NEPAL NORTH-SOUTH TRANSPORT CORRIDOR OPTIONS

Transcription

1 NEPAL NORTH-SOUTH TRANSPORT CORRIDOR OPTIONS INTERNATIONAL DEVELOPMENT ASSOCIATION ASSISTANCE STRATEGY NOTE March 1, 2005

2 TABLE OF CONTENTS Page Acknowledgement 3 Abbreviations and Acronyms 4 Executive Summary 5 1. Background 8 2. Sector Issues 8 3. North South Transport Corridor Options Conclusions and Recommendations 18 Annex 1: DOR Road Sector Portfolio 19 Annex 2: Status of North South Links to District Headquarters 21 Annex 3: List of Previous Studies on Fast Track Route between Kathmandu and Terai 22 2

3 ACKNOWLEDGEMENT The Strategy Note was prepared by Binyam Reja, (Transport Economist/Task Team Leader, SASEI) with input from Rod Stickland (consultant). Surendra Joshi (Sr. Transport Specialist, SASEI) and Ernst Hunning (consultant) contributed to an earlier draft. Peer reviewers were Jean-Noel Guillossou (Sr. Transport Economist, AFTTR) and Simon Thomas (Sr. Transport Economist, SASEI). The Note was prepared under the overall guidance of Guang Zhe Chen, Sector Manger, Transport, SASEI. The Note incorporates comments received from His Majesty s Government of Nepal. An earlier draft was discussed during a stakeholder workshop in Kathmandu, Nepal. 3

4 ABBREVIATIONS AND ACRONYMS BOT DDCs DOLIDAR DOR EWH FR FY GDP HMGN IDA LID MOLD MPPW NEPECON NPC PIP PPP PSP RF/RBN SRN Build-Operate-Transfer District Development Committees Department of Local Infrastructure Development & Agriculture Roads Department of Roads East-West Highway Feeder Roads Fiscal Year Gross Domestic Product His Majesty s Government of Nepal International Development Association Local Infrastructure Development Ministry of Local Development Ministry of Physical Planning & Works Nepal Engineering Consultancy Services Center Ltd. National Planning Commission Priority Investment Plan Public Private Partnership Private Sector Participation Road Fund and Roads Board Nepal Strategic Road Network 4

5 EXECUTIVE SUMMARY 1. His Majesty s Government of Nepal (HMGN) has requested assistance from the International Development Association (IDA) to improve Nepal s north-south transport corridors, aimed at enhancing the accessibility of remote hill districts and at improved market integration and trade facilitation. In this context, the concept of north-south transport corridors involves three distinct elements: (i) development of Feeder Roads to link unconnected District Headquarters with Nepal s Strategic Road Network (SRN); (ii) construction of additional cross-border links with China; and (iii) construction of a new direct link between Kathmandu and the Terai, also known as the Fast Track. 2. To enable IDA to consider this request further, an IDA team has considered relevant aspects of Nepal s roads sector circumstances and institutions, has examined the specific technical and investment issues, and on that basis has identified key elements of possible investment to HMGN s road sector program. 3. Sector Overview. Both by regional comparisons and relative to local development needs, Nepal s main road network has, since the late 1990s advances, lacked much-needed expansion and improvement, as well as showing a marked deterioration in the overall road condition and quality. The main impediments have been: (a) (b) (c) (d) Resource constraints due to low resource mobilization in the sector and declining HMGN allocations for sector expansion, as well as maintenance funding; Lack of effective, integrated sector policies and implementation strategy; Ineffective, narrowly focused road investment planning based primarily on administrative connectivity targets rather than on economic objectives and development outcomes; and Institutional constraints for effective performance due to capacity, structural and incentive problems, weak monitoring and poor overall accountability. 4. Conflict Impacts. The ongoing conflict between HMGN and the Maoists insurgents has clearly hampered but not prevented implementation of development assistance projects. As adherence to open and substantive community consultation and participation during implementation has proven valuable, any operations in this sector would need an effective local communication strategy aimed at the affected communities. 5. Sector Resources. While the establishment of an autonomous Roads Board and Road Fund is designed to improve domestic resource mobilization for road maintenance, the resources generated by the Road Fund so far have still been relatively low. Even in combination with HMGN budget allocations, this leaves 80 percent of the road sector budget in FY04/05 to be dependent on external assistance. Overall, the road sector is acutely under funded, and both HMGN budget allocations and the scale of collections for the Road Fund should be increased to match current and projected needs. 6. Road Sector Strategy. As presently expressed in the 2001 HMGN National Road Transport Policy and the HMGN Tenth Five Year Plan, HMGN road sector strategy needs to shift from administrative priorities into a more broadly based, outcome-oriented roads development and investment policy, wherein sector-wide priorities reflect both strategic and development objectives. The primary aim should be balancing the needs of the population and the economy across all regions, with more priority being given to the construction and management of all weather feeder roads that provide transport access 5

