 i

TABLE OF CONTENTS 1. BACKGROUND .................................................................................................................................... 1

1.1 FOCUS OF REPORTS 31 AND 40 ......................................................................................... 1 1.2 PROJECT MONITORING AND MANAGEMENT – SOME FUNDAMENTAL ASPECTS ....... 2

1.2.1 Project ......................................................................................................................... 2 1.2.2 Management ............................................................................................................... 3 1.2.3 Project Management ................................................................................................... 3 1.2.4 Project Monitoring ....................................................................................................... 3 1.2.5 Management Process ................................................................................................. 3 1.2.6 Management Systems ................................................................................................ 4

1.3 REVIEW OF PROJECT MONITORING AND MANAGEMENT IN PRACTICE BY ROAD AGENCIES ............................................................................................................................... 4 1.3.1 Review of UP PWD’s Existing Practices of Project Monitoring, Management

Processes and System ............................................................................................... 4 1.3.2 Project Management Systems in Other PWD’s and Government Agencies in India . 5 1.3.3 Project Management in Developed Countries ............................................................ 6

1.4 STRUCTURE OF THE REPORT ............................................................................................. 6

2. PROJECT CYCLE ................................................................................................................................ 7 2.1 PLAN, PROGRAMME AND PROJECTS ................................................................................. 7 2.2 CYCLE AND STAGES OF WORK ........................................................................................... 8

2.2.1 General Concepts ....................................................................................................... 8 2.2.2 World Bank and Asian Development Bank’s Project Cycle and Stages of Work ..... 11

3. PROJECT DESIGN AND TARGETED OUTPUTS ............................................................................ 20 3.1 RATIONALE ........................................................................................................................... 20 3.2 OBJECTIVE AND SCOPE ..................................................................................................... 23 3.3 TECHNICAL JUSTIFICATION – ECONOMIC AND FINANCIAL ANALYSIS ........................ 24 3.4 COST ESTIMATES ................................................................................................................ 26 3.5 FINANCING PLAN ................................................................................................................. 27 3.6 IMPLEMENTATION ARRANGEMENTS ................................................................................ 31 3.7 ENVIRONMENTAL AND SOCIAL MEASURES AND DIMENSIONS ................................... 33 3.8 POLICY MEASURES ............................................................................................................. 36

4. PROJECT MANAGEMENT AND MONITORING – PREPARATION AND PROCESS................... 38 4.1 STAGES OF PROJECT PREPARATION AND DEVELOPMENT PROCESS ...................... 38 4.2 PROJECT MANAGEMENT - DETAILED PROJECT REPORT ............................................ 38

4.2.1 Accord with Development Plan ................................................................................. 39 4.2.2 Project Definition, Concept and Scope ..................................................................... 39 4.2.3 Technical Feasibility .................................................................................................. 39


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4.2.4 Project Set-Up and Scheduling ................................................................................. 40 4.2.5 Project Cost - life cycle costing - economic appraisal ............................................... 40 4.2.6 Project Institution Framework (for construction) ....................................................... 42

4.3 PROJECT MANAGEMENT - MONITORING ......................................................................... 42 4.3.1 Project Implementation Schedule ............................................................................. 43

4.4 PROJECT RE-EVALUATION - PREPARATION OF COMPLETION REPORT .................... 44

5. PROJECT DESIGN, MANAGEMENT AND MONITORING- CASE STUDIES .................................. 45 5.1 WORLD BANK FUNDED PROJECTS ................................................................................... 45

5.1.1 Case Study on Gujarat – Gujarat State Highways Project by World Bank ............... 45 5.1.2 The World Bank funded Uttar Pradesh State Roads Project .................................... 46 5.1.3 Government of India Funded Projects ...................................................................... 47

5.2 OVER ALL ASSESSMENT OF PMGSY ................................................................................ 47

6. MASTER PLAN APPROACH – OBJECTIVES AND FUNCTIONS................................................... 48 6.1.1 Short – Term ............................................................................................................. 49 6.1.2 Medium – term investment proposals (5-10 Years) .................................................. 49 6.1.3 Long – term investment proposals (20 Years) .......................................................... 49

7. MASTER PLAN PREPARATION AND PROCESS - A LOGICAL FRAMEWORK APPROACH ..... 50 7.1 ASIAN DEVELOPMENT BANK FUNDED PROJECTS ......................................................... 53

7.1.1 Road sector master plan – Sri Lanka ....................................................................... 53 7.1.2 Introduction ............................................................................................................... 53 7.1.3 The critical needs for the Sri Lankan road sector were identified as ........................ 53 7.1.4 Road Network Performance Analysis ....................................................................... 53 7.1.5 Cause – Effect Tree Analysis .................................................................................... 53 7.1.6 Actions Required ....................................................................................................... 54

8. PLAN MONITORING MECHANISM - A LOGICAL FRAMEWORK APPROACH ............................ 57 8.1.1 Introduction ............................................................................................................... 57 8.1.2 Monitoring and Management System ....................................................................... 60 8.1.3 PMGSYS - Online Monitoring and Management System ......................................... 60 8.1.4 JNNURM’s- Programme Monitoring and Evaluation System (PMES) ...................... 62

8.2 MANAGEMENT INFORMATION SYSTEMS (MIS) ............................................................... 63 8.3 EXISTING MIS OF PWD ....................................................................................................... 65 8.4 GAP ANALYSIS ..................................................................................................................... 65 8.5 MIS IMPLEMENTATION APPROACH .................................................................................. 66

9. ROAD NETWORK MASTER PLAN AND IMPLEMENTATION OF PROJECTS .............................. 67

10. FOCUS GROUP MEETING ................................................................................................................ 68

11. PRESENTATION TO PROJECT STEERING COMMITTEE .............................................................. 69


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LIST OF TABLES

Table No. 1 : Topics to be covered in Methodology .......................................................................................... 9 Table No. 2 : Project Cycle – Stages of Work: World Bank and Asian Development Bank ............................ 13 Table No. 3 : Reports prepared at various stages of the Project Cycle ........................................................... 16 Table No. 4 : Estimated Project Costs ............................................................................................................. 27 Table No. 5 : UP Road Sector Expenditure and its Financing, 1997-2002 (2001 Prices) ............................... 28 Table No. 6 : UP Roads Sector Financing Plan, 2002-2007 (at current prices) .............................................. 30 Table No. 7 : Progress of UP SRP-II ............................................................................................................... 46 Table No. 8 : Goal Performance Indicators ...................................................................................................... 58

LIST OF FIGURES

Figure No. 1 : Elements of a Project .................................................................................................................. 5 Figure No. 2 : Merging PCM and Logframe Approach ...................................................................................... 8 Figure No. 3 : PWD Project Management Cycle................................................................................................ 9 Figure No. 4 : World Bank Project Cycle ......................................................................................................... 12 Figure No. 5 : Asian Development Bank Project Cycle ................................................................................... 12 Figure No. 6 : Cause-Effect Relationships in Plan Design .............................................................................. 51 Figure No. 7 : A typical example of a Project Logical Frame Work Matrix ...................................................... 52

ANNEXURES

Annexure - A : Cost Estimates Annexure - B : Pradhan Mantri Gram Sadak Yojna (PMGSY) Annexure – C : Examples of Economic Appraisal of Projects

Glossary AADT Annual Average Daily Traffic GNP Gross National Product

ADB Asian Development Bank GNSS Global Navigation Satellite System

ADT Average Daily Traffic GO Government Order

ADTA Advisory Technical Assistance GOG Government of Gujarat

AE Assistant Engineer GOI Government of India

APL Adaptable Program Loans GoUP Government of Uttar Pradesh

BOOT Build Own Operate Transfer GRRP Gujarat Rural Road Program

BOT Build Operate Transfer GSHP Gujarat State Highway Project

CAD Computer Aided Design HDM Highway Development and Management System

CAP Country Assistance Plan HQ Head Quarter

CAPE Country Assistance Program Evaluations HR Human Resource

CBO Community Based Organisations HRD Human Resource Development

CDP City Development Plan HRM Human Resource Management

CCL Court Cases and Litigation HRMS Human Resource Management System

C-DAC Center for Development of Advanced Computing IBRD International Bank for Reconstruction and

Development

CE Chief Engineer IA Implementing Agency

CEO Chief Executive Officer IC Institutional Capacity

COSS Country Operational Strategy Study ICB International Competitive Bidding

CPM Critical Path Method ICR Implementation Completion Report

CRF Central Road Fund IDS Institutional Development Strategy

CRRI Central Road Research Institute IDSP Institutional Development and Strengthening Plan

DBC Dense Bitumen Concrete IEE Initial Environmental Examination

DGPS Differential Global Positioning System IEG Independent Evaluation Group

DPR Detailed Project Report IRC Indian Road Congress

DMC Developing Member Countries IS Implementation Schedule

EA Executing Agency ISO International Organisation for Standardisation

EA Environmental Assessment ISOS Integrated Safeguards Data Sheet

EAR Environmental Assessment Report ISRO Indian Space Research Organisation

EE Executive Engineer IT Information Technology

E-in-C Engineer in Chief ISAP Institutional Strengthening Action Plan

EIA Environmental Impact Assessment JE Junior Engineer

EIRR Economic Internal Rate of Return JNNURM Jawaharlal Nehru National Urban Renewal Mission

EIS Environment and Social Information System LAN Local Area Network

EMP Environment Management Plan LRS Linear Referencing System

E & M Electrical and Mechanical MDR Major District Roads

ERR Economic Rate of Return MIS Management Information System

FAR Floor Area Ratio M & M Monitoring and Management

FIRR Financial Internal Rate of Return MP Management Process

FMA Financial Management Arrangements MOST Ministry of Surface Transport

FY Financial Year MoSRTH Ministry of Shipping, Road Transport and Highways

FYP Financial Year Plan MoRD Ministry of Rural Development

GPS Global Positioning System MoRTH Ministry of Road Transport and Highways

GSDP Gross State Domestic Product MOA Memorandum of Agreement

GIS Geographic Information System MoUD Ministry of Urban Development

MSS Mixed Seal Surface RWM Right of Way Management

NABARD National Bank of Agricultural and Rural Development RtMMS Routine Maintenance Management System

NCB National Competitive Bidding RRP Reports and Recommendations of the President

NITHE National Institute for Training of Highway Engineers RSMP Road Sector Master Plan

NH National Highway SA Social Assessment

NHAI National Highways Authority of India SAPE Sector Assistance Programs Evaluations

NPU Net Present Value SDBC Semi Dense Bitumen Carpet

OD Operational Directive SE Superintending Engineer

ODR Other District Road SEA Sectoral Environmental Assessment

O-D Origin-Destination SEMR Social and Environmental Monitoring Reports

O & M Operation and Maintenance SH State Highway

OP Operational Policy SOPE Report on the status of Project in Execution

OM Operational Manuals SOR Schedule of Rates

OMMS Online Management and Monitoring System SOS Strategic Options Study

OS Operating System SPV Special Purpose Vehicle

PAD Project Appraisal Document SRF State Road Fund

PAM Project Administration Memorandum SRP-II State Road Project-II

PCC Project Coordinating Consultant SWAN State Wide Area Network

PCI Pavement Condition Index TA Technical Assistance

PCU Passenger Car – équivalent Unit TCE Tata Consulting Engineers

PCM Project Cycle Management TCS Tata Consultancy Services

PCR Project Completion Report TEA Taj Expressway Industrial Development Authority

PD Program Document ToR Terms of Reference

PERT Program Evaluation and Review Techniques TNA Training Needs Assessment

PID Project Information Document UP Uttar Pradesh

PMGSY Pradhan Mantri Gram Sadak Yojana UPPWD Uttar Pradesh Public Works Department

PM Project Monitoring UPSRP Uttar Pradesh State Road Project

PMS Pavement Management System UPIEDA Uttar Pradesh Expressways Industrial Development Authority

PMES Program Monitoring and Evaluation System UNDP United Nations Development Programme

PPAR Project Performance Assessment Report VOC Vehicle Operating Cost

PPMS Project Performance Management System VPI Verifiable Performance Indicators

PPR Project Performance Report VR Village Roads

PPTA Project Preparatory Technical Assistance WB World Bank

PrMS Project Management System

PWD Public Works Department

RAP Resettlement Action Plan

RDBMS Relational Database Management System

RES Rural Engineering Services

RETA Regional Technical Assistance

R & BD Roads and Buildings Department

R & R Resettlement and Rehabilitation

RoW Right of Way

RIS Road Information System

RMMS Road Maintenance Management System


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1. BACKGROUND

Preparation of a Report on implementing comprehensive project monitoring and management process and system and Report on linking of Project Monitoring and Management Process with Master Plan are the deliverables of this TA. When this TA was conceived, it was anticipated that Network Master Plan would be made available to the TA consultants for review and suggesting, may be, enhancements thereon. Unfortunately no such document exists with PWD now. This is also true in the case of Project Monitoring and Management and System. Since both these documents/systems are not made available (as PWD does not have them) to TA Consultants, the present effort henceforth is evolved to refocus the work of TA in this regard. There were two reports that were to be prepared, although both are interlinked. Note that this aspect is being discussed with IDS Cell and PWD and agree to put the effort as one report. This report therefore is prepared to act as a Guideline and/or Tool kit to PWD on the area of concern.

Hence, the effort of these combined reports is to suggest the process for Project Management and Monitoring and interlinking that process with the Road Network Master Plan. Establishing the Road Network Master Plan can be considered as an independent Project in its own right. But once prepared, and based on the policy framework approved by the GoUP, it can be used in the formulation of strategies, forecasting fund requirements, optimizing fund allocation and formulating subsequent sub- projects.

1.1 FOCUS OF REPORTS 31 AND 40

The Tata Consulting Engineers (TCE) carried out a Policy Support and Institutional Development Study (IDS) in 2000-2002. One of the objectives of this study is to conduct or establish a sound project management functions in UPPWD. Incidentally the Final Report June 2002 of Consultancy services on Policy Support and Institutional Development Study is totally silent about Consultant’s recommendations on this aspect. However, on perusal of Annex II of Final Report it is evident that the GoUP have endorsed the IDS study findings on Project Management weaknesses and included in the present contract of TA Consultants as part of item 4C of Annexure II.

Therefore the Description of Services applicable to Report 31 and 40 of the TA Institutional Development and Strengthening Plan (IDSP) as approved by the GoUP is given in the following table.

OBJECTIVE DECISIONS ALREADY TAKEN

PROGRESS TO DATE ACTION MILESTONES

4C. Sound project management functions

IDS study findings on project management weaknesses endorsed by GOUP

Proposal to strengthen PWD project management capabilities

1. Implement comprehensive project monitoring and management process and system

2. Link with master planning MIS


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The first action milestone has been translated into:

• ‘Report No. 31: Report on implementing comprehensive project monitoring and management process and system’.

While the second action milestone refers to:

• ‘Report No. 40: Report on linking of PM&MP (Project Monitoring and Management Process) with master plan’.

Keeping the above original intent as the focus, this report is prepared with limitations stated above. Also based on our own appreciation of the elements involved in aspect of project management, project monitoring and master plan liking with it, we felt appropriate to review similar domain and efforts and include as appropriate in the report.

1.2 PROJECT MONITORING AND MANAGEMENT – SOME FUNDAMENTAL ASPECTS

Every project has a clearly defined start and a clearly defined finish. Projects have three basic elements. They are quality, cost, time.1 These are interrelated. Any change in one has an effect on the other two. Monitoring and Management (M&M) processes are critical activities in a Project. Monitoring involves periodic checking to ascertain whether activities are going according to the plan. It provides the feed back necessary for project management to keep the programs on schedule.2 For better understanding it is considered advisable to appreciate and define some of the terms and phrases which are commonly used.

1.2.1 Project

In simplest form a project is defined as Organization and Performance of resources such as men, money, machinery, materials, space and technology into logical sequence of activities. The most generic definition can be derived from Project Management Institute's Body of Knowledge as:

“A project is a series of tasks, arranged in a defined sequence or relationships that produce a pre-defined output or effect. A project always has a start, middle, and an end.”

It means when we deal with a project, we are primarily dealing with resources like time, money, equipment, technology, space, material and people. We have to organize these resources and perform activities in their logical sequence to complete the project.

1 In order to appreciate the subject dealing with Project Monitoring, Management Process it is desirable to understand the basic concept associated with the same and good practices being followed in organization similar to PWD. 2 The primary challenge of project management is to achieve all of the project goals and objectives while adhering to classic project constraints, quality, time, and budget. The secondary challenge is to optimize the allocation and integration of inputs necessary to meet pre-defined objectives, such as performance or quality.


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1.2.2 Management

Management in simple terms means the act of getting people together to accomplish desired goals. Management comprises planning, organizing, resourcing, leading or directing, and controlling an organization (a group of one or more people or entities) or effort for the purpose of accomplishing a goal. Resourcing encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources. Management can also refer to the person or people who perform the act(s) of management.

1.2.3 Project Management

Project3 Management is the discipline of planning, organizing, and managing resources to bring about the successful completion of specific project goals and objectives. A project is a finite endeavour—having specific start and completion dates—undertaken to create a unique product or service which brings about beneficial change or added value.

The scope of project management encompasses project monitoring, management processes and systems. However, definition of all these terms is given below.

1.2.4 Project Monitoring

It is an objective analysis of the progress of a project and to take corrective action when performance deviates significantly. The Project’s documented plans are the basis for monitoring activities, communicating status and determining needed corrective actions. Project Monitoring is one of the components of Project Management.

1.2.5 Management Process

Management process is a process of planning and controlling the performance or execution of any type of activity, such as a project. An organisation's top management is responsible for carrying out its management process.

Process Management is the application of knowledge, skills, tools, techniques and systems to define, visualize, measure, control, report and improve processes with the goal to meet customer requirements profitably. It is different from program management in that program management is concerned with managing a group of inter-dependent projects.

3 This finite characteristic of projects stands in sharp contrast to processes, or operations, which are permanent or semi-permanent functional work to repetitively produce the same product or service. In practice, the management of these two systems is often found to be quite different, and as such requires the development of distinct technical skills and the adoption of separate management philosophy, which is the subject of this article.


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1.2.6 Management Systems

Management system4 is the framework of processes and procedures used to ensure that an organization can fulfill all tasks required to achieve its objectives.

A Project generates enormous amounts of information that must be captured, organized and reviewed to keep the project on track and meet the owner’s reporting requirements.5 Project Management systems can dramatically speed and simplify the management of this information flow by streamlining data collection and organization, reducing duplicate record keeping and generating up – to- minute management reports and required documentation.6

1.3 REVIEW OF PROJECT MONITORING AND MANAGEMENT IN PRACTICE BY ROAD AGENCIES

1.3.1 Review of UP PWD’s Existing Practices of Project Monitoring, Management Processes and System

In UP PWD the existing practice of project management and monitoring of projects is based on traditional approaches7, like most other road agencies in India. The Projects are managed on an ad hoc basis using mostly Gantt/bar charts and informal techniques and tools such as physical and financial progress reports. It is indeed a task in itself to generate such reports every month, which requires quite a substantial input of human resources.8

Under the present project monitoring systems of PWD, time of completion and cost of project are the basic parameters, but other parameters such as defining the project goals and objectives, specifying tasks or how the goal will be achieved, what resources are needed etc, is non existent.9

4 For instance, a management system enables organizations to improve their performance through a process of continuous improvement. An oversimplification is "Plan, Do, Check, Act." A more complete system would include accountability (an assignment of personal responsibility) and a schedule for activities to be completed, as well as auditing tools to implement corrective actions in addition to scheduled activities, creating an upward spiral of continuous improvement. 5 Automated Systems improve efficiency for everyone involved. Agency staff spends less time on paperwork and more time monitoring progress and quality at the project site. Contractors experience faster turnaround on payments and speedier resolutions of contract change orders. Suppliers receive faster certification that their materials meet specifications. Record keeping is easier and more accurate and agencies save in reduced hands–on time. 6 Contract Management systems designed specifically for Highway Construction Projects are very helpful to Highway agencies and administrators in managing and tracking their projects more efficiently. There are number of software available for contract management systems. 7 Under the existing system monitoring of works is done every month at the level of Principal Secretary and the Engineer-in- Chief. Basically the project monitoring is generally limited to the extent of watching the physical and financial progress of the concerned project. The Divisional Engineer generates the monthly progress report on a standard format prescribed by headquarter each month for all the works under his charge. This monthly progress report provides broad information regarding financial and physical progress of works as a whole. The prescribed format of generating monthly progress report is too lengthy and cumbersome. 8 In UP PWD, project scheduling models such as the “Program Evaluation and Review Technique" or PERT, and the "Critical Path Method" (CPM) are almost non existent in monitoring Road projects. However, occasionally modern management techniques are applied for scheduling and programming of specialized building projects of large magnitude. Occasionally for monitoring of important projects are done using Gantt charts or Bar charts. 9 Time Management is one of the most important techniques of Project Management, wherein the project is broken down into small tasks and dependencies between tasks is set out, how much time each task will take is estimated, and monitoring is done by watching how project is doing against time estimates. UP PWD has not yet switched on the time management technique for projects.


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In an organisation such as the PWD the quality should be defined in the Specification in which case 'resources' would replace 'quality' as shown in Figure No. 1.

Figure No. 1 : Elements of a Project

1.3.2 Project Management Systems in Other PWD’s and Government Agencies in India

The project management system currently in use in Gujarat, Rajasthan, and Madhya Pradesh PWD seem no better than UP PWD. Resourceful Contractors are scheduling, programming, and monitoring their contract works of large magnitude using PERT /CPM techniques in the state of Gujarat and Maharashtra.

Project monitoring in NHAI and CPWD is mostly done on the basis of progress reports and Gantt charts. However, on projects of large magnitude, PERT/CPM techniques are applied by the Contractors and Construction supervision consultants for monitoring of projects. For monitoring normal projects, generally the contractors and consultants use the following software;

• MS Projects – for single and straightforward projects such as the construction of a bridge

• Primavera – for very complex projects such as construction of oil refinery which consists of number of inter-related sub-projects, which in themselves constitute major multi-million dollar projects

Application of modern management techniques and systems to the execution of a project from the start to finish, achieving predetermined objectives of scope, time, and cost to the equal satisfaction of those involved is not done in scientific and systematic manner. In nutshell the project management and monitoring system presently followed in UP PWD is in primitive stage, requiring substantial improvements and reforms.


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1.3.3 Project Management in Developed Countries

Project management was first used to manage the US space program and in the UK to manage the shut down and maintenance of coal burning power stations. Its practice has now been expanded rapidly through the government, the military, and the corporate world. In developed countries project management techniques are commonly used during the process of designing and implementing projects of large, medium and small sized projects. Application of advance project management techniques is prevalent in developed countries especially in USA, UK etc.

Therefore the focus of Report Nos. 31 and 40 is to develop as a guidelines and procedures for implementing project monitoring, management processes and systems in UPPWD linking with Master Plan. This can probably act as a template for the use of UP PWD.

1.4 STRUCTURE OF THE REPORT

This report addresses the topics as defined above and focuses on the following:

Chapter 2 : Project Cycle: its definition, cycle and stages of work

Chapter 3 : Project Design and Targeted Outputs

Chapter 4 : Project Management and Monitoring – Preparation and Process

Chapter 5 : Project Design, Management and Monitoring – Case Studies

Chapter 6 : Master Plan Approach - objectives and functions

Chapter 7 : Master Plan Preparedness and Process – A Logical Framework Approach

Chapter 8 : Plan Monitoring Mechanism – A Logical Framework Approach

Chapter 9 : Road Network Master Plan and Implementation of Projects


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2. PROJECT CYCLE

2.1 PLAN, PROGRAMME AND PROJECTS

Projects are neither prepared and/or implemented in isolation. Clear thoughts and objectives are generally laid down for them. Further, some sort of sectoral approach sets the framework within which they are designed. This approach is formalized as a strategy that sets clear and firm priorities regarding areas on which to focus, types of intervention, partnership arrangements and other operational matters. Projects also have confirm to a range of other cross-cutting policies and/or strategies (e.g., on socio-economic benefits, environmental protection, public participation, etc.) that have been adopted by the agency concerned.

The way in which projects are planned and carried out follows a sequence beginning with an agreed strategy, which leads to an idea for a specific action, oriented towards achieving a set of objectives, which then is formulated, implemented, and evaluated with a view to improving the strategy and further action. The project cycle provides a structure to ensure that stakeholders are consulted and relevant information is available, so that informed decisions can be made at key stages in the life of a project.

In this context, Project Cycle Management (PCM) approach is a sequence of actions to develop, implement, and evaluate projects that leads to improvement in the way in which new projects are developed and implemented. The aim of project cycle management is to improve the management of projects (and programs) by ensuring that all relevant issues and conditions are taken into account during design and implementation. In application, project cycle management consists of a set of design and management concepts, techniques, and tasks that is used to support informed decision-making. PCM tries to ensure that:

1. Projects respect and contribute to overarching policy objectives; 2. Projects are relevant to an agreed strategy and to the real problems of target groups /

beneficiaries; 3. Projects are feasible, meaning that objectives can be realistically achieved within the

constraints of the operating environment and the capabilities of the implementing agencies;

4. Benefits generated by projects are sustainable

For that purpose, PCM:

1. Uses the Logical Framework Approach to analyse the problems, work out suitable solutions – i.e. project design, and successfully implement them. In particular the Log Frame approach requires that performance indicators are set during the development stage which can be measured during and after implementation.

2. Requires the production of good-quality key document(s) in each phase, to en-sure structured and well-informed decision-making (integrated approach).

3. Requires consulting and involving key stakeholders as much as possible.

4. Puts emphasis on a clear formulation and focus on one Project Purpose, in terms of sustainable benefits for the intended target group(s).

5. Incorporates key quality issues into the design from the beginning.


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Figure No. 2 shows the merging of Project Cycle Management and the Logframe Approach.

Source: http://www.stgm.org.tr/docs/1123450143PCM_Train_Handbook_EN-March2002.pdf

Figure No. 2 : Merging PCM and Logframe Approach

2.2 CYCLE AND STAGES OF WORK

2.2.1 General Concepts

A project monitoring and management methodology covers all the things a project manager needs to do regardless of whether the project is a software development, package selection, or relocation of his department. It covers the following areas of project management. They are:

• Cost Management;

• Risk Management;

• Scope Management;

• Resource Management;

• Communications Management;

• Quality Management;

• Time Management;

• Procurement Management; and

• Integration Management

The topics listed in Table No. 1 are to be covered in the methodology evolved


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Table No. 1 : Topics to be covered in Methodology

Breakdown How is the overall project broken down into smaller components such as phases

Overview What is the purpose, objectives, deliverables and typical timeframes for each component

Activities What are the main activities

Inputs and Outputs What are the inputs or prerequisites for each activity? What are the outputs or deliverable of each activity

Instructions How do you carry out each activity

Participants Who should be involved in each activity

Supporting materials Tools, checklists, templates and other material that can assist the activity

QA How do you manage quality at either the phase or activity level

Timing How to estimate the time for each activity

Governance What authority is applicable? This may include approvals, gates to be passed, mandatory activities and sign-offs.

