Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 53308-IN

PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING (LOAN)

IN THE AMOUNT OF US$ 50.7 MILLION

TO THE

REPUBLIC OF INDIA

FOR THE

TAMIL NADU ROAD SECTOR PROJECT

March 4, 2010

Sustainable Development Department

India Country Management Unit

South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their

official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2009)

Currency Unit = Indian Rupees (Rs)

Rs 46.5362 = US$ 1.0

US$ 1.0 = US$ 0.021489

FISCAL YEAR

April 1 – March 31

ABBREVIATIONS AND ACRONYMS

AG Accountant General

BOT Built Operate and Transfer

CAS Country Assistance Strategy

CQS Selection based on Consultants Qualification

DC Direct Contracting

EIRR Economic Internal Rate of Return

EMP Environmental Management Plan

FBS Fixed Budget Selection

FIRR Financial Internal Rate of Return

FMR Financial Management Report

FY Financial Year

GL Guidelines

HDM-4 Highway Development & Management Model-4

IBRD International Bank for Reconstruction & Development

ICB International Competitive Bidding

LIB Limited International Bidding

M&E Monitoring & Evaluation

NCB National Competitive Bidding

NGO Non-Government Organization

NPV Net Present Value

PDO Project Development Objective

PMU Project Management Unit

PPP Public Private Partnership

QBS Quality Based Selection

QCBS Quality & Cost Based Selection

QPR Quarterly Progress Report

RAP Resettlement Action Plan

SOE Statement of Expenditure

SSS Single Source Selection

TNRSP Tamil Nadu Road Sector Project

VOC Vehicle Operating Costs

Vice President : Isabel M. Guerrero

Country Director : N. Roberto Zagha

Sector Director : John Henry Stein

Sector Manager : Michel Audigé

Task Leader : Pratap Tvgssshrk

TABLE OF CONTENTS

Page

PROJECT PAPER DATA SHEET ............................................................................................ (i)

A. INTRODUCTION............................................................................................................. 1

B. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE

AMOUNT OF US$ 50.7 MILLION 1

C. PROPOSED CHANGES .................................................................................................. 3

D. CONSISTENCY WITH CAS .......................................................................................... 7

E. ECONOMIC ANALYSIS OF COST OVERRUN ......................................................... 7

F. EXPECTED OUTCOMES .............................................................................................. 7

G. BENEFITS AND RISKS .................................................................................................. 7

H. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL

FINANCING ..................................................................................................................... 8

ANNEX 1: REVISED ESTIMATED PROJECT COSTS

ANNEX 2: DISBURSEMENT SCHEDULE

ANNEX 3: ANALYSIS OF REASONS FOR COST OVERRUN

ANNEX 4: SCHEDULE FOR COMPLETION OF ACTIVITIES

ANNEX 5: SUMMARY OF THE REVISED ECONOMIC ANALYSIS

ANNEX 6: GOVERNANCE & ACCOUNTABILITY ACTION PLAN

ANNEX 7: CATEGORY-WISE ALLOCATION OF LOAN

i

PROJECT PAPER DATA SHEET

Date: March 4, 2010

Country: India

Project Name: Tamil Nadu Road Sector Project

– Additional Financing

Project ID: P118981

Team Leader: Pratap Tvgssshrk

Sector Director/Manager: John Henry Stein/

Michel Audigé

Country Director: N. Roberto Zagha

Environmental Category: A

Borrower: India

Responsible agency: Government of Tamil Nadu

Revised estimated disbursements (Bank FY/US$ m)

FY 2004 2005 2006 2007 2008 2009 2010 2011 2012

Annual 7.29 36.81 46.79 61.19 97.50 113.10 107.72 23.00 13.70

Cumulative 7.29 44.1 90.89 152.08 249.58 362.68 470.40 493.40 507.10

Current closing date: March 31, 2010

Does the restructured or scaled-up project require any exceptions from Bank

policies?

Have these been approved by Bank management? Not applicable

Is approval for any policy exception sought from the Board?

○ Yes No

○ Yes No

○ Yes No

Revised project development objectives/outcomes: [Not applicable]

Does the scaled-up or restructured project trigger any new safeguard policies? No

For Additional Financing

[X] Loan [ ] Credit [] Grant

For Loans/Credits/Grants:

Total Bank financing (US$ m): 50.7

Proposed terms: IBRD Flexible Loan with variable spread and final maturity of 25 years

including a grace period of 5 years

Financing Plan (US$ m)

Source Local Foreign Total

Borrower

IBRD

Total

6.40

40.15

46.55

0

10.55

10.55

6.40

50.70

57.10

1

A. INTRODUCTION

1. This Project Paper seeks the approval of the Executive Directors to provide an additional loan in

an amount of US$ 50.7 million to Tamil Nadu Road Sector Project, India (Project ID: P050649, Loan

Number: 4706-IN). The proposed additional loan would help finance the costs associated with cost

overrun as discussed in paragraph 6 below. There would be no changes to the original design and ongoing

activities of the Project.

B. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE

AMOUNT OF US$ 50.7 MILLION

Project Data and Performance

2. Tamil Nadu Road Sector Project was declared effective on October 31, 2003, with a loan amount

of US$ 348 million. Key project data and performance are summarized below:

Key Project Data Project Performance

Loan Amount: US$ 348 million Development Objectives: Satisfactory

Effectiveness date: October 31, 2003 Implementation Progress: Satisfactory

Closing date: March 31, 2010 Environmental Safeguards: Satisfactory

Project Age: 73 months Social Safeguards: Satisfactory

Loan Disbursed: US$ 314.73 million (90.44%) Risk Flags: None

3. The Project Development Objective (PDO) is to improve the quality and sustainability of the core

road network of Tamil Nadu. This objective is to be achieved through implementation of the following

three project components:

a) Road Upgrading Component consisting of widening and strengthening of about 750 km of

existing state highways to two lane roads

b) Road Maintenance and Safety Works Component consisting of periodic maintenance works

covering about 2000 km of state roads

c) Institutional Strengthening and Policy Development Component consisting of implementation

of Institutional Strengthening Action Plan, strengthening of road maintenance planning and

implementation, road safety, training, equipment, and pre-investment studies

4. The Project impact is monitored through improvements in key performance indicators relating to:

(a) rate of accident fatalities; (b) road network condition; (c) annual maintenance expenditures; and (d)

implementation of institutional strengthening action plan. Achievement of the PDO is satisfactory based

on the performance indicators agreed at appraisal. Three indicators out of six have exceeded the end-of-

project targets. These indicators are (a) reduction in road accident fatalities, (b) adequacy of resources

allocated to road maintenance, and (c) reduction of travel time. Implementation of the institutional

strengthening action plan, the fourth indicator, has been moderately satisfactory. The fifth indicator,

percentage of core road network in poor condition, has not yet met the end-of-project target. The sixth

indicator (i.e. actual economic rate of return of civil works financed under the project) will be calculated

at the end of the project.

The project implementation is satisfactory. The implementation progress by component is:

2

a) Road upgrading: The overall progress of works in five contracts which are under implementation is

about 89%. For one contract [i.e construction of Tsunami Bridge], procurement of works has been

completed. For the remaining one contract [i.e 4 km-long Kumbakonam Bypass], bids are expected to be

invited shortly.

b) Road maintenance and safety works: 849 km of roads have been improved. Works on 117 km of roads

are in progress. For improvement of about 300 km of roads on performance-based maintenance contracts,

bidding documents are being prepared. For another 113 km of roads, which have been studied for

development on PPP basis but were found to be unviable for toll-based BOT operations due to low FIRR

values, bidding documents are being prepared for maintenance.

c) Institutional Strengthening and Policy Development: Activities have focused on the institutional

framework of the Highways Department and on capacity building. Activities in the component are now

concentrating on providing tools to strengthen the operational capacity of the Highways Department.

These include Road Management System (RMS), Integrated Human Resource, Project and Financial

Management System (P&FMS), Geographic Information System (GIS), Road Accident Data

Management System (RADMS).

5. All legal covenants are in compliance.

Causes of the Cost Overrun

6. The project has experienced significant cost overrun. The cost overrun is primarily due to (a)

increased costs of the upgrading works due to increase in the prices of construction materials and delays

in execution of contracts, (b) appreciation of Indian Rupee vis-a-vis the US Dollar, and (c) addition of a

Tsunami affected bridge for which amendment to the Loan Agreement was carried out. Detailed analysis

of the reasons for cost overrun is presented in Annexure 3. The table below presents the breakdown of the

increase in costs.

(in million US $)

Item Amount of increase % of total increase

Upgrading works 41.5 73

Savings/overrun in all other items (-) 8.4 (-) 14.8

Exchange rate fluctuation 23.8 41.8

Total 56.9 100

a) Due to unprecedented hike in international oil prices, the prices of oil-based materials have

escalated. The prices of other road construction materials have also skyrocketed due to higher

transportation charges. Delays in execution of contracts and vast number of road works being undertaken

in the country also contributed to the increase in prices of key input materials. These have resulted into

requirement of more than expected „price contingencies/escalation‟. The bids for three civil works

contracts were received in October 2003 and agreements signed in October 2004/February 2005. This has

also resulted in escalation of cost of these contracts even though the bid prices do not vary with respect to

the base costs estimated at the time appraisal.

b) The other primary reason for cost overrun is appreciation of Indian Rupee. At the time of

appraisal of project, the exchange rate was 1 US$ = Rs. 48. During the course of the project, Indian Rupee

has appreciated to the level of about 1 US$ = Rs. 39. About US $ 23.8 million have already been spent

because of appreciation of Indian Rupee.

c) The Loan Agreement was amended in May 2005 to support the reconstruction and rehabilitation

of all roads and structures damaged and affected by the 26 December 2004 Tsunami that struck the coast

3

of Tamil Nadu. A bridge affected by the Tsunami is added to the scope of work for which procurement is

in process. Estimated Bank financing required for this bridge is about US $ 3.73 million.

Rationale for Additional Financing

7. The causes of the cost overrun were mostly outside the control of the Government of Tamil Nadu.

The additional loan will allow for completion of the works and services in the project. Without additional

finance, the PDO would not be achieved and the indicators related to reduction in core road network in

poor condition and implementation of institutional strengthening action plan would be compromised.

C. PROPOSED CHANGES

8. There are no changes in the PDO, design, and scope. There are no complimentary changes

applicable to the financial management and disbursement arrangements. The changes applicable to the

institutional arrangement and implementation mechanism are presented in paragraphs 13 and 20. Two of

the upgrading contracts (i.e. Tsunami Bridge and Kumbakonam Bypass) and periodic maintenance works,

which are presently at the stage of procurement, cannot be completed within the Loan Closing Date. To

complete these works in the project, extension to the Loan Closing Date by two years i.e. up to 31 March

2012 would be necessary. This would also allow for implementation of a Highways Department wide

Integrated Human Resource, Project and Financial Management System (P&FMS) and Geographic

Information System (GIS) which are presently at the stage of procurement. Revised estimated project

costs and disbursement schedule are presented in Annexes 1 and 2.