6 to settlements. The roads classification and responsibility framework also needs updating by HMGN to ensure realistic and effective attribution of responsibility and ownership for all roads. 7. Institutional Factors. Responsibility for implementing HMGN road sector objectives has been relatively fragmented and uncoordinated among relevant agencies, which must be overcome in order to develop a sector-wide program. Capacity building activities in the sector need to shift from the typical project-oriented focus to aim at sustainable sector-wide approaches and outcomes. The sector also needs an effective performance evaluation and management framework. 8. The Department of Roads (DOR), the main HMGN roads agency responsible for the SRN, is beginning to embrace such reforms in its Institutional Strengthening strategy. It is implementing major changes, including modernized staff mobility policies, road sector skills training, functional and staffing adjustments, more cost-effective and accountable business practices, upgraded quality management and (subject to HMGN endorsement) appropriate performance incentives and performance management mechanisms. For feeder road developments to link district headquarters, the DOR has the appropriate HMGN mandate, although its limited resources have so far been concentrated on operating and maintaining the main national highways, leaving it with little capacity for feeder roads development and operations in remote areas. To meet future feeder road demands for linking district headquarters, DOR will need to strengthen its regional units and to take action to counter the effects of poor incentive structures, its heavily centralized management style, and lack of expertise in community-based road works, which are essential for feeder road development in remote areas. 9. Development of Feeder Roads to link unconnected District HQ with the SRN. Only half of the 1570 km earthen tracks identified in the Priority Investment Plan (PIP) and other DOR documents to connect the 17 non-road-served district HQs have so far been opened to a Fair Weather Earth Track standard. Motorized transport has yet to start because of the poor road construction quality, missing links and the lack of completion of the initial track access to district headquarters. To serve the beneficiary communities appropriately, the Earthen Tracks at least need upgrading to all-weather standard, as well as links to settlements along the corridor. Beyond the PIP, a new, well-defined, outcome-oriented Road Sector Program should be prepared by HMGN to guide the development of appropriate road access to all isolated settlements, and of all-weather motorable links to the SRN for large-population settlements. The Road Sector Program should provide the basis for donor support in the sector, as well as for providing support for road connectivity and upgrading of existing roads to all weather access to hill districts. 10. Cross Border Links with China. Of the nine official border crossing points with China, in terms of year-round transport accessibility and capacity for further trade growth, only Kodari and Rasuwagadi would warrant development at present, with Rasuwagadi the more promising site. In consultation with HMGN, China is helping to develop Rasuwagadi as a second main border crossing. While designs for the missing 18 km from Syabrubesi to the border now being prepared by a Chinese technical team, HMGN will also need to consider upgrading the present Kathmandu-Syabrubesi road to achieve a viable commercial route overall. The associated arrangements for trade and transit across Nepal s northern border will need further consultations and agreement between China, Nepal and possibly India. Once that and the 18-km road link are completed, an integrated trade and transport project to develop the route further may merit financing. 11. Kathmandu Terai: Fast Track Route. A Fast Track route from the Kathmandu to Terai may be an economically viable investment to reduce substantially the distance, time and cost of transport between Kathmandu and the border with India. Available studies indicate that a new, more direct route, with tunnels, could reduce the road distance by over 100 km to about 65 km, reduce travel time by up to five hours and may improve transport reliability. However, given the complex technical and investment issues 6

7 involved, a more detailed feasibility and financial study is needed. This should focus on the two main options - a Bagmati Corridor route linking with the East-West Highway (EWH), or a tunnel route from Kathmandu to Hetauda relative to the third option of upgrading the existing roads with limited realignment (virtually a do nothing option). Private finance is likely to be a critical element for the Fast Track development, and for this, HMGN needs to undertake a legal review of its recent BOT Law and strengthen its private sector participation (PSP) planning and implementation framework, and the capacities and skills to support this. 12. Overall Recommendation.: Future IDA assistance for development of north south transport corridors and improved links to remote districts in Nepal should be part of an integrated HMGN Road Sector Program, which should include: (a) (b) (c) (d) Finalization by HMGN of a new holistic road sector policy framework with a balanced set of outcome-oriented strategic and development policy objectives; Preparation and promulgation by HMGN of an updated comprehensive roads classification and responsibility framework; Formulation of a 10-year Road Sector Investment Plan and updating the Medium Term Expenditure Framework to accommodate the finance implications of both the 10-year Investment Plan and Road Sector Program; An enhanced medium-term strategy to sustain a widened reform and organizational strengthening process in DOR, including moving the department to a modern road agency. 13. In formulating these policies, strategies, and plans, HMGN should work closely with all major donors to achieve greater donor harmonization and improved overall outcomes in the road sector. 7