The Project Management Cycle indicates the various stages of a project from inception to completion. Figure No. 3 indicates the Project Management Cycle that relates to the work of the PWD.

Figure No. 3 : PWD Project Management Cycle

The Project Management Cycle consists of six phases as shown in the centre of the Figure No. 3. Around the outside of the circle are shown a series of actions / processes which need to be taken before moving on to the next stage of the project cycle. For example, during the Feasibility Study phase it will be necessary to appraise the project in economic and technical terms before moving on to the Project Design phase.


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Project identification: This is the first phase in the Project life cycle and essentially involves identifying probable projects. The identification of a project may necessitated on account of political, socio-economic and/or technical considerations for expansion, rehabilitation or improvement of road network. The identification of a project should be carried out on the basis of parameters fixed by the funding agency (may be state, central Government or lenders), political considerations or, preferably, in accordance with the Road Network Master Plan (if exists). At this stage the purpose and scope of the project is defined.

Pre-feasibility study: During pre-feasibility stage preliminary technical and economical analyses are carried out to determine the viability of the project before conducting a comprehensive feasibility study of the project. For external funded and BOT projects it is necessary to prepare a pre-feasibility report to enable the funding agency or private financier to appreciate the broad features of the project, the levels of financial involvement and probable returns. This may be done on the basis of reconnaissance survey by collecting information on the present status of the road, deficiency/distress identification and development potential, environmental impact, traffic data (present and future), preliminary designs, approximate estimation of cost and an economic analysis. The economic analysis may involve traffic allocation studies, assessment of resources generation potential, funding pattern and risk. This is an important requirement for project scoping but in practice GoUP often skips this step.

Feasibility Study: The feasibility study is intended to establish whether the proposal is acceptable in terms of soundness of engineering designs and expected benefits from the project for the investment involved. The feasibility report enables the funding agency to accord approval of the project. This approval is commonly known as administrative approval in UP PWD. When international funding is involved the feasibility report forms a basis for investment decision.

The feasibility study should be carried out based on preliminary site surveys, traffic analysis and projections, project cost estimation and economic analysis. In UP PWD there is no practice to conduct feasibility studies for projects funded by the State Government. Mostly the administrative approval is accorded by GoUP on the basis of preliminary cost estimates prepared by the PWD. In a typical PWD situation with constrained budgets all projects will be ranked and selection made on a political appraisal. But a far better approach would be to undertake a feasibility study to determine which projects should be taken up for detailed design.

Project Designs: The project design phase of the project life cycle essentially involves preparation of a detailed project report. It involves a chain of activities such as detailed field surveys and investigations, preparation and evaluation of various alternative designs, drawings and estimates. It is essential that every project should be prepared only after thorough investigations and collection of relevant information and evaluation of possible alternatives. The detailed engineering covers detailed alignment survey, soil and material survey, pavement design studies, drainage studies, environment management plan based on environment impact assessment studies, detailed drawings, estimates implementation schedule and contract documents. On the basis of the detailed project report the technical approval and financial sanction are accorded by the competent authority in UP PWD, enabling the project to be executed. The technical approval will also include the proposed performance indicators of the project.


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Project Implementation: With the issue of technical approval of the project and a suite of project plans, the project implementation phase of the project starts. This is the phase in which the deliverables are physical built and presented to the public for use. It involves appointment of the Contractor through the process of procurement of works and mobilizing the team for construction supervision and monitoring and control of the project.

Monitor and control of the project includes a suite of management processes such as time management, cost management, quality management (testing of materials and finished works), procurement management, communication management and contract management.

Project completion: Once the construction of the project is completed and opened for the use of public the project is ready for closure. This involves the issue of a completion certificate by the Engineer, formally taking over the deliverables from the Contractor. These deliverables not only include the completed project and opening same for the public but also handing over the as-built drawings, operating and maintenance manuals etc. The defect liability period commences on the day the completion certificate is issued by the Engineer. At project completion stage the accounts finalized and final payments made to the Contractor, including up to half the value of the retention money. On successful completion of the defect liability period the remaining retention money and performance guarantee is released to the contractor. For the PWD regular maintenance of the road starts on completion of defect liability period.

2.2.2 World Bank and Asian Development Bank’s Project Cycle and Stages of Work

The externally funded agencies like the World Bank (WB) and Asian Development Bank (ADB) too have their own Project Cycles10 which are given in Figures Nos. 4 and 5.

World Bank financed projects are identified, implemented and evaluated during specific phases in a well-documented project cycle. Documents produced by the bank during the project cycle - particularly during the identification and implementation stages - can be valuable sources of information for businesses that seek to bid on bank-financed projects or plan to become involved in developing countries' projects. There are eight major stages of the project cycle. It identifies the documents produced as part of the process, and highlights the information that is available online.

ADB prepares projects through a multistage process called the project cycle that provides all potential participants ample opportunity to get involved. ADB identifies, prepares, implements,

10 It is believed that a review of the processes followed by these two multi-lateral funding agencies does reveal the domain and focus of Project Management and Monitoring. This to our belief will be of use but limited use to UP PWD. The reason we feel it would be limited is that GoUP is accountable to public in its spending and transparency in all its’ spheres of activities is very critical. However, we feel the WB and ADB processes will act as guideline for UP PWD.


November 2008 12

and evaluates such projects in the project cycle. Civil society groups, nongovernmental organizations, and others have many opportunities to get involved throughout the multistage process. The project cycle involves several steps that start with the country programming phase in which all projects are identified. It continues with preparation, loan negotiation and approval, implementation, and evaluation.

The substance of the cycle is a project performance management system (PPMS). It is a results-based approach to project planning, monitoring, and evaluating implementation performance and development impact at various stages of the project cycle. Through a design and monitoring framework and a project performance report (PPR), it provides regular updates of projects and early warning to project managers and others of emerging problems.

Source:http://web.worldbank.org/WBSITE/EXTERNAL/OPPORTUNITIES/0,,contentMDK:20142781~menuPK:317355~pagePK:95645~piPK:95672~theSitePK:95480,00.html

Source: http://www.adb.org/Projects/cycle.asp

A comparison of the Project Cycle stages of the World Bank and the Asian Development Bank is shown in Table No. 2.

Figure No. 4 : World Bank Project Cycle Figure No. 5 : Asian Development Bank Project Cycle


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Table No. 2 : Project Cycle – Stages of Work: World Bank and Asian Development Bank

Stages of a Project Cycle: WORLD BANK (WB) Stages of a Project Cycle: ASIAN DEVELOPMENT BANK (ADB)

Cou

ntry

Str

ateg

y / P

roje

ct

Iden

tific

atio

n

The World Bank's Country Assistance Strategy (CAS) forms the blueprint for its assistance to a country. For low-income countries, the CAS is based on the priorities identified to reduce poverty and to improve living standard. The CAS is supposed to be produced in co-operation with the government and interested stakeholders. The project identified can range across the economic and social spectrum from infrastructure, to education, to health, to government financial management and once project is identified the world bank and the government agrees on an initial project concept and its beneficiaries, and the Bank's project team identifies proposed objectives, imminent risks, alternative scenarios, and a likely timetable for the project approval process.

Asian Development Bank country strategy is to do analysis of economic growth, key sector assessments, and analysis of social issues, governance, institutions, environment, the private sector, and other areas in the country. Asian Development bank also includes consultations with stakeholders in, coordination with other agencies and partners concerning the overall approach, development priorities, and policy at the country, sector, and thematic levels.

Proj

ect P

repa

ratio

n

The borrower government and its implementing agency or agencies are responsible for the project preparation for which government contracts with consultants and other public sector companies for goods, works and services, if necessary, and consults with Beneficiaries and stakeholders to obtain their feedback and support for the project. However, the World Bank generally takes an advisory role and offers analysis and advice, when requested, and assess the relevant capacity of the implementing agencies, in order to reach agreement with the borrower about arrangements for overall project management, such as the systems required for financial management, procurement, reporting, and monitoring and evaluation. This phase is supposed to be country driven. "Technical, institutional, economic, environmental and financial issues facing the project" are studied. If relevant, environmental assessments, indigenous people’s development plans, and environmental action plans should be made available to the public. Bank understanding suggests that Poverty and Social Impact Assessments would be conducted at this stage.

Asian Development Bank’s Project preparatory technical assistance helps in preparing project’s technical, financial, economic and environmental and the government with its key stakeholders develops a design and monitoring framework for project planning. This framework helps in understanding the overall process with required information about the project. This final design and monitoring framework results in the identification of problems and opportunities, the key stakeholders, analysis of cause and effect, specification of objectives and assessment of alternative approaches.


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Stages of a Project Cycle: WORLD BANK (WB) Stages of a Project Cycle: ASIAN DEVELOPMENT BANK (ADB) Pr

ojec

t App

rais

al

World Bank and the government are responsible for project appraisal. They combined review the work done during project identification and preparation phase and confirm the outcomes for project monitoring progress. Confirmation with the Bank’s operations requirement and government’s institutional arrangement results to the project time table, public disclosure of key documents and for final bank’s approval. The final steps are assessment of the project's readiness for implementation and agreement on conditions for effectiveness (agreed upon actions prior to implementation). The Project Information Document is updated during this phase. These documents are released to the public only after the project is approved.

In consultation with the government and other stakeholders, an appraisal mission examines the project’s technical, financial, economic, environmental, and management features. It also examines potential social impact. A detailed project risk analysis is done to assess the viability of the project. Loan terms and conditions are discussed (for program loans) to address key sector and policy issues. After examination in the field and completion of the appraisal mission, the loan proposal report and draft loan agreement are revised in preparation for loan negotiations.

Proj

ect I

mpl

emen

tatio

n

Project implementation is the responsibility of the borrowing country. The borrowing government, with technical assistance from the Bank, prepares the specifications, evaluates bids for the procurement of project goods and services and environmental and social impact mitigation plans. The Bank reviews this to ensure compliance with procurement guidelines, following which funds are disbursed avoiding any project delays or any unexpected events. The Bank and government combinedly prepares mid-term review to have regular check on project activities and in addition, World bank’s reports containing project execution progress are also made available for the public. The government monitors the project's progress, outcomes and impact on beneficiaries while the bank evaluate and measure the ultimate effectiveness of the operation and the project in terms of results

The executing agency, chosen by the government, implements the project according to an agreed schedule and procedures. For example, in an infrastructure project, engineering design and bidding documents are prepared, machinery and equipment are obtained, and civil works are constructed and installed. Review implementation progress and monitor the achievement of development outcomes in coordination with the borrower and the executing agencies. The PPR helps monitor implementation. Regional departments hold PPR meetings at least quarterly to review project performance.


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Stages of a Project Cycle: WORLD BANK (WB) Stages of a Project Cycle: ASIAN DEVELOPMENT BANK (ADB) Pr

ojec

t Com

plet

ion

At the end of the loan disbursement period, a completion report (staff self-evaluations) is documented by World Bank and Government identifying accomplishments, problems, and lessons learned. This document is now available to the public using input from the implementing government agency, co-financiers, and other partners/stakeholders. This report facilitate in comparing the final project outcomes achieved versus expected results and helps determining additional government measures and capacity improvements to sustain the benefits derived from the project. The outcome of the project is intended to benefit similar projects in the future.

Eval

uatio

n

The Bank's Independent Evaluation Group assesses the performance of roughly one project out of four (about 70 projects a year), measuring outcomes against the original objectives, sustainability of results and institutional development impact. From time to time, IEG also produces Impact Evaluation Reports to assess the economic worth of projects and the long-term effects on people and the environment against an explicit counter-factual.

On the completion of a project, an evaluation is conducted by preparing a Project Completion Report (PCR) to document the implementation experience and identify lessons learned. The executing agency prepares a separate report. Departments responsible for executing and supervising projects prepare the PCRs. Independent evaluation of the project takes place after completion when impact should be available. Evaluation Department then evaluates projects with evaluation reports, which are done on a selective basis. These include detailed assessment of the project’s formulation and implementation; the economic, financial, and social benefits; and the environmental impact.


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At every stage of the project cycle various sets of Reports need to be prepared as listed in Table No. 3.

Table No. 3 : Reports prepared at various stages of the Project Cycle

Reports : World Bank Reports : Asian Development Bank

Cou

ntry

Ass

ista

nce

Stra

tegy

/ Pro

ject

Iden

tific

atio

n

• Project Information Document (PID) - describes the project, sector, borrower, implementing agencies, objectives, cost, financing, implementation, and benefits. Every project in the pipeline has a PID, which is usually three to five pages long and includes the name of the World Bank Task Manager or Team Lead who is supervising the project, a key bank contact for bidders. The PID is an essential resource for tailoring bidding documents to the project under consideration.

• Integrated Safeguards Data Sheet (ISDS) - identifies key issues under the World Bank's safeguard policies for environmental and social issues and provides information concerning their management in the proposed operation. These policies address issues such as natural habitats, pest management, cultural property, involuntary resettlement, indigenous people, dam safety, projects on international waterways, and projects in disputed areas.

• Country Operational Strategy Study (COSS) - provides basis for determining country - specific, thematic, and sectoral priorities. Provide framework for country performance review. It also identifies and describes the distinctive role of ADB in the Developing Member Countries (DMC) in the context of strategic objectives and the development priorities and facilitates its decisions regarding choices in its operational program. ADB also provides the strategic framework to guide the preparation of the Country Assistance Plans. The COSS is usually prepared once every three years and is revised, as necessary.

• Country Assistance plan (CAS) - is core planning documents for operations in developing countries for three years. It documents medium - term operational programs, including support of policy reforms support of governance, capacity building, and regional cooperation programs related public sector lending and technical assistance programs, and private sector operations.

They provide the basis for overall three - year Rolling Work Program and Budget Framework, which in turn underpins the annual Administrative Budget submission.


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Reports : World Bank Reports : Asian Development Bank Pr

ojec

t Pre

para

tion

• Safeguard Policies- The World Bank's environmental and social safeguard policies are a cornerstone of its support to sustainable poverty reduction. The objective of these policies is to prevent and mitigate undue harm to people and their environment in the development process. These policies provide guidelines for bank and borrower staffs in the identification, preparation, and implementation of programs and projects. The effectiveness and development impact of projects and programs supported by the bank has substantially increased as a result of attention to these policies. Safeguard policies have often provided a platform for the participation of stakeholders in project design, and have been an important instrument for building ownership among local populations.

• Environmental Assessment Report (EA)- analyzes the likely environmental impact of a project and the steps required to mitigate possible harm.

• Indigenous Peoples Plan- identifies potentially adverse effects on the health, productive resources, economies and cultures of indigenous peoples.

• Environmental Action Plan- describes the major environmental concerns of a country; identifies the principal causes of problems; and formulates policies and concrete actions to deal with them

• Project Information Documents (PID) - is summary information on a project (loan, grant, or technical assistance). For public sector projects, ADB posts PIDs as soon as preparatory work begins on the project. During project implementation, public sector PID updates for loans and grants include the status of financing, implementation progress, development outcome, and loan covenants. Private sector PIDs reflect activities, status of development objectives, and material changes.

• Technical Assistance Reports (TA)- is a recommendation to the Board or President (depending on the amount of assistance) to finance a technical assistance project which are of three types:

1. Project preparatory technical assistance (PPTA) to prepare a project loan, a program loan, or a sector loan for financing by the ADB and other external sources

2. Advisory technical assistance (ADTA) to finance, for example, institution building or sector-, policy-, and issues-oriented studies

3. Regional technical assistance (RETA) for any of the activities covered in (1) and (2) involving more than one member country.


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ojec

t App

rais

al/ A

ppro

val

• Project Appraisal Document (PAD) - is the main technical document of a project or sector loan that is extensive and is only available to the public after a loan has been approved. It is a form-based document that allows a concise presentation of the information that the Board needs to approve a project for Bank financing. When project processing and the Project Appraisal Document are complete, it is sent for approval by the Board under cover of a Memorandum & Recommendation, usually no more than one page in length that contains only the information necessary to transmit the Project Appraisal Document, plus any confidential or sensitive information that was deleted from the Project Appraisal Document (in accordance with the provisions of the Bank's Disclosure Policy).

• Program Document (PD) - is prepared for each adjustment operation proposed for World Bank financing, describing the operation and setting forth the Bank's appraisal and assessment of the feasibility of, and justification for the program.

• Reports and Recommendations of the President (RRP) - sets out the terms and conditions proposed for the loan project, and seeks approval from ADB's Board of Directors. When the RRP is circulated to the Board, the loan, grant, or other legal agreement is attached.

Proj

ect I

mpl

emen

tatio

n

• Report on the Status of Projects in Execution (SOPE) - is intended to bridge the gap in information available to the public between the Project Appraisal Document or Program Document, disclosed after the Bank approves a project, and the Implementation Completion Report, disclosed after the project closes. In addition to the project progress description, the SOPE report contains project level comparisons of disbursement estimates and actual disbursements, and a table showing the loan/credit/grant amount and disbursements to date.

• Project Administration Memorandum (PAM) - sets out the project or program's implementation agreements and details and is used by the borrower, executing agency, implementing agency, and ADB to monitor project implementation and evaluate project impact. The PAM is an active document, updated and revised as and when necessary, particularly during midterm review and following any changes in project costs, scope, or implementation arrangements.

• Social and Environmental Monitoring Reports (SEMR)- If a project has significant environmental or social issues, ADB may require the borrower or project sponsor to submit periodic reports during project implementation on the status of those issues or mitigation measures. These types of reports are broadly termed social or environmental monitoring reports.


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ojec

t Com

plet

ion

• Implementation Completion Report (ICR) - reviews the results and assesses an operation, is required upon completion of each lending operation financed by the Bank.

• Project Completion Reports (PCR) - evaluate the performance of all completed public and private sector projects and programs. The project's executing agency submits to ADB its own completion report when the project is complete. Then, ADB operations staff visits the project site and prepare the project completion report, usually within 12-24 months after the project is complete.

Eval

uatio

n

• Project Performance Assessment Report (PPAR) - is based on the review of the Implementation Completion Report, or ICR, (a self-evaluation by the responsible Bank department) and fieldwork conducted by OED, the Bank's Operations Evaluation Department. To prepare PPAR's, OED staff examine project files and other documents, interview operational staff, and in most cases visit the borrowing country for onsite discussions with project staff and beneficiaries.

• Impact Evaluation- is the systematic identification of the effects positive or negative, intended or not on individual households, institutions, and the environment caused by a given development activity such as a program or project. It is an important component of the armoury of evaluation tools and approaches, albeit only one among a number.

• Country Assistance Program Evaluations (CAPE)- evaluate the performance of ADB’s country strategy and assistance programs, usually over the past 10 years, against the objectives laid out and the country’s own development priorities.

• Sector Assistance Programs Evaluation (SAPE) - assess the relevance, efficiency, effectiveness and sustainability of ADB’s assistance with respect to a particular sector’s development and financial performance, as well as its impact on economic development and poverty reduction.

• Special Evaluation Studies- focus on selected thematic issues across sectors or countries, or evaluate an ADB policy or process.

• Project/program performance evaluation reports- evaluate the design, implementation, and performance of loan projects and programs. They are prepared about 3 years after project completion.


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3. PROJECT DESIGN AND TARGETED OUTPUTS

3.1 RATIONALE

The project rationale is established in the Project Appraisal Document (PAD) and Report and Recommendation to the President (RRP) document for proposed loan by the banks. To quote some examples of infrastructure projects see Box 1 (urban sector) and Box 2 (road sector). This will help to understand why a project is indispensable for a State in identified infrastructure area either through an externally funding agency or funded in-house by a State Government or its concerned Department.

This particular logic may be applied to a Project to develop a Road Network Master Plan for the Road Sector of Uttar Pradesh, as UP PWD does not have a road network master plan at present.

Box 1: Report and Recommendation of the President to the Board of Directors on an Proposed Loan to India for the Rajasthan Infrastructure Development Project – Asian Development Bank, November 1998

RATIONALE: (URBAN SECTOR)

The Project focus is on improving the living and investment environment in the largest cities, at a minimum to meet basic human needs for safe water and environmental health conditions, and optimally to generate sustainable social and economic development. The Project cities have the largest concentrations of people suffering from inadequate urban facilities required to meet basic human needs such as water supply and sanitation and are the primary centers of economic activity. Sustainable social and economic development, including demonstration impact in the state of Rajasthan as well as other states. The Project cities -Ajmer, Bikaner, Jaipur, Jodhpur, Kota and Udaipur- have substantial potential as loci for stimulating the state’s economic and social development if the urban infrastructure and services are improved to a level considered attractive by residents and private investors. For example, tourism development has vast potential in the Project cities, but environmental quality and urban services must be improved before such potential can be realized.

Each city prepared subproject proposals, which were initially scrutinized by the state and the bank in terms of likely eligibility for Bank financing and with regards to assuring that basic needs are met along with other social and public health objectives. A multi-tier approach for selecting subprojects in the Project cities was applied: city-level discussions were held to fully understand the city’s priorities; socioeconomic surveys and consultations with CBOs determined the priorities of beneficiaries as well as affordability and willingness to pay for improvements; and a consultative workshop was held in each city at which local government and elected officials reviewed the investment proposals and discussed the necessary policy reform commitments.


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Box 2: Project Appraisal Document on a Proposed Loan in the Amount of US$488.00 million to the Government of India for the Uttar Pradesh State Roads Project – World Bank, November 18, 2002

Strategic Context: The project development objective is to improve the performance of the core road system in Uttar Pradesh. This involves improving the physical condition and capacity of the road network, enhancing its efficiency to meet the road transport demands of the growing and liberalizing economy, and expanding the role of the private sector in the development and management of the road network.

RATIONALE: (ROAD SECTOR)

Project alternatives considered and reasons for rejection:

Choice of Class of Roads, Selection of Links and Types of Works. As a result of the GoUP's past policy emphasis on extending and surfacing the rural road network with limited resources, the network of State Highways (SHs) and Major District Roads (MDRs), which carry most of the traffic volume, has been seriously under-developed, and now poses the greatest constraint to economic development. The project will therefore concentrate on the SHs and MDRs, which are the main responsibility of the PWD. The urban road network is under the responsibility of the respective municipalities, and they will not be addressed under the project. Selection of specific road links for improvement under the project has been made on the basis of a Strategic Options Study and detailed technical and economic feasibility studies that incorporated technical, economic, financial, and social criteria in the selection process. Given the scarcity of land in the State and to minimize social and environmental impacts, the project will concentrate on capacity expansion and rehabilitation of existing state roads rather than construction of new roads.

Choice of Lending Instrument. Without a steady improvement in institutional capacity, there is a risk that a single investment loan operation may not achieve the intended institutional objectives. The long-term sector policy and organizational issues may have been better addressed by an Adaptable Program Loan (APL) with appropriate triggers for each phase or a sequence of single investment projects over a longer term period. However, since the project is part of a comprehensive and sequenced program of Bank support to the State, it was considered that the series of planned adjustment operations in the Bank's assistance program in UP would provide the longer-term policy support which might otherwise have been provided under an APL. In any case, some of the key policy reforms, such as civil service reform, transparency, and fiscal reform are difficult to pursue in a road-sector operation, and are better supported under adjustment operations. The project will leverage improvements in the road sector against the overall reform program supported under complimentary adjustment operations. In addition, the project design has included a provision for pre-investment studies to support further investment in the road sector. This will only proceed if there is demonstrated capacity and performance improvement in the PWD which can be evaluated at the mid term review of the project. As in most states in India, the opportunities for private investment in the road sector are very limited and public financing is fully justified for the foreseeable future.

Policy Agenda. The GoUP has embarked on a comprehensive program addressing fiscal and governance reforms across all sectors. This project fits under the umbrella of this broader program and will focus on fundamental changes to institutional development of the road sector and the PWD, which is one of the key public service providers in the state. Since the PWD is the main agency responsible for managing the State's road infrastructure, road sector reform and development has to be initiated through the institutional development of PWD. The Institutional Development Strategy study undertaken by the GoUP during project preparation has led to the endorsement by GoUP of an IDS action plan that is to be implemented during the project. Through this, the project will also address asset management and funding issues of the state road network under PWD jurisdiction (including rural roads). By linking the project with broader state level fiscal reforms, opportunities will be created for placing the financing of state roads on a more sustainable and predictable footing.


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Project Appraisal Document on a Proposed Loan in the Amount of US$381.00 million to the Republic of India for the Gujarat State Highway Project – World Bank, August 7, 2000

RATIONALE: (ROAD SECTOR)

Project alternatives considered and reasons for rejection

The Project focuses on strengthening the institutional capacity of the Roads and Buildings Department (R&BD) to plan and manage the road network and on improving part of the core SH network to address its growing capacity and structural deficiencies. The Project is consistent with the World Bank's own sector strategy as defined in the "India Transport Sector - Long Term Issues Report (1995)" which will be updated in 2000/2001. The World Bank's sector strategy focuses both at the National and State levels to meet the investment and maintenance requirements of India's core road network. Consistent with this strategy, at the National level, the World Bank has recently approved the Third National Highway Project and has started the preparation of the Fourth National Highway Project which will include the four-laning of part of the Great Trunk Route (NH2) between New Delhi and Calcutta. At the State-level, the World Bank has prepared and is currently preparing several State-specific highway projects. In the particular case of Gujarat, the GSHP will be the second State-specific World Bank funded road project and will complement the development objectives (expanding the quality and connectivity of VR network) of the GRRP.

GOG completed a Strategic Options Study (SOS) of the core State road network to identify roads for improvement based on condition, capacity, traffic and connectivity criteria. Of the roads screened, about 1,500 km of SHs were selected for further techno-economic feasibility studies. The feasibility studies (using economic criteria within a constrained budget scenario) selected about 800-900 km of SHs for immediate improvement. The feasibility studies considered and optimized the different types of construction improvement intervention such as: (a) strengthening roads within existing formation width; (b) widening and strengthening roads with paved shoulders; (c) widening and strengthening roads without paved shoulders; and (d) four laning.

To reduce the existing SHs periodic maintenance backlog, about US$68 million has been allocated under the Project for the periodic maintenance of the core State road network. The roads selected for periodic maintenance works were screened on the basis of condition, traffic, connectivity and geographic distribution criteria and all yielded positive Net Present Value (NPV) and very high Economic Rate of Return (ERR) (in the range of 50% to 100%).

The final choice of SHs slated for improvement and periodic maintenance works (asphalt overlays) was motivated by the following two considerations :( a) maximizing the benefits to the State economy; and (b) ensuring that for geographic equity reasons, the civil works should cover as large a portion of the State core road network as possible. Furthermore, the final size of the Project was influenced by the good implementation capacity demonstrated by the R&BD during the implementation of GRRP and through a realistic assessment of the financial capacity of the State to meet its counterpart funding requirements. Finally, if the GSHP is successfully implemented, a follow-up project will be considered to meet the growing demand for road infrastructure in the State.


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3.2 OBJECTIVE AND SCOPE

Project objectives defines target status at the end of the project, reaching of which is considered necessary for the achievement of planned benefits. They can be formulated as S.M.A.R.T.

• Specific;

• Measurable (or at least evaluable) achievement;

• Achievable (recently Acceptable is used regularly as well);

• Relevant; and

• Time terminated (bounded).