9. Financing Plan

Revised financing plan (in US $ million)

Source Parent Project Additional financing Total

IBRD 348 50.7 398.7

Government of India /

Borrower 102 6.4 108.4

Total 450 57.1 507.1

The revised category-wise loan allocation is presented at Annexure 7.

10. Implementation Schedule - To complete all the works and services in the project, extension to

the Loan Closing Date by two years i.e. up to 31 March 2012 would be necessary. The expected schedule

for completion of works/activities is presented at Annexure 4.

11. Disbursement Arrangements - Disbursements under the project will follow the SOE method

which is well established (reimbursement with full documentation and against SOE). Expenditures on

Land Acquisition, utility shifting and operating costs will be continued to be financed by the project from

Government of Tamil Nadu‟s own funds and will not be reimbursed by the Bank.

12. Financial Management – There are no changes in the implementation arrangements and the

consequently the accounting & reporting units remain unchanged and the existing project‟s financial

management arrangements, which are considered adequate, will account for and report on the additional

financing also. The existing financial management for the project is fully mainstreamed and uses country

systems for budget and accounting (Accountant General‟s accounting systems). For the purpose of

FMR/QPR a separate (excel based) system has been established at the PMU which helps generate

contract/package and activity-wise financial progress and the aggregate expenditure information in the

two systems (AG and excel) is reconciled on a monthly basis. The finance staff is also from the state

4

finance and accounts service in the PMU and divisional accountants in the 6 divisions. The project has

submitted the audit report for the year 2008-09 in a timely manner and there are no significant

accountability issues or ineligible expenditures identified in the external audit report. There is an in-house

internal audit wing in the PMU which carries out a 100% check of all expenditures on the up-gradation

component and audit of a sample of maintenance works is carried out by the internal audit wing of

Highways dept. There were issues relating to payments of variations orders beyond 15% and equipment

advance against hypothecated assets which were identified by internal audit – these have since been

satisfactorily resolved by the project management and there are no major unaddressed issues identified in

internal audit. The project also has a practice of obtaining independent confirmation (from the Bank) of

the Bank guarantees furnished by the contractors to confirm authenticity. The external audit for the

additional financing will also be carried out by Comptroller and Auditor General, who is the auditor for

the existing project also, as per the existing terms of reference. There would be one consolidated audit

report for both the existing project and the additional financing with a segregation of the claims under the

original and additional financing. The following audit reports will be monitored in the Audit Reports

Compliance System (ARCS):

Implementing Agency Audit

Auditors Audit Due Date

GOTN Highways Dept PMU Project financial

statements with SOE

CAG 6 months after the end of each

fiscal year (March 31st)

DEA/GOI Designated account CAG 6 months after the end of each

fiscal year (March 31st)

13. Procurement – Even though the additional financing is needed mostly to meet the cost overrun,

about 30 contracts (Works, Goods and Services) will be issued during the period of additional financing

(April 1, 2010 to March 31, 2012). Procurement of the activities financed by this additional loan will be

as per the World Bank Procurement/Consultant Guidelines of May 2004, revised October 2006. The

PMU is well equipped to handle the procurement proposed under the project and most of the officials

involved in procurement have undergone the training in Bank funded procurement. The Highways

Department has earlier handled many Bank-financed projects and is fully aware of the Bank procurement

procedures. Despite this, the delays in decision-making process are a major cause of concern. Based on

these factors, it is considered as “Medium-Risk” implementing agency. Though some other projects in

Tamil Nadu have experienced lack of competition in the bidding process for Civil Works, TNRSP has not

faced this problem in the past probably because of nature of the Works (viz. roads) and also size of the

contracts (relatively larger). Moreover, most of the civil works contracts are already awarded.

a) Procurement Methods: The details are given in the following table:

Category Method of

Procurement

Threshold (US$ Equivalent) for

parent loan

Proposed threshold (US$ Equivalent)

for additional loan

Civil Works

ICB >10,000,000 >10,000,000

NCB Up to 10,000,000 Up to 10,000,000

Shopping Up to 50,000 Up to 50,000

DC Not applicable As per para 3.6 of Guidelines

BOT Contract As per para 3.13(a) of GL As per para 3.13(a) of GL

Force Account As per para 3.8 of GL As per para 3.8 of GL

Goods and

Non-consultant

services

ICB >200,000 >1,000,000

LIB Not applicable As per para 3.2 of GL

NCB Up to 200,000 Up to 1,000,000

Shopping Up to 30,000 Up to 30,000

5

Category Method of

Procurement

Threshold (US$ Equivalent) for

parent loan

Proposed threshold (US$ Equivalent)

for additional loan

DC As per para 3.7 of GL As per para 3.6 of GL

Consultants‟

Services

CQS/LCS Not applicable Up to 100,000, as per para 3.6-3.7

SSS As per para 3.8-3.11 of GL As per para 3.9-3.12 of GL

Individuals As per para 5.1-5.4 of GL As per para 5.2 to 5.4 of GL

FBS As per para 3.1 and 3.5 of GL As per para 3.1 and 3.5 of GL

QBS Not applicable As per para 3.1 and 3.2 of GL

QCBS For remaining cases For remaining cases

Shortlist

Shortlist may comprise national

consultants only <200,000

Shortlist may comprise national

consultants only <500,000

b) Bank‟s Review: The frequency of supervision missions will be one every 6 months and the

Designated Procurement Specialist (DPS) will be part of the implementation supervision missions. The

Bank will prior review all the Works contracts above US$ 5 Million in value (against US$ 3 Million for

parent loan), Goods as well as non-consultancy services contracts above US$ 1 Million in value (against

US$ 500,000 for parent loan), and Consultancy services contracts above US$ 200,000 for firms (no

change) and US$ 50,000 for individuals (no change). In addition, all consultancy contracts to be issued on

single-source basis exceeding US$ 50,000 in value to consultancy firms shall be subject to prior review.