8 1. BACKGROUND 1.1 While Nepal s road network expanded by about 7 percent a year in the 1990s, this has stalled in recent years, down to less than 1 percent a year since 2001, partly due to the impact of the prevailing conflict and security problems, but also due to the marked decline in the allocation of resources to the road sector, which has declined from about 10 percent of total HMGN budget in the 1990s to 5 percent since Today, the main network consists of about 16,000 km of roads (4,627 km of black top, 3,883 km of gravel, and 7,490 km of earthen roads), plus there are about 5,000 km village and agriculture roads, bringing the total road network in Nepal to 21,000 km. By regional comparisons, Nepal s total road stock and network density is very low, while the road network quality and standard is very poor. It is also unequally distributed, with about 63 percent of the network concentrated in the Terai, while roads in the hill and mountain districts comprise respectively about 33 percent and 4 percent only of the network. This has limited the economic development potential (especially high valued agriculture) and delivery of social services in the more remote hill and mountain districts. 1.2 The proportion of the Strategic Road Network (SRN) in good and fair condition increased from less than 50 percent in 1992 to 90 percent in 2001, but a recent road condition survey shows that it has declined to 76 percent. The initial improvement in the condition of the road network throughout the 1990 s largely came because of donor and government funded rehabilitation works on the network to overcome the effects of inadequate and irregular maintenance. In recent years, however, as donor programs shifted towards new construction and rural access infrastructure, funding for maintenance has been significantly short of requirement. HMGN has established an autonomous Roads Board and Road Fund with a view to linking road sector funding to road use and improving the level of domestic funding for road maintenance. However, the Roads Board, which became operational in 2004, generated only about NRs.300 million (US$4.2 million) in FY2003/2004, only a third of the maintenance requirement of just the SRN. Unless periodic and routine maintenance works are urgently undertaken, it is likely that the road network will once again deteriorate significantly, with costly rehabilitation consequences. 2. SECTOR ISSUES 2.1 The lack of adequate road infrastructure and transport services in Nepal is attributable largely to the following key issues: inadequate road sector resource mobilization, ineffective planning and allocation, lack of coherent and integrated sector policies and implementation strategy, weak institutional capacity and performance constraints, and the impacts of the ongoing conflict. These are in turn discussed below. Road Sector Finances 2.2 Issue: Road sector resource allocation is inadequate and thinly distributed on a large, disparate portfolio, while domestic resource mobilization is weak and poorly administered. 2.3 Government spending in the road sector is only about half of what is required to support the growth and poverty reduction targets set out in the Tenth Plan. In order to facilitate a six-percent GDP growth rate projected in the Tenth Plan, Nepal needs to invest about 2 percent of its GDP (about US$115 million a year) on expanding the road network to remove transport impediments to economic growth, and another 0.5 percent of its GDP (about US$30 million a year) on maintaining the current road assets. In sum, Nepal needs to invest about 2.5 percent of its GDP (about US$145 million a year) in expanding and 8

9 maintaining its road network 1. However, Table 2 shows that HMGN s spending in the last three years has been significantly lower than this requirement. For FY04/05, HMGN has allocated about NRs.5.5 billion (US$77 million), which is only about 5 percent of the total HMGN budget. Of this amount, NRs.2.5 billion (US$35 million) is allocated for Rehabilitation and Maintenance, but this is funded mostly from donor supported periodic maintenance and rehabilitation programs (see Annex 1 for details of budget breakdown). Table 1: Road Sector Expenditure (US$ Millions) Budget Head 2002/ / /05 Source (2004/05) Actual Revised Foreign Allocation HMGN Expenditure Estimate Grant Loan Highways Feeder Roads Rehabilitation and Maintenance Recurrent Expenditure Urban Roads Bridges Misc. Projects Total Road Sector Expenditure Total HMGN Budget 1, , , ,102.50* Source: Ministry of Finance, Red Book. * Includes domestic borrowing. 2.4 In addition, the low level resources are thinly distributed, which makes the investments ineffective and unsustainable. Annex 1 lists the Feeder Roads and Highways Portfolio managed by DOR. In all, there are 32 Feeder Roads and 8 highways under construction. Although the Medium Term Expenditure Framework instituted by DOR guides road sector expenditure, there are still politically motivated and inefficient projects in the portfolio, which receive inadequate annual allocations. Priority 3 (P3) projects, the lowest ranked priority in the portfolio, for example, receive 40 percent of the total funds allocated for feeder roads. The rest of the feeder roads in the portfolio receive on average about NRs.15.1 million (US$210,000). This covers the cost of constructing only 3 km of earthen feeder road. Yet, the average feeder road length is about 85 km, which means that at the current allocation, it takes 28 years for DOR to complete the construction of a feeder road. 2.5 Road Sector Revenue is characterized by week domestic mobilization and heavy dependence on foreign sources. The transport sector is expected to generate NRs.22.3 billion (US$31 million) in FY04/05 in transport related taxes and fees. However, this is only about 40 percent of the current road sector expenditure allocation, and 20 percent of the estimated need for the road sector. Moreover, only a fraction of the road sector revenue (about US$5 million) has been earmarked to the Roads Board in FY04/05. The result is that the road sector is acutely under-funded and depends on foreign sources; about 80 percent of road sector budget in FY04/05 comes from foreign grants and loans (Table 1). Although the establishment of the Road Fund and Roads Board Nepal (RF/RBN) is expected to improve the level of domestic funding for road maintenance, the RF/RBN mechanism is still in its infancy, and requires ongoing HMGN policy commitment and support to ensure fuel levies and other revenues generated by the 1 For comparison with other countries, China currently invests about 4 to 5 percent of its GDP on expanding and maintaining its transport system, while Korea, during its development stage, used to spend about 5.2 percent of its GDP. Brazil spends about 2.4 percent of its GDP, and Bangladesh spends about 2.5 percent of its GDP. Most OECD countries, with mature transport network, invest about 2 percent of their GDP on maintaining their transport assets. 9