The evaluation (measurement) occurs at the project closure. However a continuous guard on the project progress should be kept by monitoring and evaluating.

Where as a project scope can be defined as requirements specified to achieve the end result. The overall definition of what the project is supposed to accomplish and a specific description of what the end result should be or accomplish. A major component of scope is the quality of the final product. The amount of time put into individual tasks determines the overall quality of the project. Some tasks may require a given amount of time to complete adequately, but given more time could be completed exceptionally. Over the course of a large project, quality can have a significant impact on time and cost (or vice versa).

In this context, the objective and scope of a project may be illustrated through an Asian Development Bank and World Bank approach as given in Box 3 and Box 4.

Box 3: Report and Recommendation of the President to the Board of Directors on an Proposed Loan to India for the Rajasthan Infrastructure Development Project – Asian Development Bank, November 1998

OBJECTIVE AND SCOPE: (URBAN SECTOR)

The objective of the Project is to optimize social and economic development in urban Rajasthan by facilitating policy reforms intended to strengthen urban management and supporting priority investments in urban infrastructure and services required to meet basic human needs, improve quality of life, and stimulate sustainable social and economic development. The assistance is directed at the cities with the greatest development potential to i) redress immediate infrastructure and service deficiencies as well as meet future demand for fulfillment of basic human needs, ii) act as a vehicle through which the policy reforms can progress and be effectively executed, and iii) have the maximum demonstration effect for replication in other cities in Rajasthan and in other states.

The Project will be undertaken in five parts. Part A will provide support for capacity building and community participation, including community awareness and education. Part B will include water supply rehabilitation and expansion. Part C will improve urban environmental quality including wastewater management, solid waste management, drainage, slum conditions, sites and services, fire-fighting service, and protection of historic sites. Part D will improve urban transportation and management through upgrading of streets, bridges, terminals, parking and improved traffic management. Part E will provide implementation assistance covering incremental administration, equipment, and vehicles for implementation, design and construction supervision services, and Project management services.


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Box 4: Project Appraisal Document on a Proposed Loan in the Amount of US$381.00 million to the Republic of India for the Gujarat State Highway Project – World Bank, August 7, 2000

OBJECTIVE AND SCOPE: (ROAD SECTOR)

The objectives of the project will be to: (a) promote a more rational and efficient approach to road investment planning, management and maintenance at the state level; (b) improve the GOG institutional capabilities in the sector; (c) improve resource mobilization in the sector to ensure financial sustainability of the SH network; (d) upgrade capabilities of the private engineering and construction industry to meet growing demand for high quality highways, engineering and construction services; and (e) improve the riding quality and capacity of selected congested segments of the SH network.

Source: Project Appraisal Document, March 1998.

The principal development objectives of the Project are to enhance the capacity of the Government of Gujarat (GOG) for the effective and efficient planning and management of road infrastructure, while concurrently maximizing existing road infrastructure asset utilization through priority investments and increased maintenance funding.

3.3 TECHNICAL JUSTIFICATION – ECONOMIC AND FINANCIAL ANALYSIS

Economic Analysis: The purpose of the economic analysis is to determine the project feasibility from the view of economic perspective. Since the resources for investment are limited, the results of the economic analysis are used for justification of investing in a particular project and to assess the impact of the project on improving the economic welfare of the community/people of a city/region/state/country.

Transportation can be considered as an intermediate process involved in the production of all goods and services in the economy. Any reduction in the transportation cost would result in the reduction of production cost of all goods and services thereby generating additional benefit for the economy. Road improvements also bring about a reduction in transportation cost in terms of vehicle operating costs, travel time, environmental pollution, etc. For the purpose of economic analysis the cost stream has been considered to comprise of land acquisition, construction and maintenance costs required for the proposed upgraded facility. The savings in vehicle operating costs and the reduction in travel time for passengers and goods have been considered as the benefits due to the project.

Financial Analysis: Economic analysis results warrant project implementation. But due to the competing uses of the limited funds available with the Government, there is a need to explore the potential of private sector participation in the proposed project. This can ensure relief to some budgetary resources for alternate uses. In order to ensure this, there is a need to explore the financial viability of the project, without which no private investor would come forth to pick up the project for implementation. The primary objective is to assess the financial viability of the project and to determine its feasibility. The revenue and cost streams have been analyzed to determine the project's rate of return. The underlying parameters for appraising the project are based on the norms usually followed by the various financial institutions and banks, while appraising and financing projects.


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Link to Economic Evaluation: Both financial and economic appraisals will need to be conducted for each project; the latter providing a measure of the overall value of the project to the broader economy of Uttar Pradesh and potentially India, whilst the former would measure the commercial (financial) viability of the toll road to the highway operator. Both analyses incorporate similar features in as much as they examine the same basic data and estimate the net benefits of an investment project.

A project may, for example, be economically beneficial but not financially viable and, it is also possible, that a project may be financially viable but not economically beneficial. For a project to be taken forward, both financial and economic viability should be met. For a project that is economically viable, it must also be financially sustainable. Should financial sustainability not be met then it is unlikely that there will be sufficient funds available to construct, operate, maintain and replace assets. Moreover, a project not exhibiting financial sustainability is unlikely to attract private sector participation and will therefore require investment of public funds if the associated economic benefits are to be realised.

Whilst both analyses are conducted in monetary terms, the major difference between the two lies in the definition of Costs and Benefits. In a financial analysis, all expenditures incurred in respect to the investment and, all revenues resulting from the investment, are taken into account over the life of the project.

The above can be further explained by an example given in Box 5 and Box. 6


TECHINCAL JUSTIFICATION: ECONOMIC AND FINANCIAL ANALYSIS (ROAD SECTOR)

Economic Analysis: The economic analysis of the Project was based on the "Gujarat State Highways Project - Investment Prioritization Report", which included the feasibility study for widening and strengthening of about 1,500 km of SHs selected under the Strategic Options Study (SOS). Of the roads studied, about 820 km of high priority SHs were selected for inclusion in the Project for widening and strengthening. A separate feasibility study was undertaken which resulted in the selection of about 855 km of priority State roads for periodic maintenance treatment under the Project's road maintenance component. The combined ERR for all the project component is estimated at 44% with an NPV of US $ 838 million.

Financial Analysis: Plan (capital) allocations. The Project will generate total counterpart funding requirements of about US $ 152 million, of which, at least US $ 130 million will be from Plan allocations spread over five years. At present, 9th State Plan allocations for the road sector are estimated at Rs. 726 Crores (about US $ 183 million), although actual expenditures for the first three years have already exceeded this amount. For example, during the three years of the 9th State Plan (FY97-99) have been about Rs. 831 Crores (about US $ 209 million), already exceeding the Plan ceiling. For FY2000 GOG has allocated about Rs. 450 Crores (about US $ 113 million). Although Plan expenditure for the road sector has increased substantially above what was forecast at the beginning of the 9th Plan, counterpart funding requirements for the Project will still place a significant burden on overall road sector allocations. This could mean that without some funding "additionality" to meet the counterpart funding needs of the Project, the R & BD may have to re-prioritize some of its allocations for the road sector.

Non-Plan (maintenance) allocations. Compared to Indian FY 1999-2000, 2000-2001 maintenance allocations for routine and periodic maintenance are expected to increase by 18% to about Rs. 324 Crores (about US $ 81 million). GOG has been increasing maintenance funding in real terms for the last several years and is now spending about 60% of GOI Finance Commission norms for road maintenance versus less than 50% three years ago. Although maintenance funding levels have improved during recent years, they are still insufficient and have led to a large periodic maintenance backlog. This is especially the case for the high traffic SH network which is the focus of the Project.


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TECHINCAL JUSTIFICATION: ECONOMIC AND FINANCIAL ANALYSIS (ROAD SECTOR)

The cost-benefit analysis of the project focused on the two project components which comprise about 95 percent of the total project-widening and upgrading component and the rehabilitation component.

Cost-benefit analysis has compared the benefits accrued to the economy through reduction in vehicle operating costs, time savings for the current traffic, changes in consumer surplus for generated traffic and its time savings and the economic costs of upgrading and maintenance of roads. The roads investigated comprised those routes identified during the Strategic Option Study (SOS), excluding several routes that had been reclassified as National Highways and with the addition of a number of new routes identified by the UPPWD. For each road a cost-benefit study determined the ERR and NPV by discounting the net benefits over the life of the project at 12 percent. The roads were selected for improvement options based on the NPV and social and environmental considerations.

A detailed feasibility study of 2,655 km roads, selected through a strategic option study from a core network of about 8,000 km, was undertaken for upgrading and rehabilitation. Based on economic criteria, environmental and social considerations, 1,000 km of roads were prioritized for upgrading and 1,000 km were selected for rehabilitation. In addition, another 1,500 km of roads were selected from the core network for rehabilitation making a total of 2, 500 km for rehabilitation.

The economic analysis was conducted using the Highway Design and Maintenance (HDM-III) Model developed by the World Bank. The model simulates life cycle road/pavement conditions and vehicle operating costs and provides economic decision criteria for multiple road design and maintenance alternatives for a given road characteristics, traffic, and agency and user costs. Details of the economic analysis are defined in the Uttar Pradesh State Roads Project - Feasibility Study Final Report which is available in the project files. For selection of rehabilitation roads which were not part of the SOS study, a matrix was developed for the most economic treatment option given the traffic and road characteristics. The matrix used the HDM-III model and the improvement options were selected accordingly.

3.4 COST ESTIMATES

The total cost of a Project is calculated keeping in mind the physical and price contingencies, duties, taxes, interest and other charges during construction. This includes direct and indirect foreign exchange costs along with a component of local currency. The procedure for preparation of cost estimates is given in Annexure A.

The components which are generally considered for deriving the total Project Cost are given in Table No. 4, citing two examples of State Highway Projects.


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Table No. 4 : Estimated Project Costs

Annex 3 : Estimated Project Costs

INDIA : GUJARAT STATE HIGHWAY PROJECT

Project Cost by Component Local

US $million Foreign

US $million Total

US $million

1. Widening and Strengthening of about 800-900 km of SHs 242.60 100.40 343.00

2. Land Acquisition and R&R 1.00 0.70 1.70

3. Maintenance of about 1,000 km of SHs 39.70 16.50 56.20

4. Design and Supervision 15.40 11.10 26.50

5. Institutional Strengthening, Training, TA, and Equipment 6.40 4.10 10.50

6. Pre-investment Studies 1.90 1.40 3.30

Total Baseline Cost 307.00 134.20 441.20

Physical Contingencies 23.00 10.10 33.10

Price Contingencies 40.90 17.80 58.70

Total Project Costs 370.90 162.10 533.00

Total Financing Required 370.90 162.10 533.00

Project Cost by Category Local

US $million Foreign

US $million Total

US $million

Civil Works 355.30 126.20 481.50

Goods 0.50 1.00 1.50

Services 10.00 23.00 33.00

Unallocated 5.10 11.90 17.00

Total Project Costs 370.90 162.10 533.00


Annex 3 : Estimated Project Costs

INDIA : Uttar Pradesh State Roads Project

Project Cost by Component Local US $million

Foreign US $million

Total US $million

1. Upgrading of about 1,000 km SHs 229.93 94.15 324.08

2. Rehabilitation of about 2,500 km of SHs and MDRs and Pilot Performance Based Maintenance

179.46 32.24 211.70

3. Institutional strengthening, training, equipment, and pre-investment studies

7.51 5.61 13.12

4. Road safety and traffic operations program 11.18 1.98 13.16

Total Baseline Cost 428.08 133.98 562.06

Physical Contingencies 11.69 3.75 15.44

Price Contingencies 24.07 8.39 32.46

Total Project Costs1 463.84 146.12 609.96

Front-end fee 4.88 4.88


Project Cost by Category Local

US $million Foreign

US $million Total

US $million

Civil Works 6.30 1.40 7.70

Goods 431.40 131.22 562.62

Services 26.14 13.50 39.64

0.00

Total Project Costs1 463.84 146.12 609.96

Front-end fee 4.88 4.88

Total Financing Required 463.84 151.00 614.84 1 Identifiable taxes and dues are 92.87 (US$m) and the total project cost, net of taxes, is 521.97 (US$m). Therefore, the project cost sharing ratio is 93.49% of total project cost net of taxes.

3.5 FINANCING PLAN

In general usage, a financial plan can be a budget, a plan for spending and saving future income. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, therefore it describes the transportation / road sector investments that can be supported with transportation / road sector funding sources which can be reasonably expected during the planning period. Depending on the type of availability of funds and sources of revenue, a Project may be financed based on a flexible approach i.e. tailored to the availability of funds. Some of the Project components can be packaged and funded as stand alone measures and some may be candidates for private sector participation.

This can be further explained by referring to a report published by the World Bank11. The transportation/ road network is financed through Central and State revenue sources.

11 ‘India - Financing Highways’ a World Bank report is designed to provide information and advice to the Indian Union and States Governments on the principles and practicalities for establishing a sound and sustainable system of highway financing. The report reviews the economic principles for establishing efficient and equitable road user charges (road pricing), and examines the potential mechanisms for charging road users. Present road taxation in India is assessed in the light of these considerations as are the levels of highway funding required meeting government objectives. The report reviews the potential contribution of private sector finance to the sector and assesses the present use of private finance and the alternative possibilities for utilizing the private sector in the financing and management of the network. The report also examines the need for an agenda of sector reform which addresses both the financial and institutional frameworks needed to achieve network sustainability and public acceptance of higher user charges.


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An example of a financing plan referred in a Project Appraisal Document 12of World Bank

As part of the strategy to promote economic growth and alleviate poverty in UP, the GOUP and GOI have put considerable emphasis on improving the state's transport system. The road sector expenditure has increased from about 12 percent of the state's total budget in the Eighth Five Year Plan (FYP) to 21 percent in the Ninth FYP (1997-2002), making the total road sector expenditure during the Ninth FYP to about Rs.80 billion.

Table No. 5 shows the Ninth FYP (1997-2002) expenditure for the road sector.

Table No. 5 : UP Road Sector Expenditure and its Financing, 1997-2002 (2001 Prices)

UP Road Sector Expenditure ---Ninth Five-Year Plan Period--- Average for period as %

of total Rupees Crore (‘0,000,000) 1997-98 1998-99 1999-00 2000-01 2001-02

----Undivided UP---- UP less Uttamchl ---> PWD Establishment (non-plan) 420.59 427.41 483.35 542.79 472.08 29.4 PWD Non-Wage O&M (non-plan) 178.06 189.82 135.53 301.28 287.38 16.5 o/w Central Road Fund 2.51 2.39 2.40 1.94 19.78

State Road Fund 90.44 169.09 140.86 State Monsoon repairs 39.74 25.00 16.65 16.02 16.29 State Non-Plan (other) 135.81 162.43 116.48 114.23 110.45

State Sector Investment Plan 741.19 782.19 653.11 123.49 76.42 43.6 o/w Ext. Aided Project Funding 39.20 24.75 9.95 6.79 9.25

State Counterpart Funding 16.80 8.25 3.32 2.26 3.08 Other State Plan 685.19 749.19 639.84 114.44 64.09

Village Roads Investment (plan) 78.82 85.00 99.68 173.19 325.55 10.5 o/w RIDF (NABARD Load Funding

PWD Dep. Works (GoI Grants) RD Dept. Dep. Works (GoI Gr)

78.82

85.00

99.68

111.68 61.51

112.14 151.91

61.50

Total UP Roads Sector /*/

1418.66

1484.42

1371.67

1140.75

1161.43

100

o/w Central Govt Grant Funding 2.51 2.39 2.40 63.45 233.19 External Donor Funding 39.20 24.75 9.95 6.79 9.25 Domestic Bank Funding 78.82 85.00 99.68 111.68 112.14 State’s Own Funds 1298.13 1372.28 1259.64 958.83 806.85

/*/ Excluding national highways as well as village roads managed by other departments and market committees (Mandi Parishads)

Source: Department of Finance, GOUP

12 Project Appraisal Document on a Proposed Loan in the Amount of US$488.0 million to the Government of India for the Uttar Pradesh State Roads Project – November 18, 2002


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The table demonstrates that recently a disproportionate amount of resources have gone to capital expenditure, while maintenance has received a lower allocation, which is even less than establishment costs.

Despite this substantial investment, however, the road sector in UP continues to perform poorly. This is in part due to:

(i) the emphasis on capital expenditure for village roads at the expense of the major state highways,

(ii) the neglect of maintenance, and

(iii) Inefficient use of resources stemming from the ineffective institutional arrangements in the road sector and the large staff cost for PWD.

(iv) not considering life cycle costing in which construction and maintenance costs are considered together and not in isolation

Future Road Sector Expenditure: Total expenditure in the roads sector in Uttar Pradesh, including the proposed project (UPSRP), is projected to be about Rs. 25 billion annually during 2002-07 increase amounts to about 22 percent over 5 years. See Table No. 6. While total expenditure in the sector is projected to rise at roughly the expected rate of economic growth, or a little slower, the allocation required from the state's own resources is projected to be less in real terms, compared to the past, thanks to:

(i) Increased availability of central funding and domestic bank funding, especially for village connectivity, and

(ii) The additional external resources available under the proposed project.

The composition of expenditure within the roads sector is projected to shift significantly in favour of:

(i) Non-wage operation and maintenance (O & M) of the network and

(ii) Investment in expanding village connectivity.

Expenditure on staff salaries is projected to be lower in real terms during 2002-07 compared with 1997-2002, as a result of:

(i) The creation of Uttaranchal state out of the former hill districts of UP and consequent move of a section of staff to the new state; and

(ii) Attrition based downsizing of about 2.5 percent-3 percent annually.

As a result, there is a sharp rise projected in the ratio of non-wage to wage component of recurring expenditures, from 46 percent in 1997-2002 to 109 percent in 2002-07. Investment in highways and other major roads in the state, including the proposed project, is projected to remain roughly at the same level as in the past 5 years; in other words, the impact of the project will not be to raise the aggregate level of investment in state roads (excluding village roads) but to prioritize investment on the strategically most important core road network.


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Table No. 6 : UP Roads Sector Financing Plan, 2002-2007 (at current prices)

UP Roads Expenditure

{Sept 25, 2002} --- Tenth Five-Year Plan Period --- Rupees Crore (‘0000000) 2002-03 2003-04 2004-05 2005-06 2006-07

PWD Establishment (non-plan) 461.98 485.08 509.33 534.80 561.54 PWD Non-Wage O&M (non-plan) 442.75 492.59 570.72 621.35 676.73 o/w Central Road Fund 116.75 122.59 128.72 135.15 141.91

State Road Fund 200.00 220.00 242.00 266.20 292.82 State Monsoon repairs State Non-Plan (other) 126.00 150.00 200.00 220.00 242.00

State Sector Investment (plan) 237.20 731.76 797.44 835.28 789.60 o/w Ext. Aided Project Funding 78.13 484.80 531.20 554.40 508.00

State Counterpart Funding 15.63 96.96 106.24 110.88 101.60

Other State Plan 143.45 150.00 160.00 170.00 180.00

Village Roads Investment (plan) 523.86 550.00 580.00 620.00 650.00 o/w RIDF (NABARD Load Funding

PWD Dep. Works (GoI Grants) RD Dept. Dep. Works (GoI G)

273.86 200.00 50.00

300.00 200.00 50.00

330.00 200.00 50.00

370.00 200.00 50.00

400.00 200.00 50.00

Total UP Roads Sector /*/ 1665.79 2259.43 2457.49 2611.43 2677.87 o/w Central Govt Grant Funding 366.75 372.59 378.72 385.15 391.91

External Donor Funding 78.13 484.80 531.20 554.40 508.00 Domestic Bank Funding 273.86 300.00 330.00 370.00 400.00 State’s Own Funds 947.06 1102.04 1217.57 1301.88 1377.96 o/w Earmarked thru Road Fund 200.00 220.00 242.00 266.20 292.82

Non-earmarked 747.06 882.04 975.57 1035.68 1085.14

/*/ Excluding national highways as well as village roads managed by Agriculture Dept and market committees (mandi parishad)

Source: Department of Finance, GOUP

Fiscal Impact:

From the Roads Sector Financing Plan discussed above, it appears that under normal circumstances, there is little risk that the roads sector will suffer from lack of resources during the project period, provided this plan is fully carried out by the government. The total funding requirement of the proposed project, estimated on average at Rs 5.89 billion per year, is equivalent to about 32 percent of the total annual average road sector expenditure (i.e., Plan and non-Plan expenditure, minus PWD establishment cost) over the next the five-year period (Tenth FYP).


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The overall fiscal situation in Uttar Pradesh, as measured by the consolidated fiscal deficit of the state government and power utilities combined, improved during the years 1999-00 and 2000-01, roughly by about 1 percentage point of GSDP. In the year 2001-02, however, the fiscal situation has deteriorated, both due to expenditure pressures and weak revenue collection effort associated with the state assembly elections, as well as due to the slackening of reforms and deterioration in the finances of the power sector.

3.6 IMPLEMENTATION ARRANGEMENTS

The implementation agency involves the following:

• The Executing Agency (EA): is a form of organization that may undertake any combination of the following activities: (i) design of a project; (ii) implementation of a project; or (iii) operation of a project. An efficient EA is critical to the success of implementing and, in many cases, operating a project. Therefore, it is essential that the management of an EA (for example, a ministry or government department), be fully informed of objectives and requirements for project implementation and operation.

• Project Organization and Management:

Project organization is the order to ensure the active involvement of stakeholders in the project and to establish a management structure through which all key stakeholders are actively involved in the project activities and related consultative processes.

Project Management is the discipline of planning, organizing, and managing resources to bring about the successful completion of specific project goals and objectives. A project is a finite endeavour—having specific start and completion dates—undertaken to create a unique product or service which brings about beneficial change or added value.

• Institutional Capacity (IC): is defined as the provision of technical or material assistance designed to strengthen one or more elements of organizational effectiveness. The elements of organizational effectiveness include governance, management capacity, human resources, financial resources, service delivery, external relations and sustainability. The goal of IC is to strengthen an organization in terms of its overall sustainability.

• Implementation Schedule (IS): is a type of timeline for the different tasks to be completed, represented in a form of list. To understand how detailed the individual tasks should be, a good rule of thumb is that each task should correspond roughly to the respective allotted time period. Given the amount of time for implementation, this is necessary that the progress can be monitored continuously within regular intervals of time.

• Procurement: means any process of acquiring goods, works and related services at the best possible total cost of ownership such as: transportation, insurance, installation, training, maintenance and other similar services required for the implementation of a project excluding consultancy services, generally via a contract.


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Works:

International Competitive Bidding (ICB): is a method for procuring goods and services that requires notification to the international community. Bidders from eligible countries, as defined by the contracting agency or country, are given an equal opportunity to bid with an element of domestic preference. Bidding is allowed for all the works where supplies need import irrespective of value.

National Competitive Bidding (NCB): is the procedure normally used for public procurement in the country of the Borrower, and may be the most efficient and economical way of procuring goods or works which, by their nature or scope, are unlikely to attract foreign competition. NCB procedures may also be used where the advantages of ICB are clearly outweighed by the administrative or financial burden involved.

Direct contracting / shopping / Force Account :

Direct contracting is an existing contract for goods or works, awarded in accordance with procedures acceptable to the Bank, may be extended for additional goods or works of a similar nature. The Bank shall be satisfied that no advantage could be obtained by further competition and that the prices on the extended contract are reasonable.

Shopping is a procurement method based on comparing price quotations obtained from several Suppliers, usually at least three, to assure competitive prices, and is an appropriate method for procuring readily available off-the-shelf goods or standard specification commodities that are small in value.

Force Account can be justified for the quantities of work involved which cannot be defined in advance, are small and scattered or in remote locations, are required to be carried out without disrupting ongoing operations and avoiding emergencies with prompt attention.

Goods: means objects of every kind and description including raw materials, products and equipment and objects in solid, liquid or gaseous form, and electricity, as well as services incidental to the supply if the value of those incidental services does not exceed that of the goods themselves; (the enacting State may include additional categories of goods).

Services: encompasses the strategic management and procuring of complex category services such as contract labour, consultancy services, marketing, print, travel, telecoms and legal services for which variety of consultants is needed. Services spend represents an enormous expense and while companies try in earnest to control the costs, few have the same visibility into their services expenditure as for goods and materials.


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• Disbursement: is the withdrawal of loan proceeds by the financing institution (World Bank, Asian Development Bank etc.) from the loan account upon the borrower’s provision of an application for withdrawal and the Bank’s clearance of the application.

Financial Management Arrangements (FMA): are used for recording all transactions and balances, supporting the preparation of regular and reliable financial statements, safeguarding the entity’s assets, and are subject to audit for the executing/implementing agency’s (EA/IA) systems.

Accounting Policies and Procedures: are used for the purpose to ensure that assets are safeguarded, that financial statements are in conformity with generally accepted accounting principles, and that finances are managed with responsible stewardship.

• Land Acquisition and Resettlement (LAR): means the taking of land, buildings, or other assets from Displaced Persons for purposes of the Project and to ensure that Displaced Persons who need to be physically relocated are provided with relocation, such as moving allowances, and provided with residential housing or housing sites or, as required, agricultural sites.

• Mid term Review: is a meeting held in the middle of the project term to review progress on implementing undertakings thus highlighting significant progress made almost halfway into the project period with consideration of different challenges arisen and taken in the recommendations for the next period of work, and the action taken far to implement them.

• Benefit Monitoring and Evaluation: is an instrument for assessing a project's socioeconomic impact on the target beneficiaries. BME is done for the preparation and analysis of baseline information on persons and population groups benefiting from the project as well as the affected population prior to the project's commencement, for monitoring benefits delivered to intended beneficiaries during implementation and for evaluation of project impact in three to five years after completion when all project facilities and services have been fully developed.

3.7 ENVIRONMENTAL AND SOCIAL MEASURES AND DIMENSIONS

In order to predict environmental impacts of any development activity and to provide an opportunity to minimize against negative impacts and enhance positive impacts, the environmental impact assessment (EIA) procedure was developed in the 1970s.

Environment Impact Assessment (EIA) is a management tool for planners and decision makers and complements other project studies on engineering and economics. Environmental assessment is now accepted as an essential part of development planning and management. Thus it should become as familiar and important as economic analysis in project evaluation.

Several types of Environmental Assessments (EAs) may be conducted depending upon the project or programme requirement. The types of EA used for road projects around the world are presented in Box 7. As per the Environmental Impact Notification of the Government of India, the primary type of EA required for road projects is an Environmental Impact Assessment [EIA] which comprises of two stages:


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• Initial Environmental Examination (IEE): To identify the regulatory institutions from which the project shall require clearances and

• Environmental Impact Assessment: To prepare a Rapid / Detailed EIA for clearance from the Ministry of Environment and Forests (Central Government).

Box 7: Types of Environmental Assessment

Traditional Project-specific EAs

1. Summary or Initial Environmental Evaluation: These are applicable to projects where limited environmental analysis is appropriate. They focus on specific impacts and their mitigation.

2. Project specific EA: These EAs focus on identifying potential impacts on the local and immediate environment within the context of a region or sector. It involves familiarization with environment status of the site for impact identification and integration of mitigation measures into all project stages (planning, construction and operation).