In case of single source contract to individuals, the qualifications, experience, terms of reference and

terms of employment shall be subject to prior review. All contracts below the prior review threshold will

be subject to periodic post review on a sample basis.

c) Procurement Risk: The following table lists major procurement related risks and the mitigation

plan. The risk ratings have been decided based on both the probability of occurrence of various risk

factors as well as their likely impact. Based on the risk factors, the overall residual procurement risk

rating for the project is proposed as “Substantial”.

Risk Factor Initial

Risk

Mitigation Measure Completion

Date

Residual Risk

F&C risk

(including

collusion and

outside

interference) in

contracting process

High • Measures to improve competition such as

appropriate packaging, realistic post

qualification criteria, market-linked cost

estimate etc.

• Increased disclosure, improvement in

complaint handling, documentation, etc.

• Monitoring of indicators of F&C in the

procurement process and initiate appropriate

action if such indicators are noticed

Ongoing

Ongoing

Ongoing

Substantial

Inefficiencies and

delays in

procurement

process

High • Cutting down the internal delays in decision

making by closer scrutiny of the procurement

progress

• Using e-mail for communication with the

Bank and forwarding complete information to

the Bank in one go

Ongoing

Ongoing

Substantial

Overall Risk High Substantial

6

d) Other Procurement Provisions: All other procurement provisions applicable to parent loan will

also be applicable to additional loan.

14. Environmental Safeguards – The environmental safeguard policies developed for the parent

project will also apply to the additional loan. The environmental issues in the project included

unavoidable tree cutting, road upgrading and widening adjacent to eco-sensitive coastal zone, unavoidable

removal and shifting of community assets from the corridor of impact and temporary construction related

impacts. These impacts have been, by and large, addressed through effective management as detailed in

the Environmental Management Plan (EMP) and Environment and Resettlement Management Plan

(ERMP). The key features of EMP include sound environmental management of temporary impacts

during construction phase; extensive tree plantation efforts jointly organized with Tamil Nadu Forest

Department; compliance with Ministry of Environment and Forests (MOEF) regulatory clearance

conditions stipulated for the road packages adjacent to sensitive coastal zone; and environmental

enhancements for cultural and community assets, and incidental spaces along the project corridors.

Integration of environmental enhancement measures along the project corridors, in addition to project

EMPs, has paid good results and built community goodwill. The progress of these measures in all the

upgrading roads except TNRSP - 01 is about 90%, and in TNRSP - 01, the progress is about 55%. The

specific value addition includes restoration/protection of 108 roadside ponds, enhancement of 155 cultural

/ community properties and improvement of about 70 incidental spaces contributing to road safety,

common space for community use, and better landscaping. The successful implementation of

enhancement measures highlights the need for enhancing the community assets along the project corridor

through EMPs. As part of the project, the Highways Department will commission a specific study to

document good practices and lessons learnt in implementing the project EMPs. EMP implementation

progress is in line with construction progress and implementation is satisfactory. However, the EMP

implementation progress of about 55% in TNRSP 01 is slow compared to that of other contract packages

of the project. The Highways Department will continue to critically monitor the progress of EMPs. For

implementation of EMPs, the current structure of Environmental Management Unit with one

Environmental Engineer and one Forest officer will continue. The consolidated Environmental

Assessment Report has been published on November 12, 2009.

15. Social Safeguards – The magnitude of private land acquisition and resettlement impacts in the

project is one of the largest for the State Highway projects of this nature (432 hectares, 11,155 land

owners and 1085 displaced families). The implementation of Resettlement Action Plan for mitigation of

these impacts has been largely completed (about 97%). The land acquisition and resettlement impacts in

the two upgrading contracts, which are currently in procurement stage, are very limited and award of

these contracts is linked to the satisfactory completion of pre-identified actions in the implementation of

RAP. The overall land acquisition and resettlement implementation is proceeding satisfactorily except

that there is one unresolved issue. This issue relates to pending payments to NGOs and M&E consultants

where some of the payments have been disallowed by the Highways Department. The Highways

Department held a meeting with NGOs/M&E consultants on this issue during the recent Bank mission in

November, 2009 wherein the Highways Department has clarified that it will provide a statement on the

status of payments and disallowances, and any outstanding eligible payments will be released

immediately. The Highways Department, accordingly, have prepared a statement on payments made and

outstanding and shared that with consultants on 6 January 2010. As per the statement prepared by the

Highways Department, there are no outstanding eligible payments. As regards disallowances, the

Highways Department clarified that they are not in a position to revisit and the NGOs and M&E

consultants can resort to the remedial measures as available in the contract.

7

D. CONSISTENCY WITH CAS

16. The project is consistent with the November 2008 CAS (for the period FY 2009 – 2012) which is

organized around three pillars: rapid and inclusive growth, sustainable development, and service delivery,

with a cross-cutting focus on improving the effectiveness of public spending and achieving results. The

project will help in removing infrastructure and skills constraints to growth in both urban and rural areas.