10 road sector are fully and efficiently transferred to the Road Fund. The RBN in turn needs to improve its organizational capacity to ensure that it manages the Road Fund efficiently, allocates resources in an effective manner, monitors the outcomes from RF disbursements and maintains an objective advocacy for the resource needs of the sector. Road Sector Policy and Strategy 2.6 Issue: HMGN s road sector policy and strategy lacks an outcome-oriented focus and a sectorwide approach to guide the development of the sector and coordinate donor support. 2.7 HMGN s road sector strategy, expressed in the 2001 National Road Transport Policy and successive Five Year Plans, has over-riding political and administrative objectives concerning connectivity for district headquarters, rather than a more sector-wide focus on development outcomes. In Nepal s present context, connectivity for district HQ is a vital part of overall national needs but it has been pursued largely in isolation from wider development considerations and outcomes. A more positive and balanced primary objective would be to provide transport access to isolated populations and likely economic growth centers, regardless of whether they are in connected or unconnected districts. The lack of outcome-oriented road transport strategy has led to considerable previous investments in tracks and roads that have little or no motorized traffic and hence are unlikely to facilitate local economic development and generate the wider potential user benefits. The current policy framework should be revised towards a more holistic policy focus on the transport needs of the population and the economy in its diverse forms across Nepal s regions, with more balanced priority given to the construction and management of feeder roads that are motorable throughout the year. 2.8 Many road corridors are constructed on non-rational grounds, with little investment analysis and without a network approach. Thus, the possible provision of access to large settlements living along the corridor is not directly addressed, limiting the overall benefit of the initial investment. Similarly, maintaining the objective to connect district headquarters as a priority has had the effect of not developing an intra-district transport system in non-road served districts. Many non-road-served districts do not receive adequate road investment allocations from HMGN on the grounds that they need to be first connected to the SRN. However, many of these districts are accessible by air, and as has been seen in some mountain districts, some level of intra-district transport system could be developed with considerable local benefits, while simultaneously working towards connecting the district headquarter with the SRN in due course. Therefore, HMGN s objective to connect district headquarters with motorable roads should be integrated with the development of a network approach that takes into account the road transport access requirements of large settlements within districts. 2.9 The road sector in Nepal operates on a project basis, and is largely driven by donor-funded programs. HMGN does not have a sector wide program that it uses to coordinate and integrate donor programs in the sector. The PIP, prepared in 1997, was a resource-constrained prioritization of road investment and maintenance in the sector, and is based on outdated criteria and data; hence it is no longer a fully effective guide to the road sector s medium-to-longer priorities and circumstances. Early action by HMGN is warranted on a strategic needs assessment to determine the sector priorities and outcomes, and forecasts of future road sector resources. In particular, HMGN needs to define a set of sustainable development outcomes for the transport sector, with a suitable balance between strategic connectivity outcomes and those of a wider socio-economic nature, such as bringing settlements with population of 5,000 people or more, within four hours of walking to all weather motorable transport access in a defined period. This kind of outcome-focus sector policy and strategy can help coordinate aid and harmonize donor practices in the sector, while attracting increased investment in the sector. In parallel, the roads classification and responsibility framework for Nepal should be comprehensively revised and updated, to ensure clear, realistic and effective attribution of responsibility for all forms of roads to an appropriate 10

11 central, regional and/or district-level owner. This would also provide a valuable guiding framework for HMGN and RBN roads funding and future performance management across the sector. Road Sector Institutional Framework 2.10 Issue: DOR implementation capacity for feeder road development in remote districts is constrained by a combination of poor incentive structures, the distance of its management from remote project sites and its lack of expertise in community-based road works to the extent that, without major changes, the DOR would be unable to effectively implement expanded road sector programs The road sector responsibilities are shared between five entities, with overall HMGN coordination and oversight exercised by the National Planning Commission (NPC). These entities are the Ministry of Physical Planning & Works (MPPW), the Department of Roads (DOR), the Ministry of Local Development (MOLD), the Department of Local Infrastructure Development & Agriculture Roads (DOLIDAR) and individual District Development Committees (DDCs). The former two entities are nominally responsible for the whole of Nepal s main road network, and the DOR has particular responsibility for the SRN. The latter three entities share various responsibilities in the development and maintenance of district-level roads and have some interests in the planning and development of feeder roads, although such feeder roads are primarily DOR s concern. All of these entities are hampered operationally by the cumulative consequences of the ongoing conflict and security problems but these entities are also affected by varying capacity weaknesses, structural and organizational constraints. Planning and implementation performance in the sector to date has not been strong, as these entities have mostly pursued separate planning and implementation processes, achievement of planned targets have not been effectively monitored, their capacity building activities have mostly been project-oriented without focus on sustainable sector-wide performance outcomes, and there has not been an effective performance incentive framework DOR s Kathmandu-centered management culture and centralized decision-making processes have limited its capacity to effectively work in remote areas. The conditions of service for its technical and managerial staff do not provide for differentiated incentives for staff appointments in remote districts (with their comparative hardship factors) relative to staff appointments in the Kathmandu region, hence DOR has found it very hard to identify staff such as project engineers for remote district appointments, let alone to keep such staff stationed and productive there in remote districts for an effective period. Furthermore, DOR does not presently have adequate skills to carry out effective community-level local consultations and beneficiary mobilization for road building operations Although the DOR has made considerable progress in key aspects of its technical and managerial capacity building plans, the department continues to be reliant on significant donor support to discharge its primary responsibilities at acceptable performance levels. The DOR has been slow to extend the application of modernized policies, processes and technology on a more sector-wide basis. While its HQbased policy, monitoring and support units are inadequately resourced for their ascribed functions, the DOR overall is overstaffed, with 3,500 staff looking after about 4,000 km of the SRN. Performance assessment in the DOR is not directly based on objective outputs, let alone on outcomes. Sanctions for under-performance are almost non-existent and there are very few positive performance incentives openly available to the DOR executive and line managers. Accordingly, the department s present staffing and promotion policies are only broadly influenced by performance considerations and in most cases, have little relevance to the outcomes being pursued by the organization These institutional realities present a challenge to HMGN in ensuring DOR s effectiveness for both its conventional SRN role and a revitalized role in the wider road network development in remote areas. Building upon the present capacity-building programs underway in DOR, it is now timely (indeed 11