3. Programmatic EA: Also known as Class EAs these have been developed for consideration of groups of projects which are similar in type, scope and scale and whose impacts are generally well understood. Within a given group EA steps consist of a prescribed methodology that includes specific criteria, standards and relevant mitigation measures. There is little involvement of the regulatory agency.

4. Regional EA: These are used to assess environmental effects relating to the broad spatial context of a proposed project. They assess the cumulative and other potential effects that all projects (present and future) proposed for a geographic area or administrative region might have on the environment.

Strategic EAs

5. Sectoral EAs: These assess macro scale development alternatives and formulate sound environmentally based advice on appropriate and sustainable development goals. SEA is most commonly applied in the context of sector investment programs involving multiple sub-projects.

Source: Roads and the Environment – A Handbook

The Environment Assessment process primarily comprises the following three components:

1. Initial Environmental Examination and Screening

2. Environmental Impact Assessment and

3. Environmental Management Plan

If the Project is a World Bank funded, then the following should be done:

• EIA should be carried out as per Operational Policy (OP) 4.01, Bank Procedure (BP) 4.01

• EMP should be as per provisions of OP 4.04

• For protection of natural habitats OP 4.04, BP 4.04 are applicable

• For forestry OP 4.36 is applicable

If the Project is Asian Development Bank funded, the following should be followed:

• Operations Manual (OM) section F1 on environment (2006)

• Environmental Assessment Guidelines (2003)


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Social Assessment (SA) is required to be carried out as part of the project preparation, to examine the potential adverse and beneficial consequences of the proposed development project, so that due consideration can be given to these aspects in further stages of the project planning, design and implementation.

The overall objective of the SA is to ensure that the potential social impacts/problems are recognized at an early stage of project preparation, so that these can be effectively addressed during subsequent stages. It consists of the following key procedures:

• Identify key stakeholders and establish an appropriate framework for their participation in the project selection, design and implementation;

• Ensure that project objectives and incentives for change are acceptable to the range of people intended to benefit, and that gender and other social differences are reflected in project design;

• Assess the social impact of investment projects, and where adverse impacts are identified, to determine how they can be overcome or at least substantially mitigated; and Develop capacity at the appropriate level to enable participation, resolve conflict, permit service delivery, and carry out mitigation measures, as required.

An SA for road projects is conducted in three stages as identified below:

i. Initial Social Screening,

ii. Social Impact Assessment

iii. Resettlement and Rehabilitation (R&R) Action Plan / Social Management Plan.

Initial Social Screening: This stage involves preliminary assessment of the social and cultural context of the proposed road projects and likely impacts of the proposed interventions on key social and cultural issues. The output is the Initial Social Screening Report.

Social Impact Assessment: This stage involves detailed examination of socio-cultural baseline conditions; possible alternatives of project interventions and selection of a suitable alternative that best suits the project needs and inflicts minimum impacts on the environment. The output is the Social Impact Assessment Report.

Resettlement and Rehabilitation (R&R) Action Plan / Social Management Plan: This stage involves taking into account several issues which needs proper mitigation measures to tackle the situation like: land and structure acquisition, compensation measures, public consultation, monitoring and evaluation, institutional organization and budget. The output is the Resettlement Action Plan (RAP).


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If the Project is a World Bank funded, then the following should be done:

• Resettlement and Rehabilitation (R&R) Policy should be prepared in accordance with Operational Directive (OD) 4.30 on Involuntary Resettlement and OD 4.20 on Indigenous People to cover situations where temporary or permanent relocation of people is required or other types of losses will be incurred.

• For Common and Cultural Property, mitigation and enhancement plans as per OP 4.01 and OPN 11.03 should be prepared as part of RAP and EMPs due to the earthworks involved.

If the Project is Asian Development Bank funded, the following should be followed:

• Operations Manual (OM) section F2 on involuntary resettlement (2006) • Operations Manual (OM) section F3 on indigenous people (2006) • Handbook on Involuntary Resettlement • Indigenous Peoples Handbook (forthcoming in ADB website)

3.8 POLICY MEASURES

It is important to augment government resources through institutional financing and multilateral funding institutions but before seeking investment from these sources it is important to understand the policy measures that would act as a guide for all participants – the State, classified sectors and the external agencies. The policy measures should contain the following:

Programmatic Approach and Policy Dialogue

A programmatic approach should be adopted by the executing agency to realize goals in a progressive and evolutionary manner. An effort should be made to (i) strengthen project development/implementation capability; (ii) enhance participation of stakeholders in project development; (iii) strengthen fund recruitment capability; (iv) strengthen project management and monitoring function; and (v) enhance professional management capability and financial viability.

Institutional Improvements

Improving management of the state road sector will enable Government to more efficiently manage state roads and ensure more reliable road transport services to support State’s social and economic development. Development will be through improving governance in public administration and accountability in sector resource and road asset management, and improving sector capability and capacity to create a transparent environment that is conducive to increased efficiency and competition. This, in turn, will ensure higher quality of construction and maintenance and more sustainable road infrastructure.

Institutional reform will result in more reliable institutional and policy frameworks. Reform will also provide the capacity to ensure that the investments under the sector approach will be implemented successfully, and that project-generated development can be sustained through improved governance and accountability. Support proposed for asset management and improvement of sector management will ensure that roads improved under the Project are adequately maintained.


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Strengthening of Road Maintenance and Monitoring Capability

The road sector in Uttar Pradesh is currently suffering from Road Maintenance and Monitoring capabilities, and as a result roads are deteriorating. In response to this problem suitable road maintenance and monitoring program should be formulated. As a part of this policy, a Road Maintenance Fund should be established into which revenues from the road users will be paid. This fund will provide the implementing agency with a clearly identified source of funds for road maintenance and monitoring activities during the rehabilitation of road projects, instead of requiring it to rely solely on allocations from the general budget. A suitable maintenance and monitoring program is require to be develop, manage, and implement and to prioritize the allocation of resources that can become available through the road maintenance fund.

Box 8 and Box 9 illustrate the Uttar Pradesh and Gujarat’s Key policy and Institutional Reforms supported by the Project.


KEY POLICY AND INSTITUTIONAL REFORMS SUPPORTED BY THE PROJECT: (ROAD SECTOR) Policy reforms

• Clearer separation between client and provider functions and responsibilities in PWD, achieved through an organizational restructuring along functional lines.

• Enhancing accountability of the PWD through (i) introducing more transparent planning and reporting processes (ii) linking the sources and uses of funds for the sector more explicitly and (iii) introducing formal mechanisms for more stakeholders - road users, business and agricultural interests - to become involved in performance evaluation.

• Increasing the attention and relative budget allocation in PWD for road maintenance to reduce the existing maintenance funding gap, reduce the maintenance backlog on PWD roads and thereby redress current poor maintenance outcomes.

• Increasing competition in the supply of works and services through gradually outsourcing selected service provision functions of the PWD to private sector consultants and contractors.

• Updated Road Policy to be drafted, discussed widely and then endorsed by GOUP.


KEY POLICY AND INSTITUTIONAL REFORMS SUPPORTED BY THE PROJECT: (ROAD SECTOR)

As a result of the Project:

a) R&BD's evolution from "provider" to "manager" of road infrastructure will be accelerated and institutionalized;

b) During the next five years GOG has committed itself to increase maintenance funding by at least 10% per annum in real terms to reduce the existing maintenance funding gap; and

c) International "best practices" in the areas of engineering preparation, road construction, quality control and contract supervision will be further mainstreamed in Gujarat.


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4. PROJECT MANAGEMENT AND MONITORING – PREPARATION AND PROCESS

Project Management techniques should be applied to ensure that the projects as a whole have clear and relevant plans for reviewing and approving work, ensuring cash flows, and reporting systems are in place. A project can only achieve the intended results if management adequately supports the implementation process and ensure that quality of the finished work is not compromised.

4.1 STAGES OF PROJECT PREPARATION AND DEVELOPMENT PROCESS

Many projects fail because the baisc premises upon which they are founded are suspect. For example, inadequate attention to site surveys and preparation of the detailed project report can mean that cost estimates are at best 'an inspired guess'. Thus the sanctioned sum may or may not be in accord with the actual costs, which frequently leads to cash flow problems. In additon the works themseleves may not be adequately designed to meet the requirements of trafic volume and axle loading.

Even more serious may be the fact that the works themsleves are of a low priority and simply undertaken to satisfy political or social pressure and as such have not been subject to a full econmic appraisal including life cycle costing. Without a Road Network Master Plan upon which to base road development works it is very difficult for the PWD to overcome the current ad hoc approach.

4.2 PROJECT MANAGEMENT - DETAILED PROJECT REPORT

In the PWD the Detailed Project Report is a vital document and used as the basis for fund sanction and allocation. The preparation of this report is a vital stage in the life of a project; component: The detailed project report (DPR) must be prepared carefully and with sufficient details to ensure appraisal, approval, and subsequent project implementation in a timely and efficient manner.

As an example the project report for a road widening project should cover the following components which are based on the JNNURM13:

a. broad project rationale: accord with the Road Network Master Plan

b. project definition, concept and scope

c. technical feasibility: survey and investigation, existing crust thickness, design of crust thickness, traffic data, and widening based on projected traffic

d. shifting of utilities, environmental issues,

e. rates for each element based on PWD Schedule of Rates, analysed rates based on market rates

13 Detailed project report preparation tool kit, Jawaharlal Nehru National Urban Renewal Mission


November 2008 39

f. project cost - including life cycle costing - economic appraisal

g. project institution framework

h. project financial structuring

i. project phasing

j. project operation and monitoring framework and planning

k. project financial viability/sustainability; and

l. project benefits assessments

4.2.1 Accord with Development Plan

The project must be in tune with the Road Network Master Plan and in the development strategy developed by the PWD. Thus the selected project will meet the requirements to develop / improve the road network so as to reduce travel costs and encourage commercial development within the State. In turn the concept and scope of the project will be developed and the objectives of the proposed project clearly identified.

4.2.2 Project Definition, Concept and Scope

The proposed project needs to be clearly demarcated in terms of all its constituent sub-components. (Several project DPRs specify only the “to-be-constructed” infrastructure component which does not represent the complete project) The project concept comprises several sub-components /elements including:

• Total area of land required and confirmation that the required land is owned / already purchased by the Local body, land title is to be clear and unencumbered.

• The physical infrastructure of each project can be considered in terms of specific components. These would be unique for each project and would vary upon the nature of the project, e.g. rail over-bridge, road widening, and road strengthening.

4.2.3 Technical Feasibility

This is the fundamental requirements of any project. The project must be technically feasible through a thorough process of technical investigations and analysis. In particular feasibility studies must be based on facts, technical data, social data, environmental data, and cost data derived from similar and completed projects. The design itself must be based on accurate data determined from site investigations and other surveys.

This will also include environmental survey data, land acquisition data, and the current situation regarding the location of facilities / services. A realistic time scale needs to be established for each stage of the process since land acquisition can be a complex and time-consuming process.

The detailed design, drawings, Specification, and contract documents are to be included Technical Feasibility. At the same time the forms of contract and the packaging of contracts needs to be addressed.


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The PWD needs to establish a unit in each of the Zones in which the staff have been trained in all these aspects, including cost estimation.

4.2.4 Project Set-Up and Scheduling

Proper scheduling will provide the project manager with a benchmark to use in monitoring progress and controlling the project. Planning for project implementation involves preparing a work plan describing the tasks and activities, indicating how the tasks will be accomplished and managed, and identifying the resources necessary to carry out the project activities.

When bids are requested the selected contractors should include a comprehensive works programme together with a cash flow forecast ('S' curve). These items will provide the PWD with the basis for monitoring progress of the works from both physical and financial aspects.

4.2.5 Project Cost - life cycle costing - economic appraisal

Project Costs: The purpose of a project cost estimate is to provide a basis for the provision of adequate financial resources for the project to be successfully implemented. The Project Cost Estimate should therefore be as accurate as possible. It should be adequate to ensure that sufficient funds will be provided for the project for it to be successfully undertaken but it should not be excessive as to tie up financial resources unnecessarily.

The project (construction) cost should cover distinct elements, including but not limited to the specific components listed below:

• Land acquisition/site development

• Physical infrastructure component-wise cost

• Environmental compliance cost

• Rehabilitation and resettlement cost

• Cost of surveys and investigations

• Cost of shifting utilities

• Cost of consultancy services: (a) Design (b) Supervision (c) Quality Assurance

• Other statutory compliance costs if applicable

• Finance/interest cost during construction

• Contingency /Any other - risk analysis

• Maintenance works over the designed life of the project

Acceptable project costs can only be determined once the site surveys have been undertaken and detailed designs prepared and costs prepared based on similar previous works.

The PWD will need to establish a computer data base of these costs based on completed projects so that these costs can be used to predict the probable costs associated with the project under consideration. Provision for possible price escalation is another factors of uncertainty that needs to be dealt with judiciously in the project cost estimation and is one of the risk factors.


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Life Cycle Costing: The costs must be 'life cycle costs' which incorporate both construction and maintenance costs. It is no longer considered good practice to just consider construction costs since the end result is to build cheap and suffer the consequences of high maintenance costs.

Economic Appraisal: An economic appraisal should be carried out for all development projects to ensure that money is wisely invested. In general the project costs are those associated with the design and construction of a project that includes all the items list under Project Costs above.

The 'income' will be the anticipated savings generated once the project has been completed. These could be:

1. reduction in travel time

2. reduction in number of accidents

3. reduction in vehicle operating costs

4. in the case of a by-pass it could include reduction in congestion in the city/town.

5. increase in commercial investment

There are a number of forms of economic appraisal that can be undertaken to ensure the financial viability of a project. For each project it may be expedient to consider more than one form of appraisal. Each project will need to be ranked and compared with others and a priority list drawn up since the PWD will be operating under a restricted budget and thus not able to implement all the projects even if they have acceptable rates of return.

Listed below are some of the methods frequently applied when carrying out economic appraisal for road or road related projects:

(i) Economic Internal Rate of Return (EIRR): Analysis of economic internal rate of return treats the project from the national standpoint. The project is judged to be desirable or otherwise on the basis of how many benefits it can bring to the State. For a revenue generating project the economic rate of return should generally be not less than 10 percent. Social projects such as education and health are excepted

(ii) Financial Internal Rate of Return (FIRR): In the analysis of the financial internal rate of return the project is viewed from the perspective of the sponsoring body. In other words the project is judged on the basis of how much financial return it can generate for the sponsoring body. Generally speaking, the financial internal rate of return of a project should not be less than the prevailing opportunity cost of money.

(iii) Benefit-Cost Ratio: The net present value of the anticipated project benefits are divided by the net present value of the project costs. The resulting figure is known as the Benefit-Cost Ratio. For a project to be worthy of further consideration the ratio must be at least of 1.00.

Risk Analysis: One of the key tasks is to carry out an assessment of risk. In the Logical Framework approach detailed in Section 7 of this report an assessment of the project risks is required under the heading of 'Assumptions'.


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Sensitivity Analysis: this is an analytical approach to risk analysis. A project is judged to be economically viable or otherwise based on an analysis of its expected rates of return. The rates of return calculated are in turn based on a number of estimates and assumptions made. If these estimates and assumptions are inaccurate then the viability of the project as shown by the rates of return calculation may be seriously flawed. In the analysis of the project it is desirable to ascertain how the viability of the project will be affected by a drift in the estimates or assumptions made. This is termed “Sensitivity Analysis”

The three main factors that have a major impact on the viability of projects are:

(i) Cost estimate

(ii) Benefits, and

(ii) Implementation time

The normal procedure is to recalculate the rates of return by assuming an increase in each of the above factors, but taken one at a time. For example, first the cost of the project is assumed to increase by say 10 percent and the new rates of return are calculated. Next, the procedure is repeated for the case of the project taking say 10 percent more time than assumed to complete. In this way how “sensitive” the viability of the project is to a change in each of the parameter will be demonstrated in each case. It is possible, and in fact probable, that changes will not occur singly but in combination. It is therefore, wise to investigate what would happen to the viability of the project under the worst scenario of a combination of adverse changes. In the example quoted a recalculation of the rates of return may be made for a 10 percent increase both in project cost and in implementation time

4.2.6 Project Institution Framework (for construction)

The project report needs to clearly specify the institutional arrangements, including the information detailed below:

• Roles of different institutions involved in the various phases of the project

• Whether the works are to be funded by the public or private sector, or a combination of both

• Manner of undertaking works i.e. whether the works are to be undertaken:

(i) in-house or through out-sourced contractors

(ii) by being tendered out under the supervision/management of the local body

(iii) through a separately established legal entity/project implementation company such as an SPV (Special Purpose Vehicle)

4.3 PROJECT MANAGEMENT - MONITORING

Managing and monitoring a project involves a continuing process of reviewing each task throughout implementation and comparing actual durations, costs, and resource requirements with the original estimates in the project setup.


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As each task is completed, the project manager must check to see that the task has been completed correctly in accordance with the specified technical, functional, regulatory, and/or financial requirements. If the task has exceeded the assigned duration, appropriate action must be taken to either regain lost time by completing other related tasks in a shorter time or through other mitigating action to ensure that overall the project remains on track.

Controlling costs is an important component of project management. Through close monitoring of each project task and total project expenditures, and by comparing actual expenditure with the cost estimate for the work completed to date, potential cost overruns should be identifiable at an early stage, so that action can be taken to correct or minimize the overruns. Cost control measures include the following:

• implementing authorization procedures for expenditures on project goods and services;

• controlling disbursements to suppliers, contractors, and consultants;

• controlling project variations and change orders;

• controlling overhead expenditure for communications, transport, and documentation;

• controlling expenditure for overtime work, etc.

Forecasts of the cost to complete a project should be accomplished on a regular basis (e.g., monthly) and compared with budget predictions. The actual costs and forecasted costs to completion should be compared with the contract value and action taken to ensure that the project budget is not over-spent.

On a monthly basis the actual costs, or in the case of the Client (i.e. the PWD), the value of the Contractor's monthly certificate should be superimposed on the 'S' curve submitted by the Contractor along with his bid and which forms part of the Contract documents. Cases where the summation of certificate values is less than the forecasted 'S' curve at any point in time indicate that the project is behind the planned progress.

4.3.1 Project Implementation Schedule

As for project cost estimate the length of the time taken to implement a project can have a profound effect on the viability of a project.

Even when the project is not “time critical” the time it takes to complete the project can impact greatly on the cost of the project or the benefits that the PWD is able to derive from the project. A shorter project implementation period will generally mean that the project will cost less to implement and thus confer more benefits on the road user.

It follows that it is essential that a realistic project implementation schedule must be established to accurately reflect the order in which the works will b carried out. It will also give a clear indication to the PWD as to what money they will be expected to pay on a monthly base for work completed. This will aid the PWD when preparing their own cash flow for each year.


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4.4 PROJECT RE-EVALUATION - PREPARATION OF COMPLETION REPORT14

The main objective of compiling a Project Completion Report (PCR) is to document and learn from the experience gained in the implementation of a project and to use the lessons learnt to improve the implementation of future projects.

A project is deemed to have been completed when all the facilities and components to be constructed or provided under it have been substantially completed and are ready to be put into operation. A Project Completion Report should:

(1) provide a concise history of the project from formulation to completion;

(2) provide a preliminary evaluation of initial operation and benefits;

(3) evaluate the quality of project appraisal with particular emphasis on accuracy of cost estimate, implementation schedule and project benefits;

(4) document the significant problems encountered and the adequacy of the solutions adopted during project implementation;

(5) assess and propose follow-up actions required during project operation; and

(6) based on the evaluation and lessons learnt make recommendations on future project appraisal, implementation and operation.

The PCR should generally focus on:

(1) variation from appraisal projections in terms of scope, cost, implementation arrangements and implementation schedule;

(2) variation in major factors affecting financial economic, social and other benefits;

(3) difficulty encountered in compliance with major covenants and institutional reforms; and

4) lessons that may be learnt and the experience that may be applied to future projects.

The Project Completion report should describe briefly whether the project was implemented as conceived and, if not, explain the main difficulties encountered and remedial measures taken. Rate the project as “Successful”, “partially successful” or “unsuccessful” in accordance with its overall performance.

In the following Section some examples have been given which highlight and illustrate some of the issues given in this Section.

14 Project Preparation , Asian development Bank.


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5. PROJECT DESIGN, MANAGEMENT AND MONITORING- CASE STUDIES

5.1 WORLD BANK FUNDED PROJECTS

5.1.1 Case Study on Gujarat – Gujarat State Highways Project by World Bank15

The World Bank-financed Gujarat State Highways Project (GSHP), implemented by the Government of Gujarat, stands out as an example of a well managed road project in India in recent times. The GSHP has been successful on various counts. Contrary to significant cost overrun in almost all highway projects in the country, GSHP was completed with a significant cost savings compared to the originally estimated project cost. The saving has been achieved in spite of marginal increase in the scope of the project. The upgrading works contracts were signed at an overall 18% lower price than the estimated costs, a significant measure of the project’s procurement efficiency. Moreover, only six of the 15 upgrading works contracts had an upward variation in contract price during implementation, whereas the remaining nine have been completed at lower than contract price, reflecting adoption of efficient contract management and cost control measures during implementation.

The project overall has taken two years more than the originally estimated project period. However, the delays were primarily due to a devastating earthquake in 2001 leading to diversion of resources to earthquake recovery, and unprecedented rainfall and floods during the years 2005 and 2006, and not due to delays in pre-construction activities or implementation delays usually experienced in other projects in India. Many works contracts performed well and were completed without much extension of the completion date. Four of the five upgrading works contracts in Phase 1 of the project were completed within two months of the original completion date, in spite of the diversion of the contractors' equipment for earthquake recovery. One upgrading works contract of Phase 2 was completed well before the original stipulated completion date.

GSHP has been also exceptional in the number of cases of contract claims or disputes. Only seven disputes have arisen in 15 upgrading works contracts, out of which only two cases were referred to arbitration and none was referred to the court. This is exemplary considering that in other large road projects in the country the number of disputes for each contract on average would exceed far more than the total number of disputes in GSHP. Preliminary analyses show that continuity of a highly motivated and dedicated project team of the Gujarat government for the entire duration of the project is one of the main reasons for such a stupendous success. The project received the full support and attention of the highest level of the state government at every stage, helping in smooth interdepartmental coordination and efficient implementation of the project. Reasonably good business and working environment in the state has helped in obtaining competitive bids, often even lower than the estimated costs.

15 Roads and Buildings Department , Gujarat.


November 2008 46

Moreover, right from the initial project preparation phase the Government of Gujarat efficiently handled the project preparatory and pre-construction activities, which contributed to better quality project design and fewer contract variations, faster implementation progress and fewer contract claims and disputes. Further, during the implementation stage, the pragmatic and efficient project management by the state government and a true spirit of partnership that it fostered among all the three contracting parties (implementing agency, contractors and consultants) have helped in efficient and dispute-free progress of the works to a high quality standard. The state government's focus on value-for money, willingness to adopt cost-effective and modern technology and better application of technical specifications stipulated in the contract also led to cost-effective road construction. Overall, this project demonstrates how a conducive business environment and efficient project administration can create an enabling environment for the construction industry to deliver timely, cost-effective and quality outputs.

5.1.2 The World Bank funded Uttar Pradesh State Roads Project

As a result of the Strategic Options Study - July 1996, conducted by the Consulting Engineering Services Pvt. Ltd, and the Feasibility study-August 2000, conducted by the DHV Consultants BV, a loan from the World Bank was sanctioned to GoUP in the year 2003 through the Government of India for upgradation of 953km of State Highways and major maintenance on 2,574 kms of State Highways / Major District Roads. The cost of the project was Rs. 2,952 Crores, of which Bank’s share was Rs. 2,342 Crores, and the GoUPs share was Rs. 610 Crores. However, due to depreciation in the dollar rate, changes made in design on suggestions from World Bank, and substantial increase in the cost of construction materials during the construction period, the total length of road selected for the project was reduced to 2,817 kms. This project is being implemented in two phases. Table No. 7 shows the progress made by UP State Roads Project Phase II.

Table No. 7 : Progress of UP SRP-II

SI. No. Year Target

Length Number of kilometers Completed

Budget (Rs. in crores)

Allotment (Rs. in crores)

Expenditure Incurred

1 2001-002 - - 3.24 3.24 3.24

2 2002-003 - - 97.66 67.66 60.90

3 2003-004 463 241 485.93 154.55 148.93

4 2004-005 390 305 432.29 209.29 152.43

5 2005-006 382 81 488.87 348.99 326.70

6 2006-007 500 515 500.44 500.44 474.39

7 2007-008 650 749 700.00 652.58 598.85

Total 2,385 1,891 2,708.43 1,936.75 1,765.44

Source: PWD


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Initially the date of completion of the project was 31st December 2008. However an appeal has been made by the PWD to extend the date of completion by 1 year. The reasons for the requested extension in time are confused but the failure to meet the target length of road completed in the years 2003/2004, 2004/2005, and 2005/2006 could not have helped.

5.1.3 Government of India Funded Projects

The Pradhan Mantri Gram Sadak Yojana or PMGSY is a nationwide plan in India to provide good all-weather road connectivity to unconnected villages. It is under the authority of the Ministry of Rural Development and was begun on 25 December 2000. The goal was to provide roads to all villages:

(1) with a population of 1,000 persons and above by 2003,

(2) with a population of 500 persons and above by 2007,

(3) in hill states, tribal and desert area villages with a population of 500 persons and above by 2003, and

(4) in hill states, tribal and desert area villages with a population of 250 persons and above by 2007.

In order to implement this, an Online Management and Monitoring System or OMMS GIS system was developed to identify targets and monitor progress.

5.2 OVER ALL ASSESSMENT OF PMGSY16

PMGSY has succeeded in providing connectivity to some of the most deserving habitations although the pace of implementation in most of the selected States is rather slow. Selection of these road works seem to be justified, unless one gives a high weight age to the opportunity cost in terms of road works forgone in other Districts/other States.

All the implementing States have designated an implementing agency as the nodal agency. All the selected implementing States have more or less adhered to the PMGSY guidelines as far as selection of habitations, project proposals and clearance are concerned.

Quality of PMGSY roads has been found to be generally good. PMGSY roads provide connectivity to important places such as School/College, Market Centre, and Block Office etc. It has improved the accessibility of beneficiary villagers and resulted in higher income in the form of better price for agricultural produce, new employment avenues etc.

Both the phases of PMGSY are efficiently completed within prescribed time targets by overcoming the problems/constraints faced from time to time but the learning experiences of the past are also always kept in view.

A review of this study has been presented in Annexure B.

16 Summary of A Quick Concurrent Evaluation of PMGSY -2005


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6. MASTER PLAN APPROACH – OBJECTIVES AND FUNCTIONS

Roads carry by far the greatest share of all traffic and link important political and economic centres/areas. For sustainable and orderly implementation of projects/programmes in meeting the socio-economic objectives of the State, development throughout the road network, must be in accordance with the Road Network Master Plan is prepared. The Road Network Master Plan is the basis for the co-ordinated development of the road network in accordance with physical, social, economic and political framework for the State as a whole.