E. ECONOMIC ANALYSIS OF COST OVERRUN

17. Revised economic analysis has been carried out for the upgrading roads because in these works

there are cost overruns. At the time of appraisal of the parent project, economic analysis was carried out

for 743 km of upgrading roads and the overall EIRR for these roads was 30.2% with an NPV, discounted

at 12%, of Rs 26,233 million. For carrying out revised economic analysis, four homogenous/typical

stretches in TNRSP 01 and two each in all the other roads have been considered. Revised economic

analysis has been carried out using the Highway Development and Management Model (HDM-4). The

analysis is done considering a period of 25 years including construction period. Vehicle Operating Costs

(VOC) and value of time have been considered in the analysis. Updated vehicle parameters and unit costs

have been used in the analysis. In all sections, the NPV discounted at 12% is positive confirming the

economic justification of the project even though the cost of civil works increased significantly. The

EIRR for all the sections is between 15.6% and 49.6%. Some of the sections have higher EIRR than at

appraisal. The sections in TNRSP 02 stretch have higher EIRR than all other stretches due to higher

traffic volumes and relatively less increase in construction costs. Comparatively low EIRRs of sections in

TNRSP 03 and TNRSP 04 are due to the combination of high increase in construction costs and lower

traffic volumes. The results of the sensitivity analysis considering 20 percent decrease in benefits show

the economic justification of the project even though the benefits are decreased significantly. The EIRR

for all the sections in such situation also is more than 12%. Annexure 5 presents details of analysis carried

out.

F. EXPECTED OUTCOMES

18. The expected outcome is to improve the quality and sustainability of the core road network of

Tamil Nadu. The outcome is on track and the additional loan will help ensure that it is ultimately

achieved.

G. BENEFITS AND RISKS

19. The project is aimed at improving the quality and sustainability of the core road network of Tamil

Nadu. With successful implementation of road upgrading, and road maintenance and safety works

components, the quality of the core road network would be improved. Implementation of the Integrated

Human Resource, Project and Financial Management System (P&FMS) and Geographic Information

System (GIS), which are presently at the stage of procurement and operationalization of Road

Management System and Road Accident Data Base Management System, would enhance the

management capabilities of the Highways Department. Functional re-organization of the Highways

Department, which has been finalized and awaiting approval of the Government of Tamil Nadu, will also

be completed.

20. There are no additional risks associated with this additional Loan. However, a Governance and

Accountability Action Plan [enclosed at Annexure 6], which will be applicable to the activities financed

by this additional loan, has been prepared by the Highways Department together with the Bank and its

implementation will be reviewed during project implementation support missions.

8

H. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL LOAN

21. The additional financing loan would IBRD Flexible Loan with variable spread and final maturity

of 25 years including a grace period of 5 years. The Front End Fee for the additional financing would be

0.25%. The additional financing will be processed as an amendment of the original Loan Agreement

under the original General Conditions rather than as a new Loan. This is in compliance with the

understanding between Legal and OPCIL that if an additional financing involves no new activities but

just cost overruns, a simple amendment would be acceptable.

22. There are no effectiveness conditions.

9

Annex 1

REVISED ESTIMATED PROJECT COSTS

Project Cost By Component Local Foreign Total

US$ million US$ million US$ million

1. Road Upgrading Component 255.95 99.54 355.49

2. Road Maintenance and Safety Works Component 94.75 10.53 105.28

3. Institutional Strengthening and Policy Development 13.03 5.85 18.88

Project Costs 363.73 115.92 479.65

Exchange rate fluctuation* 23.80 - 23.80

Total Project Costs 387.53 115.92 503.45

Front-end Fee - 3.61 3.61

Total Financing Required 387.53 119.53 507.06

Project Cost By Category Local Foreign Total

US$ million US$ million US$ million

1. Goods 3.48 1.06 4.54

2. Works 327.71 102.51 430.22

3. Services 32.54 12.35 44.89

Project Costs 363.73 115.92 479.65

Exchange rate fluctuation* 23.80 - 23.80

Total Project Costs 387.53 115.92 503.45

Front-end Fee - 3.61 3.61

Total Financing Required 387.53 119.53 507.06

Note: * Effect of exchange rate fluctuation is shown separately. This amount is consumed in road upgrading component and road

maintenance and safety works component against works.

10

Annex 2

DISBURSEMENT SCHEDULE

Years Ending June 30

US$ Million 2004

(actual)

2005

(actual)

2006

(actual)

2007

(actual)

2008

(actual)

2009

(actual)

2010 2011 2012 Total

Parent Project

Total Financing

Required

Project Cost

Investment cost 3.11 36.11 46.09 60.49 96.80 112.4 87.32 442.32

Recurrent Cost 0.7 0.7 0.7 0.7 0.7 0.7 0.0 4.20

Total Project

Cost

Front-end fee 3.48 0.00 0.00 0.00 0.00 0.00 0.00 3.48

Total Financing 7.29 36.81 46.79 61.19 97.50 113.10 87.32 450.00

Financing

IBRD 4.99 26.61 37.89 42.09 77.00 88.70 70.72 348.00

Government 2.30 10.20 8.90 19.10 20.50 24.40 16.60 102.00

Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Project

Financing

7.29 36.81 46.79 61.19 97.50 113.10 87.32 450.00

Additional

Financing

Total Financing

Required

Project Cost

Investment cost 20.27 23.00 13.70 56.97

Recurrent Cost 0.00 0.00 0.00 0.00

Total Project

cost

20.27 23.00 13.70 56.97

Front-end fee 0.13 0.00 0.00 0.13

Total Financing 20.40 23.00 13.70 57.10

Financing

IBRD 18.00 20.00 12.70 50.7

Government 2.40 3.00 1.00 6.40

Others 0.00 0.00 0.00 0.00

Total Project

Financing

20.40 23.00 13.70 57.10

11

Annex 3

ANALYSIS OF REASONS FOR COST OVERRUN

1. Due to unprecedented hike in international oil prices, the prices of oil-based materials have

escalated. The prices of other road construction materials have also skyrocketed due to higher

transportation charges. Delays in execution of contracts and vast number of road works being undertaken

in the country also contributed to the increase in prices of key input materials. These have resulted into

requirement of more than expected „price contingencies/escalation‟. Some of the price increases during

the course of the project are as follows:

234% increase in the cost of bitumen from Rs. 10660 per MT to Rs. 35670 per MT

193% increase in the cost of steel from Rs. 19500 per MT to Rs. 57200 per MT

Material Unit Current

Price

(in Rs.)