12 urgent) for HMGN to initiate more fundamental enhancements to DOR s structure, resources, accountabilities and incentive framework, aimed at greater DOR effectiveness in: all the facets of SRN development and management, as per HMGN priorities; and the development and implementation of major feeder road construction projects and maintenance programs in remote and/or non-road-connected districts, sector-wide The introduction of new performance and mobility incentives will be needed to enable DOR management to motivate skilled staff to accept redeployment into DOR regional offices in remote locations. At present, there are donor-assisted HMGN initiatives underway on Governance Reform, which are, inter-alia, piloting performance incentives and performance management mechanisms for eventual implementation in HMGN administration. These mechanisms (once endorsed by HMGN) should be embraced by the DOR for early application in the realignment and devolution of DOR operations to Regional Offices, preferably through an early pilot for performance incentives and performance management program aimed at translating the new roles and performance parameters into operational practice. Operating in a Conflict Situation 2.16 Issue: The long-running conflict between HMGN and the Maoist insurgents has hampered, though not always prevented, implementation of development assistance HMGN administrative operations have been disrupted by the insurgency and externally assisted operations face additional financial and economic costs. Some donor-supported activities are continuing by adopting low-key and neutral approaches. The conflict situation is the major operational issue for any expanded feeder road development program in remote areas, especially in the conflict affected Far-West and Mid-West Regions. Project implementation would be difficult and have high risks, but there is also the growing recognition that the conflict-affected areas are those most in need of development assistance 2. Thus, any expanded investment program in these areas would have to be based around: (a) an effective communication strategy to inform the communities of the poverty alleviation and development objectives; and (b) interventions through local road user and other community groups to facilitate participation and mobilization of the affected communities. 2 See, for example, Social Change in Conflict Affected Areas: Assessment Report Prepared for UK Department for International Development (DFID) Nepal 12

13 3. NORTH SOUTH TRANSPORT CORRIDOR OPTIONS 3.1 Against the above background and sector issues, HMGN is seeking to further develop its northsouth transport corridors. However, as will be discussed below, any development of north south corridors will have to be part of an overall road sector program. The overall concept of north-south transport corridors used in this review can be considered as three distinct elements: (a) development of feeder roads to link unconnected district headquarters with the SRN; (b) construction of additional cross-border links with China; and (c) construction of a new direct link between Kathmandu and the Terai, also known as the Fast Track. This chapter assesses these links separately and provides recommendations that could be considered in the development of north-south corridors in Nepal. Links to District Headquarters 3.2 Current Status. About 1,570 km earthen tracks have been identified in the PIP and other DOR documents to connect the 17 non-road served district headquarters. Of these, about 758 km have so far been opened to a Fair Weather Earth Track standard. However, motorized transport has yet to start in these roads because of the poor quality of the road construction and missing links. The status of individual road links designed to connect these district headquarters is provided in Annex 2 and are summarized below: (a) (b) (c) (d) Eastern Region Districts: Progress in the Eastern Region is the most advanced. Arrangements are in hand to open the initial access and connect all five remaining non-road-served districts (Sankhuwasabha, Solukhumbu, Bhojpur, Okhaldhunga & Diktel) through other donor support and the Royal Nepal Army. Mountain Districts (West & Mid-West Regions): Road access to the five mountain districts was not recommended in the PIP. However, given community demands and economic potentials for tourism and trade, HMGN and the concerned communities have been carrying out civil works to open track access. However, because of the low level of investment and lack of donor support, progress has been slow. The Royal Nepal Army is currently working to open track access along the Baglung-Beni-Jomson road and other districts, but the pace is going slow at the rate of 10 km per year. Mid-Western Hill Districts: Access to Jumla and Kalikot will be achieved through the completion of the 220 km Karnali Highway. With support from IDA-financed Road Maintenance and Development Project (RMDP), 112 km of the Karnali Highway was completed. HMGN plans to complete the road from 112 km to 180 km using the Royal Nepal Army, and the final 40 km to Jumla using local community road building groups, financed under the restructured RMDP. Once opened, the road will require upgrading to all-weather standards. Progress in connecting the other two Mid-Western Hill districts, Jajarkot and Rukum, has been slow. Both districts are in the heartlands of the Maoist insurgency and road construction activity is suspended. It is unlikely that these districts will be connected in the current plan period. Far-Western Hill Districts: RMDP supported road construction activities in Bajura (Martadi), Bajhang (Chainpur) and Darchula have been suspended due to the security situation. HMGN is continuing the works using its own resources and with support from the Royal Nepal Army. 3.3 Next Steps: It is clear from the above and Annex 2 that substantial works need to be done in order to complete the initial track access to district headquarters, as well as upgrading tracks once opened to all weather road standard in order to ensure that investments are effective and provide the intended benefits. Furthermore, additional roads need to be identified and developed in order to provide a network of road spur accesses to link settlements along the corridor. While the PIP identified the initial track access to district headquarters, HMGN/DOR do not have a well-defined policy and strategy to provide all 13