The functions of the Master Plan / Development plan are as follows:

• To guide development of a state in an orderly manner so as to improve the quality of life of the people;

• Organize and coordinate the complex relationships between settlements, growth centres and land uses;

• Chart a course for growth and change, be responsive to change and maintain its validity over time and space and be subject to continual review

• Direct the physical and settlement development of the state in relation to its social and economic characteristics based on comprehensive surveys and studies on the present status and the future growth prospects; and

• Provide a resource mobilization plan for the proposed development works.

For a sustainable development through out the entire road network, it is essential that a comprehensive Master Plan is prepared in needs order that all activities relating to roads such as Construction, Up-gradation and Maintenance can be taken up systematically within the frame work of this Master Plan.

(i) The Road Master Plan should map out a road network development strategy and program over the next 5-20 year period, with a main focus on providing connectivity to potential centres of economic activities. Improvement of the highest priority roads,

(ii) Conduct a feasibility study for road projects that are accorded high priority.

(iii) Improvement and rehabilitation of deteriorated roads.

(iv) Road maintenance.

The targets of the Master Plan are sub-divided into the following actions:

1. Short-term actions

2. Medium –term actions

3. Long-term actions


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6.1.1 Short – Term

The Short–Term proposals are those that can be implemented within a short time span may be 3- 5 years. These short term actions should represent the highest priority of road capacity improvements of the development programme.

Prior to commencing any large new projects for improving road capacities, measures that quickly yield results and are cheap to carry out, should be implemented.

For example:

1. As soon as the decision has been made on for the revision of the UP road classification as suggested in Report Number 2417, the roads should be furnished according to their functional class starting from the major and minor arterial roads. This would include uniform systems in traffic signing, destination and location signing, road markings, traffic arrangements in general, and many small improvements indicating the road hierarchy.

2. Implementation of necessary minimum immediate improvements of the Core Road Network has to be given high priority. These would include improving of the riding quality to an acceptable level (Report Number 4518 and Report Number 4419 some road maintenance strategies were suggested to improve the ride quality), opening of worst bottle necks through turning lanes, installing traffic signals for the most critical intersections, clearing of sight distance, enforcement of right – of – way, filling edge drops and adding necessary road structures for improved road safety.

6.1.2 Medium – term investment proposals (5-10 Years)

The medium–term actions will continue uncompleted ongoing projects and expand the programme to the next priority areas based on the expected pace of development. The time span should be about 5-10 years.

6.1.3 Long – term investment proposals (20 Years)

The Long-term plan should include the ongoing projects that have not been completed during the previous periods. The programme also expands to new areas required by economic and traffic development. The time span is up to about 20 years.

17 Report on suggestions to revise UP road classification and maintenance criteria for core Network and other categories. 18 Report on comprehensive objective analysis of long term core road network maintenance funding requirements for future plan process. 19 Review report on implementation of upgraded maintenance practices and standards for core network


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7. MASTER PLAN PREPARATION AND PROCESS - A LOGICAL FRAMEWORK APPROACH

While preparing a Master Plan, a logical framework approach can adopted as a development aid by the Policy and Planning Cell. The framework matrix should interconnect a mixture of factors that influences the necessity of the plan to be developed. After various surveys, analyses and alternative plans and considerations, realistic goals for the proposed plan should be determined. These goals are usually set against possible resources, institutional capabilities, government intentions and local needs. The goals should be progressive and allow for future adjustments.

A logical framework process20 thus developed should analyze the sector requirements and end with the design of a project or program intervention using the logical framework.

A brief overview of this logical process is presented below, step by step:-

Step 1: Assess Sector Performance: Road sector performance is assessed by using performance indicators that reflect the contribution of the sector to the larger economy and to the quality of life of people. Examples of sector indicators traffic flows.

Step 2: Identify Sector Performance Problems/ Opportunities: Problems or opportunities are identified as issues of concern. Such problems or opportunities are identified in relation to a specific sector performance indicator. Examples are increasing traffic congestion.

Step 3: Cause-Effect Analysis of Problems/ Opportunities: A core problem or opportunity is selected to improve sector performance. It is analyzed to identify the causative factors as well as consequent effects. It is usually diagrammatically presented in the form of a cause-effect tree. The effects of the problem indicate its wider dimensions and impacts on the economy. The causative factors identify the variables influencing the problem/opportunity and provide the basis for solution.

Step 4: Objectives Tree: The cause-effect tree is converted into an objectives tree, thereby providing the spectrum of possible actions that can be taken to address the problem or opportunity.

Step 5: Alternatives Analysis: Various courses of possible actions are derived from the objectives tree, all aimed at improving sector performance for the performance indicator being analyzed. The options are assessed against each other using specific criteria, leading to the choice of the most appropriate (efficient and effective) option in the circumstances.

Step 6: Project Design Using the Logical Framework: The chosen course of action is translated into a logical framework that provides the basic design of the project or program in terms of its intended objectives, outputs and activities.

20 Asian Development Bank


November 2008 51

A logical framework of the plan should be presented with the key elements of a development intervention and their interrelationships. The intervention is usually termed a project or a program.

The framework should clearly identify the impacts or objectives the project or program will achieve.

• It should also allocate measurable and/or tangible performance targets to them.

• The framework also should clearly identify the inputs and outputs the project or program will deliver to enable achievement of the proposed objectives.

• Thus, the framework should present a cause and effect matrix where inputs lead to outputs and outputs lead to immediate objectives, which in turn lead to longer-term objectives.

Figure No. 6 shows the basic concept of a logical framework. The process begins with Inputs which in turn leads to Outputs. These Outputs must achieve a Purpose or Project Objective which in turn leads, in the long-term, to the achievement of the Project Goals.

Figure No. 6 : Cause-Effect Relationships in Plan Design21

These steps invariably include a situation analysis, stakeholder analysis, cause-effect analysis, objectives analysis, and alternatives analysis culminating in the design of the project.

An example of the way in which a logical framework approach to the creation of a road network master plan is given in Section 7.1.

21 Asian development Bank


November 2008 52

Design Summary Performance Targets Monitoring Mechanisms Assumptions & Risks Goals • Saved travel time • Reduced pollution • Fuel conserved

• Average journey time to work reduced from current 1 hour

• TSP, PM10, Lead levels within WHO guidelines

• Improved fuel consumption/km

• Quarterly sample survey • Quarterly field surveys • Motor association survey

Purpose • Reduced traffic congestion • Increased traffic speed on

major arteries from 12km/hr to 25km/hr in 3 years

• Daily reports from traffic monitoring system

• Traffic growth stays at or below 5% per year

Outputs • Automated traffic signal

system upgraded and operating

• New and old signals operating by end of 2000. Downtime reduced by 10%.

• Project implementation progress reports

• Maintenance records of traffic authority

• Traffic authority is capable of managing

• Automated traffic monitoring system installed and operating

• Installed by end of 1999 • Provides real time data for

traffic management


• Traffic authority reports

• Peak hour vehicle restriction scheme on major arteries

• Effective 1 January 1999 • Vehicle use drops by 20% by

end of 1999

• Traffic monitoring reports • City mayors will accept and enforce the scheme despite public protests

• Increased enforcement of traffic rules and regulations

• New fines system introduced 1 January 1999

• Traffic infringements drop by 30% by 1998 and stay level to end of 2000

• Police Reports • Traffic enforcers are given adequate incentives to implement effectively

• Trained staff in traffic management & enforcement

• Traffic Management & Policing Courses developed by mid 1999

• All traffic managers retrained by end of 2000

• Police trained in more effective policing and enforcement of regulations


• Training is appropriate, effective and implemented

Inputs • Consultants • Equipment and software • Civil Works • Salaries / Others

• Consultants $ 5mn • Equipment and software $ 20mn • Civil Works $ 30mn • Salaries/Others $ 5mn Total: $ 60mn


• Project accounts

• Consultants are competent • Local contractors are

competent • Counterpart budget is

available on a timely basis • Counterpart staff are

available.

Figure No. 7 : A typical example of a Project Logical Frame Work Matrix

Design Summary Performance Targets Monitoring Mechanisms Assumptions and Risks

Goals

Purpose

Outputs

Inputs


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7.1 ASIAN DEVELOPMENT BANK FUNDED PROJECTS

7.1.1 Road sector master plan – Sri Lanka22

7.1.2 Introduction

A Road Sector Master Plan (RSMP) was prepared by the Road Development Authority of Ministry of Highways, the RSMP was highly needed for upgrading the road network in Sri Lanka. This Plan was based on the findings and recommendations of the RSMP study, which was funded by Asian Development Bank, during July 2004 and September 2005.

The study had the following aim:

To prepare a Road Sector Master Plan (RSMP) under Multimodal transportation framework, comprising:

1. an overall review and assessment of the road network, including road classification;

2. formulation of a comprehensive and integrated road network master plan, including a framework for rural roads;

3. formulation of a strategic Investment Plan with a 10 – year horizon ; and

4. formulation of financing strategies for the road sector, including private sector participation and public road investment.

5. development of a project Monitoring and Management system.

7.1.3 The critical needs for the Sri Lankan road sector were identified as

1. sufficient road maintenance;

2. improvement and rehabilitation of deteriorated roads and

3. construction of new high mobility highways connecting major cities and growth centers to accelerate economic growth

7.1.4 Road Network Performance Analysis

7.1.5 Cause – Effect Tree Analysis

The cause-effect tree analysis was carried out to identify the road agency/sector inputs and its impacts at national level. The analysis was based on an approach presented in an ADB publication from 1998: Using the Logical Framework for Sector Analysis and Project Design.

The analysis came up with road congestion as the key performance indicator and most complex problem for the Sri Lankan road network. The cause-effect tree analysis carried out illustrates the connections starting from the sector inputs to the national level impacts, solutions to the problems were rated for prioritization. Eight sector outputs that were causing traffic congestion were identified. Diagram No. 1 shows the Cause – effect analysis in the road sector of Sri lanka.

22 Technical Assistance Consultant’s Report, Sri Lanka : Road Sector Master Plan, December 2005.


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Diagram No. 1 : Cause-Effect Analysis - Road Sector

It was summarized that the huge negative impacts based on the existing traffic problems come out in lower quality of life and in extra costs for the society, directly and indirectly. This gives decision-makers justification to urgently implement corrective measures.

7.1.6 Actions Required

The possibilities that elimination of the key problem would yield was analyzed. The scoring matrix is given in Diagram No. 2. There are numerous courses of action that can be taken, but due to limited resources not all can be accomplished. Investing the available resources in an optimal way yield the best impacts and therefore the priorities should be carefully considered. The long-term influence of improvement programs must be evaluated also in order to see that the shorter term actions support achieving the long-term goals. For assessing the priorities for actions to be taken, the options were weighed by the impact - criteria weights and by scoring the courses of actions.


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Diagram No. 2 : Analysis of Actions Required

An objectives tree was prepared based on the premise that there would be smooth traffic flows.The results are given in Diagram No. 3 showing a similar cause-effect analysis to that undertaken for the exisitng conditions.


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Diagram No. 3 : Cause-Effect Analysis for Smooth Traffic Flows


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8. PLAN MONITORING MECHANISM - A LOGICAL FRAMEWORK APPROACH

8.1.1 Introduction

Effective management of a plan requires the ongoing monitoring of the progress of a project towards the achievement of specified objectives. In performance management, it is important to measure what the project has achieved, not simply what it has completed.

To effectively manage project performance, the project manager requires indicators that are simple to understand, easy to measure, and for which information can be collected and processed in a timely manner. Management needs an efficient and effective management information system (MIS) that works as an early warning system for potential problems.

Using Performance Indicators to Specify Performance Verifiable performance indicators (VPIs) are measures used to establish the accomplishment of inputs, outputs, purpose, and goal(s) of a project. VPIs indicate in specific, measurable, and/or tangible (and therefore monitorable) terms the performance to be achieved at each level in project design. In effect, they clarify the minimum achievement requirement for inputs to cause the outputs and for the outputs to cause the envisaged impacts. VPIs should also be used to specify and monitor the risks/assumptions and the extent to which these hold true or change during project implementation.

When identifying and specifying VPIs remember: if we can measure it, we can manage it. Thus, in defining VPIs for a project, designers are forced to clarify what various objective-type statements used to describe the outputs and impacts of the project mean. VPIs help to remove vague and imprecise statements about what can be expected from our project interventions. VPIs should measure results, not just processes, and if possible they should

Identify these results in terms of all of the following dimensions:

• the expected quantities to be achieved;

• the expected quality standards to be achieved;

• the time period over which the quantitative and qualitative achievements will occur; and

• the location/area of achievement.

Thus, each indicator must specify a target in terms of quantity, quality, time, and location (if relevant). For the indicator to measure change it must have a baseline as a reference point. This is usually current performance of the entity and/or of a comparator at the beginning of a project. Performance during project implementation is measured against the target, taking into account the baseline as well as expected improvements above it.

The number of indicators is to be kept minimum. Only those performance indicators are to be used that are needed to determine whether the objective is accomplished. Performance indicators should always be developed at the same time as the specification of the project design summary, viz, the project’s goals, purpose, outputs, and inputs.

The performance indicators and related targets test the realism of the project’s design at each level:-


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a. Goal(s)

Performance indicators at this level are the long-term impacts expected from the project, and in this sense they are not project specific. Rather, at this level they are program, subsector, or sector objectives to which this particular and several other projects will contribute.

Ensure that the project’s goals and related performance indicators or targets are realistic. The project should have reasonable potential in contributing to the achievement of its goals, though this may be only in the longer term.

The performance indicators for monitoring success in achieving the goal of reduced pollution in the transportation sector are shown in Table No. 8.

Table No. 8 : Goal Performance Indicators

b. Purpose

Performance indicators and related project targets at this level are most crucial and can sometimes be difficult to determine. They are the performance targets for which the project takes full accountability to deliver. They are the performance measures by which the project will be judged a success or failure.

The purpose or end-of-project impact defines the project’s immediate impact on beneficiaries or institutions and related changes in the behaviour of project beneficiaries and institutional functioning. In transportation, the immediate purpose or objective of the project must be reduced traffic congestion. Thus the performance indicator and related target is specified as: average traffic speed on major arterial roads is increased from 12 km/hr in 1998 to 25 km/hr in 2003. The purpose should be stated as simply as possible to ensure its feasible achievement and ease of monitoring. This is not to say that we should simplify the objective so that it can be easily achieved. The achievement of the purpose depends on the successful achievement of the various outputs. Thus the outputs will be defined in relation to the purpose level objective and related indicators.


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c. Outputs

The outputs are usually the easiest to specify in terms of performance indicators and targets, because outputs are the tangible goods and services to be delivered by the project. All outputs have to be accomplished by the end of the project’s implementation period.

d. Inputs

These are the resources available for project implementation. Inputs are usually money (budget); equipment; technology; and human resource expertise. Performance indicators and targets may be altered after they have been established. Adjustments are possible and sometimes advisable during implementation to accommodate changes in the circumstances of the project. Changes may also be necessary due to deficiencies in data availability on the performance indicator. Therefore, indicators and targets should be periodically re-examined and refined if necessary to provide the most up-to-date measure of the project’s.

e. Performance

Using Performance Indicators to Manage, Monitor and Evaluate Performance VPIs provide a basis for monitoring and evaluating the project. To serve this function, performance indicators must be integrated into the management information system of the project and/or of the institution or executing agency. The monitoring mechanisms are the data sources and reporting systems that will be used to verify the status of each indicator. They will show what is accomplished with respect to inputs, outputs, purpose, and goals of the project.

The monitoring mechanisms and the information system will provide the evidence that the objectives have been achieved.

The indicator and the monitoring mechanism must be determined together to ensure that the monitoring mechanisms and information systems are practical and cost-effective.

In determining the monitoring mechanism for a particular performance indicator it is necessary to consider the following:

• Is the data available from normal sources?

• How reliable is the data?

• Is the data available on a timely basis?

• If special data has to be collected, what will it cost?

Definitions of performance indicators should be realistic, practical, and precise. The data collection effort should be cost-effective in meeting the needs of various decision-makers. Moreover, the need for data collection, using existing sources of information, has to be matched by the capability of the various agencies that would generate and report the information. Also, those who use it for decision-making should assess the need, comprehensiveness, and value of data. If an indicator cannot be verified, then another indicator should be found.


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f. Monitoring Assumptions

Monitoring assumptions is critical to project success. The environment is continually influencing the cause-effect hypotheses on which the project is built. Project implementors must ensure that such hypotheses continue to remain valid. Monitoring should be built into the project’s performance monitoring and management system. The project’s performance indicators should be regularly monitored, and the assumptions on which they are built should be frequently checked and verified.

g. Performance Management

Effective performance management requires the ongoing monitoring of the progress of a project towards the achievement of specified objectives. Included is the regular reporting of results to decision-makers to amend or improve performance. In performance management, measure what the project has achieved, not simply what it has completed.

To effectively manage project performance, the manager requires indicators that are simple to understand, easy to measure, and for which information can be collected and processed in a timely manner. Management needs an efficient and effective management information system (MIS) that works as an early warning system for potential problems. At the same time, the system should also measure the level of achievement of the project at input, output, purpose, and goal levels. Too often in development projects, separate monitoring and evaluation systems are established independently of existing systems within the executing or implementing agencies. The argument for this approach is that the project requires special information, which cannot be gathered through the existing system. However, the substantial amount of information collected by such monitoring and evaluation units often remains unprocessed; or if it is processed, it may not be delivered in a form useful to management or may be too late to be an effective input to decision making.

8.1.2 Monitoring and Management System

The following are examples of Monitoring Management Systems.

8.1.3 PMGSYS - Online Monitoring and Management System

The Online monitoring and management system of Pradhan Mantri Gram Sadak Yojana (PMGSY), stands out as best example for an efficient system for project monitoring and management. PMGSY is a program to connect 1, 60,000 habitations by road by 2007. Presently over 20,000 road works are in various stages of execution in 28 States and 6 Union Territories. In order to effectively monitor the entire programme and bring about improved efficiency, accountability and transparency in implementation, a web enabled application software - Online Management and Monitoring System (OMMS), has been developed by Center for Development of Advanced Computing (C-DAC), Pune for the Ministry of Rural Development (MRD), Government of India.


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The Salient features and modules of the OMMS are:

• Master Data Creation: This module consists of various masters that need to be standardized before operating the other modules of the system. It consists of master information related to Districts, Constituencies, Blocks, Villages, Habitations, Existing Roads, Schedule of Rates etc.

• Rural Road Plan: Rural Road Plan consists of the list of proposed roads for providing connectivity to unconnected habitations to already connected habitations or to the existing all-weather roads. This module will help to prepare the road plan at block level which is then compiled at district level as District Rural Road Plan.

• Proposal: Proposals are prepared annually and submitted for Project Clearance. This module aids in the preparation of district level Annual Proposal, its compilation at State level and submission to MRD for Project Clearance.

• Design and Estimation: This module will generate the crust details of proposed roads based on the data gathered during base surveys and standards already defined by IRC. This module aids in preparing the estimates based on prevalent Schedule of Rates (SoR).

• Tendering: This module is used for publishing the tender notices on the web and for maintaining information related to award of work to the selected contractor.

• Execution and Monitoring: It has the facility for recording the quantities of executed items of work.

• Monitoring: This application is used to track and analyze the progress of works with respect to the approved schedule.

• Quality Testing: This module enables the material testing officials in maintaining the test register for the various prescribed on-site and laboratory tests.

• Inspections: This module will enable the inspecting officials to enter their inspection reports on the quality of work and track their compliance.

• Payments and Fund Flow: This module handles the finance-related transactions that occur in the entire process of road construction, including the details of fund releases and utilization. It enables an up-to-date and accurate accounting of the funds It helps in relating the payments to the physical progress and quality of road works.

• Maintenance and Handover: After completion of work, the road is to be maintained for 5 years and then handed over to local authority.

• Discussion Forum: Facility for discussions on various topics of interest, related to PMGSY implementation, is provided in this section. News Uploading Facility Events of importance at state and central level can be published through this section.


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8.1.4 JNNURM’s- Programme Monitoring and Evaluation System (PMES)

The Programme Monitoring and Evaluation System (PMES) is an integrated management information system which will enable the Ministry of Urban Development (GoI) to monitor the status of various activities and initiatives of the JNNURM programme. Some of the key aspects of the JNNURM programme which will be monitored by PMES are :

• Submission, appraisal and approval of CDPs

• Submission and approval of MoAs

• Submission, appraisal and approval of DPRs

• Physical progress of projects

• Utilisation of project funds

• Implementation of reforms

• Project/Reform outcomes through sector indicators

The PMES is a workflow driven application and will provide a system for centralized data processing with facilities for decentralized inputs and outputs.

PMES Modules:

a. City Development Plan (CDP) Module

• This module will track the progress of the CDP from submission through appraisal to approval.

• The module will capture key features of the CDP such as city profile, sector strategies, Capital Investment Plan and Financial Operating Plan.

• The module will enable the evaluation of outcomes through a system of tracking using sector indicators at a city level.

b. Detailed Project Report (DPR) Module

This module will track the progress of the DPR from submission through appraisal to approval. The module will capture key features of the DPR such as project rationale, details of project beneficiaries, costs and timelines. Approved DPRs will be dynamically linked to Projects in the Project Module.

c. Memorandum of Agreement (MOA) Module

This module will track the progress of the MOA from submission to approval.

The module will capture the Reform Checklist online. The module will facilitate self monitoring of reform implementation by city and state level agencies and monitoring by independent reform monitoring agencies.


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d. Projects Module

This module will capture key features of the approved projects such as implementation work plan, package details, costs and timelines. The module will facilitate self monitoring of project implementation by city/project implementation agencies as well as independent monitoring by external project monitoring agencies.

e. Fund Management Module

This module will track the request, release and utilization of JNNURM funds to states and cities for project implementation.

f. Budget Management Module

This module will provide decision support information to MoUD to enable them to forecast future fund requirements under the programme on an annual basis.

g. Key Users and roles

User Name Role

MoUD Approve/facilitate approval of submitted CDP, DPR, MoA and Projects Approve/Monitor Fund Release & Utilisation Monitor status of project and reform implementation Evaluate the impact of projects on the sector as a whole

SLNA Approve/facilitate approval of CDP, DPR, MoA and Projects prior to submission. Submit CDP, DPR, MoA and Fund Requests. Submit quarterly progress reports on implementation of reforms and projects.

Urban Local Body/City Agencies

Submit CDP (details as well as documents) Submit quarterly progress updates on city level reform implementation and project implementation.

Appraisal Agencies (CDP, DPR)

Appraise CDP/DPR and submit appraisal comment/reports

Monitoring Agencies Submit appraisal feedback and appraisal reports.

General Public Access online reports and queries

8.2 MANAGEMENT INFORMATION SYSTEMS (MIS)

The essential elements of an efficient and effective MIS are as follows:

• Information requirements for managing projects must be incorporated into the existing system of an executing or implementing agency.

• Information collected must indeed measure the level of achievement at the input, output, purpose and goal levels.

• The information must be accurate, timely, and cost effective.

• Management must be able to easily interpret information for use in decision-making.


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Monitoring is concerned with both the efficiency and effectiveness of project implementation. Specifically, it is concerned with assessing how efficiently inputs are translated into outputs. This form of input-output monitoring focuses on the availability of project resources and the use of these to achieve outputs.

The transition from outputs to purpose is often referred to as effectiveness, that is, the ability of the resources and outputs to achieve the purpose of the project. This level of monitoring is even more critical since the value of the project investment is in achieving the project impacts. Project evaluation focuses on the achievement of the project’s purpose and goals. It is conducted after the completion of project implementation.

Several Management Information Systems might be involved in providing the information needed to manage the performance of a particular project, particularly if several agencies are involved. Each agency will collect data to identify its own contribution to the achievement of the various inputs, outputs, purpose, and goal. Ideally these should be integrated into one MIS for the project. The MIS for the project must provide an early warning system to project management about potential problems.

It may also suggest possible ways to improve the overall project. The executing agency or agencies are usually most interested in the indicators reflecting the use of inputs, and the achievement of outputs. Planning agencies and donors, while also interested in these VPIs, are probably more interested in the VPIs at the output, purpose and goal levels.

It is their business however, to encourage existing agencies to place equal emphasis on monitoring impacts as well. While it is of vital importance to monitor the VPIs closely at each level of the cause-effect hierarchy, it is equally important to monitor the risks/assumptions of the project environment. Therefore, the project’s MIS must also provide for monitoring and reporting on these external variables.

Given that project planners must make assumptions about projects at the planning stage, the operational plan for a project must allow for incorrect assumptions. This can be done by

• highlighting key assumptions to monitor during the course of the project,

• suggesting ways of ensuring that an assumption turns out to be correct,

• indicating how the validity of the assumption can be monitored,

• suggesting what action to take if an assumption is proving invalid.


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8.3 EXISTING MIS OF PWD

Report No. 4823 suggested an approach for developing a Management Information System (MIS). It stated that PWD procedures provide for preparation of information and status reports, progress reports and various special reports, following guidelines and formats prescribed in the PWD Manual and Government Orders (GO) issued from time to time.

There is low level of processing and consolidation carried out on the data that is generated mostly at the Division level. It is difficult to access and retrieve information as required, because the required information is lost in a mass of data. As a result often the original source of information has to generate and communicate the information again, causing duplication of effort, as retrieval is mostly done manually.

In many cases, the information required does not reach the concerned person in time. Reports often are delayed. Senior officers, very often, request additional information, in addition to the regular PWD reports. Some reports such as project progress reports have to be sent to more than one destination but in different formats. This results in multiple reporting of the same information and duplication of work.

8.4 GAP ANALYSIS

Management Information system provides organizational authorities with comprehensive information on performance. Considering three broad levels of organization in PWD, various reporting requirements have been identified.

Proposed MIS for the PWD needs to be in line with the broad level organization redesign. Accordingly, the system should capture and process information related to progress/activities under the heads; Development Works, Maintenance & Network Operations, and Quality Management.

The integration of the MIS needs to be done so that the decision-making and control requirements are met at every level of the organization. As the design of the organization is based on the management control framework it is essential that the MIS reflect this design characteristic.

Therefore, it is recommended that the PWD undertake a detailed information assessment exercise across all the levels- Headquarters, Zone, and District-with a view to identify their strategic, managerial, and operational control needs in order to frame a Software Requirement Specification. The outcome of this exercise will form the basis for the designing effective MIS for the organization.

23 Develop to implement a PWD – specific Management Information System (MIS) embracing technical, financial and operational MIS priorities and reporting requirement, networked to all major units -June 2008


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8.5 MIS IMPLEMENTATION APPROACH

Management Information System (MIS) implementation approach, suggested in Report No.48 addresses the needs of Uttar Pradesh Public Works Department (PWD). The implementation of the recommendations will require commitment of financial as well as manpower resources from PWD. This calls for a well-conceived, integrated yet flexible plan coupled with strong management control to ensure its success.