Price in

Base year

[Sep 2003]

(in Rs.)

Percentage

increase of

current price

over base

price

Maximum during

the construction

Percentage

increase over

base price Price

(in Rs.)

Period

Bitumen MT 22777 10660 113.67 35670 Dec-08 234.62

Bitumen

Emulsion MT 26542 11636 128.10 26542 Jun-09 128.10

Cement MT 4400 2660 65.41 5200 Feb-08 95.49

Steel MT 32000 19500 64.10 57200 Jul-08 193.33

Diesel Liter 34.40 22.66 51.81 35.51 Oct-06 56.71

2. The bids for three civil works contracts were received in October 2003 and agreements signed in

October 2004/February 2005 as shown in the table below. This has also resulted in escalation of cost of

these contracts even though the bid prices do not vary with respect to the base costs estimated at the time

of appraisal.

Contract Bids invited on Bids opened on Agreement signed on

TNRSP 01 7-Jul-03 15-Oct-03 8-Oct-04

TNRSP 02 16-Jul-03 14-Oct-03 4-Feb-05

TNRSP 03 16-Jul-03 14-Oct-03 4-Feb-05

TNRSP 04 16-Jul-03 14-Oct-03

TNRSP 04 - Second

invitation 17-Feb-05 12-May-05 13-Nov-05

3. There are variations in the upgrading civil works contracts. The primary reasons for the variations

are (a) huge time difference between the preparation of Detailed Project Report in year 1999 to start of

construction of works in year 2005, (b) damages done to the existing pavements because of the Tsunami

that struck the coast of Tamil Nadu on 26 December 2004, and (c) deficiencies in the bills of quantities.

However, some of the contracts have positive and others have negative cumulative variations. Therefore,

as a whole, there is no contribution of variations to the cost overrun. The cost overrun in upgrading

contracts is about US $ 41.5 million. The details are shown in the table below:

12

(in million US

$)

Contract

/ Item Category

At appraisal stage As of now for completion of works

Base

cost

Physical contingen

cies

Price contingen

cies

Total

cost

Bank

Share

Original contract

price

Variati

ons Escalation

Total

cost

Bank Share

required

TNRSP

01 1 (a) 138.54 10.39 11.17 160.10 128.08 127.44 -20.83 31.17 137.77 110.22

TNRSP

02 1 (a) 42.71 3.20 3.44 49.35 39.48 41.41 12.06 15.38 68.85 55.08

TNRSP

03 1 (a) 25.83 1.94 2.08 29.85 23.88 29.88 11.43 11.46 52.77 42.22

TNRSP

04 1 (a) 23.96 1.80 1.93 27.69 22.15 24.85 7.70 9.38 41.92 33.54

TNRSP

05 – 1 1 (a)

9.27 0.70 0.75 10.72 8.58

7.35 0.00 0.65 8.01 6.41

TNRSP

05 – 2 1 (a) 4.70 0.00 0.50 5.20 4.16

Tsunami

Bridge 1 (a)

4.17 0.00 0.50 4.67 3.73

Total

240.31 18.03 19.37 277.71 222.17 239.80 10.36 69.03 319.19 255.35

Difference with respect to the estimates at the stage of appraisal -0.51 -7.67 49.66 41.48 33.18

4. As can be seen from the above, the primary factor contributing to the increase in total cost is the

escalation due to increase in prices of input materials. In escalation/price contingencies, the contribution

of cement, steel, bitumen, oil and lubricants, and other materials including aggregates are 8.5%, 4.2%,

32.3%, 12.9% and 42.1% respectively.

5. The Loan Agreement was amended in May 2005 to support the reconstruction and rehabilitation

of all roads and structures damaged and affected by the 26 December 2004 Tsunami that struck the coast

of Tamil Nadu. A bridge affected by the Tsunami is added to the scope of work for which procurement is

in process. Estimated Bank financing required for this bridge is about US $ 3.73 million, which is

included in the above calculations.

6. The other primary reason for cost overrun is appreciation of Indian Rupee. At the time of

appraisal of project, the exchange rate was 1 US$ = Rs. 48. During the course of the project, Indian Rupee

has appreciated to the level of about 1 US$ = Rs. 39. The average exchange rate of Indian Rupee versus

US $ in different months during the project duration is as under:

13

About US $ 23.8 million have already been spent because of appreciation of Indian Rupee. The

details of expenditure made up to 31 July 2009 in various currencies and corresponding disbursements are

presented below.