14 weather road transport services on a network basis to isolated settlements. DOR has recently drafted a Twenty Year Master Plan, which mainly focuses on opening access to district headquarters, connecting second east-west highway and upgrading postal roads in the Terai. As discussed above, simply constructing access tracks/roads may not meet the development objective of providing transport access to isolated population. Therefore, it is recommended that HMGN develop a road sector program, aimed at connecting settlements with large number of people with all weather motorable roads. This would require a survey of settlements currently not served by all weather road and taking inventory of previous investments and associated missing links, as well as identifying new links and grids to connect large population settlements. A recent quick accessibility mapping study by DOLIDAR regarding percentage of population having access to all weather road transport has been carried out. This study revealed that about 39% of the people in the hills do not have motorable all weather access within four hours walk and about 13% of the Terai people have to walk more than two hours to reach an all weather road head. DOR is in the process of carrying out a study to develop an investment program to provide optimum accessibility for remote population of the Mountains, Hills and the Terai. Based on this program, an updated PIP for the development and maintenance of strategic road network and an Organizational Reform Action Plan is expected to be ready by December DOLIDAR has also drafted a long term Rural Transport Sector plan based on the Local Infrastructure Development Policy (2004). Cross Border Links with China 3.4 Current Status: There are nine official border crossing points with China but only one main road link crossing at Kodari. The other official border crossing points, as well as a number of informal local crossing points are trails with unrecorded, often barter, trade and have severe access restrictions during the winter and monsoon months. Kodari is connected by all-weather gravel roads on both sides of the border and handles approximately 8% (value) of Nepal s total trade, with a substantial (70%) import imbalance. The Kodari crossing would be a severe bottleneck if trade flows through China expanded substantially. This is because: the first 35 km of the Friendship Highway from the border, within Tibet, crosses an unstable geological area, is in poor condition and subject to frequent slides and closures; the actual border is located on a bridge within a steep-sided valley and has difficult approach roads on both sides of the border; and there are minimal opportunities to improve or expand the facilities on either side of the border. The available space is restricted with limited parking for trucks and has become seriously congested in recent years. The above factors have contributed to a demand for a second road border crossing to accommodate the continuing growth in trade and possibly in the future, transit flows. 3.5 Rasuwagadi is being developed by the Chinese (in consultation with the Nepalese) as a second main road crossing. A Chinese technical team is surveying the route and will prepare the designs for the missing 18 km from the border to the existing road at Syabrubesi. Adequate land is available at (or near) the border for the necessary immigration and customs facilities. However, to develop a viable commercial route, the existing road from Kathmandu to Syabrubesi will also need upgrading. 3.6 The status of the other official crossing points is outlined in Table 2. It is very unlikely that any of these links will need to be developed for substantial trade flows in the foreseeable future. However, road links through China may provide the access to some of the remote districts which is not available from within Nepal. 14

15 Table 2: Existing Nepal-Tibet Border Crossings Location (from East to West) Olangchunggola Nepal Side Nearest road head at Taplejung, approx 100 km to south Kimathanka Nearest (proposed) road-head at Khandbari (100 km south); local (village) roads proposed Lamabagar Larke Mustang Namja Pass (Mugu) Yari/Hilsa On historic trade route north of Charikot/Dolakha; no motorable road No connection is available or proposed to link with existing road at Gorkha (150 km) Approach within Nepal would be along Kali Gandaki Valley within the Annapurna Conservation Area Very remote unpopulated area of northern Mugu; existing customs post 15 km from border Local Road under construction (85 km) linking Simikot (District HQ) with border (Hilsa) Tibetan Side Nearest town 22 km; no road; within Chomolungma Conservation Area No road; border settlement on Arun River; nearest village road 6 km; in Chomolungma Conservation Area Village road approx 10 km to north; in Chomolungma Conservation Area Nearest village and local road approx 10 km distant Local standard road exists up to (and across) the border; some trucks operate to Lo Mantang Nearest village and road is 50km distant: no proposals to provide link Provincial Highway (S207) under construction linking with Highway 219 (27 km); access to Burang 3.7 Next Steps: Future cross-border links with China will be limited to the development of Rasuwagadi as a major trade route. However, before any further investment is contemplated, discussions between China and Nepal (possibly also including India) should be concluded to ensure that the arrangements for trade and transit, across Nepal s northern border, are clearly understood and agreed to. Once the trade agreements and the 18-km road link are in place, HMGN should consider an integrated trade and transport project to develop the route, including the upgrading of the road to Dhunche. Kathmandu Terai: FAST TRACK ROUTE 3.8 Rationale for Fast Track Route: The objective of a Fast Track route is to reduce substantially the distance, time and cost of transport between Kathmandu and the Terai/Indian Border. The existing routes are indirect and very lengthy. As the crow flies, the distance between Kathmandu and Hetauda is 40 km, the main road via Mugling and Narayanghat is 220 km. A more direct route, with tunnels, could reduce the road distance to about 65 km and reduce travel time by up to five hours. A Fast Track route may also improve transport reliability as the existing road is subject to frequent closure/disruption during the monsoon, which increases the transport costs of goods. A Fast Track route would also facilitate the development of a potential transit link, between India and China, generating the transit earnings for Nepal. 3.9 The Fast Track route has been discussed within Nepal for the last three decades 3 but the high cost and more pressing priorities have prevented its realization. However, a number of factors may now give the Fast Track route higher priority: Traffic on the Kathmandu-Terai route has been growing by about 10% annually; The Road Fund will provide secure funding for road maintenance and there is less likelihood that a Fast Track route will seriously distort sector expenditures; 3 Kathmandu-Birgunj Corridor Feasibility Study prepared by COMTEC in collaboration with Alpine and Macchi for UN-HMG in March