Keeping this in mind, a phased implementation approach is recommended with emphasis on the following:

Phased development and implementation of application systems (Suggested as IT Road Map)

• Incremental acquisition of technology Retaining and protecting the existing investments in IT wherever possible

The MIS implementation approach should:

• Provide PWD with the appropriate time to stabilize while the personnel undergo skills upgrade program and the new systems are being analyzed and designed

• Minimize disruptions to the end users and aid assimilation of new technology into PWD culture through change management initiatives

• Facilitate modular upgrades to accommodate increased requirements arising out of unforeseen circumstances

• Provide an opportunity for acquiring updated technology

An implementation approach best suited for PWD for its managerial and technical functions as well as communication needs in order to implement management information systems is discussed. The approach has also taken into account the strengths and weaknesses of PWD. The implementation approach broadly details out the priorities for the development of the application system, approaches for software development, implementation, quality management, change of procedure, training, risk management etc. For further information refer Report No 4824

Large scale and intensive training effort would be needed for developing necessary skills for implementation planning, monitoring and information systems. Report Number.1125 has given some suggestions for restructuring and staffing re- alignment, including ongoing internal staff communication on all major aspects of UP PWD.

24 Develop to implement a PWD – specific Management Information System (MIS) embracing technical, financial and operational MIS priorities and reporting requirement, networked to all major units -June 2008 25 Report for implementation progressive PWD Re-Structuring and Staffing Re-Alignment, Including ongoing internal staff communication on all major aspects.


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9. ROAD NETWORK MASTER PLAN AND IMPLEMENTATION OF PROJECTS

The objective of this Report is to provide the PWD with a system for the comprehensive monitoring and management of projects that have themselves been generated in accordance with the road network master plan. If nothing else the Report has highlighted the need for all projects to be selected in conformity with the road network master plan.

It is understood that the implementation of projects under PMGSY do not suffer from external political interference. It is recognised that the plans have been developed in accordance with an overall master plan that has itself been prepared in accord with a set political framework and resultant strategy.

When development plans are drawn up as part of a recognised process the chances of interference are considerably reduced. There will of course always be some form of political input and requirement placed upon these plans but with a tangible road network master plan in place political pressures at all levels will be reduced.

By ensuring that the procedures for project identification through to project completion are along the established project management cycle the PWD will know that all projects have met basic criteria and been subject to economic appraisal.

Adoption of project management principles or techniques will do much to ensure that projects are completed on time and within the original cost estimate.

The use of computers for all these processes and procedures should be mandatory. This will not only improve effectiveness but also efficiency.

It is believed that above report shall act as guideline/tool kit for the UP PWD. This is to used by Projects Policy and Planning and Strategic Planning Units.


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10. FOCUS GROUP MEETING

Focus Group ‘H’ meeting was held on 7th November 2008, to discuss the Report Nos. 31 and 40 submitted as draft.

Members of Focus Group requested examples of methods relating to economic appraisal of projects. These are included in Annexure C.

The Focus Group members agreed to the suggestions made in the Report.


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11. PRESENTATION TO PROJECT STEERING COMMITTEE

Report No. 31: Report on Implementing Comprehensive Project Monitoring and Management Process and System, and

UPSRP IDS

Management Process and System, andReport No. 40: Report on Linking of Project Monitoring and Management Process

with Master Plan

PWD FOCUS GROUP HPWD FOCUS GROUP H

Sri N.K. Kanodia Chief Engineer, Faizabad Zone, Faizabad

Sri Devendra Kumar SE (Planning), Lucknow

Sri Daya Shanker Raj EE CD-2, Fatehgarh, Farukhabad

Sri Harendra Nath Pandey EE Asthayeel Khand (Pr. P), Amroha

Sri S.K. Rastogi EE BDD-11, PWD, Lucknow

Sri P.K. Srivastava EE P.D Sultanpur

Sri F I F Hashmi AE Planning Division LucknowSri F.I.F. Hashmi AE Planning Division, Lucknow

Sri Yogesh Mathur SE Bulandshahar

Sri P.K. Saxena EE, CD Ghazipur

LEA International Ltd. and LEA Associates South Asia Pvt. Ltd.

Mr. Alan Stanbury Team Leader

Reports Nos. 31 and 40UPSRP IDS

When this TA was conceived, it was anticipated that the Road NetworkMaster Plan would be made available to the TA consultants for review.

Unfortunately no such document exists with PWD.

This is also true in the case of Project Monitoring and Management andSystem.

Since neither of these documents/systems are available to the TAConsultants it was necessary to refocus the work of TA in this regardConsultants, it was necessary to refocus the work of TA in this regard.

Two reports that were to be prepared, although both are interlinked. Thisaspect was discussed with IDS Cell and PWD and agreement reached toaspect was discussed with IDS Cell and PWD and agreement reached towrite one report

UPSRP IDSReports Nos. 31 and 40

The TCE Report (June 2002), Annex II, makes it evident that the GoUPd d th i fi di P j t M tendorsed their findings on Project Management.

This item was included the ToR for the TA Consultants, under Item 4C ofAnnex IIAnnex II.

This Report covers the following aspects and the way in which theyshould be linked together:g

• Project Management

• Project Monitoring andProject Monitoring, and

• Road Network Master Plan


The Basic Elements of Project Management


The Project Management Cycle


Detailed Project Report - Contents

a) broad project rationale: accord with the Road Network MasterPlan

b) j t d fi iti t db) project definition, concept and scope

c) technical feasibility: survey and investigation, existing crustthickness design of crust thickness traffic data and wideningthickness, design of crust thickness, traffic data, and wideningbased on projected traffic

d) shifting of utilities, environmental issues,

e) rates for each element based on PWD Schedule of Rates,analysed rates based on market rates

f) project cost – including life cycle costing – economic appraisal


Detailed Project Report – Contents (continued)

g) project institution framework

h) project financial structuringh) project financial structuring

i) project phasing

j) project operation and monitoring frameworkj) project operation and monitoring framework

k) project financial viability / sustainability

l) project benefits assessmentl) project benefits assessment

P j t C t Th j t ( t ti ) t h ld di ti t l t


Project Costs: The project (construction) cost should cover distinct elements,including but not limited to the specific components listedbelow:

1. Land acquisition/site development

2. Physical infrastructure component-wise cost

3 E i t l li t3. Environmental compliance cost

4. Rehabilitation and resettlement cost

5 Cost of surveys and investigations5. Cost of surveys and investigations

6. Cost of shifting utilities

7 Cost of consultancy services: (a) Design (b) Supervision (c) Quality7. Cost of consultancy services: (a) Design (b) Supervision (c) Quality Assurance

8. Other statutory compliance costs if applicable

9. Finance/interest cost during construction

10. Contingency /Any other - risk analysis

11. Maintenance works over the designed life of the project


‘P j t I B fit ’‘Project Income – Benefits’

1. reduction in travel time

2 d ti i b f id t2. reduction in number of accidents

3. reduction in vehicle operating costs

4 i th f b it ld i l d d ti i ti i4. in the case of a by-pass it could include reduction in congestion in the city/town.

5 i i i l i t t5. increase in commercial investment

Life Cycle Costing


Economic AppraisalEconomic Appraisal

1. Economic Rate of Return

2. Financial Rate of Return

3. Benefit – Cost Ratio

Risk AnalysisRisk Analysis

Sensitivity Analysisy y


Project Monitoring

Contractors should be instructed to include a project programme withtheir bids complete with ‘S’ Curve showing cash flow anticipatedbased on their programme.

For simple monitoring purposes compare this ‘S’ Curve with thatderived from the Contractor’s payment certificates.


Road Network Master PlanRoad Network Master Plan

1. The functions of the Master Plan / Development plan are as follows:

2. To guide development of a state in an orderly manner so as to improvethe quality of life of the people;

3 Organize and coordinate the complex relationships between3. Organize and coordinate the complex relationships betweensettlements, growth centres and land uses;

4. Chart a course for growth and change, be responsive to change andg g , p gmaintain its validity over time and space and be subject to continualreview

5 Di t th h i l d ttl t d l t f th t t i l ti5. Direct the physical and settlement development of the state in relationto its social and economic characteristics based on comprehensivesurveys and studies on the present status and the future growthprospects; and

6. Provide a resource mobilization plan for the proposed developmentworksworks.


Road Network Master Plan

1. The Road Master Plan should map out a road network developmentstrategy and program over the next 5-20 year period, with a mainstrategy and program over the next 5 20 year period, with a mainfocus on providing connectivity to potential centres of economicactivities. Improvement of the highest priority roads,

2. Conduct a feasibility study for road projects that are accorded highpriority.

3. Improvement and rehabilitation of deteriorated roads.

4 R d i t4. Road maintenance.


Logical FrameworksLogical Frameworks

Step 1: Assess Sector Performance: Road sector performance isd b i f i di t th t fl t th t ib ti fassessed by using performance indicators that reflect the contribution of

the sector to the larger economy and to the quality of life of people.Examples of sector indicators traffic flows.

Step 2: Identify Sector Performance Problems/ Opportunities: Problemsor opportunities are identified as issues of concern. Such problems oropportunities are identified in relation to a specific sector performanceindicator. Examples are increasing traffic congestion.


Logical FrameworksLogical Frameworks

Step 3: Cause-Effect Analysis of Problems/ Opportunities: A coreproblem or opportunity is selected to improve sector performance It isproblem or opportunity is selected to improve sector performance. It isanalyzed to identify the causative factors as well as consequent effects.It is usually diagrammatically presented in the form of a cause-effecttree The effects of the problem indicate its ider dimensions andtree. The effects of the problem indicate its wider dimensions andimpacts on the economy. The causative factors identify the variablesinfluencing the problem/opportunity and provide the basis for solution.

Step 4: Objectives Tree: The cause-effect tree is converted into anobjectives tree, thereby providing the spectrum of possible actions thatcan be taken to address the problem or opportunity.


Logical Frameworks

Step 5: Alternatives Analysis: Various courses of possible actions arederived from the objectives tree, all aimed at improving sector

f f th f i di t b i l d Th tiperformance for the performance indicator being analyzed. The optionsare assessed against each other using specific criteria, leading to thechoice of the most appropriate (efficient and effective) option in thecircumstances.

Step 6: Project Design Using the Logical Framework: The chosenp j g g gcourse of action is translated into a logical framework that provides thebasic design of the project or program in terms of its intendedobjectives, outputs and activities.objectives, outputs and activities.


Logical Frameworks - Cause-Effect Relationships in Plan Design


Logical Frameworks

Design Performance Monitoring AssumptionsDesign Summary

Performance Targets

Monitoring Mechanism

Assumptions and Risks

GoalsGoals

PurposePurpose

Outputsp

Inputs


Steps in the Management Process (Policy and Planning Unit)

1 Roads for development rehabilitation widening strengthening to1. Roads for development, rehabilitation, widening, strengthening tobe selected in accordance with the Road Network Master Plan

2 Th M t t b id d b th P j t M t2. The Management process to be guided by the Project ManagementCycle

3. Roads selected to be subject to rigid technical and economicappraisal

4. Logical Frameworks can help in the selection process and also withrisk analysis and monitoring process by establishing verifiableperformance indicators and means to measure sameperformance indicators and means to measure same

5. Monitoring to take place during the works and evaluation oncompletioncompletion


November 2008 i

ANNEXURE A – COST ESTIMATES

Costs Associated with Constructed Facilities

The costs of a constructed facility to the owner include both the initial capital cost and the subsequent operation and maintenance costs. Each of these major cost categories consists of a number of cost components.

The capital cost for a construction project includes the expenses related to the initial establishment of the facility:

• Land acquisition, including assembly, holding and improvement

• Planning and feasibility studies

• Architectural and engineering design

• Construction, including materials, equipment and labor

• Field supervision of construction

• Construction financing

• Insurance and taxes during construction

• Owner's general office overhead

• Equipment and furnishings not included in construction

• Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses:

• Land rent, if applicable

• Operating staff

• Labor and material for maintenance and repairs

• Periodic renovations

• Insurance and taxes

• Financing costs

• Utilities

• Owner's other expenses

The magnitude of each of these cost components depends on the nature, size, and location of the project as well as the management organization, among many considerations. The owner is interested in achieving the lowest possible overall project cost that is consistent with its investment objectives.


November 2008 ii

It is important for design professionals and construction managers to realize that while the construction cost may be the single largest component of the capital cost, other cost components are not insignificant. For example, land acquisition costs are a major expenditure for building construction in high-density urban areas, and construction financing costs can reach the same order of magnitude as the construction cost in large projects such as the construction of nuclear power plants.

From the owner's perspective, it is equally important to estimate the corresponding operation and maintenance cost of each alternative for a proposed facility in order to analyze the life cycle costs. The large expenditures needed for facility maintenance, especially for publicly owned infrastructure, are reminders of the neglect in the past to consider fully the implications of operation and maintenance cost in the design stage.

In most construction budgets, there is an allowance for contingencies or unexpected costs occurring during construction. This contingency amount may be included within each cost item or be included in a single category of construction contingency. The amount of contingency is based on historical experience and the expected difficulty of a particular construction project.

Approaches to Cost Estimation

Cost estimating is one of the most important steps in project management. A cost estimate establishes the base line of the project cost at different stages of development of the project. A cost estimate at a given stage of project development represents a prediction provided by the cost engineer or estimator on the basis of available data. According to the American Association of Cost Engineers, cost engineering is defined as that area of engineering practice where engineering judgment and experience are utilized in the application of scientific principles and techniques to the problem of cost estimation, cost control, and profitability.

Virtually all cost estimation is performed according to one or some combination of the following basic approaches:

1. Production function: In microeconomics, the relationship between the output of a process and the necessary resources is referred to as the production function. In construction, the production function may be expressed by the relationship between the volume of construction and a factor of production such as labor or capital. A production function relates the amount or volume of output to the various inputs of labor, material, and equipment.

2. Empirical cost inference: Empirical estimation of cost functions requires statistical techniques which relate the cost of constructing or operating a facility to a few important characteristics or attributes of the system. The role of statistical inference is to estimate the best parameter values or constants in an assumed cost function. Usually, this is accomplished by means of regression analysis techniques.


November 2008 iii

3. Unit costs for bill of quantities: A unit cost is assigned to each of the facility components or tasks as represented by the bill of quantities. The total cost is the summation of the products of the quantities multiplied by the corresponding unit costs. The unit cost method is straightforward in principle but quite laborious in application. The initial step is to break down or disaggregate a process into a number of tasks. Collectively, these tasks must be completed for the construction of a facility. Once these tasks are defined and quantities representing these tasks are assessed, a unit cost is assigned to each and then the total cost is determined by summing the costs incurred in each task. The level of detail in decomposing into tasks will vary considerably from one estimate to another.

4. Allocation of joint costs: Allocations of cost from existing accounts may be used to develop a cost function of an operation. The basic idea in this method is that each expenditure item can be assigned to particular characteristics of the operation. Ideally, the allocation of joint costs should be causally related to the category of basic costs in an allocation process. In many instances, however, a causal relationship between the allocation factor and the cost item cannot be identified or may not exist. For example, in construction projects, the accounts for basic costs may be classified according to (1) labor, (2) material, (3) construction equipment, (4) construction supervision, and (5) general office overhead. These basic costs may then be allocated proportionally to various tasks which are subdivisions of a project.

Types of Construction Cost Estimates

Construction cost estimates may be viewed from different perspectives because of different institutional requirements. In spite of the many types of cost estimates used at different stages of a project, cost estimates can best be classified into three major categories according to their functions. A construction cost estimate serves one of the three basic functions: design, bid and control. For establishing the financing of a project, either a design estimate or a bid estimate is used.

1. Design Estimates: For the owner or its designated design professionals, the types of cost estimates encountered run parallel with the planning and design as follows:

• Screening estimates (or order of magnitude estimates)

• Preliminary estimates (or conceptual estimates)

• Detailed estimates (or definitive estimates)

• Engineer's estimates based on plans and specifications


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2. Bid Estimates: For the contractor, a bid estimate submitted to the owner either for competitive bidding or negotiation consists of direct construction cost including field supervision, plus a markup to cover general overhead and profits. The direct cost of construction for bid estimates is usually derived from a combination of the following approaches.

• Subcontractor quotations

• Quantity takeoffs

• Construction procedures.

3. Control Estimates: For monitoring the project during construction, a control estimate is derived from available information to establish:

• Budget estimate for financing

• Budgeted cost after contracting but prior to construction

• Estimated cost to completion during the progress of construction.

Unit Cost Method of Estimation

If the design technology for a facility has been specified, the project can be decomposed into elements at various levels of detail for the purpose of cost estimation. The unit cost for each element in the bill of quantities must be assessed in order to compute the total construction cost. This concept is applicable to both design estimates and bid estimates, although different elements may be selected in the decomposition.

For design estimates, the unit cost method is commonly used when the project is decomposed into elements at various levels of a hierarchy as follows:

1. Preliminary Estimates: The project is decomposed into major structural systems or production equipment items,

2. Detailed Estimates: The project is decomposed into components of various major systems,

3. Engineer's Estimates: The project is decomposed into detailed items of various components as warranted by the available cost data.

For bid estimates, the unit cost method can also be applied even though the contractor may choose to decompose the project into different levels in a hierarchy as follows:

1. Subcontractor Quotations: The decomposition of a project into subcontractor items for quotation involves a minimum amount of work for the general contractor. However, the accuracy of the resulting estimate depends on the reliability of the subcontractors since the general contractor selects one among several contractor quotations submitted for each item of subcontracted work.


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2. Quantity Takeoffs: The decomposition of a project into items of quantities that are measured (or taken off) from the engineer's plan will result in a procedure similar to that adopted for a detailed estimate or an engineer's estimate by the design professional. The levels of detail may vary according to the desire of the general contractor and the availability of cost data.

3. Construction Procedures: If the construction procedure of a proposed project is used as the basis of a cost estimate, the project may be decomposed into items such as labor, material, and equipment needed to perform various tasks in the projects.

Historical Cost Data

Preparing cost estimates normally requires the use of historical data on construction costs. Historical cost data will be useful for cost estimation only if they are collected and organized in a way that is compatible with future applications. Organizations which are engaged in cost estimation continually should keep a file for their own use. The information must be updated with respect to changes that will inevitably occur. The format of cost data, such as unit costs for various items, should be organized according to the current standard of usage in the organization.

Construction cost data are published in various forms by a number of organizations. These publications are useful as references for comparison. Basically, the following types of information are available:

• Catalogs of vendors' data on important features and specifications relating to their products for which cost quotations are either published or can be obtained. A major source of vendors' information for building products is Sweets' Catalog published by McGraw-Hill Information Systems Company.

• Periodicals containing construction cost data and indices. One source of such information is ENR, the McGraw-Hill Construction Weekly, which contains extensive cost data including quarterly cost reports. Cost Engineering, a journal of the American Society of Cost Engineers, also publishes useful cost data periodically.

• Commercial cost reference manuals for estimating guides. An example is the Building Construction Cost Data published annually by R.S. Means Company, Inc., which contains unit prices on building construction items. Dodge Manual for Building Construction, published by McGraw-Hill, provides similar information.

• Digests of actual project costs. The Dodge Digest of Building Costs and Specifications provides descriptions of design features and costs of actual projects by building type. Once a week, ENR publishes the bid prices of a project chosen from all types of construction projects.


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Historical cost data must be used cautiously. Changes in relative prices may have substantial impacts on construction costs which have increased in relative price. Unfortunately, systematic changes over a long period of time for such factors are difficult to predict. Errors in analysis also serve to introduce uncertainty into cost estimates. It is difficult, of course, to foresee all the problems which may occur in construction and operation of facilities. There is some evidence that estimates of construction and operating costs have tended to persistently understate the actual costs. This is due to the effects of greater than anticipated increases in costs, changes in design during the construction process, or over optimism.

Since the future prices of constructed facilities are influenced by many uncertain factors, it is important to recognize that this risk must be borne to some degree by all parties involved, i.e., the owner, the design professionals, the construction contractors, and the financing institution. It is to the best interest of all parties that the risk sharing scheme implicit in the design/construct process adopted by the owner is fully understood by all. When inflation adjustment provisions have very different risk implications to various parties, the price level changes will also be treated differently for various situations.

Cost Indices

Since historical cost data are often used in making cost estimates, it is important to note the price level changes over time. Trends in price changes can also serve as a basis for forecasting future costs. The input price indices of labor and/or material reflect the price level changes of such input components of construction; the output price indices, where available, reflect the price level changes of the completed facilities, thus to some degree also measuring the productivity of construction.

The best-known indicators of general price changes are the Gross Domestic Product (GDP) deflators and the consumer price index (CPI). They are widely used as broad gauges of the changes in production costs and in consumer prices for essential goods and services. Special price indices related to construction are also collected by industry sources since some input factors for construction and the outputs from construction may disproportionately outpace or fall behind the general price indices. On the other hand, the price indices of various types of completed facilities reflect the price changes of construction output including all pertinent factors in the construction process.

Applications of Cost Indices to Estimating:-

The general conditions for the application of the single parameter cost function for screening estimates are:

1. Exclude special local conditions in historical data 2. Determine new facility cost on basis of specified size or capacity 3. Adjust for inflation index 4. Adjust for local index of construction costs 5. Adjust for different regulatory constraints 6. Adjust for local factors for the new facility


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Some of these adjustments may be done using compiled indices, whereas others may require field investigation and considerable professional judgment to reflect differences between a given project and standard projects performed in the past.

Allocation of Construction Costs over Time

Since construction costs are incurred over the entire construction phase of a project, it is often necessary to determine the amounts to be spent in various periods to derive the cash flow profile, especially for large projects with long durations. Consequently, it is important to examine the percentage of work expected to be completed at various time periods to which the costs would be charged. More accurate estimates may be accomplished once the project is scheduled, but some rough estimate of the cash flow may be required prior to this time.

Consider the basic problem in determining the percentage of work completed during construction. One common method of estimating percentage of completion is based on the amount of money spent relative to the total amount budgeted for the entire project. This method has the obvious drawback in assuming that the amount of money spent has been used efficiently for production. A more reliable method is based on the concept of value of work completed which is defined as the product of the budgeted labor hours per unit of production and the actual number of production units completed, and is expressed in budgeted labor hours for the work completed. Then, the percentage of completion at any stage is the ratio of the value of work completed to date and the value of work to be completed for the entire project. Regardless of the method of measurement, it is informative to understand the trend of work progress during construction for evaluation and control.

Computer Aided Cost Estimation

Numerous computer aided cost estimation software systems are now available. These range in sophistication from simple spreadsheet calculation software to integrated systems involving design and price negotiation over the Internet. While this software involves costs for purchase, maintenance, training and computer hardware, some significant efficiency often result. In particular, cost estimates may be prepared more rapidly and with less effort.

Some of the common features of computer aided cost estimation software include:

• Databases for unit cost items such as worker wage rates, equipment rental, or material prices. These databases can be used for any cost estimate required. If these rates change, cost estimates can be rapidly re-computed after the databases are updated.

• Databases of expected productivity for different components types, equipment and construction processes.

• Import utilities from computer aided design software for automatic quantity-take-off of components. Alternatively, special user interfaces may exist to enter geometric descriptions of components to allow automatic quantity-take-off.

• Export utilities to send estimates to cost control and scheduling software. This is very helpful to begin the management of costs during construction.


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• Version control to allow simulation of different construction processes or design changes for the purpose of tracking changes in expected costs.

• Provisions for manual review, over-ride and editing of any cost element resulting from the cost estimation system

• Flexible reporting formats, including provisions for electronic reporting rather than simply printing cost estimates on paper.

• Archives of past projects to allow rapid cost-estimate updating or modification for similar designs.

A typical process for developing a cost estimate using one of these systems would include:

1. If a similar design has already been estimated or exists in the company archive, the old project information is retrieved.

2. A cost engineer modifies, adds, or deletes components in the project information set. If a similar project exists, many of the components may have few or no updates, thereby saving time.

3. A cost estimate is calculated using the unit cost method of estimation. Productivities and unit prices are retrieved from the system databases. Thus, the latest price information is used for the cost estimate.

4. The cost estimation is summarized and reviewed for any errors.

Estimation of Operating Costs

In order to analyze the life cycle costs of a proposed facility, it is necessary to estimate the operation and maintenance costs over time after the start up of the facility. The stream of operating costs over the life of the facility depends upon subsequent maintenance policies and facility use. In particular, the magnitude of routine maintenance costs will be reduced if the facility undergoes periodic repairs and rehabilitation at periodic intervals.

Since the tradeoff between the capital cost and the operating cost is an essential part of the economic evaluation of a facility, the operating cost is viewed not as a separate entity, but as a part of the larger parcel of life cycle cost at the planning and design stage. The techniques of estimating life cycle costs are similar to those used for estimating capital costs, including empirical cost functions and the unit cost method of estimating the labor, material and equipment costs. However, it is the interaction of the operating and capital costs which deserve special attention.

As suggested earlier in the discussion of the exponential rule for estimating, the value of the cost exponent may influence the decision whether extra capacity should be built to accommodate future growth. Similarly, the economy of scale may also influence the decision at a given time. As the work becomes extensive, it becomes a capital project with all the implications of its own life cycle. Hence, the cost estimation of a project may also involve capital and operating costs.


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ANNEXURE B : PRADHAN MANTRI GRAMIN SADAK YOJNA (PMGSY)

1. REVIEW OF PMGSY (PRADHAN MANTRI GRAMIN SADAK YOJNA)

Rural Road Connectivity is not only a key component of Rural Development in India, it is also recognized as an effective Poverty reduction Programme. Notwithstanding the efforts made, over the years, at the State and Central levels, through different Programmes, about 40% of the Habitations in the country are still connected by all weather roads. It is well known that even where connectivity has been provided, the roads constructed are of such quality that they cannot be categorized as All-weather roads.

Government have resolved to provide Rural Road Connectivity to all habitations and accordingly decided that 50% of the Cess on High Speed Diesel (HSD) would be earmarked for this Programme. Accordingly, Rs. 2500 crore (being 50% of the Cess on High Speed Diesel (HSD) has been earmarked for the purpose during the year 2000-2001.

On the 15th August 2000, the Prime Minister announced a Centrally Sponsored Scheme called the Pradhan Mantri Gram Sadak Yojana with the objective of connecting, within next three years, every village that has a population of more than 1000 through good All-weather roads and every village of more than 500 persons similarly connected by the year 2007. The budget for the year 2000-2001 indicates the flow of funds for Rural Roads as Additional Central Assistance. Since this has been taken into consideration while determining the Plan size of States, it is proposed to retain the arrangement as such for this year. From the year 2001-2002 onwards, it is proposed to commence a 100% Centrally Sponsored Scheme, with the same objectives.

2. PROGRAMME OBJECTIVES AND COVERAGE

The objective of the Government is to provide Road Connectivity, through good All-weather roads, to all Rural Habitations with a population of more than 500 persons by the year 2007 (end of Tenth Plan Period). In the process, all unconnected Habitations having a population of more than 1000 persons would be covered in the next three years. Accordingly for the year 2000-2001, the Programme would cover Habitations having a population of more than 1000 persons. Where a State has no uncovered Habitations of this population size, smaller habitations may also be covered, subject to the minimum population size being 500. In case of hilly/desert tracts, this may not be less than 250.