Bank financed eligible expenditure made Disbursed in $

(excluding Special

Account) in various currencies in equivalent INR (approx. at Rs 48, 40, 80 per $, AUS

$, and #)

$ 6,022,357 289,073,119 6,022,357

AUS $ 85,588 3,423,535 648,731

# 266,708 21,336,608 482,165

INR 12,152,797,000 12,152,797,000 276,349,665

Total 12,466,630,262 283,502,917

14

Annex 4

SCHEDULE FOR COMPLETION OF ACTIVITIES

Activity/Contract Ongoing / to be

procured

Expected date of

completion

TNRSP 01 upgrading works contract Ongoing March 2010

TNRSP 02 upgrading works contract (except Vettar Bridge and

Bridge No.s 31 and 32)

Vettar Bridge

Bridge No.s 31 and 32

Ongoing

Ongoing

Ongoing

March 2010

June 2010

December 2010

TNRSP 03 upgrading works contract Ongoing Substantially

Completed

TNRSP 04 upgrading works contract Ongoing March 2010

TNRSP 05 upgrading works contract – Ramanad bypass Ongoing July 2010

Third and fourth year maintenance works Ongoing July 2010

Kumbakonam Bypass upgrading works contract to be procured July 2011

Tsunami Bridge upgrading works contract to be procured December 2011

Performance based maintenance contracts – first year

-second year

to be procured April 2011

December 2011

Minor road safety improvement works to be procured December 2010

Project and Financial Management System to be procured August 2011

Geographic Information System to be procured August 2011

Transaction advisory services for feasibility study of PPP roads to be procured March 2011

Pre-investment studies to be procured December 2010

Equipment for implementation of RADMS to be procured December 2010

Equipment for data collection for GIS to be procured December 2010

15

Annex 5

SUMMARY OF THE REVISED ECONOMIC ANALYSIS

1. Revised economic analysis has been carried out for the upgrading roads because in these works

there are cost overruns. The following table presents the variation in costs in the upgrading contracts.

Contract

/ Road

Stretch

Initial costs (Rs million) Revised Costs (Rs million) Variation

in total

cost (%) Base

cost

Physical

contingencies

Price

contingencies

Total

cost

Contract

price Variations Escalation

Total

cost

TNRSP

01 6650 499 536 7685 6117 (-) 1000 1496 6613 (-) 13.9

TNRSP

02 2050 154 165 2369 1988 579 738 3305 39.5

TNRSP

03 1240 93 100 1433 1434 549 550 2533 76.8

TNRSP

04 1150 86 93 1329 1193 370 450 2013 51.4

The decrease in cost of TNRSP 01 road stretch is due to deletion of six Road Over Bridges, which were

entrusted to the contractor for TNRSP 02. The decrease in cost is also due to deletion of road works in

about 13.6 km length of the stretch.

2. Traffic counts were carried out in year 2008 and these are presented vis-à-vis the corresponding

figures in the year 2003 in the following table.

Contract / Road

Stretch

Traffic volume in PCUs in the year

2003 2008

TNRSP 01 3450 6104

TNRSP 02 6148 11586

TNRSP 03 2414 4486

TNRSP 04 1087 2221

3. At the time of appraisal of the parent project, economic analysis was carried out for 743 km of

upgrading roads and the overall EIRR for these roads was 30.2% with an NPV, discounted at 12%, of Rs

26,233 million. For carrying out revised economic analysis, four homogenous/typical stretches in TNRSP

01 and two each in all the other roads have been considered. The following table presents the lengths and

unit costs of these homogenous sections.

Contract /

Road Stretch

Homogenous /

typical section

Length of

homogenous section

(km)

Unit cost in 2003

(Rs million)

Revised Unit cost

(Rs million)

TNRSP 01

1 24.7 5.0 6.3

2 27.8 12.5 16.5

3 28.6 11.6 15.38

4 27.0 10.6 14.13

TNRSP 02 1 17.6 14.2 20

2 30.3 15.3 20.3

TNRSP 03 1 31.5 15.0 24.0

2 23.5 13.6 23.6

16

TNRSP 04 1 29.2 11.7 17.8

2 38.5 10.6 16.2

4. The following traffic growth rates are used in the analysis. These assumed growth rates are based

on the overall growth of economy and is consistent with those used in the initial economic analysis.

Vehicle type Traffic growth rates (% per year)

TNRSP01 TNSRP02 TNSRP03 TNSRP04

Car 8.5 8.5 10 9

Bus 5 5 5.5 5

Light Commercial Vehicle 6 5.5 6.5 5.5

Multi Axle Vehicle 6.5 6.5 8 7

Heavy Commercial Vehicle 5 4.5 6 5

Auto 7.5 7.5 7.5 8.5

Tractor 5 5 1 5

Two Wheeler 9 9 8 9

5. Revised economic analysis has been carried out using the Highway Development and

Management Model (HDM-4). The analysis is done considering a period of 25 years including

construction period. Vehicle Operating Costs (VOC) and value of time have been considered in the

analysis. Updated vehicle parameters and unit costs have been used in the analysis. In year 2008, the price

of fuel has increased substantially and it is not true representative, instead of 2008 fuel prices, fuel prices

in 2009 have been used in the analysis. The following table presents the results of the revised economic

analysis.

Contract /

Road stretch Homogenous /

typical section

Results of revised economic analysis NPV based on

original costs and

traffic in year 2003 EIRR (%) NPV (Rs million)

TNRSP 01

1 27.8 333 308

2 46.6 1231 1185

3 43.9 635 648

4 33.4 512 512

TNRSP 02 1 49.6 3164 3044

2 46.8 5404 5189

TNRSP 03 1 20.2 532 76

2 19.5 368 74

TNRSP 04 1 15.6 77 46

2 18.7 167 176

6. In all sections, the NPV discounted at 12% is positive confirming the economic justification of

the project even though the cost of civil works increased significantly. The EIRR for all the above

sections is more than 12%. Some of the sections have higher EIRR than at appraisal, which was 30.2%.

The sections in TNRSP 02 stretch have higher EIRR than all other stretches due to higher traffic volumes

and relatively less increase in construction costs. Comparatively low EIRRs of sections in TNRSP 03 and

TNRSP 04 are due to the combination of high increase in construction costs and lower traffic volumes.