16 Development of rural roads has been decentralized to districts, thus shifting the responsibility for rural roads to districts and allowing the center to concentrate on SRN; Legislation now provides for private financing of infrastructure. The Fast Track route is proposed as a public-private partnership (PPP) and there appears to be significant private sector interests; Advances in tunneling techniques and improved maintenance arrangements may reduce some of the previous environmental and technical concerns The potential case for the Fast Track may thus now be stronger and HMGN should investigate the opportunities for construction and funding, including a full re-assessment of the costs and risks involved Previous Studies of Fast Track Options: Previous studies 4 have examined a number of alignments for a direct route between Kathmandu and Terai. The alignment options are: a tunnel route from Kathmandu to Hetauda, plus options for a new alignment or upgrading the existing road to the Indian border; a Bagmati Corridor route to link with the East-West Highway (EWH), plus options to connect with (or terminate at) Hetauda; and upgrade the existing roads with limited re-alignment, the do nothing option Tunnel Route Option: The total length of the proposed route to Heatuda is 65 km and would require almost 30 km of completely new road, including three sections of tunnel, totaling 7 km. The cost has been estimated at NRs.9.4 billion NRs.12.2 billion (US$130 US$170 million). The studies concluded that the tunnel route would have generated acceptable economic returns and could potentially offer reasonable financial returns to a private investor. The higher than forecast traffic growth, since the studies, will have raised the benefits, though it is also possible that the construction costs may have increased in real terms Bagmati Corridor Option: A study of potential alternative Fast Track routes, without tunneling, has recently been completed (April 2003) for the DOR. The study estimated that a Fast Track route along the Bagmati river would cost about NRs.6.1 billion (US$85 million). Based on this cost estimate and traffic projections, the study concluded that Bagmati Corridor option would be more cost-effective than a Tunnel option While the Bagmati corridor is preferred in the latest study, it is strongly recommended that a full feasibility study should be undertaken of the two options before a decision is made on which option to follow. In particular, a new study is required because of the following: All previous studies including the Bagmati Corridor Study are very preliminary in nature; The studies looking at the tunnel and no-tunnel options were carried out at different times and using different assumptions, and therefore, cannot be compared to make a decision on which option is preferred; and The studies do not look into options for private sector participation in the Fast Track. 4 See list in Annex 3. 16

17 3.15 Therefore, it is recommended that a new detailed feasibility study is undertaken of the two options, using the same basic economic, traffic and engineering parameters, a consistent methodology, and the same level of engineering detail. The study should give close attention to the environmental impacts and potential engineering risks attached to each of the options. On this basis, a marginal benefit analysis should be carried out to make a decision on which option provides better economic returns. Private Sector Participation 3.16 The Framework for Private Sector Participation (PSP): Private finance is likely to become a critical element for the development of the Fast Track and is the major impetus for HMGN s renewed interest. HMGN expects that it will not be able to fund the major elements of the potential project in the current fiscal environment. However, experience in other countries also suggests that the private sector is unlikely to deliver such a project without substantial government involvement in the form of enabling legislation, provision of land, environmental and social protection, and possibly financial guarantees and/or some measure of co-financing. HMGN will need to establish a suitable enabling environment if the Fast Track route is to be developed through PSP The following are considered the key prerequisites for a successful PSP for the Fast Track. Conducive Legislative and Regulatory Environment: Nepal s BOT law has recently been issued, but the private sector response has not yet been tested. HMGN should explain its BOT law to domestic and international private investors, through investor conferences, and obtain the investors reaction. It is also recommended that a legal review is undertaken on the BOT law to ensure that it meets international standards and will be capable of attractive private investment in the sector; Institutional arrangements for PSP: HMGN has established a BOT Cell in MPPW but it does not have the necessary staff or skills and strengthening it will be essential. In addition, a Special Purpose Vehicle may need to be established to develop the Fast Track route on behalf of HMGN; Risks and Risk Management: HMGN needs to be clear about the types and quantity of risks it wishes to transfer to the private sector. For the Fast Track corridor, the risks would include construction, geological, traffic, regulatory and security; all would need to be allocated between HMGN and the private investors; Direct or indirect Public Support: HMGN can adjust the distribution of risks by financial support. Soft loans or grants are the most common form of public funding 5 and given the heavy cost of the Fast Track corridor, significant public support may be necessary. HMGN should work with its development partners to provide the public support as part of the PPP scheme. The likely scale of public support should form part of a detailed feasibility study. Due Diligence for PSP: HMGN needs to be sure that the use of private finance is properly considered and fully justified. PSP projects require very considerable due diligence by the client as well as the investor. HMGN needs to establish that (a) value for money will be obtained when providing public support; and (b) consumer interests will be protected. Some governments 6 have a detailed Public Sector Comparator process to undertake this due diligence. 5 In India, the toll structure is fixed by government in the bidding and BOT concessions are awarded on the basis of the minimum grant required. 6 Such as Canada, the State of Victoria in Australia and the UK. 17