The primary focus of the programme will be on construction of new roads. However, upgradation (to prescribed standards) of existing roads will be permitted to be taken up under the programme so as to achieve connectivity through good All-weather roads. In taking up upgradation, the population norms indicated in Para 2.1 above shall be observed. Upgradation would involve conversion, depending on the need of Gravel roads/Water Bound Macadam (WBM) roads to Black-Topped (B.T.). Extension of existing roads to the SC/ST Habitations in the village would also be covered under upgradation. Upgradation would, however, not cover repairs of existing Roads.

The Programme shall cover only ‘Other District Roads’ (ODRs) and ‘Village Roads’ (VRs).


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The Rural Roads to be taken up will, by and large, be surfaced roads (black topped/cement concrete). However, depending upon the soil conditions, All-weather roads may also be Gravel Roads, but with all necessary cross-drainage structures.

Implementation of the Programme

Each State Government / UT Administration would identify one or two suitable Agencies (having a presence in all the Districts and with established competence in executing time-bound programme), to be designated as Executing Agencies.

At the District level, the Programme will be planned, coordinated, and implemented through the Executing Agencies. A Programme Implementation Unit (PIU), entirely directed towards the programme, will be set up in all the Districts concerned. All PIUs will be manned by competent technical personnel from amongst the available staff or through deputations and no new posts will be created for the purpose.

The State Governments will establish suitable linkages in this behalf with the District Rural Development Agencies (DRDAs). Funds would be released to the concerned DRDAs for the year 2000-2001.

District Rural Roads Plan

The Programme Implementation Unit will formulate a Master Plan for each Block indicating the Habitations in that Block and the existing status of road connectivity, including the proposed new construction as well as roads requiring upgradation. Roads under construction under other Schemes such as RIDF, the erstwhile BMS, externally aided projects or State/District Sector Schemes should also be clearly specified. This shall thereupon be integrated into a District Master Plan, to be called the District Rural Roads Plan. The Plans so prepared would be subject to close technical scrutiny so as to arrive at the most economical cost of achieving the targets of the Programme and would also indicate the spacing execution of works. The Master Plan would be approved in the Governing Body of the respective DRDA, taking into account the views and suggestions of the local Members of Parliament and Members of State Assembly.

State Level Standing Committee

The DRDA will, thereupon, forward the Master Plan to the State-Level Standing Committee, set up by the State Government (ideally headed by the Chief Secretary), to ensure close and effective monitoring of the Programme. Upon approval by the said Standing Committee, the project proposals would be forwarded by the State Government to the Ministry of Rural Development.

It will be the responsibility of the Standing Committee to oversee that lands are available for taking up the proposed road works. A Certificate to this effect will accompany all the proposals. No provision is to be made for the Land Acquisition under this Programme.


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Empowered Committee

At the Central level, the Project proposals received from the State Governments would be considered by an Empowered Committee (to be Chaired by Secretary, Department of Rural Development) and including the AS&FA, Ministry of Rural Development; Advisor/Additional Adviser (Transport), Planning Commission; Director, Central Road Research Institute, New Delhi; One Expert to be nominated by the Ministry of Rural Development; and Joint Secretary (RC), Department of Rural Development as Members. The Deputy Secretary/Director handling the Programme in the Ministry of Rural Development would be the Convener. The representatives of the State Government, whose projects are being considered by the Empowered Committee, may be invited to attend the Meetings, as and when required. The recommendations of the Empowered Committee would, thereafter, submitted to the Ministry of Rural Development for further orders / approval.

Execution of Works

On clearance of the Project proposals, the relevant projects would be executed by the PIUs and completed within a period of 9 months, from the date of approval; in exceptional cases, this period may be extend up to 12 months. Delayed execution of projects could also hold up further sanctions.

The well-established procedure for tendering, through competitive bidding, would be followed for all projects. The projects would be tendered in packages of appropriate size (between Rs. 1 crore to Rs. 5 crore).

The road works, including the Cross Drainage works, will be executed as per the technical specifications prescribed by the Ministry of Surface Transport/Indian Roads Congress. The Ministry of Rural Development will, in due course, issue further Guidelines in this regard. Special care will be taken in coastal areas etc. to see that the shoulders are duly consolidated. Use of locally available material, including product like Ash, should be encouraged subject to adherence to technical norms. The roads must have proper drainage facilities. The bridges may be designed as to serve, where feasible, as bridge-cum-Bandharas. No lead charge would be payable for transportation of soil (except in case of Black Cotton soil).

Time / Cost over-runs (and consequent cost escalations) will not be permitted and, in such and eventuality, the State Government concerned would have to bear the additional expenditure. To avoid such a contingency, the Executing Agency will incorporate suitable Penalty Clauses in the Contract.

The roads constructed under this programme are expected to be of very high standard, requiring no major repair for at least five (5) years after completion of construction. In order to realise this objective, suitable clauses relating to Performance Guarantee shall be included in the Contract Documents.

Planting of fruit bearing and other suitable trees, on both sides of the roads, would be one of the contract conditions.


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It will be the responsibility of the PIUs to ensure timely payments to the contractors. Each Road works will be photographed at three stages – beginning, middle and at the final stages.

The Ministry of Rural Development will indicate the design of a logo, road borders and all relevant information and these will be duly installed.

Supervision of Works and Quality Control

Quality of works being the essence of this Programme, all works will be effectively supervised. It will be the prime responsibility of the PIU to make certain that the work done (and all the materials utilised in the same) conforms to the prescribed specifications. In addition to checking the quality of materials at site, the steps warranted in this direction should include:

Obtaining the Test Certificates of manufactured materials from the sources from which these are procured.

In the case of mineral aggregate, inspection of the quarry, (or even stationing a representative) to ensure that only approved rock is crushed to the required sizes.

For works involving processing (i.e. stabilisation or compaction involving equipment), requiring the contractor to do the work on a trial stretch so as to ensure that the equipment and procedures used turn out work of the highest quality.

Periodic inspections of works will be carried out by the competent supervisory Authorities of the Executing Agency. It will be necessary for the Executing Agencies to set up Quality Control Units, independent of the PIU.

The State- level Standing Committee will oversee that the supervision of works is continuous and effective.

The Ministry of Rural Development will engage Independent Monitors (Individuals / Agency) for inspection of works under the Programme. It will be the responsibility of the PIU to facilitate the inspection of works by the Monitors, who shall be given free access to all records, administrative, technical and financial.

Monitoring

The Ministry of Rural Development would evolve suitable software for an "Online Management & Monitoring System". The State authorities are advised to equip the PIUs with necessary Computer Hardware to enable on-line monitoring. The cost of the Hardware may be included in the Project cost. The cost would also include the cost of digitisation of maps, for which the Ministry of Rural Development would issue separate Guidelines.

The Ministry of Rural Development will in co-operation with the Nodal Department for the Programme at the State Level organise suitable Training Programmes for the PIU personnel.

The Ministry of Rural Development will prescribe Periodical Reports and Returns for monitoring the performance and progress of Projects taken up under this Programme.


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Maintenance of Rural Roads

The Rural Roads constructed / upgraded under this Programme will be maintained by the concerned Panchayati Raj Institution (District Panchayat / Intermediate Panchayat). The concerned Panchayati Raj Institutions would need to be identified while submitting the project for approval and the State Authorities will be required to furnish an Undertaking that they would remit (to the identified Panchayats Raj Institution), from the State Government funds, the requisite cost of maintenance. The State Government will also offer an Undertaking for the release of maintenance costs, along with their project proposals. The Ministry of Rural Development would oversee the implementation of this undertaking.

Efforts will be made to involve local people’s participation in the maintenance of Rural Roads. Suitable mechanisms and procedures will be evolved by the State Governments in consultation with the Ministry of Rural Development.

Funding

For this year (2000-2001) only, funds under the Programme are being provided by the Centre to the States as Additional Central Assistance (ACA) and will follow the normal pattern of Additional Central Assistance. The Ministry of Rural Development will indicate the manner of release of funds, possibly including an "On-line payment system" for the Programme from the next financial year.

The Ministry of Rural Development may allocate additional funds to any State taking into consideration, inter alia, the Special Problems/Needs of specific areas.

For the year 2000-2001, the cost of the approved Projects will be released to the concerned DRDAs, through the State Governments, in two instalments. The release will be made by the Ministry of Finance on the recommendations of the Ministry of Rural Development. State Governments will be required to transfer funds to the concerned DRDAs within 15 days of release by Government of India. The funds will be no lapsable at the DRDA level.

It will be incumbent on the DRDAs to open a separate and single Bank Account for the funds received under this Programme. These funds will remain entire separate from those of any other Programme/Scheme. The interest earned on this Account will not be diverted to any other Programme, even on temporary basis.

The funds for the Second Instalment will be released after fulfilment of procedures prescribed by the Ministry of Rural Development, which will include satisfactory reports from Independent Monitors engaged by the Ministry of Rural Development. For the year 2000-2001 alone, the Ministry of Rural Development may release the entire approved cost in one instalment, subject to the total release being limited to the allocation for the State / UT.


November 2008 vi

The Head of the PIU, subject to not being below the rank of an Executive Engineer, will be competent to operate on this Account, subject to the normal rules and regulations of the State Government concerned. The funds earmarked for each Project are to be utilised for the Project only. The Head of the PIU will sent a Monthly Account to the Project Director, DRDA. The Second Instalment for each Project will be claimed by the Project Director, DRDA through the State Government.

It will be open to the State Government to nominate the Head of the District PIU as the ex-officio Project Director, DRDA for the purposes of this Programme.

Accounts & Audit

The well-established accounting system of the Works Departments would be utilised for this Programme. The Ministry of Rural Development may evolve suitable accounting procedures, including computer-based ones, keeping in view the normal procedures that are in force.

The Ministry of Rural Development would lay down the Audit requirements for the Programme. In addition to such Audit procedures as may be prescribed, the works under this Programme would be subject to audit by the Office of the Comptroller and Auditor-General of India (C&AG). The Audit of the work done would cover aspects of quality, in addition to financial audit.

All the road works will be subjected to Social Audit by way of discussion in the Gram Sabha. Relevant information in this regard will be made available to the Gram Sabha. State Governments will issue necessary instructions in this regard.

Miscellaneous

No Agency charges will be admissible for road works taken up under this Programme. The Executing Agencies will not levy charges in any form, such as Centage charges etc.

The Ministry of Rural Development may allow costs incidental to execution of the road works, such as Telephone and other Office expenses, and cost of travel and may lay down suitable Guidelines in this regard. Such cost would be treated as Project expenses and would be debited to the Project Cost.

To maintain quality and ensure timely completion of works, the Ministry of Rural Development will lay down a scheme of incentives/disincentives to the States/Districts.

The Ministry of Rural Development may, from time to time, issue such directions as may be necessary for smooth implementation of the Programme.

For the year 2000-2001 only, the Project proposals may include the road works initiated under the erstwhile Basic Minimum Services (BMS) Programme which are still incomplete. The Project proposals should clearly specify the value of the work done under the BMS component and the value of the work remaining incomplete. Such works shall be completed within the specified period.


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ANNEXURE C : EXAMPLES OF ECONOMIC APPRAISAL OF PROJECTS

1. FUNDAMENTAL CONCEPTS AND SOME SOLVED EXAMPLES ON ECONOMIC AND FINANCIAL EVALUATION OF PROJECTS1

1.1 METHODS OF ECONOMIC EVALUATION

1.2 NET PRESENT VALUE (NPV) METHOD

The net present value (NPV) of a project is the sum of the present values of all the cash flows, positives as well as negatives that are expected to occur over the life of the project.

(1) Net Present Value:- ( )

−+

=∑=

tt

n

t rC

NPV11

0 Initial Investment

Ct =cash flow at the end of year t

n= life of the project

r =discount rate

Example 1 :

To illustrate the calculation of net present value, consider a project which has the following cash flow stream:

Year Cash Flow

0 Rs. (1,000,000)

1 2,000,000

2 2,000,000

3 3,000,000

4 3,000,000

5 350,000

The cost of capital, r , for the firm is 10 percent.

1 Manual on Economic Evaluation of Highway Projects in India IRC SP : 30, 1993


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Solution:

The net present value of the proposal is:

NPV = ( ) ( ) ( ) ( ) ( )54321 10.1

000,35010.1

000,30010.1

000,30010.1

000,20010.1000,200

++++ -1,000,000 = -Rs 5,273

The net present value represents the net benefit over and above the compensation for time and risk. Hence the decision rule associated with the net present value criterion is:

Accept the project if the net present value is positive and reject the project if the net present value is negative.

Example 2:

The cost of improving an existing road, 25 km long, is Rs. 4.00 lakhs per km. The (i) road user costs, with and without the improvements, (ii) accident costs, with and without improvement, and (iii) maintenance costs, with and without the improvements are tabulated in Table 1 for a 10-year period after the completion of the improvements. Assuring a discount rate of 10 percent, find out whether the project is economically justifiable. Use the NPV method.

Table 1 : Road user costs, Accident costs, and Maintenance costs

Year (t)

Road User Costs Accident Costs Maintenance Costs

With Impr. Without Impr. With Impr. Without Impr. With Impr. Without Impr.

(1) (2) (3) (4) (5) (6) (7)

0 - - - - - -

1. 105.5 126.5 1.1 3.1 3.5 2.5

2. 110.3 132.2 1.1 3.1 3.5 2.5

3. 115.8 138.9 1.2 3.5 3.5 2.5

4. 121.6 145.8 1.2 3.7 3.5 2.5

5. 127.6 153.0 1.3 3.8 3.5 2.5

6. 134.0 161.0 1.3 4.0 3.5 2.5

7. 140.7 168.9 1.4 4.0 3.5 2.5

8. 147.8 177.0 1.5 4.4 3.5 2.5

9. 155.1 186.2 1.6 4.7 3.5 2.5

10. 162.9 195.2 1.6 4.9 3.5 2.5

Solution:

The calculations are tabulated in Table 2.

Cost of improvements = Rs. 25 x 4 = Rs. 100 lakhs

Since the NPV is positive, the project is economically justified.


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Table 2 : Computation of NPV (All amounts in Lakhs of Rupees)

Year (t)

Road User Costs Accident Costs Maintenance Costs Benefits (Bt) Cols. [(3) +

(5) + (7) – Col. [(2) + (4) + (6)]

Bt - Ct ( )ttt

1.01CB

+

−With Impr.

Without Impr.

With Impr.

Without Impr.

With Impr.

Without Impr.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

0 - - - - - - -100.0 -100.0 - 100.0

1. 105.5 126.5 1.1 3.1 3.5 2.5 22.0 22.0 + 20.0

2. 110.3 132.2 1.1 3.1 3.5 2.5 23.1 23.1 + 19.1

3. 115.8 138.9 1.2 3.5 3.5 2.5 24.4 24.4 + 18.4

4. 121.6 145.8 1.2 3.7 3.5 2.5 25.7 25.7 + 17.6

5. 127.6 153.0 1.3 3.8 3.5 2.5 26.9 26.9 + 16.7

6. 134.0 161.0 1.3 4.0 3.5 2.5 28.7 28.7 + 16.2

7. 140.7 168.9 1.4 4.0 3.5 2.5 30.0 30.0 + 15.4

8. 147.8 177.0 1.5 4.4 3.5 2.5 31.1 31.1 + 14.5

9. 155.1 186.2 1.6 4.7 3.5 2.5 33.2 33.2 + 14.1

10. 162.9 195.2 1.6 4.9 3.5 2.5 34.6 34.6 + 13.4

+ 165.4 - 100.0

= + 65.4

1.3 BENEFIT-COST (B/C) RATIO METHOD

There are a number of variations of this method, but a simple procedure is to discount all costs and benefits to their present worth and calculate the ratio of the benefits to costs. Negative flows are considered costs, and positive flows as benefits .Thus the savings in the transport costs are considered as benefits .If the B/C ratio is more than one , the projects is worth undertaking.

(2) Benefit Cost Ratio (BCR)

Example 3: To illustrate the calculation consider a project which has a capital cost of 12%.

Year Cash Flow 1 25,000 2 40,000 3 40,000 4 50,000

Initial Investment: Rs 1, 00,000


November 2008 iv

Solution 3 :

The benefit cost measures for this project are:

BCR = ( ) ( ) ( ) ( )

145.112.1000,50

12.1000,40

12.1000,40

12.1000,25

4321 =+++

When BCR

>1 Accept the project

<1 Reject the project

Example 4:

An existing single lane road, 30km long, is to be widened to two lanes. The cost of widening is Rs.10 lakhs per Km. The vehicle operating costs, accident costs and maintenance costs, with and without widening, for a 10 year period are tabulated in table 3 below. The discount rate is 12 per cent. Is the project worthwhile?

Table 3 : Road user costs, Accident costs, and Maintenance costs

Year (t)

Road User Costs Accident Costs Maintenance Costs

With widening Without

widening With widening

Without widening

With widening Without

widening

(1) (2) (3) (4) (5) (6) (7)

1. 101.5 160.7 2.5 3.6 10.0 7.5

2. 105.6 168.2 2.6 3.7 10.0 7.5

3. 110.2 176.3 2.7 3.8 10.0 7.5

4. 116.2 185.2 2.8 3.9 10.0 7.5

5. 122.3 190.0 2.9 4.0 10.0 7.5

6. 128.4 199.0 2.9 4.0 10.0 7.5

7. 135.6 210.0 3.0 4.1 10.0 7.5

8. 143.2 219.5 3.1 4.2 10.0 7.5

9. 149.1 228.2 3.2 4.3 10.0 7.5

10. 154.6 240.1 3.2 4.3 10.0 7.5

Solution:

The calculations are tabulated in Table 4.

Cost of project = Rs. 30 x 10 lakhs = Rs. 300 lakhs

Benefit/cost ratio 1. than greater 1.27, 300

8.382==

Hence the project is economically justified.


November 2008 v

Table 4 : Computation of B/C Ratio (All figures in Lakhs of Rupees)

Year (t)

Road User Costs Accident Costs Maintenance Costs Benefits (Bt)

Cols. [(3) + (5) + (7) – Col. [(2) +

(4) + (6)]

Discount Benefits

( )tt

12.01B

+(1+0.12)

With widening

Without widening

With widening

Without widening

With widening

Without widening

(1) (2) (3) (4) (5) (6) (7) (8) (9)

1. 101.5 160.7 2.5 3.6 10.0 7.5 57.8 51.6

2. 105.6 168.2 2.6 3.7 10.0 7.5 61.2 48.8

3. 110.2 176.3 2.7 3.8 10.0 7.5 64.7 48.1

4. 116.2 185.2 2.8 3.9 10.0 7.5 67.4 43.0

5. 122.3 190.0 2.9 4.0 10.0 7.5 66.2 37.6

6. 128.4 199.0 2.9 4.0 10.0 7.5 69.7 35.3

7. 135.6 210.0 3.0 4.1 10.0 7.5 73.0 33.0

8. 143.2 219.5 3.1 4.2 10.0 7.5 74.9 30.3

9. 149.1 228.2 3.2 4.3 10.0 7.5 77.7 28.0

10. 154.6 240.1 3.2 4.3 10.0 7.5 84.1 27.1

Total 382.8

(3) Internal Rate of Return (IRR)

The IRR of project is the discount rate which makes its NPV equal to zero. Put differently, it is the discount rate which equates the present value of future cash flows with the initial investment.

In the NPV calculation we assume that the discount rate (cost of capital) is known and determine the NPV. In the IRR calculation, we set the NPV equal to zero and determine the discount rate that satisfies this condition.

Example 5:

To illustrate the calculation of IRR, consider the cash flows of a project

Year Cash Flow

0 100,000

1 30,000

2 30,000

3 40,000

4 45,000


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Solution 5 : The IRR is the value of r which satisfies the following equation:

100,000= ( ) ( ) ( ) ( )4321 1

000,451

000,401

000,301

000,30rrrr +

++

++

++

The calculation of r involves a process of trial and error. Different values of r should be tried till the right-hand side of the above equation is equal to 100,000.

Let us try r=15%.

( ) ( ) ( ) ( )4321 15.1

000,4515.1000,40

15.1000,30

15.1000,30

+++ = 100,802

This value slightly higher than our target value, 100, 000.So, we increase the value of r from 15% to 16%. (In general, a higher r lowers and a smaller r increases the right –hand side value)

( ) ( ) ( ) ( )4321 16.1000,45

16.1000,40

16.1000,30

16.1000,30

+++ = 98,641

Since this value is now less than 100,000, we conclude that the value of r lies between 15% and 16%.

Accept: If the IRR is greater than the cost of capital.

Reject: If the IRR is less than the cost of capital.

To Explain IRR the calculations here in the above example are done manually by hand, but it is more convenient to use excel function IRR.

Relationship between NPV and IRR

As shown in graph ‘A’ below, where the NPV is plotted on the Y axis and the discount rate is on the X axis .The IRR is the point at which the NPV profile crosses the X axis

Graph A: Plotted between NPV and Discount Rate


November 2008 vii

2. ECONOMIC AND FINANCIAL ANALYSIS – A CASE STUDY

2.1 INTRODUCTION

A case study has been incorporated in this chapter, which gives a comprehensible procedure for economic and financial analysis for a Road project2.

2.2 ECONOMIC ANALYSIS

The economic evaluation has been carried out within the broad framework of social cost benefit. The objective is to determine the appropriate improvement Scheme out of several proposals that leads to minimizing total transport costs and maximizing benefits to the road users. The indicators for economic viability analysis are Economic Internal Rate of Return (EIRR), Net Present Value (NPV) and NPV/Cost Ratio.

The costs considered comprise agency costs and costs to road users as follows.

Road Agency costs

• Construction Cost

• Maintenance Cost

Road Users Costs

• Vehicle Operating Cost

• Travel Time Costs

• Congestion Costs

• Accident Costs.

The benefits accruing to society from the proposed improvement are as follows

Road User Benefits:

• Vehicle Operating Cost Savings

• Value of Travel Time Savings

• Value of Savings in Accident Costs

• Savings in Maintenance Costs

Social Benefits:

• Improvements in administration, Law and order

• Improvements in health and education

2 Feasibility Study and Preparation of Detailed Project Report for 4/6 laning of stretch from Tirupati-Tiruthani-Chennai section of NH-205, located in Chittoor District of An dhra Pradesh State and Tiruvallur District of Tamil Nadu state. National Highways of India


November 2008 viii

• Improvements in agriculture, Industry, trade and mining

• Improvements in environmental standards

• Appreciation in value of Land adjacent to roads

At the present state of knowledge in the country, it is possible to monetarily quantify only the direct road user benefits. This report, therefore, restricts itself to only the direct road user benefits.

Road users experience different costs in the “With Project” and “Without Project” conditions. The benefits to road users are constituted by the savings in costs. Increasing traffic volumes as a result of the project implies more vehicle kilometres and hence more vehicle operating costs and, possibly showing more saving in with project conditions viz. benefits as a result of the project.

Based on traffic, Road network and Socio-economic characteristics of the project road, two different improvement options (with project) have been considered. With two different combination of proposed up-gradation/improvement Options (Bypasses / without Bypasses) of the project road. The Economic analysis is carried out for the following improvement options

1. “Without project/ Do minimum” - Routine maintenance of the existing road

2. “With Project”- Four laning of Project Road

The total transport costs for both the Options have been worked out on yearly basis for the entire analysis period of 20 Years. All costs and benefits considered in the study have been valued in monetary terms and expressed in economic prices for avoiding distortion in the input prices of labour, materials, equipment and foreign exchange due to market imperfections. The ratio of Economic and Financial costs is taken as 0.85.

2.2.1 Measures of Project Analysis

In order to quantify the economic viability of a project or projects three measures can be used. All of these use a discounting approach. These are:

* Net Present Value (NPR)

* Benefit Cost Ratio (BCR)

* Internal Rate of Return (IRR)

(1) Net Present Value (NPV)

NPV = Discounted Benefit – Discounted Cost

Where BI = Benefit in the ith year

CI = Cost of the ith year


November 2008 ix

(2) Benefit Cost Ratio (BCR)

(3) Internal Rate of Return (IRR)

The IRR is that discount rate r which makes NPV = 0

2.2.2 Decision Criterion

The formal decision criterion is to accept all projects with a BCR of one or greater than one, NPV greater than Zero or IRR greater than opportunity cost of capital, since primary tangible returns are greater than primary tangible costs. If funds are limited, the magnitude of IRR or BCR can be used in ranking the order of priority of undertaking projects whose ratios are more than one. This assumes, of course, that the indirect tangible and intangible benefits and costs are of minor importance or are approximately the same for the various projects under consideration. Sometimes, however, the indirect tangible and intangible benefits may dictate over direct tangible benefits and so the projects with even less than one BCR may be selected for the overall intangible benefits of the society. In practice, there is really no single yardstick to measure the economic and financial viability of the project.

2.2.3 Price Elasticity of Demand and Traffic Forecasting

An important benefit of a capacity expansion project is the reduction in travel times for highway users. Travel time is a major component in overall price or cost to the user, which includes time as well as out-of-pocket costs. As with most goods and services, a lower price can be expected to lead to more quantity demanded - in this case, some additional travel.

Price elasticity of demand is an economic concept used to summarise how much more or less of something people will consume if its price changes. From the standpoint of estimating future traffic levels, elasticity represents how a change in the cost of driving, due to a reduction in travel time or implementation of a toll, may affect the volume of travel that will take place. These changes in volume result from some drivers' decisions to make more or fewer trips than they otherwise would have made.


November 2008 x

Elasticity is stated in percentage change terms, e.g., an “X” percent reduction in travel time leads to a “Y” percent increase in travel Km or trips. An elasticity of zero implies that travel is unresponsive to a time change, no matter how large, while an infinite elasticity implies that even a one-second decrease in travel time will cause all capacity to be completely absorbed. While price elasticity is a generally accepted tool in economics, there are differing opinions about how to apply it in a transportation context. The transportation economics literature reveals a wide range of measured elasticity values, reflecting different study methods, data, time periods, and locations. No studies, however, suggest that travel demand elasticity is either zero or infinite. When measured on a given facility, observed elasticity includes the effects of both diverted trips, which represent existing traffic that has simply shifted from other routes or time periods, and new travel taken as a consequence of the lower user cost. Additional research is needed to narrow the range of elasticity values that are applicable to a given set of circumstances - whether facility, corridor, or region – and to develop methods for better incorporating demand elasticity into traffic forecasting.

2.2.4 Road User Costs (RUC) Components

RUC consists of following three components:

• Vehicle operating costs (VOC), that is, the physical costs of operating a vehicle such as fuel, spare parts, depreciation, crew costs, etc;

• Travel time costs (TTC), that is, the value of time spent in travelling that could be used in other activities;

• Accident costs (ACC), that is, the physical costs of an accident and the value of injuries and fatalities.