7. The first reason which explains the differences in the EIRR is the relative increase in construction

costs compared to the increase in VOCs and savings. VOCs have increased due to the price of inputs such

as fuel and lubricants which saw a major increase and also due to the general inflation for other inputs.

17

The second reason is that the roads deteriorated between the time the initial economic analysis was

carried out and the time the works were executed and roads were improved. This resulted in higher

savings on VOCs than estimated at appraisal, further confirming that the maintenance/improvement of the

roads was justified. The third reason is that the roads became operational later than expected at appraisal

and as a result the savings in the revised economic analysis are based on 2008 traffic volumes while they

were based on 2006/2007 traffic volumes in the initial economic analysis.

8. The following table presents the results of the sensitivity analysis. The sensitivity analysis

considered 20 percent decrease in benefits.

Contract / Road

stretch Homogenous /

typical section

Results of revised economic analysis

with 20% reduction in benefits

EIRR (%) NPV (Rs million)

TNRSP 01

1 24 254

2 40 963

3 37 494

4 28 398

TNRSP 02 1 44 2493

2 42 4251

TNRSP 03 1 18 523

2 17 301

TNRSP 04 1 13 29

2 16 90

9. The above results show the economic justification of the project even though the benefits are

decreased significantly. The EIRR for all the above sections is more than 12%. However, this sensitivity

is unlikely to happen (a) as traffic is expected to grow to accompany the current economic growth, (b)

there is little uncertainty on the cost of the works as all the contracts are nearing completion and the costs

have been updated to take into account the price escalation as well as variations, and (c) VOCs are

unlikely to be reduced in view of the past trend for the price of inputs such as fuel, lubricants, tires, and

salaries.

18

Annex 6

GOVERNANCE AND ACCOUNTABILITY ACTION PLAN

The following Governance and Accountability Action Plan (GAAP) has been prepared to

address key risks in the project as follows:

Delays in land acquisition/pre-construction activities

Collusion by contractors

Submission of fraudulent documents by bidders

Financial progress on project not commensurate with physical progress

Sub-standard quality of road design and/or road work.

Deterioration of assets created under project due to lack of commitment/resources to road

maintenance

Use of Project

Funds

Risk/level of risk Existing measures Proposed Measures Timeline

Upgrading

Works

Delays in Land

acquisition/Low

50% land

acquisition prior to

award of work

100% land to be acquired

prior to award of work

Faulty

designs/Moderate

Designs by reputed

international

consultants

Proof-check by independent

consultants

Due procurement

process not

followed/Low

Complaints handling

mechanism under Chief

Vigilance Officer to deal

with all complaints; Full

disclosure of all award

information

December 2009

Low number of bids

received/Low

Contractor workshops,

appropriate packaging, better

post-qualification criteria to

be employed

Continuous

Collusion by

contractors/Moderate

PIU to start maintaining

database of contractor

participation and contract

award information;

Information to be on website

within 5 days of contract

award

Starting

December 2009

19

Use of Project

Funds

Risk/level of risk Existing measures Proposed Measures Timeline

Upgrading

Works

Submission of fraudulent

documents by

bidder/Moderate

Reference checks to be

conducted for successful

bidder

Continuous

Financial progress not

commensurate with

physical progress/Low

PFMS being developed;

Disclosure of financial

progress reports on

website along with action

taken on external audit

reports, details of audit

notes pending by division

and cumulative payments

against major contracts

June 2010

Ineffective monitoring of

condition/Low

GIS based system along

with RMS will enhance

monitoring of condition

of network

December 2010

Maintenance

Contracts

Quality of work/Low Monitoring by

Highways

Department and

Project Management

Unit, checks by

Technical Examiner

Consultants

Will be performance

based maintenance

contracts; dedicated

quality control cell with

adequate resources under

the proposed Institutional

Development Study in the

TNRSP; empanelment of

a quality control panel

with retired engineers by

GoTN

December 2010

Compliance to

safeguards/Low

Dedicated social and

environmental officer to

monitor these in design

and bid documents

Asset

Management

Low sustainability of

assets created under

project/Low

User satisfaction surveys

and RMS to assess the

quality and percentage of

bad roads under CRN

Surveys at start

mid-point and

end of project

Poor information

disclosure hampers public

scrutiny and

accountability

Disclosure Policy to be

agreed upon; Website to

be in Tamil. Citizen

information boards to be

at all sites. Project

information to be

disseminated through the

departmental Highway

Bulletins as well.

By negotiations

and continuous

through project

implementation

20

Annex 7

CATEGORY-WISE ALLOCATION OF LOAN

S.

No.

Category Amount of the

Original Loan

Allocated

(Expressed in

Dollars)

Amount of the

Additional Loan

(Expressed in

Dollars)

% of Expenditures

to be Financed

1 Civil Works

(a) under Parts A. 1 and B of

the Project

309,170,000 45,453,250 80%

(b) under Part A.3 (c) of the

Project

3,100,000 60,000 90%

2 Goods 3,660,000 40,000 100% of foreign

expenditures, 100%

of local

expenditures (ex-

factory cost), and

80% of local

expenditures for

other items

procured locally

3 (a) Consultant's Services 19,450,000 5,020,000 90%

(b) NGO services and training

under Part A.3 (a) of the

Project

2,480,000 - 100%

4 Subprojects 6,660,000 - 100% of amount

paid by Tamil Nadu

5 Fee 3,480,000 126,750 Amount due under

Section 2.04 of this

Agreement

Total 348,000,000 50,700,000