18 3.18 Next Steps: The available studies indicate that a new route, from the Terai to Kathmandu, could potentially be economically and financially viable. However, more detailed studies are needed before any decisions are taken on either of the route, as well as the financing mechanism. It is recommended that HMGN commission a full feasibility study which would also identify the most suitable PSP model(s). The proposed study should examine the available options and issues including: construction and financing risks, design standards, alternative alignments and connections, potential environmental and social risks and impacts, and potential funding and operational modalities. The study should provide construction cost estimates (±20 percent) and an assessment of the risks and degree of uncertainty surrounding any tunneling costs. Based on the findings of the study, HMGN should take decisions on the project and its financing. 4. CONCLUSIONS AND RECOMMENDATIONS 4.1 Based on the above strategy analysis and discussions with HMGN, the following recommendations can be made for the development of north south transport corridors: Further investment for cross-border linkages with China should be postponed until the missing 18 km link is constructed and cross-border trade and transit arrangements are agreed; and A comprehensive feasibility study of the preferred Fast Track option(s) is essential and can be financed through bilateral grants if available. IDA could provide advisory services to strengthen the recently established BOT Cell in MPPW and ensure that private sector participation in the Fast Track and other PPP initiatives are implemented within a conducive regulatory and institutional framework. 4.2 Before seeking donor support for north south links to district headquarters (and any associated feeder road works), it should be confirmed that such a plan is part of an overall Road Sector Program (RSP) prepared by HMGN (for which IDA is providing support) and aimed at meeting the key HMGN objectives and outcomes in the road sector. However, any agreement on funding for such an RSP should be conditional on: finalization, by HMGN, of a new holistic policy framework for the road sector, comprising a balanced set of outcome-oriented strategic and development policy objectives; promulgation of an updated comprehensive roads classification and responsibility framework; preparation of a 10-year Road Sector Investment Plan and an updated, realistic Medium Term Expenditure Framework, accommodating the finance implications of the proposed Road Sector Program; and a medium-term strategy to sustain the reform and organizational strengthening process in DOR, emphasizing sector-wide application of new processes and capacities, improved performance and accountability, and effective devolution to regional units for both SRN and FR purposes. 4.3 In formulating these policies, strategies, and plans, HMGN should work closely with all major donors to achieve greater donor harmonization and improved overall outcomes in the road sector. 18

19 Annex 1: DOR Road Sector Portfolio (US$ Millions) Budget Head (Feeder Roads) Priority Code 2002/ / /05 Actual Expenditure Revised Estimate Allocation HMG Source (2004/05) (in USD Million) Grant Foreign Other Central Level Ongoing Projects P Ilam-Mai-Pokhari-Sandakpur P Fikle - Sree Antu Danda Bansantpur-Terhathum-Athrai P Basantpur-Chainpur-Khandbari P Naradmuni Thulung Highway - Hile Leguwaghat Bhojpur P Katari-Okhaldhunga P Paspalal Highway-Nayapul Khimti-Manthali- Ramechhap Road - New Bridges P Chkrapath-Tokha-Jhor-Chahare-Gurje Bhanjyang- Chahare-Talakhu Including Chhahare Bride P Galchhi-Devighat - Including Bridges P Ganeshman Singh Marg - Thankot - Chitlang Lumbini Garden Road -upto MRM Baglung-Beni-Jomsom P Chhinchu-Jajarkot P Surkhet-Ranimatta-Dailekh P Jaya Prithvi Bd. Singh Highway - Khodape- Bajhang P Sanfebagar-Marthadi P Sanfebagar-Mangalsen P Dasharath Chanda Highway, Satbanj-Baitadi- Jhulaghat P Gangte Labdhu Samundratar Galphubhajan Road - Including Dorkhu Bridge P Postal Roads P Damak Chisapani P Chatara - Gaighat - Kattari P Tallo Dhungaswor Satkhamba Dullu Pipalkot Dailekh P Holeri Chunwang Kalakate - Gadhawa - Sikta P Dabasthal Kainidanda Chaurjahari-Dolpa P Gumi Patihalna Chour Surkhet P Trishuli-Syaprubesi - Rasuwagadhi P Tanakpur Link Road P Karnali Highway-Manma, Kalikot Musikot-Burtibang P Total Allocation on Feeder Roads Average Feeder Road Allocation Average Feeder Road Allocation (without P3 projects) Loan 19

20 DOR Road Sector Portfolio (US$ Millions) Budget Head (Highways) Priority Code 2002/ / /05 Actual Expenditure Revised Estimate Source (2004/05) (in USD Million) Foreign Allocation HMG Grant Loan Mechi Highway (Phidim-Taplejung Section) Sagarmatha Highway (Gaighat-Diktel Section) Bishesor Prasad Koirala Highway - Banepa, Sindhuli, Bardibas P Rapti Highway P Karnali Highway (Surkhet-Jumla Section) P Mahakali Highway (Baitadi-Darchula Section) P Kanti Rajpath P Tribhuvan Rajpath Total Highways Expenditure Average Highways Allocation Average Highways allocation with out Bishesor Prasad Koirala Highway - Banepa, Sindhuli, Bardiba Budget Head (Rehabilitation and Maintenance) Priorit y Code 2002/ / /05 Source Actual Revised Allocation HMG Foreign Expenditure Estimate Total Grant Loan Other Urban Roads Various Road Repair & Maintenance P Road maintenance & Development Project P Mirchaiya - Katari Road Araniko Highway Repair and Maintenance Project P Beshisahar-Chame P Gorusinghe-Sandhikhark Chakchake-Liwang - Including Bridges and Others Roads P Road Network Development Project - Fourth Road Improvement P Road Board P Total Exp on Rehab and Maint