The financial price is the retail market price to the consumer of the product. The economic price reflects the true value (that is, the real worth) as well as the scarcity premium of the resource to the economy. In the economic jargon, this is termed as a “shadow” or “accounting” price of the resource in the economy. The shadow price of unskilled labour, for instance, may well be lower than the wage to reflect its abundant supply, while that of a skilled professional may be higher than the salary given to him, if his opportunity cost is considered. The economic price of a factor or a product also excludes all tax elements as they reflect mostly a transfer of resources from one sector of the economy to another. On the other hand, subsidy elements, if any, are included with the economic price. Further more, market distortion or imperfection and government regulations or interventions are also taken into consideration while shadow-pricing a factor or a product. In case of imported inputs, economic costs were based on the border prices plus port handling, transportation, assembling and retail cost (profit margin) duly shadow priced. Local inputs of labour and materials were shadow priced using the Standard Conversion Factor of 0.85.


November 2008 xi

2.2.5 Inputs to the HDM-4 Model

Project Road Details:

Based on the existing traffic and pavement conditions, the project road has been divided into 5 homogeneous Sections. Details are given in Table 5.

Table 5 : Project Cost Summary of Concessionaire cost (Rs. Millions)

General Inputs:

Analysis period - 20 years

Discount rate - 12 %

Construction Period - 3 Years

Construction Beginning Year - 2008

Opening year to Traffic - 2011

Standard Conversion factor - 0.85

Salvage value - 15 %

Construction Phasing - 25% 1st Year

40% 2nd Year

35% 3rd Year

2.2.6 Road and Pavement Characteristics:

Road and pavement characteristics obtained from the Road Inventory Survey have been used as Model input. These include road length, carriageway width, width of paved shoulders, existing pavement composition, sub-grade CBR, roughness of the existing road (IRI), structural number, BBD and cracking area.

The details of model inputs for road and pavement characteristics are presented in Table 6. For the flexible pavement, opening year roughness has been taken as 2.0 IRI.


November 2008 xii

Table 6 : Details of existing Pavement Conditions

2.2.7 Traffic Volume by Composition and Growth Rates:

Based on Classified Traffic Volume counts for 7 days 24 hours the average AADT of the volume counts have been carried out at 5 locations namely Km 295.00, Km 320.20, Km 334.00, Km 24.00 and Km 57.20 for the Homogeneous sections -1,2, 3,4 and 5 respectively. The base year traffic considered for the year 2005 by composition for the package is given below in Table 7.


November 2008 xiii

Table 7 : Section wise AADT (Vehicles) details

The traffic growth rates have been worked out on the basis of present GDP and NSDP for the state of AP. The growth rates for the 30 horizon years are given in table 8 below for the motorized traffic and for the non-motorized traffic a growth rate of 2% has been considered.


November 2008 xiv

Table 8 : Traffic Growth Rates

Growth rates for AP Section

Growth rates for TN Section

Road Side Friction:

Roadside friction has to be computed for each project road package considering the following:

• The road width

• Total traffic Volume and its Composition (Slow, Two and Three wheelers Traffic)

• Settlement pattern along the road side

• Percentage of Built-up Area

• Number and location of Dabhas and Fuel Stations


November 2008 xv

The number of settlements along the roadside and especially the extensive ribbon development that take place is a major factor influencing road performance. The maximum friction factor for the existing condition is taken as 0.7 and the minimum 0.6 amongst different sub projects.

After upgradation and improvements of the package the roadside friction factor for the four lane has to be taken as 0.95.

Roadside friction factors have been incorporated into VOC as well as vehicle speeds for the given volumes and composition of traffic. Survey speed observations by the traffic planner have validated the speed assumption for the HDM-4 inputs. It is considered that the creation of free flow conditions will be a more important yardstick with which to measure the success of any project improvement rather than increase in vehicle speeds.

2.2.8 Base Vehicle Characteristics and Utilization Data:

The data as given in the table 9 below have been obtained from manufacturer’s literature and RUCS report.

Table 9 : Vehicle Characteristics and Utilisation Data

2.2.9 Capital Cost of Project

The capital costs (financial) of the project road have been converted into economic cost by using a standard conversion factor of 0.85, as suggested by the World Bank for highway projects in India. The conversion factor of 0.85 has been applied to all cost items except land acquisition cost and R&R cost. The economic cost excludes the cost of toll plazas and the proportionate design & supervision cost for the same.

A salvage value of 15% of capital cost has been considered in the terminal year for flexible pavements. The project costs in financial and economic terms for different schemes are presented in Table 10.


November 2008 xvi

Table 10 : Summary of Capital Cost Section wise

2.2.10 Routine and Periodic Maintenance

Routine maintenance, Periodic maintenance costs have been considered as per the MORT&H guidelines 1997 prices. Routine maintenance, Periodic maintenance costs of 1997 prices have been escalated to 2006 prices with an inflation rate of 5%. The details of the maintenance costs and administration charges are given below in Table 11.

Table 11 : Routine and Periodic Maintenance

2.2.11 Project Benefits

The direct benefits of road improvement considered in the study include vehicle operating cost (VOC) savings for vehicular traffic using the project road and time savings for passengers and goods (carried) in transit. The benefit streams have been computed annually over the 20 year benefit period for all homogeneous sections.


November 2008 xvii

VOC Savings:

The unit Vehicle Operating Cost (VOC) by vehicle type and VOC savings sectionwise has been computed by the HDM model. The VOC computation takes into account capacity augmentation, pavement characteristics, roughness progression vis-à-vis intervening surface treatment and strengthening policies, traffic characteristics, geometric conditions and vehicle characteristics.

Time Savings:

The HDM Model has generated average speeds in km/hr by vehicle type, in the existing (without project) and the improved (with project) road conditions. The time savings for passengers and goods (in transit) vehicles have been derived separately.

For computing time saving for passengers of cars and buses, a weighted average occupancy was used viz. Car – 4 persons and Bus – 30 persons. The average payloads considered for goods vehicles are: LCV – 3.2 tonnes, Truck-9 tonnes and MAV – 18.3 tonnes.

The value of time (VOT) for passengers and goods considered in this analysis has been based on earlier studies carried out in recent years. For the average car passenger, VOT has been taken as Rs. 40 per hour, and for the average bus passenger it was Rs. 20 per hour. The value placed on time is rather on the conservative side. For goods in transit, time value has been worked out using the inventory cost method, with a 15% interest rate considered as the opportunity cost of capital. The VOT for goods (Cargo) vehicle worked out to Rs. 2.11 per hour for LCV, Rs. 6.47 per hour for 2-axle trucks and Rs. 12.11 per hour for multi-axle vehicles. All above said values are based on Road User Cost Study Report by CRRI.

Accident Cost Savings

A distinction made between main cause of accident and the contributory factors of accident. It is usually difficult to identify the main cause of accidents; where as several factors which could have contributed to accidents can be identified.

Contributory factors of Accidents:

Human Factors: Manner of executions (Deficiency in actions and behavior)

Perceptual errors

Impairment

Lack of Skill

Road Factors: Adverse Road Design

Adverse Environment

Inadequate Furniture or Markings

Obstacles


November 2008 xviii

Vehicle Factors: Tyres

Brakes

Other defects due to poor maintenance

Unsuitable Designs

It is possible to predict the reduction in accidents on account of road improvements. The accidents costs collected from IRC-SP-30 (the values are in the year 1990 and escalated with 5% to get the values in the year 2006) are given table 12 below.

Table 12 : Accident Costs

*Source IRC SP-30

Accident data for the year 2005 (from 09 -09-05 to 08-08-06) was collected from different police stations along the project road. The data provides a good source of analysis about accidents in project road reach. Accident data related to Number of Accidents, no. of fatal accidents, no. of injury accidents (major / minor) and property loss. The accident data for the project road section is given in table13 below.

Table 13 : Accident Data


November 2008 xix

2.2.12 Economic Viability

The annual cost and benefit streams are used to derive the net cash flow for the project. The EIRR and NPV @ 12% discount rate are determined using the discounted cash flow technique for all the Sections and Package. The results for the different improvement schemes are presented table 14 below.

Table 14 : Economic Internal Rate of Returns (%) by considering Savings in VOC, Travel Time and Accidents

Table 15 : Net Present Values (Millions) by Considering Savings in VOC, Travel Time and Accidents

The minimum acceptable rate of return for viability of transport infrastructure projects in India is 12 percent. The EIRR values for the option 4-lane with bypass is getting very higher than the accepted value, hence it can be considered that the project is economically viable.

2.2.13 Sensitivity Analysis

Sensitivity analysis has been carried out for the below mentioned four variations in costs and benefits. Sensitivity analysis has been performed for both with time and without time alternatives. The sensitivity scenarios take into account possible construction costs overrun, traffic volume, revenue shortfalls, interest rate volatility, non-compliance or default by contractors, and political risks.

Case-I Base Cost and Base Benefits

Case-II Base Cost plus 15 % and Base Benefits

Case-III Base Cost and Base Benefits minus 15%

Case-IV Base cost plus 15% and Base Benefits minus 15%


November 2008 xx

Summary for the Sensitivity analysis is given in Table 16.

Table 16 : Sensitivity Analysis

2.2.14 Conclusions

From the results of the Economic Analysis, it can be seen that for all the improvement schemes, the EIRR is getting higher than accepted value of 12%. So it can be concluded that the project of Four-lane widening with paved shoulder option is economically viable and recommended for implementation.

2.3 FINANCIAL ANALYSIS

2.3.1 Background

The main objective of financial analysis is to assess the likely returns to the investors under realistic conditions. For this purpose the prevailing market rates and return on debt and equity issues in local capital markets are the important factors. In the present studies the financial viability of the project is assessed on the basis of project’s financial internal rate of return on investments and Rate of Return on Equity, which is estimated on the basis of cash flow analysis.

2.3.2 Approach to Financial Evaluation

The main objective of financial analysis is to examine the viability of implementing the project on BOT basis. The analysis attempts to ascertain the extent to which the investment can be recovered through toll revenue and the gap, if any, be funded through Grant / Subsidy. This covers aspects like financing through debt and equity, loan repayment, debt servicing, taxation, depreciation, etc. The viability of the project is evaluated on the basis of Project FIRR (Financial Internal Rate of Return) on total investment). The FIRR is estimated on the basis of cash flow analysis, where both costs and revenue have been indexed to take account of inflation. Financial analysis has been carried out for the entire project road with debt equity ratio of 70:30. The basic indicators for assessing the Financial Viability of the project are as follows.

NPV (Net Present Value): The NPV for the project should be positive when a discount rate representing the opportunity cost along with a risk premium is applied in the financial analysis.

FIRR (Financial Internal Rate of Return): The FIRR should have a value above the discount rate (opportunity cost).

Cash Flow (Liquidity): The cash flow situation should be satisfactory in each year of the concession period. In other words, the cash balance at the end of every year should be positive.


November 2008 xxi

NEW MODEL CONCESSION AGREEMENT – Considerations

Financial analysis was carried out based on following Assumptions:

1) Time Assumptions:

• Concession Period has been fixed to the year in which the projected traffic would cross the design capacity of the Project Road. (if project road capacity reaches the design capacity with in the concession period)

• Concession Period included the time required for the construction also.

2) Economic Assumptions:

• Toll Fee indexing is considered as 40% of the Growth Rate of WPI (5%). The inflation of Toll growth rate is taken as 5 % (as per old Toll Policy) per annum.

• Annual Inflation rate of 5% has been considered for determining the Project Cost, Routine Maintenance and Periodic Maintenance.

3) Project Cost Assumptions:

• Contingency cost has been taken as 3% of the civil construction cost

• IC & Pre Operative Expenses cost has been taken as 1.0% of Estimated Project Cost

• Financing Cost has been taken as 2% of the Debt.

• Interest rate for calculation of Interest During Construction has been taken as 11%.

• The Construction cost for the up gradation of the Project road does not include the Environmental, Social, Land Acquisition, Utility relocation and Tree cutting cost for the purpose of Financial Analysis.

4) Financing Assumptions:

• The Debt has been considered as 70% of the Net Project Cost.

• The Equity has been considered as 30% of the Net Project Cost.

• Maximum Government/Client Contribution (Grant) is 40% of TPC.

• Equity Support (Percentage of Grant at the time of construction) should be less than Equity amount and less than 20% of Net Project Cost.

Civil Cost of Package (from km 274.800 to km 341.600 of AP section and from km 0.000 to km 59.600 of TN section of NH-205) is 6348.25 Millions

The annual phasing of capital cost is made as per the work schedule. Construction cost is phased over a 910 days period of 2008, 2009 and 2010 as 25%, 40% and 35% respectively.


November 2008 xxii

5) Revenue Assumptions:

• Exempted vehicles and leakage vehicles are considered as 2% of total traffic.

• A monthly fee of 5 times the fee payable for the respective vehicle if it were to undertake a single one-way trip on project road for the Local Traffic.

• Return Pass on the same day, payment of a sum equal to 160% of the fee payable for the respective vehicle if it were to undertake single one -way trip on the project road.

• Frequent users can have tickets at a discounted rate equivalent to 80%of the fee payable for the respective vehicle.

• O&M Grant has been considered as 20% of the Equity Support in each year, upto grant exhausted.

• Additional Fee for Overloaded Vehicles: Add 50% of the extra fee to the actual Fee, if overload is not greater than 20% of the permissible load. Add 100% of the extra fee to the actual Fee, if overload is exceeds the 20% of the permissible load.

• Toll rates have been rounded to nearest 5 rupees.

6) Expenditure Assumptions:

• Cost of Routine Maintenance has been taken from MORT&H Guidelines A Report on Maintenance Norms for Highways, IRC Publications.

• Cost of Periodic Maintenance has been found out by considering the layer width, length, thickness and layer cost per cum.

• Concession Fee is payable until the 10th anniversary of the appointed date is 1 rupee per annum, after that 1% of the total realizable fee during the 10th year, 2% of the total realizable fee during the 11th year and so on.

• Interest rate on Debt has been considered as 11% per annum.

7) Other Assumptions:

• Loan Repayment Period- 14 Years.

• Loan Payback Grace Period- 1 Year.(optional)

• Tax Exemption/Tax Holiday-10 Years of Concession Period to get maximum advantage of tax exemption. The MAT rate has been made applicable in those years.

• Income Tax rate- 33.66%

• MAT- 11.22%


November 2008 xxiii

2.3.3 Cost Phasing of the Project

Civil Cost of Package (from km 274.800 to km 341.600 of AP section and from km 0.000 to km 59.600 of TN section of NH-205) is 6348.25 Millions

The annual phasing of capital cost is made as per the work schedule. Construction cost is phased over a 910 days period of 2008, 2009 and 2010 as 25%, 40% and 35% respectively.

2.3.4 Interest During Construction (IDC)

The interest during construction, which is on the cost of funding incurred on the project, has been calculated on the basis of an interest rate of 11% as per the present trends.

The total landed cost for the project at the end of the construction period has been estimated by adding the (capitalizing) interest during construction (IDC). The total landed cost at the time of commissioning is thus estimated and is given in Table 17. Computations of IDC are for 910 days construction period with 11% interest on debt.

Table 17 : Project Cost Summary of Concessionaire cost (Rs. Millions)

A Concessionaire Cost Cost (Rs. in Million.)

1 Total Civil Construction cost for 124.6 KM 6350.00

2 Contingencies/QC @ 3% Civil Cost 190.50

Total EPC Cost 6540.50

3 IC & Pre-operative expenses @1% of EPC 65.41

4 Financing Cost @ 2 % 112.25

5 Esclation @ 5% Per Annum 435.66

6 Interest During Construction 864.36

TOTAL PROJECT COST * 8018.18

Say 8018

TOTAL PROJECT COST Rs (million) / Km. * 64.35

2.3.5 Toll Rates

The Project investment would be recovered by imposing user levies on vehicles using the road. In general, the toll rate for the project should have a direct relation with the benefits that the road users would gain from its improvements. The benefits to road users are likely to be in terms of fuel savings, savings in travel time and Good riding quality.

Toll Rates for the project have been determined on the basis of user fees as prescribed by Central Government for Collection of Fees by any person for the use of National Highway/ Permanent Bridge/Temporary Bridges on National Highways (effective July 11 1997).


November 2008 xxiv

Table 18 : Old Toll Rates on Highway

Vehicle Types Toll Capping Rates (Rs/km)

1997 (NHAI Rates as per Circular)

2011 (Escalation of 1997 rates with 5% per annum)

2011 Toll Rates Rs./TRIP

Car 0.40 0.79 50

LCV 0.70 1.39 90

Bus, Trucks 1.40 2.77 175

MAT (> 2 Axles) 2.25 4.45 280

Table 19 : New Toll Rates on Highway

Vehicle Types Toll Capping Rates (Rs/km)

2007 (NHAI Rates as per New Circular)

2011 (Escalation of 2007 rates as per new Circular)

2011 Toll Rates Rs./TRIP

Car 0.65 0.743 47

LCV 1.05 1.20 76

Bus, Trucks 2.20 2.513 159

MAT (> 2 Axles) 3.45 3.941 249

2.3.6 Traffic Details

Traffic surveys for seven days volume count have been carried out in 5 locations and out of which two volume counts have been taken for the analysis by considering homogeneity of traffic and Toll Plaza Location s. The effective length for the toll plaza¬1 is from km 274.800 to km 341.600 in the state of Andhra Pradesh and Toll Plaza -2 is from km 0.000 to km 59.600 in the state of Tamilnadu. The details of the same are given in table 20 below.

Table 20 : AADT (Vehicles) for the base year (2005) and opening year (2011)

Toll Plaza-1 (@ km 320.200 count station)

Car M- Bus Bus LCV 2 AT M AT

Traffic Volume in the year 2005 1362 85 897 358 555 660

Traffic Volume in the year 2011 (Opening Year)

2009 124 1322 529 818 972

Toll Plaza-2 (@ km 57.000 count station) Car M- Bus Bus LCV 2 AT M AT

Traffic Volume in the year 2005 1438 255 305 490 709 708

Traffic Volume in the year 2011 (Opening Year)

2120 376 451 723 1044 1043


November 2008 xxv

2.3.7 Toll Revenue

The toll revenue is the product of the forecast traffic expected to use the road and the appropriate toll fee for the vehicle category. A toll indexing pattern @ 5% per year has been adopted and rounded off to nearest five rupee multiples. As per the New MCA the Toll calculations for Through, Local and Frequent vehicles are given below.

Through Traffic Toll = Number of Through Traffic X Toll Rate X 365 days

Local Traffic Toll

(Monthly Passes) = Number of Local Traffic X Toll Rate X 5 X 12 Months

Frequent Traffic Toll

(Daily Passes) = Number of Frequent Traffic X Toll Rate X 160% X 365 Days

A summary of Toll revenue has been given in table 21.

Table 21 : Toll Revenue (Rs. Millions)

Year

OLD Policy NEW Policy

AP Revenue

TN Revenue

Total Revenue (Millions)

AP Revenue TN Revenue

Total Revenue (Millions)

2011 265.07 243.10 508.17 238.87 217.19 456.06

2015 393.76 356.59 750.36 321.62 291.05 612.67

2020 637.65 581.47 1219.12 459.66 416.31 875.97

2025 1040.78 944.67 1985.45 651.65 590.43 1242.08

2030 1697.94 1547.48 3245.43 911.89 826.74 1738.64

2035 2760.79 2513.09 5273.88 1266.45 1149.22 2415.67

2037 3367.88 3058.23 6426.11 1443.61 1307.00 2750.61

2.3.8 Tax Calculation Module

According to the scheme under section 80-IA, 100% of the profit is deductible for the continuous period of ten years out of the concession period. However the benefit deduction is available only for ten consecutive assessment years falling within the concession period. The tax rate adopted for this study is 33.66% (30% tax + 10% surcharge + 2% education cess) following the deduction of depreciation and amortization. Minimum Alternate Tax (MAT) of 11.22% (10% tax + 10% surcharge + 2% education cess) has been taken into account for the total concession period.


November 2008 xxvi

2.3.9 Proposed Sources of Finance

In general, the developer shall crystallize the sources of finance by optimizing his equity returns keeping in view the project cash flows, terms, and conditions of various financing options available. Further the market standing and financial strength of the Developer would largely determine the terms and conditions of finance offered to the Developer by various lending agencies. For the purpose of the study, following sources of finance have been taken:

• Equity: To be provided by the Developer

• Subsidy / Grant for viability of funding, to be provided by the client.

• Debt: To be arranged by the Developer / Concessionaire.

2.3.10 Methodology

The procedure and steps undertaken to assess the financial viability of the captioned Project are outlined in this section. The first stage in evaluation of the financial viability is the identification of the revenue and expenditure streams. The revenue for the captioned Project will be generated primarily from toll income. Revenues from hoardings are not considered in the income stream.

2.3.11 Expenses

Expenses can broadly be classified based on the phases in which they are incurred, viz. construction period expenses and operation and maintenance period expenses.

• Construction Period Expenses

Preliminary and pre -operative expenses

Contingency allowance

Interest during construction period

• Operation and Maintenance Period Expenses

Toll collection expenses

Administrative expenses for day-to-day operation.

Maintenance expenses, which include routine and periodic maintenance.

Interest expenses incurred for servicing term loans. Client would extend toll collection rights to the developer. The developer then would have the option of either collecting the toll himself or further subcontracting the same to a toll collection agency. In the present study, it is assumed that the developer would undertake operation and maintenance himself. The details of the toll collection expenses are given in the Table 22.


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Table 22 : Toll Plaza Expenses per Annum (for collection of Toll)

S. No. Item Description Cost

1 Toll Collection Exp. 0.70 Cr./Annum/Tollplaza

2 Office Expenditure 2.00 Cr./Annum/Tollplaza

3 Elec. & Patrolling Exp. 0.01 Cr./km/Annum

2.3.12 Operation and Maintenance Cost

The maintenance costs both routine and periodic have been discussed in the Cost Estimate Chapter. Routine maintenance costs comprise of maintenance of the pavement, collection of litter, traffic management, repairs due to accident and all ancillary works including beautification.

The periodic maintenance costs include cost of overlay, repair/renovation of road furniture, drains, buildings etc. The periodic maintenance includes periodic renewals at every 5 years.

Routine maintenance/ Periodic maintenance costs have been considered as per the MORT&H guidelines- “Report of the Committee on Norms for Maintenance of Roads in INDIA”. The details of the maintenance costs and administration charges are given below in Table 23.

Table 23 : Routine and Periodic Maintenance

Sl. No Description Amount

(Rs. millions)

1 Routine maintenance in every year (cost per km for the four lanes with paved shoulder) (Rs millions / Km)

0.3

2 Periodic maintenance every fifth years (cost per km for the four lanes with paved shoulder) (Rs millions / Km)

4.0

2.3.13 Resources Mobilization

As the Project is proposed to be implemented on BOT basis, the developer shall mobilize resources equivalent to the construction expenditure, preliminary and pre operative expenses and escalation, phasing it appropriately to synchronize loan drawls with resource requirements. In the present study, the project is envisaged to be funded through equity and debt components only. If the Project revenues are not enough to sustain the capital expenditure, option such as capital grant / subsidy shall be explored.

2.3.14 Resource Mobilization Schedule

In general, the duration of construction for similar size road projects ranges between 1.5-2.0 years. Since the proposed Project is to be implemented on a BOT format, the developer has an incentive in early completion of the project in order to expedite toll collection. Hence, the Project implementation period has been taken as 910 days. Based on the implementation period, the project cost has been phased as under:


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Table 24 : Project Cost Phasing

Description Starting Year Second year Third year

Progress of Work and Cost Phasing 25% 40% 35%

2.3.15 Minimum Return Criteria

The minimum return criteria for the B.O.T project is considered as follows: Return on Equity (EFIRR): Considering a safe investment in bank in the form of a term deposit, an interest rate of 10% is generally a return with safety. However, when investing in the road sector, a perspective investor would normally need to cover the business risks(e.g. the decreasing revenue, increasing cost, construction time overrun, etc.) and therefore would require a return higher than a return on the safe investment as mentioned above. Based on usual trends, it is estimated that an additional return of 5% would be adequate to cover these risks. Hence, a minimum return on equity of 15% could be considered satisfying the requirement of prospective concessionaire. The return on project investment (PFIRR): In the light of the facts as stated above Project FIRR of 12% is considered to be a satisfactory criteria. The minimum average DSCR is taken as 1.5 to 2.5.

Considerations for Calculating the Project FIRR

• Investment = Net Project Cost

= Total Project Cost– Equity Support (Grant During Construction)

• Operating Income = Toll Revenue O&M Support

• Operating Expenses =Toll Plaza Maintenance

(O&M Expenses) Annual Maintenance of Road Periodic Maintenance of Road concession Fee Tax on Net Profit as per Income Tax Act

Considerations for Calculating the Equity FIRR

• Investment = Equity Contribution on Net Project Cost (30% of the Net Project Cost by the Concessionaire)

• Operating Income = Toll Revenue

O&M Support (Grant During Operation)

• Operating Expenses =Toll Plaza Maintenance Annual Maintenance of Road Periodic Maintenance of Road Concession Fee Tax on Net Profit as per Income Tax Act Interest on Debt/Loan (Diminishing Interest) Debt/Loan Repayment

Debt Service Coverage Ratio (DSCR)

DSCR = Net Operating Income after Tax / (Interest on Loan + Repayment of Loan)

Net Operating Income = Total Revenue – O&M Expenses - Tax

Net Operating Income Period equal to Loan Repayment Period


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2.3.16 Financial Viability

The main objective of undertaking this study is to assess whether the project is financially viable or not. It is important to note that the proposal should be an attractive proposition for private sector participation under Build, Operate and Transfer (BOT) system. The basic methodology followed for estimating the financial viability of the project is to calculate the FIRR (Financial Internal Rate of Return) on the investment for the project.

Following assumptions are taken into consideration for the financial analysis:

• Debt – Equity ratio :-70:30

• Subsidy – 40%

• Concession period (Including 910 days construction period) – 30 years.

• Escalation – 5%

• Interest on Debt – 11%

• Project Phasing : First year – 25%, Second year – 40% and third year – 35%

• Loan Repayment period – 14 years

• Tax rebate – 10 years (100% exemption for 10 years out of block of 20 years).

• Depreciation by Straight line method -100% for Concession Period

• Depreciation by Written down value method – 10%

• Financing cost -2% of project cost

• Toll Escalation is 5 %

2.3.17 Results and Analysis

Based on the project structure traffic study and toll rate analysis, financial feasibility analysis has been carried out as per the methodology outlined in earlier sections. The objective of the financial analysis is to ascertain the existence of sustainable project returns, which shall successfully meet the expectations of its financial investors. The analysis reveals various FIRR values corresponding to each year of toll operation. FIRR for the Returns on Investment and Returns on Equity for the concession period of 30 years has been examined. The results are given below in Table 25.

Table 25 : FIRR Results

Concession Period (Including Construction Period)

Grant Equity FIRR (%) Project FIRR

(%) NPV

(Millions)

Old Toll Policy 30 Years (3+27) 40% 15.00 13.25 816.68

New Toll Policy 30 Years (3+27) 40% 6.97 8.21 -1822.64


November 2008 xxx

2.3.18 Conclusions

The analysis was carried out for a grant of 40% and a concession period of 30 years with old toll policy and new toll policy.

The Package is viable by getting Equity FIRR of 15.00% and Project FIRR of 13.25 % for a Concession period of 30 years and a Grant of 40% with old toll policy.